NAM Activity Scenarios Beyond COVID-19

A Study of the Demand Trends on U.S. Liquids Production.

Waqar Syed, MBA

Investors are skeptical about the future of US shale, believing that the “call on US shale production” will be greatly diminished post-COVID 19, as people reduce air travel and continue to work from home. In addition, they believe that incremental oil demand would be met by OPEC/Russia, reducing the call on US production.

Current D&C Levels Insufficient for Post-COVID Environment
We conclude that global demand for oil and liquids should likely return to 2019 levels of 100.3 mmbbl/d in the post-COVID environment (2022e), ranging from 99.9 mmbbl/d to 100.8 mmbbl/d. In the full report, our scenario analysis shows the call on US liquids supply ranging from 16.8 mmbbl/d to the extremely bullish scenario of 20.8 mmbbl/d, with the mid-point around 18.8 mmbbl/d. We see the low-to-mid scenarios as the most likely, with the industry needing 485, 800 and 913 rigs in the three scenarios, respectively. For context, the US produced about 18.8 mmbbl/d in Q4/19 and Q1/20, and by Q2/20, supply had dropped to 17.3 mmbbl/d, owing primarily to production shut-ins. We estimate that even to maintain production near Q2/20 levels, the industry would need to more than double the rig count (currently 237 rigs). Similarly, frac crews will have to materially increase. We estimate frac crew demand of 147 to 171 at the lower level of the call on US production, and 238 to 278 at the mid level. We estimate that there are about 80 frac crews currently active in the US.

Global Liquids Demand Could Return to 2019 Levels Post COVID (2022e)
Permanent changes in consumer behavior, if any, will likely be in OECD countries impacting gasoline and jet fuel demand. Demand from non-OECD countries should be less affected owing to their higher leverage to manufacturing and agriculture. (Chinese demand has already recovered above year-ago levels.) Assuming OECD gasoline demand falls 4% to 7% versus 2019, and jet fuel by 7% to 15%, OECD oil demand could be 0.4-1.1 mmbbl/d lower versus 2019. However, if non-OECD demand grows 0.5-1.1 mmbbl/d (versus 5-year 1.1 mmbbl/d average), post-COVID global oil demand could be in the 99.9 to 100.8 mmbbl/d range.

Complex Supply Picture as 30% of the Global Supply Secularly Declining
Supply growth potential has narrowed to just Saudi Arabia, Iraq, the US, Canada, Brazil, Russia, and Guyana. Countries contributing to ~30% of 2019 global supply have been secularly declining, with production likely 2.6 mmbbl/d less in 2022, a gap that will need to be filled. Libya and Iran are also currently producing 1.3 mmbbl/d less versus 2019. Even assuming Russia/OPEC-GCC (Gulf Cooperation Council) sharply grow, the call on US supply could be 16.8-20.8 mmbbl/d, with the range driven primarily by the status of sanctions on Iran and the Libyan civil war.

US Activity Well Below Normal
Approximately 237 rigs and 80 frac crews are active in the US. To meet the low-end of the call on US oil supply, we estimate ~485 rigs and 147-171 pumping crews will be needed; at the midpoint ~800 rigs and 238-278 crews will be needed.

Waqar Syed, MBA 720-683-6705

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