Back to the future for US oil as it changes dynamic
New outlooks are transforming the US energy market, with many more shifting boundaries set to come
It’s a little-known fact that shows the changing dynamic of US oil supply as it strives to regain the elusive energy autonomy it has craved for more than half a century. In January, North Dakota overtook California as the third-largest oil producing state and is fast closing on second-place Alaska. North Dakota has been producing oil for almost a century, but never in such quantities.
The state oil and gas commission said production topped 546,000 barrels a day (b/d) in the opening weeks of the year, up some 11,000 b/d from December 2011. At that rate, North Dakota is on track to meet or exceed last year’s 35% production increase, virtually all of it from the Bakken. Pipeline operator
Enbridge expects Bakken production to hit 650,000 b/d by 2015. But if things keep going as quickly as they are now, it’s likely to hit 1 million b/d before then.
High oil prices are buoying drillers. State records show some 212 new wells began drilling in January, compared with 140 new spuds in the first 10 weeks of 2011. Even more telling, the number of new wells waiting to be fractured rose to 780 from about 730 last summer: a sign that production is poised to climb higher as behind-pipe volumes come on stream.
But it’s not just North Dakota where unconventional oil is transforming the outlook. Top producer Texas is undergoing a renaissance of its own, as rising output and rig counts in the Eagle Ford lead the state out of recession.
Texas’ oil production of 1.6m b/d is the highest since 1995. According to the Texas Railroad Commission, 907 rigs were drilling in March, almost half the entire US onshore drilling fleet. According to
IHS Cera, a firm of consultants, by 2020 Texas could return to its post-war production peak of about 3.4m b/d, set back in 1970. Production up; demand down
Even as production soars, demand is falling and there’s a sense those trend lines will eventually intersect.
According to the
American Petroleum Institute (API), an industry lobby group, US petroleum demand fell 2.3% against the same period last and another 4.3% so far in 2012. It confirms a trend: overall petroleum consumption peaked in 2005 and has been falling ever since.
Some of the decline can be attributed to the lingering effects of the global recession. But structural shifts in the US market, for both oil and natural gas, are also playing their part. According to the
Energy Information Administration (EIA), the statistical arm of the Department of Energy, US natural gas imports are at their lowest since 1992. Liquefied natural gas imports peaked at 2.1bn cubic feet a day (cf/d) in 2007 and fell to just 600,000 cf/d in the first three months of 2012. The EIA says the US is on track to be a net LNG exporter by 2016 and an overall gas exporter by 2021.
The pattern is being repeated with refined products. A
Wood Mackenzie study suggests US demand for refined petroleum fell 150,000 b/d in 2011 and is down 1.9m b/d since 2005.
That has tilted the Lower 48 into a surplus position for products like diesel and gasoline for the first time since 1949. The EIA in February said US refiners exported 439,000 b/d more products than they imported last year, up from an initial surplus of 269,000 b/d recorded in 2010.
The shift in energy fundamentals could help lead the US’ economic recovery. Swiss bank Lombard Odier Darier Hentsch & Cie reckons that rising domestic production of oil and gas could wipe out the US trade deficit by the end of the decade. Petroleum accounted for approximately 40% of the $52.6bn trade gap reported in January.
“Combined with higher domestic oil production, and given the massive energy weight in the current account deficit, the gap will gradually close,” said the bank. “The trend is firmly in place and will be of great help to a country struggling to reduce deficits and debt levels.”
Land of the import-free?
Though it is clearly in sight, true energy independence – and the fruits of plenty -- remain out of reach. Even as production grows, gasoline prices are soaring close to $4 a gallon, thanks to transportation bottlenecks at the main trading hub at Cushing, Oklahoma. It is frustrating many American motorists, some of whom will vote in the coming presidential election.
The Obama administration is considering policies aimed at stifling exports of petroleum and natural gas, even as the country continues to import slightly less than half of its daily oil consumption. Industry figures, such as Chesapeake chief executive Aubrey McClendon, have come out firmly against natural gas exports.
Though the aim of the policies is to protect consumers from higher prices, industry groups complain that keeping prices artificially low will reduce the incentive to keep drilling for new reserves and may make them uneconomic.
ITG Investment Research, break-even costs for North Dakota’s Bakken have risen to $70 a barrel from $55/b in 2010 -- a troubling trend that could sap US production momentum. “Notwithstanding thinning margins, the Bakken continues to represent a massive resource”, says analyst Trevor Sloan.
On 20 March, the API called for opening up federal lands for drilling and avoiding policies that would increase costs.
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