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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