DALLAS—Even at today’s low commodity prices “we will see production growth” with crude prices at $60/bbl and natural gas at $2.85/Mcf for the foreseeable future.
Those were the predictions of Maria Sanchez, manager of energy analysis for Drillinginfo Inc. in her Oct. 12 presentation to Oil and Gas Investor’s A&D Strategies Conference and Workshop. “Those are the basic prices that will support production growth,” she added.
The economics of U.S. production continue to support higher supply—and even a slight improvement in prices translates into significant production gains, Sanchez said. Also, demand is growing, but that growth is at a slower rate than that of production.
Production growth will vary by basin with “the big takeaways from the Permian and Anadarko Basin getting the attention,” she added. “Year over year, well performance has continued to improve in these basins, leading to higher productivity per well and better economics. But there will be sweet spots all across the nation” in other shale plays that will garner some interest from producers and their midstream supporters.
“Production efficiency is improving” and that translates into the ability of producers to operate profitably at lower commodity prices, Sanchez explained. “Efficiencies have been striking back at lower prices and leading to production forecasts being revised upwards.”
But the worldwide industry must stabilize supply with demand, she cautioned. “Before there can be any sustained rise in prices, inventory levels must normalize to levels from prior to the price crash” that started in late 2014.
The supply/demand equation does seem to be improving as 2017 nears its end, Sanchez said, noting the Organization for Economic Co-operation and Development revised its demand forecasts for second-half 2017 as the worldwide economy perks up. “But normalization is a tough task,” she added.
Two outliers that have thrown off supply estimates this year have been Libya and Nigeria, which were not part of OPEC’s production cutback strategy due to political turmoil that had essentially taken them off the market. However, both nations achieved some measure of peace and returned to the market this year, adding nearly 700 Mbbl/d to OPEC’s overall production.
Drillinginfo expects U.S. production growth throughout the next five years, Sanchez said. Domestic production will surpass 10 MMbbl/d in early 2018—eclipsing the 9.6 MMbbl/d peak set in 1970—and surpass 12 MMbbl/d before mid-2020, she said. That will come through a modestly rising rig count and efficiencies in well productivity.
The downside—and weak prices—to that swelling oil tide will be if global demand does not grow fast enough to absorb that supply growth. That would mean a further weakening in oil prices.
“How fast will global demand grow?” is a basic question right now, Sanchez said.
Look for growing natural gas production too, she added. There will be a significant uptick in fourth-quarter 2017 output as the midstream adds new pipeline capacity that can move Marcellus and Utica gas out of the capacity-constrained Appalachian Basin.
Longer term, “the Haynesville and Eagle Ford are two other key basins contributing to production growth in the U.S.,” she said. Gas-fired power generation capacity will continue to grow, particularly in Texas, Appalachia and the Mid-Atlantic states, while coal-fired capacity continues to decline across much of the nation. Renewables will continue to increase—always dependent on gas-fired generation when the wind stops and the sun sets. Texas, often overlooked as a renewable energy leader, will set the pace in new wind generation capacity through 2021, she noted.
However, “LNG will be the fastest growing sector for gas,” Sanchez said, projecting a 5.1 Bcf/d increase in LNG exports by 2021. She noted Dominion’s Cove Point, Md., plant is scheduled to start up by late this year with two more major liquefaction plants—Cameron in Louisiana and Freeport in Texas—on schedule to start in 2018-19.
After that, would for a “Round 2” of LNG projects in the next decade that could add an additional 7 Bcf/d of export capacity. “Not all of them will be built, and that will be a significant advance” in gas demand.
Pipeline exports to Mexico could grow, although that growth could be hindered by a lack of Mexican midstream infrastructure to match the U.S. deployment of new pipeline capacity to the border.
“Overall, most of the U.S. infrastructure to move gas from growing supply basins, such as the Eagle Ford and Permian, is operational, but projects on the Mexico side have faced constant push backs,” she explained.
NGL exports will continue to grow, particularly to Latin American markets, Sanchez added. However, NGL supply is expected to increase by 300 Mbbl/d in 2018 with the bulk of that increase coming from the Permian. Gas and gas liquids output will tick upward even if producers cut back on gas-focused projects because of the large volume of associated—and very wet—gas production flowing from the Delaware Basin and other unconventional plays.
During a question-and-answer session, one conference attendee asked what is the “black swan” event that could throw Drillinginfo’s numbers off?
“Definitely it would be a larger than expected growth in demand,” Sanchez said. “We know the supply, we do not know the demand.”
Paul Hart can be reached at pdhart@hartenergy.com.
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