Production of crude oil and lease condensate in the US continues to provide pleasant surprises. It's increasing faster than expected just a year ago, heading for peak rates higher than forecast earlier. Surprises, though, happen in more than one direction. Production can fall quickly, too.
In its Annual Energy Outlook 2014 Early Release, the Energy Information Administration last week said it expects production to approach 9.6 million b/d in 2019—the record high rate of 1970. In the same outlook last year, EIA projected 2019 output at 7.5 million b/d. The new forecast, assuming continuation of current laws and regulations, is for production above 7.5 million b/d through 2040. Last year's base-case projection for that year was 6.1 million b/d.
Benefits mount
Surging oil production is creating jobs, wealth, income, and tax revenue. It's shrinking the requirement for imported oil. And it's sustaining a ready supply of bargain-price natural gas. Although drilling for dry gas has slumped as operators shift to targets yielding higher-value oil and gas liquids, EIA sees 11% more total gas production in 2012-40 than it did a year ago. Low-cost gas is displacing coal in power generation and stimulating industrial growth. EIA expects the US to become a net exporter of LNG in 2016 and an overall net gas exporter in 2018, 2 years earlier than it projected a year ago.
The surges in oil and gas production come from unconventional resources—hydrocarbons immobilized in the subsurface by something other than conventional geologic and stratigraphic traps. The signature disadvantage of unconventional reservoirs is the need to expend unusually high amounts of energy to establish production. In the shales and other tight formations now so bountiful in the US, the added energy fractures reservoir rock to increase permeability. The signature advantage of unconventional reservoirs is how much more oil and gas they hold in comparison with their conventional counterparts. Application of technical ingenuity to this natural generosity is what's yielding surprise after supply surprise.
Alas, supply growth from unconventional reservoirs is especially vulnerable to boneheaded policy. Production rates from most wells completed in tight formations start high and decline fast to relatively low tail rates that can last for many years. In specific plays, operators usually improve well performances impressively as they optimize drilling and completion practices. In time, total tail-rate production from many wells will be substantial. And potential might be high from recompletion and enhanced recovery. For now, though, increasing—even sustaining—production from unconventional reservoirs depends on continuously bringing wells on production at those characteristically high early rates to offset steep declines in not-so-old predecessor wells.
Any policy that discourages drilling thus threatens the US oil-supply revival. One such policy is the ever-threatened elimination of tax mechanisms unique to drilling and production, such as current-year expensing of intangible drilling costs. The latest embodiment of this menace appeared recently in a broad tax-reform proposal by Senate Finance Committee Chairman Max Baucus (D-Mont.).
The export ban
Another policy able to discourage drilling is the obsolete ban on exports of crude oil. Unless supply surprises become much larger, the US won't become a net crude exporter. On the Gulf Coast, however, a surplus is developing as new and redirected pipelines, supplemented by trains and barges, deliver more and more light crude from US shale plays and blended bitumen from Canada. Stranded by the export ban, light crude eventually might have to compete on price to back lower-value Canadian feedstock out of high-conversion refineries in Texas and Louisiana. US crude prices then might fall to levels that don't support drilling. With fewer wells coming on stream, production, governed by the steep declines characteristic of wells in tight reservoirs, would plummet.
This scenario should appeal to no one. The increase in domestic production of oil and gas is good for the US. To support the essential drilling, Congress should scrap the ban on crude exports and forswear ill-considered tax hikes on producers.
