US Oil Production On Brink Of 'Dramatic' Decline, Exec Says

US Oil Production On Brink Of 'Dramatic' Decline, Exec Says
Oil executives warn of a "dramatic" decline in US production that could pave the way for a future spike in prices if fuel demand increases.

Reuters

LONDON, Oct 6 (Reuters) - Oil executives warned on Tuesday of a "dramatic" decline in U.S. production that could pave the way for a future spike in prices if fuel demand increases.

Delegates at the Oil and Money conference in London, an annual gathering of senior industry officials, said world oil prices were now too low to support U.S. shale oil output, the biggest addition to world production over the last decade.

"We are about to see a pretty dramatic decline in U.S. production growth," the former head of oil firm EOG Resources Mark Papa, told the conference.

Papa, now a partner at U.S. energy investment firm Riverstone Holdings LLC, said U.S. oil production would stall this month and begin to decline from early next year. He said the main reason for the decline would be a lack of bank financing for new shale developments.

Official data show that nationwide U.S. output has already begun to decline after reaching a peak of 9.6 million barrels per day (bpd) in April, although production in some big shale patches, including North Dakota, has held steady thus far. The Energy Information Administration forecast on Tuesday that output would reach a low of around 8.6 million bpd next year.

Until this year, U.S. oil output was growing at the fastest rate on record, adding around 1 million bpd of new supply each year thanks to the introduction of new drilling techniques that have released oil and gas from shale formations.

But oil prices have almost halved in the last year on oversupply in a drop that deepened after the Organization of the Petroleum Exporting Countries in 2014 changed strategy to protect market share against higher-cost producers, rather than cut output to prop up prices as it had done in the past.

Benchmark Brent crude was up 5 percent, or $2.50 a barrel, at $51.75 on Tuesday as investors digested news from the London conference. It peaked in recent years above $115 a barrel in June 2014.

Spike

The chief executive of Royal Dutch Shell Plc agreed, saying U.S. oil producers would struggle to refinance while prices remained so low, leading to lower output in future.

"Producers are now looking for new cash to survive and they will probably struggle to get it," Ben van Beurden said.

Longer term, there was a risk that low levels of global production could bring a spike in oil prices, he said.

If prices remained low for a long time and oil production outside OPEC and the United States declined due to capital expenditure cuts, there was not likely to be any significant spare capacity left in the system, he said.

"This could cause prices to spike upwards, starting a new cycle of strong production growth in U.S. shale oil and subsequent volatility," van Beurden said.

Adam Sieminski, administrator at the U.S. Energy Information Administration, told reporters on the sidelines of the conference the U.S. oil industry had reacted to lower prices by improving its productivity.

But this process could not continue forever.

"Now we are seeing the limits at least in the near term and it is beginning to impact production," Sieminski said. "We see (U.S. oil production declines) continuing into next summer."

The Secretary-General of OPEC, Abdullah al-Badri, said oil supply growth from non-OPEC producers might be zero or negative in 2016 because of lower upstream investment.

But Papa said if U.S. light crude oil prices went back up to $75 a barrel, U.S. oil production would resume growth at around 500,000 bpd - or around half the record growth rates observed in the past few years.

"I see the United States as a long-term growth producer," he said. "If low oil prices prevail - then the correction in oil prices will be much more severe."

(Writing by Christopher Johnson; editing by David Evans and Christian Plumb)

Copyright 2016 Thomson Reuters. Click for Restrictions.

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Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
Dozerguy123 | Oct. 9, 2015
Most people in the know, knew that the horizontal gas wells drop off really fast. Probably not profitable without a lot of sucker investors. Wonder who is going to get screwed? The oil fields have always liked a sucker/idiot with a lot of money. Very dangerous investment for the average person. Welcome to the patch.

UKUKRMAN | Oct. 9, 2015
@Gary Absolutely spot on brother...the only thing oil producers care about is maximizing profits...and they know that comes at the expense of screwing Joe public always....The more it hurts Joe Public the more money big oil makes...they love it...values may never quite get to the rip off level of before the crash but it will go up high enough to keep big oil happy....and everyone else in misery

ANDRE | Oct. 9, 2015
Ohh Nooo !!! I am really shedding CROCODILE TEARS for those GREEDY guys that jumped for FRACKING !!! Which should NEVER HAVE STARTED AT ALL... You got plenty & easy Saudi crude, so use it.. instead of stupid government subsidies, energy independence, etc stories. Now enjoy Chapter 7 & 11. I feel sorry for $50 oil and lay-offs. Leave oil @ $70-80.

Wee How Tey | Oct. 7, 2015
I believe there is no doubt that the U.S oil output will drop precipitously sooner or later. Low financing in new upstream activity doesn't bode well for high output level at 9 mill /bpd.

R.J. Spoley | Oct. 7, 2015
The horizontal fracing dewatering resource play was doomed from the start. The oil and gas are there due to relative permeability in very low permeability, high shale content, low porosity, high water saturations that never allowed the stuff to escape during generation. The reservoir energy is due to over compressed gas as a result of the fracing. The increase in fracture numbers and size allows for the removal of the wetting fluid so that some permeability is gained to the non-wetting fluid. Once the over pressured gas is depleted, the liquids quit flowing. Thus the very rapid decline curves. You just cant effectively pump a horizontal well. When recovery factors are considered in this scenario it becomes obvious that the reserves are short lived and small to begin with. Welcome to the Queen of Hearts.

Gary | Oct. 7, 2015
Translation We can make the cost of crude rise so we can make billions of more dollars based on what we want........screw you John Q Public. Even though we know crude has been overpriced since 1973....we still like making folks pay through the nose for things they need And basically.....we dont care. The end


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