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The case for caution on sustainability of US shale oil

Analysts argue that while US unconventional crude output is surging, the industry needs to take a closer look at the sector's sustainability

The rise of tight oil in the US has been remarkable, but is it sustainable? Analysts took on that question this week at Platts' Crude Oil Summit, with many arguing that the sector still faces a number of challenges that could yet derail the tight oil boom.

Surging production from shale plays such as North Dakota's Bakken and Texas' Eagle Ford will make the US the world's largest liquid fuel producer this year when biofuels and natural gas liquids are taken into account, Christof Rühl, BP's chief economist, said at the conference.

US oil production was 7.17 million barrels a day (b/d) in February this year, the highest level since the early 1990s. Around 2 million b/d of that was produced from tight oil formations.

The resurgence of oil production has reshaped the US and global energy markets. US oil imports have fallen by about half from around 12m b/d in 2007 to around 6m b/d today. Declining fuel demand has played an important role as well, but increased domestic oil production has helped to put energy self-sufficiency within sight. North Dakota alone now produces more oil than Opec-member Ecuador.

Most forecasts see US tight oil production continuing to rise over the coming decade. In its long-term energy outlook, for instance, BP forecasts North America tight oil output growing from around 2.1m b/d in 2012 to nearly 6m b/d by 2020.

And this is, as Rühl ponts out, at the low end of some forecasts. "A lot of that is irrational exuberance or hype, these are the same consultants that three years ago were running around saying that we are running out of oil. Now they are saying that we are drowning in it because they have something to sell."

That sentiment was echoed by others. "Light tight oil is a massive resource. It is transformative. It has already shifted trade flows... but lets not get carried away by the growth potential," said David Fyfe, the head of market research and analysis at Gunvor.

So-called "above-ground" factors pose the biggest risk. Prices, for instance, need to remain relatively high for tight oil growth to be sustained. "It is a source of supply that requires spending to keep drilling, keep drilling, keep drilling thousands and thousands of wells because whether its in the Eagle Ford or the Bakken you lose between 50% and 70% of productive capacity every year so you've got to keep spending to keep production capacity high," Fyfe said. "If we are in an environment in which WTI risks dropping below $70 a barrel, it starts to get interesting for light tight oil."

The industry will also be watching closely the debate among policymakers in Washington over whether or not to ease a 1970s ban on oil exports, which are, for the most, banned under current regulations. The US House of Representative's Energy and Commerce committee held a hearing last week on the benefits and drawbacks of allowing large-scale oil and natural gas exports. How that debate plays out will be crucial to the future growth of tight oil production.

US refineries have so far been able to absorb rising domestic tight oil production, with imports from West Africa and other producers of similar grades of light oil being crowded out by domestic sources of supply. Other light oil and condensate produced alongside it will also be used by refiners to dilute heavy crudes.

But there is a limit to how much light oil the US refining system, which has been built to process heavier and sourer crudes from the Middle East, Venezuela and Mexico, will be able to absorb. And the country may be coming to the saturation point sooner than many realise. "If we get 4m b/d of growth in light crude production in the US by 2020 we will have to find a way to either export it or somehow improve the infrastructure," said Guy Caruso, a senior advisor at the Centre for Strategic & International Studies and former US department of energy official.

The industry is likely to step up pressure on the government over the next year to allow for those exports.

That is a debate that has only just begun, but Caruso sees the politics potentially moving in the industry's direction on the issue. "We now have the possibility that you will get a larger energy lobbying effort in the US because there are about 15 states now producing shale gas and tight oil. It is no longer just the Texas, Louisiana and Oklahoma - good ole boys' that will be lobbying the US Congress," he said.

"Is the political landscape shifting fast enough to get action done in 2013? I wouldn't bet on it."

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