Recovery seems to be gathering momentum in global oil and gas markets, driven more by improved production practices and technology than by gradually rising prices, speakers said during a Feb. 16 discussion at the Center for Strategic and International Studies.
“Producers are smiling again. Some are thanking [the Organization of Petroleum Exporting Countries] for stabilizing markets and surrendering some market share by reducing exports. The US could be back to running 1,000 rigs by the end of the year,” said RBN Energy LLC Pres. Rusty Braziel.
But this recovery is different from its predecessors’ because it’s relatively limited and driven by factors besides oil and gas prices, Braziel said. Production from unconventional wells after initially high rates is not declining as quickly as it did when the US upstream oil and gas renaissance began 10 years ago, Braziel said. Average volumes per rig in the Eagle Ford shale are 5-6 times more than they were in 2010, he said.
“US producers are concentrating acreage, making it cheaper to operate. Laterals can be longer—commonly 2 miles at 10,000 ft. More of the wellbore is connected to the formation. Extra sand allows producers to choke wells back, reducing the decline curve,” Braziel said. Global crude prices could stay within a $30-70/bbl range for the next 14 years, he said.
Crude oil quality continues to matter because recently resumed US exports could be limited based on world needs, noted CSIS Vice-Pres. and Trustee Fellow Frank A. Verrastro, who moderated the discussion. “The geopolitics are important because they depend on government policies, both domestically and internationally,” he said. “Now that the US has taken frontier areas away from its future plans, we might be setting ourselves up for a surprise around 2021.”
Downstream outlook fluid
The downstream outlook remains fluid as fuels such as field condensate become increasingly important in many markets and coal-to-liquids projects rise in China, observed Energy Supply Analysis Inc. Pres. Sarah Emerson. “The product demand composition is changing as [LNG] and methane are beginning to compete with diesel and gasoline within the transportation market,” she said.
There were too many products supplied in 2015, but markets began to rebalance the next year when there was a 200,000-b/d deficit, which she expects to continue in 2017, Emerson told the CSIS audience. “We’ve been clawing our way back and the refined products markets could be rebalance by 2018,” she said. “The problem is that in 2019 and 2020, we could see a tremendous increase in refining capacity worldwide.”
The global crude oil rebalancing is just getting started, with OPEC production falling somewhat amid recoveries outside the cartel, Emerson said. “By the end of 2017, we could be looking at a significant crude oil deficit if OPEC keeps up its discipline through the second half,” she said. “But refining expansions could threaten product market rebalancing during and after 2018, particularly since more products are starting to come from non-crude oil sources.”
US refiners clearly have benefited the past few years because there was virtually no downstream investment in Africa and Latin America, creating demand for US product exports, according to Kurt Barrow, vice-president of midstream and downstream oil markets at IHS Energy. “With those exports, US refiners are pretty well fixed with both light and heavy processing capacity,” he said.
Integrated oil companies and larger independent refiners are selling weaker assets and building more petrochemical capacity in the US, Barrow said. “European refining margins are weakening from high stocks and import competition,” he said. “The Middle East is now supplying about 25% of Europe’s products, up from about 10% a few years ago. Prices have flattened because of excess supplies and low freight rates. A big question is whether China’s demand will make product exports grow further.”
Continued RFS problems
Barrow said IHS analysts don’t expect big refining margin impacts because the global crude slate does not look likely to change much. “Policy-wise, the Renewable Fuel Standard is the biggest problem for domestic refiners,” he said. “It’s quite complex, with agriculture, automotive, and refining interests sitting at the same table.”
Changes in global International Maritime Organization’s ship bunker fuel composition could create problems when its sulfur content drops to 0.5% from 35% in 2020 and ships’ engineers need to be reconfigured, he warned.
Adam Sieminski, who now holds the James R. Schlesinger Chair for Energy & Geopolitics at CSIS following 4½ years at the US Energy Information Administration’s helm, said, “Refining has become global. Products are being exported from places like India [and] all over the world. The US has become a huge player, and competition has grown. Policy uncertainties certainly could play a role, and it will be hard to track.”
Economists generally expect global economic growth to increase from 2016 through 2018, Sieminski said. “Recently, the supply side has driven much of the forecast thinking, but economic growth could be a pleasant surprise,” he said.
OPEC is planning to have its compliance committee meet in late March, “and it will be interesting to see whether the Saudis believe Iran, Russia, and similar countries have been doing enough,” Sieminski said.
Contact Nick Snow at [email protected].
