SPECIAL REPORT: Crude Oil, Natural Gas Production Projected To Increase In U.S.

Transcription

1 SPECIAL REPORT: Crude Oil, Natural Gas Production Projected To Increase In U.S. April 2013

2 Executive Summary Just a few years ago, no one would have thought that U.S. oil production could surpass Saudi Arabia s production. But several recent reports have made such forecasts. Obviously, if these predictions become true, it will have a dramatic impact on the economies of the U.S. and the world. For example, the International Energy Agency (IEA) points out that the global energy map is changing, and that energy developments in the United States are profound and their effect will be felt well beyond North America and the energy sector. By around 2020, the United States is projected to become the largest global oil producer (overtaking Saudi Arabia until the mid-2020s) Other reports stated: Domestic oil production should increase an annual average of 234,000 barrels per day (bpd) from 2011 through 2019, when production reaches 7.5 million bpd. The growth results largely from a significant increase in onshore crude oil production, particularly from shale and other tight formations. Global unconventional shale boom is arguably one of the biggest technology breakthroughs in decades, and it will have economic and political ramifications worldwide. North America will likely achieve energy independence by the end of the decade. If you are interested in learning more about the ramifications of increased oil and gas production in the U.S. and Texas, go to and click on Communications/News and then on Special Report. This report is published by Texas Alliance of Energy Producers President Alex Mills, who can be reached at or alexm@texasalliance.org. 2

3 SPECIAL REPORT: Crude Oil, Natural Gas Production Projected To Increase In U.S. Report after report has projected increased production of crude oil and natural gas in the United States, primarily because of the use of hydraulic fracturing of shale formations. Some of the reports have optimistically called for U.S. oil production to surpass Saudi Arabia by 2020 and others have predicted the U.S. will become energy independent. Obviously, if these forecasts become true, it will have a dramatic effect on the economies of the U.S. and the world. International Energy Agency, World Energy Outlook, November 2012 The International Energy Agency (IEA), an autonomous agency, was established in November 1974, with a mandate to promote energy security for its 28 member countries which includes the U.S. and most European countries, through research and analysis of energy consumption and supply. IEA s 2012 report received notoriety around the world when it stated that the U.S. will surpass Saudi Arabia in oil production by The global energy map is changing, with potentially far-reaching consequences for energy markets and trade. It is being redrawn by the resurgence in oil and gas production in the United States and could be further reshaped by a retreat from nuclear power in some countries, continued rapid growth in the use of wind and solar technologies and by the global spread of unconventional gas production. The report continues: Energy developments in the United States are profound and their effect will be felt well beyond North America and the energy sector. The recent rebound in U.S. oil and gas production, driven by upstream technologies that are unlocking light tight oil and shale gas resources, is spurring economic activity with less expensive gas and electricity prices giving industry a competitive edge and steadily changing the role of North America in global energy trade. By around 2020, the United States is projected to become the largest global oil producer (overtaking Saudi Arabia until the mid-2020s) and starts to see the impact of new fuel-efficiency measures in transport. The result is a continued fall in U.S. oil imports, to the extent that North America becomes a net exporter around This accelerates the switch in direction of international oil trade towards Asia, putting a focus on the security of the strategic routes that bring Middle East oil to Asian markets. [Emphasis added] U.S. Energy Agency Predicts Production Increase The U.S. Energy Information Administration (EIA) released its long-term energy projections all the way into 2040, and it predicts that energy production in the U.S. will continue to rise, displacing imported energy and further reductions in energy-related carbon dioxide emissions. 3

