First uploaded Dec. 4, 2015.  Last updated Feb. 17, 2016.

Americans are drilling to hold acreage, drilling sweet spots where some wells can produce light oil and condensate as well as natural gas and natural gas liquids, improving performance of completions and stimulations to increase production rates per well, and innovating and finding ways to reduce costs.  With less than half the drilling rigs still operating, Americans are still drilling and completing enough wells to keep year-to-year production level - so far.

 

According to consultant Rystad Energy: “the average well performance across the US shale plays has improved significantly over time, specifically during 2015 with low oil prices. All key metrics for drilling, completion and well cost have improved across the main shale oil plays this year.”

 

It only takes nine days to drill a Texas horizontal shale oil well and there is still a back-log of drilled wells awaiting  stimulation and completion.  There are 1,300 horizontal wells that were drilled at least six months ago and remain incomplete in U.S. major shale oil fields. That is more than three times last year’s average, according to Rystad Energy.  Together the well backlog could produce as much as 500,000 bbl/d of oil according to the NY Times:

 

http://www.nytimes.com/2015/12/26/business/energy-environment/hoping-for-a-price-surge-oil-companies-keep-wells-in-reserve.html?emc=edit_th_20151226&nl=todaysheadlines&nlid=67505919&_r=0

According to consultant RBN Energy “…the latest four-week average field crude production (as reported by EIA on January 8, 2016) is still at 9.2 million bbl/d – indicating that we (the U.S.) still have not reached the point where producers have slowed down enough to make a difference.”

 

At its 168th meeting in Vienna on Dec. 4, 2015, OPEC stated  that "As far as supply is concerned, non-OPEC countries would continue to see significant reduced production growth as compared to past years". See; http://www.opec.org/opec_web/en/press_room/3193.htm

 

OPEC recognized that, so far, it had only achieved a slowing in non-OPEC production growth but it believed "...that non-OPEC supply is expected to contract in 2016."

 

However, OPEC supply will surely increase as Iran is expected to eventually increase production by up to 1,500,000 bbl/d after sanctions were lifted Jan. 16, 2016 as indicated by the chart below:

The OPEC Conference observed "since its last meeting in June.... OECD and non-OECD inventories standing well above the five-year average."  Rising inventory levels of oil and products act as a dampener on prices, but if storage runs out before increased demand offsets production growth, could lead to a further fall in oil prices.

Recently, other OPEC members have talked about re-visiting production levels to provide greater support for oil prices as the Saudis' gambit to increase market share, at least in North America, has not had the quick success they hoped for.

 

However, any attempts by Saudi Arabia and OPEC to improve oil prices by cutting back production will result in increases in North American production.

 

And it is not beyond the realm of possibility for Saudi Arabia and Iran to extend hostilities into an all-out price war to see who can produce the most oil at the lowest price and survive.

Furthermore, the U.S. is now competing internationally with OPEC, furthering downward pressure on crude prices, though this writer expects U.S. export volumes to be moderate. President Obama signed an omnibus budget bill on Friday, Dec. 18, 2015 which included an end to the ban on exports of U.S. crude in return for, among other things, concessions on green energy tax breaks. There was never a ban on crude exports to Canada which were mostly by tanker to Saint John, NB and Levis, QC refineries.
 
As a result, it appears oil prices will stay low for at least one-to-four years until demand exceeds supply - barring geo-political upheavals.

 

In this writer's opinion, Americans would be happy to see no more imports of Canadian oil sands crude, not just because of its higher than average GHG emissions and the ecological risks of transporting dilbit, but because more cheap Canadian oil sands crude drives down the domestic, mid-continent price of crude and, while increasing refining margins, negatively affects U.S. domestic production profits and self-sufficiency.

 

That was a factor in the denial by President Obama of the border crossing permit for the Keystone XL pipeline and it is a factor in President Obama's proposal of a U$10.25/bbl tax on crude oil in his 2017 budget which would apply to imported oil as well.  

 

Canada exports 79 percent of its oil production with 99 percent of those oil exports going to just one customer, U.S. refineries. That does nothing to improve the price Canadians obtain for raw bitumen, let alone capturing any added value.

 

With U.S. refinery utilizations currently running around 95%, there is little room for more heavy, sour Canadian oil sands crude particularly with the re-vamps necessary to increase refining capacity for U.S. domestic sweet, light shale oil, or without new pipelines and expensive re-vamps to handle large volumes of high-sulphur bitumen from the oil sands.

 

Finally, one or more major new crude oil pipelines to Canadian east and west coast tide-water, such as Energy East and Eagle Spirit, and/or the Trans Mountain pipeline expansion, will bring significant new volumes of crude from western Canada to compete in international markets within five years, putting further downward pressure on oil prices, and provide Canadians the opportunity to capture added-value domestically.

 

 

 

 

Mike Priaro, P.Eng.

Calgary

403-281-2156