As US producers slashed spending, idled rigs, withheld completions, and neared the ceiling on domestic storage capacity, OPEC generally maintained its high production in the first quarter.Despite OPEC members boosting daily crude production by 810,000 barrels during March, recent short-term forecasts from the Energy Information Administration (EIA) show continued growth in US production through the second quarter. However, as low oil prices and spending reductions continue to impact domestic producers, the EIA expects production to slow in the second half of 2015.

"US producers have demonstrated their commitment to capital discipline and their flexibility and agility in gearing down quickly after the decline in oil prices," said Deborah Byers, the Oil & Gas Leader for Ernst & Young LLP in the US. "Rapid, strategic response is key for individual companies' resilience amid volatile prices. And on a broader scale, it demonstrates the US' ability to move quickly and become a swing producer for the global oil market."

US crude oil storage capacity poses another challenge in the continued growth of domestic production amid low oil prices. US crude oil commercial stocks are at their highest point in more than 85 years and are growing at the rate of ~1 million b/d, but storage could be near full in the next two or three months.

Upstream
Amid volatile oil prices and reduced storage capacity, US producers continue to substantially cut capital expenditures at an average of around 20 to 25 percent.

On the conventional side, these cuts are primarily related to exploration or project sanctioning postponements or deferrals which will have little impact on short-term production, but should result in growing supply deficits over the next five to ten years. Unconventional producers, on the other hand, are experiencing the largest cutbacks, primarily around developmental drilling and increased focus on "sweet spots." These changes will likely reduce US production growth, possibly by as much as 0.5 million b/d in 2015.

Unconventional producers are also looking to significantly lower costs through technology innovations and efficiency improvements, as well as through pressures on service and equipment suppliers.

"Out of necessity, comes innovation," said Linda Castaneda, Oil & Gas Advisory leader for Ernst & Young LLP in the US. "The shale revolution was built on technology and now technology and other improvements are boosting efficiency to make it economic for unconventional E&P companies to continue producing at lower oil prices."

Improvements in drilling and completion times, multi-directional laterals, multiple frac stages and multiple wells have already significant impacted efficiencies and costs. On average, US shale oil and gas developers are now getting 10 to 11 times more production per rig than they were six or seven years ago.

With regard to natural gas, US prices have taken a smaller hit than oil prices but have been impacted by continued high production, modest winter demand and the decline in natural gas liquid prices. Led by developments in the eastern Marcellus and Utica plays, US gas production shows little signs of retreat. However, there is rising uncertainty around the extent of the decline in US associated gas, given cutbacks in unconventional oil development.

Downstream
As a result of low crude prices and some refinery outages, global refining margins were generally strong in the first quarter — particularly in the US. With access to advantaged crudes over the past four years, US midcontinent refiners have generally seen stronger gains than those more exposed to global crude oil markets. However, the Midcontinent advantage is lessening as many of the transportation bottlenecks have been removed.

Oilfield services
As upstream operators continue to push to cut operational spending, oilfield services companies will feel persistent pressure from decreased demand for their services and equipment and increased requests for discounts.

Looking regionally at rig counts, US rig activity flattened on the high end during 2014, only to slide sharply in early 2015. Canadian rig activity, which had been showing some year-on-year improvement, is now headed down with US activity. International rig counts are also sliding.

Transactions
Oil and gas transaction activity collapsed during the first quarter as companies focused on cutting spending, shoring up their balance sheets and leveraging debt and/or equity options. The reported total oil and gas deal value in Q1 was 74 percent lower than Q4 2014. The number of deals was down 32 percent in the same time period. Of the transactions taking place, the US midstream continues to dominate activity with notable deals such as Energy Transfer Partners acquisition of Regency Partners.

Looking forward, the second half of 2015 should see a noticeable uptick in transaction activity.

"While volatile oil prices make it difficult for buyers and sellers to agree on valuation, more companies will likely accept terms based on current pricing in the second half of the year," Byers said. "During this time, cost pressures, portfolio optimization and capital market tightness will likely spur increased acquisition and divestment activity."
Source: EY (Ernst & Young)