US oil boom should navigate through uncertainties - consultant

26 March 2014 23:08 Source:ICIS News

US oil boom should navigate through uncertainties - consultantFocus story by Ignacio Sotolongo

HOUSTON (ICIS)--A new era of growth and prosperity and the new energy revolution was a recurring theme at the 112th American Fuel & Petrochemical Manufacturers (AFPM) annual meeting in Orlando, Florida.

But, while most participants at the event appeared to be in a celebratory mood, there were no high-fives or victory laps, as uncertainties remain regarding the future cost of investing in finding and extracting hydrocarbons whether in the US or, for that matter, anywhere else in the world.

The statistics were all upbeat: The US becoming the largest producer of natural gas (although most of the wells are considered to be out-of-the money); domestic crude oil production rising from 5m bbl/day in 2008 to about 8m bbl/day in 2013 as a result of advanced technology, and changing dynamics where the US may become a major exporter of refined products to improve the balance of trade.

Enough discussions were also held with regards to amending the laws for the US to also become a major oil exporter and also the importance of addressing safety issues.

Oil companies have had to reset strategies while going from a world of energy scarcity and predictions of “peak oil” to a perceived world of abundance while facing a new reality for oil prices.

“Could this boom go bust?” was a question asked at the AFPM by Skip York, principal analyst for Americas Downstream, Midstream & Chemicals with Wood Mackenzie consultancy.

He outlined four potential scenarios that could undercut the growth in US tight oil production.

A universal drop in non-tight oil prices, in particular Brent, the global benchmark, could affect the boom, but geopolitical forces and global oil demand have kept prices around $100/bbl.

“A third of all production from new oil developments require more than $80.00/bbl [Brent] to break even, and tight oil is within the cost curve,” said York.

If the Brent-West Texas Intermediate (WTI) spread were to narrow, affecting the differential between foreign and US inland oil prices, it could affect crude-by-rail movements.

According to York, “our model analysis results in a Brent-WTI wide enough to support [foreign cargo] destinations other than [US Gulf Coast] and threaten wellhead economics.”

Another force that could slowdown domestic tight oil production would be a failure of drilling technology to enable expansion into difficult areas. “At present, increasing drilling efficiency reduces break-evens and expands tight oil footprints,” said the Wood Mackenzie analyst.

A fourth potential problem, York said, is classified as “above-ground constraints” such as government regulations, mandates, a ban on hydraulic fracturing (fracking) and tougher safety standards.

In the end, York deemed the four possible negative scenarios as unlikely, which would be good news to the US, as the country’s economic recovery, employment opportunities and trade balance will encourage the promotion of the tight oil boom.

“The economic stimulus of tight oil,” York said, “is critical to the US.”

By Ignacio Sotolongo