Running the rule on US supply
The head of the EIA discusses the market, the debate over fracking and what the future holds for the country’s energy data
The worst is probably over for America's tight oil producers, and prices should tick up next year as supply and demand come closer to balance, but the collapse in investment across the industry is putting the oil market in a perilous position.
That's the view from the US capital. "We think Brent crude prices are going to recover to above $50 in 2017 on average compared to $42 in 2016. That should then result in oil production bottoming out and coming back up again," the head of the Energy Information Administration (EIA), Adam Sieminski, told Petroleum Economist at the Department of Energy in Washington DC.
The EIA sees the third quarter of this year as a low point for domestic US crude output with average production of 8.49m barrels a day, down 1m b/d in early 2015. From there, production is expected to grow by about 100,000 b/d by early 2017 and stay roughly level as a slight rise in Gulf of Mexico output offsets a small decline in onshore production. That's assuming crude prices rise from around $45 a barrel to around $55/b by late next year.
If things play out like that, it would reveal a key unknown hanging over the market: the price point at which America's shale juggernaut stabilises. "I think this has been a big surprise that $45 or $50 oil seems to be enough to begin to even things out. The ship was rolling and now it's coming back to more of an even keel. Two years ago people thought that number was $80," says Sieminski.
That is unwelcome news for those in Riyadh, Moscow or Caracas who hoped declining US output would lead the way to a balanced market and, eventually, higher prices.
Any notion that US oil production has hit bottom will be hanging over Opec's next gathering in Algeria in late September (which took place as Petroleum Economist went to press). But Sieminski doesn't expect a change of course from Opec, or Saudi Arabia in particular. "The politics in Opec are harder now than at times in the past because the announcements from everybody in Saudi Arabia is that the only way that the oversupply of oil gets dealt with is through market forces, rather than the tradition of ministers meeting in Vienna and setting quotas or ceilings or freezes or something else," he says.
The clearing fable
Neither will a surge in demand ride to the rescue, says Sieminski. Consumption has been strong thanks to low prices-US drivers have logged a record number of miles so far this year. But the demand response can only come so fast. Siemiski compares it to the tortoise and the hare. The oil supply hare has raced ahead and the demand tortoise is only slowly catching up. The glut, it seems, isn't going away soon.
That raises a worrying problem for Sieminski as to where the oil market is headed over the next few years. The world is awash in crude today and that is keeping a lid on prices. But more than a year of sub-$50 oil has wrought havoc on the industry's finances and investment has been slashed across the board. The glut could quickly turn to fears of tightening supplies if demand marches ahead with little to no investment being made in the global upstream.
While shale drillers in the Permian may be relatively quick to respond to an uptick in prices, tight oil alone can't be the make-weight. And output from conventional oilfields in California, Colombia, China and elsewhere are suffering steep declines thanks to a dearth of investment that will be difficult to reverse.
"Prices recovering into the $50 range, we think that will encourage shale production to a certain extent, but probably not enough to offset the decline in conventional crude oil production," Sieminski argues. "So we may see volatility in prices, and the possibility of a big price increase in 2018 or 2019 is something that should be watched carefully."
As for domestic matters, the US election in November means the EIA will have a new federal master-with important implications for the country's energy future. Sieminski, as the head of the nation's energy-statistics agency, not a policy shop, is reluctant to wade into the contentious campaign battles. Still, the EIA has found ways to make its voice heard on some of the key energy issues being debated on the campaign trail.
Fracking regulations, for instance, have been at the fore of the energy debate. Hillary Clinton championed fracking around the world as Secretary of State, but has taken a harder stand during this campaign, saying she'd clamp down on the drilling technique. Donald Trump has said that he supports fracking generally, but thinks local communities should have a say over nearby development. The EIA over the past six months has put out data showing that half the US's domestic oil output, and two-thirds of its natural gas, comes from fracked wells.
"We're not going to get into what the rules are but that is something worth pointing out. What's at stake in this decision might be bigger than people thought," says Sieminski.
“We think $50 will encourage shale production to a certain extent, but probably not enough to offset the decline in conventional crude supply”
The EIA has been similarly active looking at the future of US carbon emissions. The next president will decide whether to push ahead with the country's commitment under the Paris climate accord and, more specifically to the US, whether to implement the Clean Power Plan (CPP), an initiative that aims to slash emissions by a third by 2030. Clinton has said she'd push the CPP forward. Trump would roll it back.
Either way, the EIA sees carbon emission from the energy sector falling thanks to efficiencies and coal being pushed out of the power mix. But the future of American energy looks quite different depending on the choices the next president makes. The CPP would be a boon to the renewables industry, with gas demand taking a hit in the early years, but seeing long-term benefits from the carbon restrictions. Without CPP, Sieminski says, there would still be less coal in the system but more natural gas and less renewable energy.
Sieminski, who spent 14 years as an analyst and energy economist at Deutsche Bank, has also been spearheading changes within the EIA since he joined in 2012. For policymakers and market watchers the EIA provides an essential window into US energy markets, and it is trying to improve the view.
It hasn't always been easy. For instance, oil-market watchers were thrilled in September to see that the EIA started publishing near real-time data on US oil exports, which gives a much clearer view not only of how much oil is moving out of the country but how much is being consumed at home. In an era of ubiquitous data, it would seem to be a fairly straightforward stream of numbers to release. It turned out to be a two-year odyssey of bureaucratic wrangling and shuttling between customs, the Census Department and other federal agencies to get everyone on board.
"Everybody was actually pretty positive about it; [but] even when everyone agrees to do something it took a long time. That's going to make both our domestic demand and export numbers a lot better," says Sieminski.
Over the past couple of years, the EIA has also rolled out hourly electricity generation data across the US to help policy-makers understand how the proliferation of renewables will fit into the grid. It has started tracking how much crude is actually moving around the country by rail ("before, we were just kind of guessing"). New maps allow officials and investors to overlay hurricane forecasts over the nation's energy infrastructure.
All the work seems to have been recognised. At a time of austerity and budget sequestering in Washington, the EIA got a $5m bump in its budget to $122m in 2016. The future for the EIA, says Sieminski, will be in channeling the proliferation of data from within its own walls and beyond to continue refining and expanding its service. For instance, in September the organisation started publishing estimates on the number of drilled but uncompleted wells-a key indicator for predicting future production growth-using data from Baker Hughes and other industry sources. If it's a sign of things to come, then it's a win for market transparency.