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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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The Future Of U.S. Oil Relies On A Single Play

U.S. oil production recently broke another record, jumping to 10.619 million barrels per day (mb/d) in the last week in April, and the sky seems to be the limit for U.S. shale drillers. However, the fate of U.S. oil, and ultimately a large slice of total additional output for the entire world, is all predicated on aggressive forecasts from one place: the Permian Basin.

Total global oil production is expected to rise by 6.4 mb/d by 2023, according to the International Energy Agency.

Offshore Mexico and Brazil are set to see higher levels of spending and development, and the IEA sees higher output from Iraq, the UAE and Kuwait over the next few years. Still, the U.S. accounts for 3.7 of the 6.4 mb/d of new supply through 2023.

In other words, more than half of all new production over the next five years will come from the U.S., and almost all of that will come from the Permian. The Bakken edges up a bit but declines again, as does the Eagle Ford. For all intents and purposes, U.S. shale has basically peaked outside of the Permian.

In that context, it is not an exaggeration to say the Permian is the most important place on the planet in terms of new oil supply.

Image source: artberman.com

Permian production is expected to double between 2018 and 2023, rising to 4.1 mb/d. That means that West Texas will be producing nearly as much oil as Iraq, OPEC’s second largest producer.

The oil market – and thus, the global economy – appears to be highly vulnerable with so much of the world’s supply growth dependent on one location. Related: Is This The Perfect Battery?

The headwinds are formidable. New oil discoveries hit a record low in 2017, amounting to less than 4 billion barrels of oil, condensate and natural gas liquids, the IEA says. Spending on exploration and development will remain at a fraction of pre-2014 levels even though it is expected to tick up beginning this year. “This is potentially storing up trouble for the future,” the IEA wrote in its Oil 2018 report earlier this year. “An added concern is that investment is overwhelmingly focused on the light tight oil (LTO) sector in the United States.”

Also, while the decline rate at conventional oil fields has narrowed a bit in recent years, the world lost about 3 mb/d of supply in 2017 as the result of declines at mature oil fields. That means the oil market lost the equivalent of production from entire North Sea last year. Every year conventional oil fields lose a chunk of supply, often around 5 percent or so, which needs to be made up from new additions elsewhere.

Decline rates combined with cuts to exploration and investment means that conventional oil field production is expected to decline on an absolute basis over the next five years.

The bottom line is that the expected increases in supply will come from shale, oil sands and other non-conventional supplies. But that statement obscures the fact that much of the additions will come from solely from the Permian, making West Texas the center of the action for the entire global oil market over the next five years.

To be sure, activity is booming. The Permian is now home to 458 rigs, more than half of the total oil rigs operational in U.S. shale. Exxon is set to become the largest driller in the Permian with 30 active rigs by the end of this year, after spending more than $6 billion more than a year ago to take acquire a foothold in the region. Related: Robots And Drones Are Changing The Offshore Oil Industry

But again, there are risks for the world in relying too much on one place.

Permian oil production is now close to 3.2 mb/d, and is bumping up against pipeline limits. The bottleneck won’t be resolved for at least another year and a half. Discounts for crude oil in Midland, Texas have exploded from a just a few dollars per barrel to over $13 per barrel this week. That is a reflection that the basin is starting to buckle because of the lack of pipeline space. Costs are down from years ago, but are starting to edge up again. There is also a strain on sand, labor, rigs, equipment and fracking services.

Much of this can be resolved in time, but the point is that there are some obstacles standing in the way of the explosive growth planned for the Permian. And because of the region’s importance to global supplies, any shortfall has broader implications than just for the quarterly profits of individual shale companies.

By Nick Cunningham of Oilprice.com

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  • Kr55 on May 07 2018 said:
    I don't think people are digging enough into oil grades and the capabilities of the refining complex in the world. Shale oil cannot satisfy the worlds demand growth, because that growth requires more of many products that simply can't be supplied from and super light shale oil.
  • David Jones on May 08 2018 said:
    Regardless of this short term outlook, my advice to anyone entering college/university right now is to avoid careers in oil development. Jobs in this field are likely to be at high risk of disappearing over the next 30 years or so. I look at it as the current coal industry equivalent of the 2050s.
  • Davy Rockland on May 08 2018 said:
    Ten years ago nobody expected much from US oil. Shale oil in Northern America has been dismissed as unworkable and unprofitable ever since it started influencing global prices. Predictions of collapse have only grown more intense with rising production.

    But if you didn't predict the coming of shale oil in NA, what makes you think you can predict its end? You can't, of course. But you have to sell advertisements, so word count is everything regardless of the words themselves.

