US crude export debate increasingly geopolitical, EIA conference told

The ongoing debate over whether more US crude oil exports should be authorized has more in common with conditions in the 1980s when supplies were ample and prices were low than the 1970s when supplies were tight and prices were high, a leading market observer said.

“Energy security was an urgent question in the ’80s despite lower prices and a glut,” said Sarah Emerson, president of Energy Security Analysis Inc. in Wakefield, Mass., during a June 15 panel discussion of low crude oil prices’ impacts on production, the economy, and geopolitics at the US Energy Information Administration’s 2015 conference.

“The discussion now is more about energy security than the possible impacts of more US crude exports on jobs or the gross domestic product,” Emerson said. “And the biggest long-term question now, as then, is what it will do to US military commitments around the world.”

The plunge in crude oil prices since mid-2014 has challenged crude oil producers worldwide, Emerson said. “Obviously, this is a difficult time for Venezuela and Ecuador, where political regimes are at risk,” she said. “Russia has had a banner year as two more fields have come on line, but its production will decline going forward. At the same time, European demand is declining and Russia has pivoted toward Asia.”

Tensions between Russia and the US, which already were strained by Russia’s annexing Crimea from Ukraine, grew more tense 2 weeks ago with a US announcement that it was moving more defense equipment and personnel into Baltic Sea nations, Emerson said.

“The South China Sea is turning into a flashpoint as Chinese demand keeps growing,” she said. “One question now is if the US will move from a policy of engagement with China to one of containment. We live in a world now where we talk about oil in terms of economics instead of politics, which increasingly matter.”

Declining activity

“Falling oil prices reflect declining global activity,” observed a second panelist, Adrian Cooper, chief executive of Oxford Economics in England. “Most of that has come from the supply shock here in the US and in Saudi Arabia. But major economies have not fully responded to more favorable conditions, possibly because consumers are waiting to see how permanent they are as they work through debt from the 2008 financial crisis.”

Cooper noted that while the global oil and gas industry cut its capital expenditures 20% during the first quarter, more reductions will come later in 2015 although the impacts of production that is still higher than before will remain positive on the US economy overall.

“Countries like India have used low oil prices as an opportunity to reduce fuel subsidies,” Cooper said. “We anticipate low oil prices will give significant boosts to world GDP this year and next, although many economies are still work through effects of the global financial. They also are forcing a period of consolidation in the industry.”

The low prices have led to a short-term decline in US production, noted the third panelist, Grant Nulle, an EIA upstream oil analyst. “We’ve seen month-by-month reductions on a par with the last downturn for the past few months,” he said. “From April to May, we started to see production from tight oil plays turn down.”

US production could be more resilient than some people expect because of the rig fleet’s improving quality, well productivity growth, and other built-in positive forces, Nulle said. “Clients will seek the most efficient rigs,” he said, adding that horizontal drilling increasingly is replacing more conventional approaches.

There also are several wells that were drilled but not completed that may add to unconventional production in places like the Bakken play, where numbers have risen in the last 6 months, he said. “There’s also evidence that industry supplier costs are falling,” Nulle said. “Frac sand producers are charging 14% less than in October, while drilling costs are off by 18%.”

Contact Nick Snow at nicks@pennwell.com.

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