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Technology remains driving force behind US energy gains

Technology will continue to improve US energy production and use, but its contribution should not be overestimated, panelists at a conference on the US Energy Information Administration’s final 2012 Annual Energy Outlook agreed.

Addressing regulatory questions that have been raised will be essential if the potential of abundant US oil and gas resources is to be realized, the panelists said June 27 during the Bipartisan Policy Center-hosted event.

More than one third of total US crude oil and one sixth of total US natural gas now being produced comes from tight shale formations, noted John Staub, EIA’s team leader for oil and gas exploration and production analysis.

“While its growth has been dramatic, it has taken time for the technology to evolve,” he said. “The Barnett shale, for example, is a 20-year overnight success story.”

Nevertheless, the US tight oil and shale gas technology story is just beginning, with much more to be written, he continued. “Rocks are just rocks until technology changes how we look at them,” Staub said. “We don’t anticipate step changes in our modeling. We do expect changes in how technology turns these rocks into value.”

EIA’s final 2012 AEO, which was released June 25, noted that US crude production increased to 5.5 million b/d in 2012 from 5 million b/d in 2008, and could expand by more than 1 million b/d in the next decade as more resources are developed in the Gulf of Mexico and more tight oil is produced onshore.

‘Key uncertainties’

“Because the technology advances that have provided for recent increases in supply are still in the early stages of development, future US crude production could vary significantly, depending on the outcomes of key uncertainties related to well placement and recovery rates,” it added.

US gas production, meanwhile, will continue to rise from further technology applications and more drilling in shale plays, the final AEO said. Its reference case predicted a shale gas production increase from 5 tcf/year in 2010 (23% of total US dry gas production) to 13.6 tcf/year in 2035, although unresolved uncertainties could affect actual growth.

Projected increases in gas production could make it exceed demand early in the next decade, it continued. “The outlook reflects increased use of [LNG] in markets outside North America, strong growth in [US] natural gas production, reduced pipeline imports and increased pipeline exports, and relatively low natural gas prices in the [US],” it said.

John Conti, EIA’s assistant administrator of energy analysis, said, “I wouldn’t bet my portfolio on the AEO’s commodity price forecasts because they cover such a long period. The one certainty I’ve observed is that markets can quickly and effectively adjust.”

Conti said the striking difference in oil and gas prices caught his attention as he worked on the forecast. “Our experience is that this won’t last long before someone finds a way to start taking advantage of it,” Conti said.

Crude oil exports

US oil demand peaked in 2005 and has been going down ever since, while production, which had declined, grew from 2008 to 2011 more than in any other country, according to James Burkhard, managing director of the global oil group at IHS-CERA Inc. in Washington. This could lead to suggestions that the US start to export some of the crude it produces, he suggested.

“This issue will grab headlines for a couple of reasons,” Burkhard said. “Where the crude is produced is not necessarily where it’s refined. Also, the crude quality is an issue since Gulf Coast refineries are configured to process heavier grades than the US is producing from its new sources.” Pressure could mount to build more pipelines, although opposition to the proposed Keystone XL extension may indicate that approvals of other projects could be hard to get, he said.

Daniel P. Ahn, a senior economist and head of commodity portfolio strategy at Citigroup, said its forecast anticipates 12 million b/d of North American crude production growth during the 2020s, making the continent self-sufficient. US gross domestic production by 2020 will have grown 2-3%, the current account deficit will have narrowed by 1.25% to 2.4% of GDP, and the US dollar’s value will have increased, he said.

Water contamination and methane emission concerns, and providing the necessary transportation of the newly produced crude to refineries will be the biggest obstacles, Ahn said. “The US benefits from having the most extensive network of pipeline, truck, and rail infrastructure in the world,” he noted. “If regulatory issues are resolved, the macroeconomic impacts could be big.”

Charlie Cooke, deputy director of the University of Texas Energy Institute, said, “If these resources are to be developed, regulation will need to be based on fact-based science. For instance, there’s a greater chemical threat on the surface, where they’re concentrated and more susceptible to spills, than downhole.”

Domestic bottlenecks and a lack of adequate gathering, transportation, and processing facilities overseas could limit tight shale gas production growth worldwide, Cooke warned. “We tend to be optimistic about what can be done elsewhere,” he said, adding, “We have to remember that we had a tremendous head start.”

Contact Nick Snow at nicks@pennwell.com.


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