The Global Energy Game Changer @ Work
The US oil and gas business is booming because of the shale revolution at work, but in many parts of the industry there are growing pains. The super majors face rising costs for finding and developing new reserves. The midstream players face infrastructure bottlenecks. Refineries face a glut of light crude or condensate that does not fit the refining process demand for heavy crude and thus must be pre-processed out. Even the shale pioneers who struck gold in places like Bakken, Eagle Ford and Permian know they face a ticking clock counting down the first easy to get, most economic oil and liquids.
In many ways these best of times in the oil & gas business are the worst of times if you are unprepared for the key questions facing oil markets today:
1. Where will Technology Take the US next in Shale? Technology-led US shale oil production growth brings new opportunities and risks, but requires a constant search for the next big play.
2. Efficiency Drives More US Exports of Refined Products? US oil imports are down as US crude oil production grows. Meanwhile, vehicle fuel efficiency, hybrid vehicle market share growth and changing driving patterns reduce fuel demand. That means more US refined product is likely to be exported.
3. Conventional Oil Growth for the Long-term? While shale may be getting all the headlines conventional oil in both the Gulf of Mexico deepwater and Canadian Oil Sands supply additions offer long term supply security as US shale oil supply growth peaks as projected in 2020.
4. When will the Ban on US Crude Exports be Lifted? As with LNG, the bet is the US will become a global oil player as well as gas supplier as demand in Asia grows faster than other markets.
5. North America as Global Energy Superstore? The pull to export crude oil from North America is growing as US supply growth affects strategic competitive positioning across world markets. This pull affects Canada and Mexico as well as the US. Energy is a key factor driving economic growth. The question is whether the US, Canada and Mexico can keep their strategic interests aligned to drive to global energy superstore leadership?
The game changing challenge at the front line of oil and gas production is to proactively manage operating costs and profitability in the low natural gas price environment, keep capital invested in production running smoothly and reliably, operating and maintaining pipelines and equipment safely in compliance with regulations. The strategic challenge for oil and gas players is how to rationalize the policies, regulations, and infrastructure with the changing supply and demand balance.
US oil production passed 8.075 million barrels per day in 2014 and is tipping the balance in oil trade around the world upsetting longstanding patterns. At the current pace the US is expected to set a new all-time high in oil production surpassing 9.637 million barrels of oil per day by 2016.
According to the US Energy Information Administration AEO2014 Reference case, net US oil imports share of U.S. petroleum consumption have been declining since 2005 and will continue to do so declines through 2023 as a direct result of the shale revolution at work in projected growth in tight oil. EIA expects net imports to fall to 25% in 2019 when EIA estimates US tight oil production peaks then imports grow back to 32% by 2040 as domestic oil production slowly declines.
Meanwhile, US oil supply growth from onshore tight oil in the Bakken shale in North Dakota and Eagle Ford and Permian Basin in Texas is projected to produce over 4 million bpd and grow through 2020 then peak at 10 million bpd. Offshore Gulf of Mexico production is also expected to grow, but more slowly than shale offering long term sustained growth in output and reserves.
Oil supply growth in the Bakken, Eagle Ford and Permian Basin plays is expected to peak prior to 2020, but that should not be a cause for alarm this is not a peak oil story. There is plenty of oil left in the long tail of maturing plays and plenty of other onshore tight oil plays in the US yet to be developed so we expect to see more E&P over time as economics align favorably with market conditions. Producers have concentrated first on the ‘sweet spots’—the place easiest to reach and most economical to extract. They will continue to work these same plays to extract the longer tail of residual oil once the peak pumping of the sweet spots is reached.
The game changer at work among North America’s oil and gas market participants is the challenge set for them when George Mitchell showed them how by adapting his field experience and technology to make the shale revolution happen. The question is whether North America can do it again adapting to new geologies, new conditions, new plays to find and economically produce enough oil to make a difference in world swing productive capacity. If we can then North America can truly be a change changer.
The game changer at work next in the oil patch is the push of the next wave of technology change. These disruptive innovations will focus on adapting the shale E&P techniques to more challenging geologic conditions, modify the gathering and processing midstream to take advantage of the light sweet crude and condensates found in many onshore shale plays and blend it with the oil sands and heavy crude types to expand the range of oil products produced.
Field operations are a complex choreography of crews, contractors, equipment and competing demands. Performing these dance steps consistently at the well site multiplied across thousands of wells makes the difference between good results and unintended consequences. This is more than just connecting the dots in a process workflow diagram. Horizontal drilling and hydraulic fracturing unleashed a revolution in energy production from onshore unconventional oil and gas plays turning the energy industry on its head and the United States into a global energy powerhouse.
Turning North America into a global energy superstore requires completing the circle bringing Canadian oil sands production and the energy reform promised expansion of Mexico oil production growth together with US supply growth and technology leadership.
The fear is that the same disruptive innovation forces that changed the natural gas markets so profoundly driving down prices will do the same thing to oil markets. It does not have to be that way. Why?
For one thing oil has been a global traded commodity for a long time. Natural gas, on the other hand, has been a regional traded commodity because it was difficult to transport until LNG technology and economics transformed it.
The WTI-Brent price spread is another example where US oil prices for West Texas intermediate or Louisiana Light Sweet have traded at lower prices than the global oil price pegged to Brent. In party this is due to the ban on US oil exports distorting markets and the pipeline, storage and export infrastructure congestion made market access difficult.
Demand in Asia is growing faster than other markets. Demand growth in China for petroleum products is expected to double by 2038. Meanwhile, North American and European demand of petroleum products is expected to decline by 2038 as electric, CNG and hybrid vehicle market share grows. Diesel use worldwide is also expected to grow at an annual rate of over 2%.
This mismatch of global supply and demand can work to North America’s advantage if we focus on improving our global competitive position, take advantage of North America’s enviable integrated energy infrastructure network and abundant oil and gas supply growth
North American oil & gas is the global game changer on the horizon and the growing pains being experienced today will speed the transformation of the infrastructure, policies, product and prices if the markets are allowed to work their magic.