US tight oil to triple by 2020, Wood Mackenzie says
US tight oil production is on the rise and will approach 4.1 million barrels per day (b/d) by 2020, with as yet unseen implications for global and domestic markets, energy consultancy Wood Mackenzie says
Big production increases in North Dakota’s Bakken and Texas’ Eagle Ford shale plays have “been nothing short of phenomenal”, according to the UK consultancy, who believe the two plays will produce 1.3 million barrels per day (b/d) each by the end of the decade.
North Dakota’s oil production was 660,000 b/d in June, and is on track to break 750,000 b/d by the end of the year, according to the Energy Information Administration (EIA).
Texas’ oil production, meanwhile, is up almost 30% since 2006, to about 1.5 million b/d. Although Eagle Ford shale has garnered the most headlines, but the Permian Basin – a mature field once believed to be all but pumped dry – is also making big gains. Since 2008, Permian oil production has nearly tripled, to 1.1 million b/d and Wood Mackenzie expects output to be 1.6 million b/d by the end of the decade.
Emerging liquids plays such as the Utica in Ohio and the Tuscaloosa marine shales in Louisiana remain unknowns that could alter the base forecast higher if they prove successful, according to Wood Mackenzie senior upstream analysts Phani Gadde and Hill Vaden.
Other areas such as Colorado and Utah are also posting smaller, but significant jumps in output.
There is potential for further gains from new plays, but the Eagle Ford and the Bakken will continue to be the “movers and shakers”, according to Padde and Vaden.
Wood Mackenzie believes the shale plays are economically viable at prices below $70 per barrel, making it competitive with other potential sources of supply, including offshore production and imports.
The ramifications of the sharp increase in US oil production are far-reaching both at home and abroad. At a global level, Wood Mackenzie says US tight oil is a key emerging non-OPEC growth area over the next decade, after Brazil and Canada.
The rapid rise in US tight oil is also responsible for the wide differential between the West Texas Intermediate (WTI) and Brent benchmarks, as infrastructure constraints around Cushing, Oklahoma have led to a glut of supply and the US’ main storage and transit facility. Wood Mackenzie believes that WTI will continue to trade at a steep discount to Brent until 2020. That will feed through to other markets as locally traded crudes are priced at differentials to WTI based on differences in quality.
Those infrastructure constraints will gradually be eased, allowing lighter onshore production to displace imported medium and heavier crudes and replace them with higher quality light shale oil, Gadde told PEU.
Wood Mackenzie does not see the US becoming completely self-sufficient. “The US is still a net importer of oil and will remain so”, says Gadde. “What tight oil does for us is change the kind of crude we’re running.”
Most imports from outside North America tend to be medium-grade crudes, while Canadian imports are mostly heavy oil. By contrast, most tight oil is a lighter, higher value product.
Canada too, is bursting at the seams. The country’s conventional light oil production is rising for the first time since the 1970s and oil sands output continues to rise. Total Canadian output of light and heavy crude is expected to reach 6 million b/d by 2030.
And investors are targeting Canada’s tight oil fields as well. Toronto Dominion Bank expects producers to spend upwards of C$1 billion ($1 billion) in 2013 in a rush to develop the Duvernay shales, a liquids-rich natural gas play in central Alberta. Wood Mackenzie expects Duvernay to add another 450,000 b/d to North America’s tight oil production.
Though Canada is the US’s largest oil supplier, virtually all of those imports go into PADD II, a sprawling region that encompasses Illinois, Ohio, Montana and North Dakota. Canadian oil is at a disadvantage because “it has to pass through the Bakken” to get to market, says Gadde.
But the party may be coming to an end. Financial analysts are warning of a price crash brought on by the sudden emergence of so much new supply.
In the same way that natural gas producers drilled their way into the poor house, the Canadian Imperial Bank of Commerce (CIBC) says oil producers are on the verge of doing the same.
Whether it is natural gas liquids, heavy oil, oil sands or tight oil has little bearing. An exhaustive CIBC report, entitled Too Much of a Good Thing, suggests US onshore production will continue to grow at a rate of 500,000-700,000 b/d per year until 2016, even after factoring in declines. That forecast rises to 800,000-900,000 b/d after factoring in production from the Gulf of Mexico and Canada.
“Any way you cut it, that is a lot of oil,” says report author Andrew Potter. “Too much of a good thing is bad.”
CIBC is forecasting wide differentials across a slate of producing basins in both Canada and in the US, driving down prices and increasing regional disparities in localised markets.
But Wood Mackenzie disagrees that oil prices will go the same way North American gas prices have gone. Oil benefits from an established infrastructure that allows it to be freely traded around the world.
While there are logistical issues related to pipelines and transportation of new tight oil sources that will persist until 2020, Gadde says the longer term picture is more favourable for oil than it is for gas.
“The oil story is manifesting itself as infrastructure bottlenecks in the short term. Beyond that, oil is more global, and that is a big differentiator,” he said