Iraq has ambitious production plans for 2017 and beyond, but infrastructure and security woes are choking production growth
In Early 2014, EIA reported in its 2014 crude oil production forecast that onshore US crude production, which includes soaring shale oil output, have undershot actual production, as companies improved the productivity of their fields by experimenting with their drilling processes.
EIA reported that such technological innovation may cause a faster rise in drilling productivity than currently forecast adding if that happens, its onshore estimate of 5.7 million barrels per day in 2013 and forecast of 7.1 million barrels in 2015 would be overshot.
US crude oil production has surged from around 5 million barrels in 2008 to 8 million barrels per day by the end of 2013. US refiners have increased the volumes of domestic crude they are processing, but have not yet had to “change their diet” in terms of crude quality.
Instead, the growing volumes of light crude produced in the US have displaced imports of light barrels from countries such as Nigeria and Angola. By the end of 2014, most light, sweet imports to the East Coast will be displaced.
It is forecasted that seasonal surpluses will start to occur, followed by a structural surplus by the end of 2015. This could push US crude prices across the board to discounts of $20-30 versus the rest of the world. Yet, US crude oil production would remain profitable, even if prices fell considerably from current levels of around $100/bbl.
It is estimated that the Eagle Ford Shale play in Texas remains profitable as long as prices do not fall below $80/bbl, while production in the Bakken play in North Dakota only starts to become unprofitable at prices of $65-70/bbl.
The growth of US domestic production has meant that refineries in US have made changes in order to accommodate this increase. US refineries are consuming, where possible, as much low-priced crude as their capacity can handle and are receiving the rents generated by depressed crude oil prices in regions such as the Midwest.
Progressively feedstock becoming lighter, due to lighter feedstock amid growing share of gasoline and light-ends currently being produced by US refineries with a fairly stagnant domestic demand, US refiners will continue to focus on the export market. This is a major threat to European refineries.
In early 2014, US Refiners have been operating at near full capacity with utilization rates well over 90% as US permits exports of oil products, enabling any dislocation to be arbitraged away.
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Consequently, and despite the difficulties of processing some parts of the growing volumes of lighter crudes, US refineries have been ramping up runs, to near record highs of well above 16 million bpd, and exporting significant volumes of oil products, particularly to booming Latin American markets and also to European and African markets.
Build-up of crude oil inventory has not been mirrored in product markets, where total inventories still remain below the five-year average. The US continues to import oil products in areas such as the Midwest and East Coast, while exporting the surplus in the Gulf Coast.
A profound impact is on light/heavy spread and on light-ends in general. The surge in light grades with high (50 API+) comes at a time when refineries in the US Gulf Coast, the Midwest, and around the world have invested billions in new upgrading capacity because they expected the share of extra-heavy oils to grow, mostly with the development of oil sands and extra-heavy oil projects in Canada, Brazil, and Venezuela.
Because of the US shale boom, West Africa continues to struggle with the ripple effects of the Atlantic basin being awash in crude oil supply. In early 2014, sellers of West African crude faced difficult months, clouded by uncertain demand in Asia, weak European refining margins and the knock-on effects of surging US shale oil production.
Over the longer term, prospects look even bleaker for European refiners and Nigerian crude sales by implication. Big new refineries in Asia are posing stronger competition in Europe’s products market as are US oil product exports made cheaper and more plentiful by the growth of shale oil. Noticeably, shale oil already displaced Nigerian barrels from the US market.
Today, the marginal barrel of crude oil has become extremely light, starving the cokers of heavy crude oil and thereby narrowing light/heavy differentials. This has been evident in price action this year, with heavier crudes; such as Urals and Angolan grades outperforming lighter grades such as Saharan and Nigerian, before the loss of Libyan crude resulted in widespread shortages in lighter grades.
Lower US lighter grades prices will further weakening Nigerian differentials that have a direct impact on the Brent structure, as they can yield the most attractive margins for refineries in the Atlantic basin, making the refineries switch away from Brent.
This, in turn, can pressurize Brent spreads due to reduced appetite from European refineries. Clearly, the more the US Midwest pushes light sweet crude to the Gulf Coast, the more Nigerian grades stay weak, and pressurize the Brent structure. This change in trade flows also has implications on Brent/Dubai differentials.
West African grades are increasingly popular in Asia, with Indian imports of Nigerian crudes at nearly 20% of total Nigerian exports. Asian countries usually take their highest volumes of crude from the Middle East, but Atlantic Basin crudes are increasingly making their way east.
As European demand remains weak for the foreseeable future, this trend of higher flows from West Africa to Asia is likely to persist. This has implications for Brent/Dubai, as an Asian pull of West African barrels can serve to widen the differential by lowering demand for Middle East crude, at the same time as reducing availability of African crude in Europe.
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Of course, stronger Asian demand is unlikely to boost demand for West African crude entirely at the expense of Middle Eastern lighter grades, but West African grades are increasingly likely to become the marginal barrel determining the Brent/Dubai spread.
Booming US shale oil production has effectively saturated the US Gulf Coast with light sweet crude, backing out imports and causing the Louisiana Light Sweet (LLS) price to drop below Brent. This is because of the rising US light crude production that pushed out more West African, Latin American and Middle Eastern lighter barrels.
Many advocates of the positive impact of unconventional oil production see it as an important anchor for oil prices, a sort of price floor of around $60-80/bbl below which unconventional producers will find it difficult to draw profits.
If prices fall over a longer period of time below this price floor, so the conventional logic goes, unconventional producers are expected to be priced out of the market A scenario currently unlikely as oil prices have remained fairly comfortably above the $90/bbl range since the late 2000s, in part in reflecting of rising costs at every part of the industry, including conventional production.
However, the expected exit of Shale oil at prices below the $60/bbl range would indeed tighten the market, and would likely shift prices back up to ranges that would re-allow the exploitation of unconventional reserves against the Middle Eastern low-cost conventional fields.
West African barrels have experienced the largest decline in crude oil exports to North America, owing to the resemblance of North and West African crude oil to US shale oil and hence declining refiners’ demand at the US East Coast. These marginal, lighter barrels have already begun to move eastwards instead, competing with Middle Eastern producers. However, such optimism about the future of shale oil in North America, rather than the Middle East is dreary.
North America’s unconventional revolution has an expectancy period for which current and projected future supply increases can be maintained, probably two to three decades, technology and oil price level permitting.
By contrast, Middle East producers can produce for between 50-100 years based on current rates, all from conventional resources. Such a perspective may at best see US shale oil production as a welcome or unwelcome episode, which will earlier or later resolve itself around some combination of cost and reservoir quality.
A fall of oil prices to levels below those seen in the second half of the 2000s as a result of a potential, gradual oversupply of the market would hurt shale oil producers far more than the conventional oil producers in the Middle East.
IEA predicts that output from North America plateaus from around 2020 and falls back from the mid-2020s onwards. While most of the oil found in the Middle East is cheap and easy to extract, tight oil requires intensive drilling as discoveries tend to deplete rapidly.
