Oil and natural gas drillers are hitting the brakes on U.S. shale production as prices tumble, but the U.S. remains poised to slash its reliance on energy imports by 2040, according to a government report.
In the short term, the domestic drilling industry is facing significant headwinds as plummeting oil prices and oversupply have prompted companies to scale back spending, backtrack on production and lay off workers. Oil prices have dropped by about 60 percent since last June.
Oil production is expected to drop by nearly 60,000 barrels a day between April and May, the first decline since the agency began reporting the figures in 2013, according to the U.S. Energy Information Administration’s monthly drilling productivity report released Monday.
“I think the EIA coming out with this is a warning that we’re hitting a wall,” said Carl Larry, director of oil and gas for Frost & Sullivan. “Drillers are able to extract more oil with less rigs, but what’s starting to happen is we’re seeing a drop-off.
“I think we’re at a tipping point,” he said.
With extended low prices, some companies that aren’t positioned to weather the storm will disappear, whether through mergers with better positioned companies or through bankruptcy, Mr. Larry said.
Still, some oil supply could be absorbed by refiners who are beginning to ramp up production to produce gasoline for the summer months.
Refiners have typically drawn about 1 million to 3 million barrels of oil a week for refining. Mr. Larry said that number could jump to 2 million to 5 million barrels a week.
“And we have a lot of cushion there,” he said, referring to the oversupplied oil market.
In the natural gas-rich Marcellus Shale play of Pennsylvania and West Virginia, production is expected to rise by about 10 million cubic feet per day (MMcf/d) between April and May to 16.7 MMcf/d, according to the EIA.
There are a couple of reasons production in the Marcellus, the country’s largest gas field, has continued to climb.
One reason is that there is rising demand for natural gas for power generation, Mr. Larry noted. In addition, natural gas isn’t as difficult to store as oil.
“With natural gas, if there’s oversupply, there’s flaring,” Mr. Larry said. “There will be a decline in natural gas as a byproduct of oil declines, but it won’t be as steep.”
The bulk of the market is expecting oil productivity to flatten or decline in the next couple of months, said Tony Starkey, an analyst with Colorado-based Bentek Energy.
Even though rig counts have fallen, there are a number of wells that have been drilled that are purposely being kept offline, waiting for higher prices.
“We could end up in the same cycle again,” Mr. Starkey said. “When prices rebound, they can complete the wells and bring them to the market. Then prices will fall and they’ll hold back wells again.”
Meanwhile, the world is beginning to adjust to oil prices in the $45 to $55 range, said Jason Wangler, an analyst with Wunderlich Securities.
“The world is trying to understand what it means to have oil at this range,” he said, unlike when prices were falling dramatically in recent months. “Every day now, we’re not looking at a new normal.”
Even with rig counts at about half of what they were, production itself won’t also be cut in half, he noted.
“We’re below where the rig count would need to be to have flat production, but it will be relatively gradual,” Mr. Wangler said. “There’s still going to be some new oil coming to the market.”
In the long term, lower levels of consumption coupled with high oil production will push the net import share of crude oil and petroleum products down from 33 percent in 2013 to 17 percent in 2040, according to the U.S. Energy Information’s annual energy outlook released Tuesday.
And in spite of recent cutbacks, crude oil production is expected to peak at 10.6 million barrels per day (b/d) in 2020, the EIA said.
Meanwhile, the U.S. is expected to transition from a net importer of 1.3 trillion cubic feet (Tcf) of natural gas in 2013 to a net exporter in 2017. Net exports, in the form of liquefied natural gas, could reach 3.4 Tcf in 2030 and remain at that level through 2040.
Stephanie Ritenbaugh: email@example.com or 412-263-4910.