4 Even though EIA predicts that renewable energy will increase from 13 percent of consumption in 2011 to only 16 percent in 2040, crude oil and natural gas will be the primary energy sources. Crude oil production, particularly from tight oil plays, rises sharply over the next decade. Domestic oil production increases an annual average of 234 thousand barrels per day (bpd) from 2011 through 2019, when production reaches 7.5 million bpd. The growth results largely from a significant increase in onshore crude oil production, particularly from shale and other tight formations. After about 2020, production begins declining gradually to 6.1 million bpd in 2040 as producers develop sweet spots first and then move to less productive or less profitable drilling areas. EIA predicts that the spot crude oil price on the international Brent market declines from $111 per barrel (in 2011 dollars) in 2011 to $96 per barrel in After 2015, the Brent price increases, reaching $163 per barrel in 2040, as growing demand leads to the development of more costly resources. World liquids consumption grows from 88 million bpd in 2011 to 113 million bpd in 2040, driven by demand in China, India, Brazil, and other developing economies. Total U.S. primary energy consumption grows by 7 percent from 98 quadrillion Btu in 2011 to 108 quadrillion Btu in The fossil fuel share of primary energy consumption falls from 82 percent in 2011 to 78 percent in 2040 as consumption of petroleum-based liquid fuels falls, largely because of the incorporation of new fuel efficiency standards. Net imports of energy decline both in absolute terms and as a share of total U.S. energy consumption. The decline in energy imports reflects increased domestic petroleum and natural gas production, increased use of biofuels, and lower demand resulting from rising energy prices and the adoption of new efficiency standards for vehicles. The net import share of total U.S. energy consumption is 9 percent in 2040, compared with 19 percent in (The share was 29 percent in 2007.) U.S. natural gas production increases, outpacing domestic consumption by 2020 and spurring net exports of natural gas. U.S. exports of LNG from domestic sources rise to approximately 1.6 trillion cubic feet in 2027, double the 0.8 trillion cubic feet projected in The United States becomes a net exporter of LNG in Unconventional Shale Breakthrough Has Large Ramifications The global unconventional shale boom is arguably one of the biggest technology breakthroughs in decades, and it will have economic and political ramifications worldwide, according to a recent study by the Securities Research Department with the Credit Suisse Research Institute. What started in a field in Texas has turned into a worldwide phenomenon, with ramifications spreading across a wide range of countries, commodities and industries, according to the report. The high cost of energy is once again stimulating the search for new energy supplies, alternative fuels and efficiency gains, with technology as always at the foreground of new developments, the study continued. Although the full impact of this game-changing revolution is yet to fully play out, it is clear that significant effects are already under way. The report states the shale revolution will spill over to other energy markets, countries and energy-intensive industries. Of course, politics as well as economics come into play particularly given the perceived links to energy security or independence, though we question some of the accepted wisdom on the latter where the U.S. is concerned, namely that of the U.S. becoming the new Middle East of oil or at least not dependent anymore on 4

5 the Middle East for its energy needs, the authors stated. We believe that there are many geopolitical reasons why the US will remain closely engaged with the Middle East, not least because many of its trading partners remain dependent on energy from the region. The potential for shale gas beyond North America is a key question. As for oil, Natella and Miller said the prices seen for most of the past five years probably have to continue for a while to attract the investment needed to bring on supply. But, ultimately, looking to the latter part of this decade and beyond, we believe that high prices will be the primary cure for high prices. Energy Independence Achievable By End Of Decade North America will likely achieve energy independence by the end of the decade, according to a study by UBS. The American energy extraction techniques of horizontal drilling and hydraulic fracturing combined with a structurally high relative price of crude oil has encouraged widespread development of America s energy resources, states the report entitled North American Energy Independence: Reenergized. Natural gas is so oversupplied in the U.S. that developers are curtailing production, while domestic oil producers are working to circumvent infrastructure bottlenecks to transport their supplies to refineries, according to the UBS study. As a result, natural gas in North America costs less than a fifth of the cost of oil on an energy-equivalent basis. The increase in crude oil and natural gas production will lead to a boost in economic activity in the U.S. However, the study projects roughly 0.5 percentage points increase to U.S. real gross domestic product (GDP). The drivers behind this growth spurt include exploration, development and infrastructure investment, direct and indirect job growth from energy extraction, and the windfall that will likely accrue to households and businesses from relatively lower-cost fuels, the study said. Additionally, the relatively inexpensive natural gas will create a competitive advantage for the U.S. This is another key factor supporting our view that the U.S. economy will experience a manufacturing renaissance through the repatriation, relocation and expansion of energy-intensive industrial operations, the authors stated. This trend is especially powerful for the petrochemical and materials sectors. On the other hand, U.S. oil consumption will continue to decline, as the comparatively high price of oil will likely prompt drivers to switch to more fuel-efficient vehicles and alternative powertrains, such as hybrids and electric vehicles. The authors speculate that natural gas will gain a larger share of the electricity generation market from coal and as a transportation fuel. Demand for renewables hinge on government subsidies, which may come under pressure in an age of heightened austerity. Fossil fuels will not go the way of the dinosaur anytime soon, according to the authors. True energy independence means consumers can no longer be held hostage to supplies and suppliers, the study said. 5

