This opinion piece presents the opinions of the author.
The United States experienced the largest increase in annual oil production ever for the industry last year. According to the annual review of world energy markets prepared by BP plc, the one-million barrels a day increase in output was the largest in the history of the United States going back to the oil industry’s beginning in 1859. BP also cited the country’s strong growth in natural gas production, too. But maybe more significant was the 2.8% decline in energy demand last year, which has certainly helped the country reduce its balance of payments due to lower oil imports. The problem, however, is that the strong performance of the domestic oil and gas industry has forecasters making aggressive predictions about its future production growth and the resulting impact on global energy markets and the political environment.
On a comparison of oil output growth based on average production for 2011 and 2012, the increase was about 800,000 barrels a day (b/d). On the other hand, if the output change was measured between the final days of the respective years, as reported by the Energy Information Administration (EIA), the increase was 1.139 million b/d. And if we use the four-week averages for December of each year from the EIA, then the increase amounts to 1.069 million b/d. These gains are significant and reflect the collective efforts of the industry to exploit shale deposits across the country and in particular the Bakken and Eagle Ford oil shale formations.
The strong performance of the oil and gas industry has caused forecasters, such as the EIA, the International Energy Agency (IEA), and private forecasters, including Citibank, to project the U.S. becoming a net exporter of oil within the next decade and that the U.S. could even out-produce Saudi Arabia by 2020 reclaiming the world’s number-one oil producer ranking once again.
The EIA suggests in its Annual Energy Outlook for 2013 that between 2011 and 2020, U.S. oil production will grow by 1.8 million b/d in its Reference case and by four million b/d in its High Resource case. With over a million barrels of net new production in 2012, the industry is well on its way to meeting the Reference projection and a quarter of the way to the High Resource target.
But will production continue to grow at the rate it has for the past two years? That will depend on the trajectory of global oil prices, trends in drilling and production, regulatory policy and the performance of existing reservoirs.
The petroleum industry continues to make progress in reducing the number of days needed for drilling the horizontal wells required to exploit shale resources. It is also advancing completion technology, including hydraulic fracturing, to boost initial well production and increase total reservoir recovery rates. All of these improvements will reduce finding and development costs and improve company financial returns. The key question is whether future technological gains will continue boosting initial production and ultimate recovery rates at a pace similar to that experienced in recent years. If the answer is yes, and government regulation and restrictions on access to land are not inhibitors, then the industry has the potential to further boost output and reduce U.S. oil imports. On the other hand, if the answer to the question is no, then due to the rapid production decline rates for shale wells, the industry will be stepping onto a drilling and fracturing treadmill as the industry will need a steady increase in producing wells merely to hold shale output steady, or to limit its rate of decline.
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G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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