OREANDA-NEWS. Talk of continued output growth that dominated the second-quarter earnings commentary of most US independents is quickly giving way to a willingness to cut production next year, as more and more areas will become unprofitable to drill based on current oil price forecasts.

Producers such as Whiting Petroleum are ready to hunker down further and spend within operating cash flow, even if that means output drops. A few, including EOG Resources, Devon Energy and Anadarko Petroleum, plan to invest within their cash flow, but are betting on fields with the most favourable economics to sustain output. Others, such as ConocoPhillips, plan to spend just enough to hold output steady if prices do not recover.

Crude futures out to 2016, which companies use for their budgets, are at $55/bl. A recent forecast by US bank Goldman Sachs puts Brent at $49.50/bl and WTI at $45/bl next year, still below what many producers need in areas such as the Permian in Texas, the South Central Oklahoma Oil Province (Scoop), the Niobrara in northeast Colorado and the Utica in the Appalachian.

At that price, even the most profitable US shale acreages, such as the Bakken in North Dakota, Cana-Woodford in Oklahoma and the Eagle Ford in Texas, may struggle to cover costs, despite a 20-30pc year-on-year drop in service fees and improved drilling efficiency. "Futures prices are currently below the average cost of production for all the main shale plays," the IEA says in its latest monthly Oil Market Report.

The widening gap between futures prices and the cost of production may prompt US independents to lower next year's capital expenditure (capex) by 20pc from this year, UK bank Barclays says. The bank's latest upstream spending survey predicts that North American producers may reduce their capex by 35pc in 2015, leading a global decline, and by another 10-15pc in 2016, assuming Nymex WTI stabilises in a $50-60/bl range. Cash flow is the most important determinant of upstream tight oil investment. Around 30pc of smaller US upstream independents surveyed by Barclays say they need a WTI price of $60/bl before they increase investment, while 58pc need $70/bl. And with WTI below $50/bl, these firms plan to halve upstream spending this year.

The situation is becoming so dire that local governments are stepping in to help. North Dakota is considering allowing drilling firms to let uncompleted wells sit idle for an extra year in "temporarily abandoned" status, Department of Mineral Resources director Lynn Helms says. The state does not want "to force oil into an already oversupplied market", she says. North Dakota has 68 active rigs at present, down from 74 in August. The all-time high was 218 rigs in May 2012.

A steep, two-year decline in capex will lead to a fall in US output because shale oil wells have very high decline rates, which means continuous investment is needed just to sustain output. The IEA forecasts US tight oil supply to fall by 385,000 b/d to 3.9mn b/d next year from 4.3mn b/d forecast for this year. An analysis of the key shale acreages shows that output per well fell by an average 72pc from initial production rates within 12 months of start-up, and declined by 82pc in the first two years, the IEA says.