6 Fracing Pushes Oil Output To Highest Level In 20 Years Bloomberg reported recently on new U.S. Energy Department data which found that the weekly average of U.S. oil production increased to million barrels per day, an increase of 1.16 million barrels per day from the same week in The data shows that the U.S. met 83% of its energy needs in the first nine months in 2012, on pace for the highest annual rate in over 20 years. The boost is attributed to increased use of horizontal drilling and hydraulic fracturing. Through October 2012, crude oil production in North Dakota, Texas, and Utah respectively increased by 40, 23, and 11%. Lipow Oil Associates President Andy Lipow called the data extraordinary, adding that I don t think anyone expected the magnitude of the change in just one year. The Energy Dept. forecasts U.S. daily crude production to average 7.32 million barrels in 2013 and 7.93 million barrels in BP Says U.S. To Become Largest Oil Producer In 2013 Increasing production from new tight oil resources will result in the U.S. overtaking Saudi Arabia to become the world s largest producer of liquids in 2013, according to BP s annual energy forecast. By 2030, the U.S. will be 99% self-sufficient in net energy, compared to 70% in Increasing output of shale oil in North America will put pressure on OPEC to cut its own crude production, the forecast stated. BP s forecast illustrated the extent to which the North American boom has redrawn the global energy map. However, BP doesn t expect the shale revolution to spread by 2030 on any great scale to Asia or Europe, where conditions for investment in unconventional oil and gas fall short of those in North America. In the U.S. alone, shale oil production is expected to grow around 5 million bpd by 2030, said BP s chief economist Christof Ruehl. This is likely to be offset by reductions in supply from OPEC, which has been producing at historical highs in recent years to compensate for output losses in Libya due to their civil war and more recently to compensate for Iranian sanctions. This will generate spare capacity of around 6 million bpd, and there s a faultline if there is higher shale production then the consequences would be even stronger, he said. OPEC spare oil production capacity last exceeded 6 million bpd in February 2002, when the price of U.S. crude benchmark West Texas Intermediate averaged just under $21 per barrel. But the shale revolution will remain largely a North American phenomenon, Ruehl said. No other country outside the U.S. and Canada has yet succeeded in combining these factors to support production growth. While we expect other regions will adapt over time to develop their resources, by 2030 we expect North America still to dominate production of these resources, said Ruehl. The growth in shale oil and natural gas production is expected to remain concentrated in North America over the next two decades thanks to favorable investment conditions, technological advances, a competitive services industry and a nimble financial sector able to fund the large numbers of drilling rigs required, said Ruehl. Growing production from unconventional sources of oil, including tight oil, oil sands and biofuels, is expected to provide all of the net growth in global oil supply to 2020, and over 70% of growth to 2030, the BP report said. Jobs, Economic Boom Created By Unconventional Activity Texas has gained more than 576,000 jobs from the ongoing U.S. oil and natural gas boom, far more than any other state, an analysis by the IHS CERA group stated. The estimate includes both direct hires by oil and gas companies and other jobs in manufacturing and services that contribute to the boom or benefit from cheap energy supplies. By 2020, IHS CERA estimates Texas will have gained 929,482 jobs from development of unconventional oil and 6

