Cuts in crude oil production by OPEC – plus some from its allies – and the boost in oil prices are proving highly beneficial to producers in the US, who are now able to restore reductions in their output forced on them by last year’s low prices. US crude oil production fell by 530,000 bpd in 2016 while this year it looks set to increase by at least 100,000 bpd, while 2018’s annual growth is forecast at 550,000 bpd, taking it to 9.5 mn bpd. Much of the increase will come from tight oil formations: principally from the Permian Basin in Texas, but other shale oil plays will also contribute to the growth between now and 2018.
The increase in output is likely to be accompanied by a rise in US exports of crude oil. Crude oil exports may even go up by more than the actual increase in production, as US oil companies attempt to make-up some of the shortfall in global supply caused by the reduction in output by OPEC and its allies.
The revival in US production is likely to attract the full support of President Trump and his administration. Before last November’s elections, Mr Trump committed himself to reducing legislative and other obstacles to increasing the output of oil. An early move has been to support the building of pipelines that the oil industry regards as necessary for increasing production, which is constrained in a number of areas by the capacity of the pipeline network. A number of these proposed pipelines, however, are politically controversial and have attracted strong local, or even national, opposition.
Rising global crude prices have encouraged US oil firms to hire more drilling rigs, boosting production in several areas, but especially in the country’s shale oil plays. Rising prices are not the only factor driving up production. A further boost is being provided by increases in efficiency brought about by improvements in drilling technology, leading to lower production costs. Most of the rise in oil production this year and next year is likely to come from shale and other tight oil formations, although the production of oil from conventional reservoirs should also show a small increase, mainly from offshore fields in the Gulf of Mexico, where output is projected to rise by about 80,000 bpd. Conventional production, however, is expected to decline slowly after 2018, mainly as a result of the natural decline in what are mainly mature oilfields.
US production of shale oil is concentrated in seven principal plays with The Permian being the largest area in terms of production, and accounting for some 46% of the total for all seven basins of 4.9 mn bpd. Output from the Permian is running at about 2.2 mn bpd. The next two in size of output are Eagle Fordand the Bakken, each with close to 1 mn bpd. In addition to being the main area of production, the Permian is the most profitable, and it is from here that the main increases are predicted to come over the next few years.
Shale production is expected to keep on growing all year. The number of drilling rigs in use is increasing and the number of completions of wells drilled but uncompleted is also set to rise. Output from all the main shale areas is expected to go up, even at the Bakken, where output was down at the end of 2016 owing to severe winter weather. Next year should see total production above the previous high of 4.9 mn bpd.
For the longer term, the expectation is of shale oil production of 6 mn bpd, or even slightly above that level by 2026, where it is expected to remain, given the right economic conditions, until well into the following decade. Most shale producers appear to be happy with WTI prices of $50 – 55/bbl, as they have been since the beginning of December 2016.
Money flows into oil
The rise in crude oil prices is starting to translate into increased upstream spending by companies across the US. Those planning to spend more in 2017 include outside investors such as hedge funds, as well as the oil companies themselves. An early indicator of the renewed optimism in the oil patch was ExxonMobil’s announcement in January of an increase of nearly $3bn in its capital expenditure this year.
ExxonMobil expects its Permian production to increase by as much as 150% thanks to its recent acreage additions, taking it to somewhere near 350,000 boe pd. The Permian, although, is far from being the only area of interest to US exploration and production companies.
The recovery in crude prices could eventually lead to shale production in new areas, such as the North Slope of Alaska. A lease sale at the end of 2016 attracted a good deal of attention from both US and foreign companies when over a million acres were put on offer.The North Slope Shale lies mainly to the landward of the Beaufort Sea, with a small offshore extension into the Chukchi Sea, and is estimated by the US Geological Survey to contain up to 2 bn bbl of oil.
While there is some infrastructure in the area, including the Trans-Alaska Pipeline System (TAPS), that would allow the tying-in of some of the shale plays, more would need to be provided before the North Slope Shale could be fully developed. The harsh environment and the absence of large water deposits nearby for use in fracking mean that large scale production is probably several years away.
This year should see a significant increase in US shale oil production, but the main gains look more likely to occur in 2018 and 2019. In these gains, although, there also lies the danger that the rise in production will exceed any increase in domestic oil demand, thereby threatening the recent recovery in the price of WTI and producing another fall in production as happened in 2015 and 2016. Falling oil prices are not the only threat.
The oil industry has yet to convince a sceptical public of the safety of fracking. There is pressure in a number of states to hold public ballots on whether to restrict or even ban the use of hydraulic fracturing. In November last year, the voters of Monterey County in California approved a proposal to ban fracking and eventually to shut down all of the county’s 22,000 bpd production.
There is also opposition in some parts of the country to the building of new pipelines, several of which are seen as necessary for the more efficient transport of oil produced from shale. One line that has attracted strong opposition is the Dakota Access Pipeline (DAPL), which is designed to allow the transport of up to 470,000 bpd from the Bakken Shale in North Dakota to the Gulf Coast, replacing some deliveries that need at present to go by rail.
Most of DAPL is complete, but the final section in North Dakota is being strongly opposed by local people who fear the line’s route on the Missouri River threatens their supply of drinking water. Opposition to DAPL has gone nationwide, and banks involved in financing the project have been threatened with sanctions by a number of local authorities.
The Trump administration has acted to restart construction, following a campaign promise made by the President in the run-up to November’s election. Mr Trump is also trying to revive an 830,000 bpd line from Alberta to Steele City, Nebraska, allowing Canadian crude to be transported more directly to the Gulf Coast than at present. The pipeline, known as Keystone XL, still faces a number of legal challenges from groups of protesters and its future is by no means assured.
More crude exports
US production of crude oil looks set to go on increasing despite delays to some pipelines and other setbacks. Concerns are growing, however, that without new pipelines to allow better transport of domestic crude to all major regions of the US, surpluses will pile-up in a number of areas.
There is a particular need for pipelines from the Mid-Continent – where most of the main, long-distance pipelines are– to refining areas on the East and West Coasts. If these, too, are delayed, US producers will need to increase their exports considerably to avoid oversupply in the Mid-Continent and Gulf Coast. Exports in 2016 averaged 520,000 bpd.
These may need to rise to totals close to 1 mn bpd if domestic crude prices are not to fall significantly. Fortunately, cuts in output by OPEC and its friends provide an opportunity for US producers to expand and develop their export business right away.If you’ve found this blog helpful and would like other topics covered, please feel free to drop me an email with suggestions. You’re welcome to subscribe using ‘Subscribe to Blog via Email’ section and this will get you the latest posts straight to your inbox before they’re available anywhere else
- U.S. Energy Information Administration (EIA). Short-term energy outlook. Table 4a. U.S. Petroleum & other liquids supply, consumption, & inventories
- Focus: Latin America’s Big Four battle production declines: with Brazil the only winner. Oil and Energy Trends 2017; 42:2; pp 3 – 6, DOI: 10.1111/oet. 12454.
- Focus : US crude production set to recover (with a little help from OPEC); Energy Trends 2017