Falling natural gas prices have caused many gas-centric E&P companies to give their liquids portfolio closer scrutiny. At the 2012 CERAWeek conference in Houston, several panelists took a broader view of the industry’s shift to oily projects, addressing the impact on demand, reduced imports and production forecasts.

In looking at the current oil versus gas rig count, this is the first time since the early 1990s that the oil rig count in the U.S. has exceeded the gas rig count.

“You could say it was the higher oil price, but if you go back to 2008 you see very high oil prices -- but you didn’t see the rising rig count,” said Marianne Kah, chief economist, planning and strategy, ConocoPhillips. “You see it rising now because people are finding exciting plays to invest in that are highly economic.”

The forecast for tight oil has really turned production numbers around, she added. While the industry saw noteworthy production growth from deepwater increases in earlier years, “tight oil has really been a game-changer.”

“In the early days of shale gas people would issue forecasts and six months later they would know it was really something higher. I would expect we’re going to see that same thing for some of these oily plays. By 2020, tight oil production is expected to reach 3 MM b/d. This time next year I suspect the forecast will be for even higher numbers.”

That kind of boost would be a plus for the oil-import scenario in the U.S. At its peak, the country’s oil-import dependence is about 60%. According to Kah, that figure has already dropped to 45%.

“Part of that is the shale phenomenon, but also, unfortunately, it’s because of the recession. But, eventually, we expect this number will get down to the 25%-20% range. And, there’s more good news for the U.S. If you look at where existing imports are coming from. We’re growing increasingly dependent on Canada, which is a good thing.”

Kah also touched on pricing factors. Currently, West Texas Intermediate is being priced $15 to $20 a barrel below the world oil price because of infrastructure constraints. While she expressed confidence that the bottlenecks would be resolved and the crude would eventually move down to the Gulf coast, questions loom: Will the U.S. be able to export it? Will producers move it to the east coast where there is still demand for light sweet crude? What will happen with all of this oil is still very unclear, she said.

“However, in order for the country to ever begin to capture this opportunity we will need good tax policies. We also have a myriad of federal state and local regulations that affect production, and we don’t want to see additional layers that are duplicative or conflicting.”

Looking Ahead

According to the panel, there are several important factors that impact the marginal cost of producing oil. Three key ones are demand, supply uncertainty and geopolitical uncertainty.

“The current situation in terms of oil supply is balanced, but it’s still against the potential for a cyclical upswing in demand,” noted Jeffery Currie, investment research, Goldman Sachs.

“When it comes to the oil markets, and commodities in general, we think any kind of structural story is going to be driven by the supply side, not the demand side. We argue that demand drives the market on a one- to two-year horizon; supply drives the markets on a two- to 10-year horizon. Paradoxically, this tells you to like the commodities with the weakest demand-growth rates.”

Marco Alvera, managing director, Eni Trading and Shipping, said that in the longer term, the biggest threat to the demand for oil will actually come from natural gas.

“This competition will happen at two levels. The first one is at the consumer level, as new projects for liquid or compressed gas-fired vehicles and ships are being actively studied. The second area of competition will be in refining, or gas-to-liquids technology.

“Demand erosion may or may not occur in the short term, but certainly in the long term oil will have to compete with natural gas. And as we discover new plays, long-term supply uncertainty should begin to ease.”

In looking at how quickly the shale/tight-oil revolution happened, Alvera also said the industry should expect similar speed in the form of technological upgrades within E&P companies. For example, Eni has invested $1.5 billion in research and development to advance new technology that combines large volumes of natural gas with crude to produce diesel and high-quality distillates. The company’s first plants will start processing next year.