7 gas. Texas has garnered 45 percent of the nearly 1.3 million jobs created by new production from fields drilled with hydraulic fracturing and horizontal drilling. Pennsylvania and California each got 8 percent of the new jobs. The number of jobs created nationwide was put at 1.7 million, and that is expected to grow to 3 million jobs by The boom has contributed $238 billion to the U.S. economy in By 2020, the contribution will grow to $416 billion, IHS CERA said. In Texas alone, government revenues from the new oil and gas plays are expected to be $22 billion this year and $38 billion by Impact On Jobs And Retail Sales Since the Eagle Ford Shale discovery in 2008, drilling and exploration have had a strong positive economic impact in South Texas. Most of the 23 Eagle Ford counties are rural, with a history of cattle ranching, hunting and some traditional oil and gas drilling. For the five counties where the job growth rate has been the strongest McMullen, Dimmit, La Salle, Live Oak and Lee seasonally adjusted retail sales grew at an annual rate of 55.1 percent, or $100.9 million, from first quarter 2010 to third quarter For the entire 23-county area, seasonally adjusted retail sales increased at a 15.4 percent annual rate, or $580.7 million. During this period, comparable retail sales rose 7.2 percent in the U.S. and 6 percent in Texas. This strong retail sales growth in the Eagle Ford counties has led to sharply increased state sales tax payments. For the 23 counties, retail sales tax revenue advanced at an annual rate of 9.3 percent, or by $8 million, from first quarter 2010 to third quarter While these 23 primarily rural counties account for only 2.9 percent of Texas retail sales, they are responsible for about 5 percent of the increase in state sales tax revenue since early Surging drilling activity has brought strong employment and wage growth to most of the counties in the Eagle Ford. Counties located above oil and condensate deposits, such as Dimmit, La Salle and McMullen, have experienced the greatest increase in employment and average weekly wages. Job growth was strong from 2005 to 2008, likely fueled by rising natural gas prices even before the Eagle Ford Shale play began. Jobs in the region sank with the recession amid sharply dropping energy prices in From a low during first quarter 2010 to third quarter 2011, jobs grew at an annual rate of 5.9 percent, reaching 2.9 percent above the previous peak value. By comparison, during the same period, jobs statewide increased 2.4 percent and remained 0.01 percent below the previous high. Generally, Eagle Ford counties represent about 2 percent of all Texas jobs. Since the beginning of 2010, the 15,773 net new jobs account for 6.9 percent of the state s net gain during the period. While recent activity is impressive, more growth may lie ahead to meet demand. The scale of development has surpassed the capacity of local industry. Hotels, restaurants and gasoline stations are jammed with outside managers, crews and technicians. As the Eagle Ford matures and the local service industry expands, many outside workers may become local residents and employees. Average weekly wages have grown markedly in most Eagle Ford counties. Weekly wages in Dimmit County increased the most from first quarter 2010 to third quarter 2011, at an annual rate of 35.8 percent, from $555 to $880. Live Oak County pay rose 25.5 percent, from $585 to $823, and in McMullen County, wages climbed 25.1 percent, from $635 to $890. Once again, counties located above natural gas liquids and oil deposits experienced more significant average weekly wage increases than other Eagle Ford counties. For the 23 counties, the average annualized growth rate in the weekly wage during this period was 14.6 percent. By comparison, average weekly wages rose 6.8 percent in Texas, from $875 to $966, and 6.3 percent in the U.S., from $870 to $953. Given the strong growth in employment and average weekly wages in the Eagle Ford, seasonally adjusted total wages paid in its top five counties increased at an annual rate of 63.4 percent during this period, while the entire 23-county area saw a 25 percent increase. 7

8 Conclusion The oil and gas industry has a promising future. The latest developments in technology have allowed the industry to explore and produce hydrocarbons under very difficult circumstances. However, the resiliency and can do attitudes of the people in this great industry give promise for the future. Yes, the industry faces huge roadblocks from federal bureaucrats, and unique challenges right here in the State of Texas. Issues such as water usage and disposal, truck traffic, road use fees, unitization, taxes and constant changes in the regulatory process regarding drilling arid completion techniques. The Texas Alliance of Energy Producers exists to act as your government relations department and to represent you in Austin and Washington and to create a better business climate for the oil and gas industry. Most companies are not large enough to hire someone to analyze the impact of a new regulation on their business, and that is why it is important that businesses in the industry work together. If you are not a member of the Alliance, I encourage you to join and become a part of the largest and fastest growing state oil and gas association in the nation. Alex Mills President and Chief of Staff Texas Alliance of Energy Producers BASIC MEMBERSHIP $ 240 CORPORATE MEMBERSHIP $ 325 CHAIRMAN S ROUNDTABLE $1,250+ Membership Form Call (800) for additional information on the benefits of membership Name Company City/State/Zip Fax Membership Level: $ Title Address Telephone Send invoice/receipt Bill my MasterCard Bill my Visa Bill my AmExpress Credit Card # Exp Date (mo/yr) Name on card Mail form & payment to Texas Alliance of Energy Producers, 719 Scott Avenue, Ste. 930, Wichita Falls, TX For federal income tax purposes, 64% of the Alliance s dues may be deductible as an ordinary and necessary business expense, but not as a charitable contribution. Austin: 823 Congress Ave., Suite 1010, Austin, TX (512) bills@texasalliance.org Houston: 3701 Kirby Drive, Suite 962, Houston, TX (713) Fax: (713) sandis@texasalliance.org Wichita Falls: 719 Scott Avenue, Suite 930, Wichita Falls, TX (940) Fax: (940) texasalliance@texasalliance.org 8