U.S. Oil Production Outlook
Energy Independence Day
Credit Suisse Connections Series
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excerpt:
Energy Independence Day: Growth in U.S. shale oil production and 100 years
of natural gas resources are driving hopes for U.S. Energy Independence and
fears of a correction in medium-term oil prices. In this note, we focus on the
outlook for U.S. oil production as a companion to our work on U.S. gas
production (The Natural Gas Reservoir). As with any new technology, our
assumptions could prove optimistic or conservative—time will tell. We will
update our basin excel model for oil production and mid-continent balances
(WTI-Brent spreads) quarterly as more information becomes available. In this
report, we consider the following 10 key questions, but more will likely emerge:
(1) How fast can U.S. production grow? Based on high oil prices and a set
of improving assumptions—i.e., a 27% higher oil well count by 2016 versus
2012, (58% higher than 2011) and a 25% improvement in 30-day initial
production (IP) rates per well, we calculate that U.S. oil production could
reach just over 10MBD by 2020 and maintain this level for a number of years.
Although the well count increases by 27%, we note that our oil rig count only
increases by 11% owing to improvements in drilling efficiency—i.e., the
number of days to drill a well. Key shale plays to watch include the Eagle
Ford, Bakken, and Permian. After recent exploration success, the offshore
Gulf of Mexico and potentially Alaska should contribute some growth also.
(2) What cash flow and hence oil price is required to fund this growth?
Single well economics suggest breakevens in the $60-75/bbl range for US
shales today. However, driving growth at forecast rates requires substantial
capital—access to capital could be a greater constraint. In a simple
calculation, we estimate that the U.S. oil industry needs around $95/bbl
Brent near term to fund the capex required to deliver this growth, based on
self-generated cash flow alone. This could be lowered by external funding,
but we are already seeing some companies reduce capex when WTI
recently fell through $90/bbl. As US oil production volumes rise, this
breakeven could fall toward $80/bbl. It is important to note that the average
recovery of a gas well is 3-5x the recovery of a typical oil well on a BTU
basis. The shale oil revolution should help meet rising global demand but
looks less likely to lead to a collapse in domestic pricing similar to U.S. gas
markets.
(3) How long can the underlying rocks maintain this rate of growth? In the short
term, growth can be maintained or even accelerate (depending on rig counts—i.e., oil
prices). However, there are 2 key challenges for oil production growth vs natural gas.
(1) Each individual shale oil well is less productive than gas wells from the
Haynesville/Marcellus that have lowered the cost of natural gas. (2) We don’t yet know
the terminal decline rates from new oil shale plays (given the limited history). Physics
would suggest oil decline could be higher than natural gas shales. This decline
treadmill will likely lead to a plateau in US production. We forecast a 10MBD plateau
for US oil production by 2020-22. At that time, we would need to add 1-1.5 current
Bakken’s every year just to offset decline in existing production. Inside we have
compared our drilling program to the core acreage in each play to cross check our
assumptions, (e.g., Bakken rig counts would need to fall unless acre spacing
improves—otherwise the acreage would be fully drilled out by 2030). Downspacing
tests are important to watch across the key plays as an indicator of longer-term
production.
(4) Downstream Implications: Accommodating 600kbd pa of oil growth from the U.S.
and 300kbd pa of Canadian growth through 2017 will require new trunkline pipes and
gathering systems. Our short term model suggests WTI-LLS will remain wide through
2H12 but narrow as Seaway, southern Keystone XL and Permian pipes are built
through 2013. Even as WTI-LLS spreads narrow, it is likely that a wider discount will
remain for Bakken and Canadian Heavy crude through 2014.
(5) Service Implications: Growing US production will require a significant increase in the
number of wells drilled from 9,200 in 2011 to 16,000 pa in 2022. This will require a higher rig
count (our assumed oil rig count rises by 112 rigs by 2017). Each rig will also need to drill
more wells each year. Although the near term outlook for onshore services remains
challenged from weak natural gas prices, North America oil shale potential and rising gas
demand should require substantial investment, people and service activity.
(6) US Energy Independence?: The gap between US oil production and consumption
is large and may not close in the forecast period (2022). However, North American oil
independence (US, Canada, Mexico) looks more achievable with appropriate policies
to promote safe drilling, energy efficiency, regional coordination and gas substitution.
However, we don’t hold out high hopes of the same low cost dividend to the US
economy provided by natural gas due to the relatively higher cost of oil shales and
Canadian oil sands. Natural gas appears the best low cost energy policy bet.
(7) And If There Is Another Recession? In the event of a double dip recession, with
industry balance sheets unable to absorb further deterioration in revenues, we would
expect a contraction in oil activity. We flex the model to show that US production could
be lower by 1.5MBD in 2017. This would also ease congestion on WTI markets, though
Canadian oil growth would still need new pipes to reach markets making refiners in the
north mid-con region more defensive.
(8) Implications for Global Shale: North America shale success is leading a wave of
entrepreneurial animal spirits. Thus far, we are most impressed with shale results in
Argentina and Germany but above ground politics need to be resolved. In the medium
term, the Russian Bazhenov oil shale needs watching, so too the gas shale potential of
China and some excitement over Australian potential. International shale will take time
to delineate and develop but could be a meaningful source of energy later this decade
and in the 2020’s.
(9) Implications for the U.S. Economy: Our U.S. industry capex model suggests
around $1.3 Trillion dollars of spend between now and 2020. Low U.S. gas prices
should encourage some $35Bn of petrochemical capex and a manufacturing
renaissance. The logistics to bring shale hydrocarbons to market could total an
additional $80Bn this decade.
(10) Implications for the Oil Price: Supply from the U.S. and Canada is visibly
growing. However, outside North America non-OPEC supply growth is negative in
2012. In our base case, spare capacity increases towards 3% by 2015 (from 2% today)
better but markets may still reflect some risk premium over marginal costs. Risks to this
view seem balanced. Spare capacity could rise faster if curtailments in Nigeria, Iran,
Venezuela, Sudan were resolved. Spare capacity could fall, if a global economic
recovery takes hold. |
