Low crude prices may thin, but not kill, US production, speakers say

Overseas competitors who were caught off-guard initially by rising US unconventional crude oil production have increased their own outputs now and can be expected to try and keep prices low to protect their global market shares, speakers at a May 12 Atlantic Council discussion said. That could make marginal US unconventional properties uneconomic, but won’t threaten the new US position as a major producing nation, they agreed.

“We’re entering a phase when all the excess capacity will be resized to the new US world market share,” said Subash Chandra, managing director and senior equity analyst at Guggenheim Partners. “I don’t expect prices to go above $70-75/bbl. If it hits $90, US producers will start working full-out again.”

“I don’t think there will be a bust,” said Russell Gold, a Wall Street Journal senior energy reporter. “This is an immature industry that’s learning to drill bigger wells. But several management teams bought suboptimal rock in an effort to keep up. Several companies will be headed for fire sales before the end of the year, but the new US role as a major producer won’t change.”

Terry Engelder, a geosciences professor at Penn State University, meanwhile, noted, “There’s been a lot of emphasis on heavy early production from many of these wells, but they also have good production later on. A lot of these wells wind up being refraced and have residual production that’s more than expected.”

‘Brute force until now’

US production surged because each new barrel had a place in global markets until November, when overseas producers decided to increase their own output to protect their prices and market shares, Chandra said.

“Up until now,” Chandra said, “this industry has spent 130% of cash flow, fully funded by Wall Street. Now, it’s moving to spend cash flow and learn more about plays it already has. It’s all been brute force up to now. There’s more emphasis on refining the science and learning more about the rock it already has.”

Gold said US producers had to learn from their mistakes, including measuring air and water quality before drilling, “because better data lead to better understanding,” he said. States need to divide regulatory and leasing responsibilities as the US Department of the Interior did offshore following the 2010 Macondo deepwater well blowout and oil spill, he added. Well construction matters more than some producers thought, he said.

Engelder said, “The industry didn’t understand that baselines need to be established in every well. In Pennsylvania, 40% of the water wells are privately owned. Also, when producers from out-of-state drilled their first deep gas wells, they didn’t realize shallower soil was saturated with its own gas, which started to find its way into water supplies.”

Gold said growing transportation of crude by rail from the Bakken shale to East Coast refineries configured to process it raised new safety questions, which in turn led to new US Department of Transportation regulations (OGJ Online, May 1, 2015). “Extraordinarily powerful interests—the freight railroads, and the oil industry—are involved,” he said.

But Chandra said producers also are committing to build new pipelines to their markets. “Some Bakken crude is marginal and won’t be produced now that prices are low. Pipelines could be sufficient to handle what’s left,” he said.

Contact Nick Snow at nicks@pennwell.com.

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