    You simply do not know, and everyone knows that you do not know.
  • Kishore Kumar on May 08 2018 said:
    Well done America. Be the top producer of oil & gas forever.
  • Justin on May 08 2018 said:
    @David Jones

    "Jobs in this field are likely to be at high risk of disappearing over the next 30"

    Nice opinion statement but the math says otherwise.

    The world has 1.2 billion vehicles. 3 million of them are EV/hybrids. By 2035 it is estimated there will be 2.0 billion vehicles.

    Annually the world produces 96 million vehicles and about 46 million are retired. 1 million of these in 2017 were EV/hybrids (38% increase from the prior year).

    Assuming EVs can maintain a 38% annual growth rate (highly unlikely) it will take until 2031 before the internal combustion engine (ICE) fleet reaches its highest number. At that time there will be 1.6 billion ICE vehicles. It will take until 2038 before ICE vehicles fall to current levels (1.2 billion) and until 2060 before they disappear. That best case scenario for EVs doesn't take into account lithium production issues. Currently world-wide annual lithium production is 36,000 tonnes annually. To produce 96 million cars annually will require 1.2 million tonnes of lithium annually (40X increase) in the next 20 years. That production growth is highly unlikely.

    None of this takes into account ship and air vehicles either which will further grow oil usage.

    Couple this in with a population growing from 7.6 billion today to 9.8 billion in 2050 (30 years time its 30% higher) plus the steadily climbing per person consumption rate of oil.

    With all of this it becomes pretty obvious oil consumption will easily grow until 2040 at the earliest and as EVs probably won't dominate the vehicle market due to structural supply issues oil demand will likely grow for several decades past 2040.

    So no, I'm not worried about my oil career at all.
  • David Jones on May 08 2018 said:
    It's not so much about this region or that really, while it may have an effect. It will likely be a combination of pressures that cause the downfall of the entire oil industry.

    1. Many car companies have come forward to present a view of an electric future as well as various EV model pledges. This may be mostly hot air atm and a reaction to being Tesla shocked (similar to shell shock) but the general trend is in that direction regardless.

    2. The fundamentals for a transition to renewable power and electric transportation are fueled by long term technological superiority trends as well as rapidly falling prices and looming government policies around the world.

    3. Climate change is a menacing background drone that everyone feels whether they are aware of it or not and as the decades pass, the pressure will increase substantially. There's simply no safe way to avoid action and if left untended will cause a severe political and economic overreaction sometime down the line which may result in massive fossil fuel taxes, litigation, outright bans of fossil fuels potentially even government dissolution/restructuring of oil companies that have failed to transition quickly enough.

    As I said in my other post, best to study something else if you are a few years away from choosing a career. Otherwise we will have the same problem that we have with coal today where the industry workforce is rapidly losing relevance and having to rely on lobbying the government for forced measures in order to survive.
  • Terry on May 08 2018 said:
    One thing you can predict Davy Rockland us that anything that requires fracking will come on strong and deplete quickly. This is from experience I drilled some of the 1st Bakken wells and the gas pressure has depleted to almost nothing in 10 years. So if the world relies on any shale play they better have a back up plan in 20 yrs or oil will be 300 dollars a barrel
  • David Jones on May 10 2018 said:
    @Justin

    This is precisely why I was discussing the potential overreaction to climate change which could and probably will invalidate current projections. Right now, everything is relatively leisurely because the more severe issues haven't presented themselves in any meaningful form. This could easily change over the next 20 years, leading to quick roll out of fossil fuel limiting or even prohibiting policies.

    You are also assuming there are no alternatives to fossil fuels for heavy duty travel which is not the case. Even today, Power to X (in terms of Synthetic Fuels) is pushing forward in Europe (Germany have massive incentives to get this done due to renewable overcapacity and lack of alternative in-house resources). Once it becomes feasible to switch completely, all it'll likely take to tip the bucket is a combination of severe disasters over a relatively short period of time. Think of Fukushima and it's consequences to the Nuclear industry across many countries, in may not be exactly like that (multiple not one disaster) but will definitely be related in consequences.

    As for lithium reserves, major car companies have pledged tens of billions for battery demand which should push mining forward. I do think there will be a squeeze (already seeing this to some extent) in the short term (5 years) but after that things will quickly change in terms of battery production capacity and simply put, EVs are superior to ICEs in every way other than range and refill (charging) speed, these issues will be solved over the next 5 years. Beyond the 2020, the oil industry will be at major risk on all fronts.

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