This week, Oil and Gas Investor spoke with energy industry insiders at the analytical firm Wood Mackenzie.
The Houston-based group is out with a new report this month that shows U.S. oil production in a full-growth mode.
The report concludes that technological advancements, along with two big shale oil sites, are driving tight-oil output.
This is from the report:
Liquids production from the U.S. is staging a strong surge in growth, mainly driven by the sharp rise in drilling activity on the two main tight-oil plays, the Eagle Ford and Bakken.
Wood Mackenzie forecasts U.S. tight-oil production to rise from 1.5 million b/d in 2012 to 4.1 million b/d in 2020 with tight oil providing 45% of total U.S. crude production by 2020.
Tight-oil plays cover large expanses across the US and now show competitive development economics with some plays having break-even prices below US$70 per barrel, translating into a strong appetite for investment. We believe there is potential upside to our forecast not only from new emerging plays, but also from continued growth in the Eagle Ford and Bakken as operators leverage efficiencies.
The pace of non-OPEC production growth this decade is relatively strong, increasing by over 8 million b/d from 2011 to 2020, an annual average growth rate of almost two percent. Outside the U.S., other key non-OPEC growth areas are Brazil (pre-salt plays), Canada (predominantly oil sands and some upside from tight oil) and Kazakhstan (new and expansion projects).
Oil and Gas Investor reached out to Wood Mackenzie senior analysts Phani Gadde, Matthew Partridge and Hill Vaden to elaborate on the report and explain the far-reaching impact of U.S. tight oil on the energy market and on investors.
Here is what they had to say:
OGI: Why is U.S. tight-oil production on the rise?
WM: The main reason for the growth in tight-oil production is the simultaneous combination of the decline in gas prices, strength of oil prices and improvements in technology. Industry proved so successful applying hydraulic fracturing and horizontal drilling to unconventional gas reservoirs that the price of natural gas fell to a point that drilling is no longer sustainable in many plays. Operators sought improved returns, and high oil prices incentivized them to look at oilier assets. The same technology that produced the shale-gas boom -- hydraulic fracturing and horizontal drilling -- is proving successful in tight-oil formations.
OGI: What role have the Bakken and Eagle Ford played in your estimate?
WM: The Bakken and Eagle Ford currently account for an average of about 70% of the tight-oil volumes in our forecast through 2015, when we see the U.S. producing 3.1 mmb/d of tight oil.
OGI: What does the NGL story tell us right now? What factors should investors consider when reviewing liquids, per your forecast?
WM: The move to liquids-rich plays in search of improved returns has led to a surge in NGL production. This production growth has, in turn, led to softening of prices and eroded some of that liquids-rich advantage.
Investors should consider that exposure to oil and NGLs varies by play, location and by operator. There are portions of acreage within the liquids-rich plays that are heavily reliant on revenues from NGLs, while others offer greater exposure to crude and condensate. Investors worried about NGL price softness should look closely at the assets and acreage that offers exposure to crude and condensate as well.
OGI: You cite "emerging plays" in your estimate summary? Can you elaborate? What emerging plays and why?
WM: Our emerging plays estimate is heavily weighted to the Utica Shale in Ohio. We are also watching the Monterey in California, as well as the Tuscaloosa Marine Shale near the Gulf Coast, Lower Smackover in Arkansas and a handful of other plays that industry is exploring.
OGI: Your report cites "non-OPEC growth" as a big factor in the tight oil landscape. What's the story there? How does that impact U.S. oil prices going forward?
WM: US tight oil production has eased tightness in the global supply and demand balance for oil. But it remains landlocked and its impact on prices outside the US is muted by the inability to export it.
Meanwhile other forces affect the international oil market that lift oil prices despite the rise in U.S. oil output. These have been instability and revolution in the Middle East, the imposition of harsh sanctions against Iran and the persistence of non-OECD oil demand growth.
Regarding the impact on US crude prices specifically, as tight-oil production has grown, and as there has been limited pipeline capacity to move production growth to key refinery demand centers, prices have been negatively impacted. In addition, as we cannot export the crude oil, the U.S. will end up with a large amount of light sweet crude hitting the Gulf Coast market. Because the crude cannot be exported, it will have to displace imports of increasingly inferior quality. This will have the effect of keeping the differential between Brent and WTI wide for some time to come.