Thanks to shale oil and gas including quantities extracted from the Bakken, the United States is poised to become energy independent in the not-so-distant future. It’s been talked about politically for a number of years by many administrations, and it may soon become a reality.
The actual conversation of energy independence at least in political circles, seems to be more about saying the right things than actually acting on the need to develop policy that would support the concept. But, despite what many would call political interference rather than assistance, the U.S. appears to be moving solidly moving in that direction.
By the end of this decade the U.S. will become a net-zero importer of energy, according to Edward L. Morse, managing director and global head of commodities for Citigroup. At a February gathering at the Fairmont Hotel in Chicago, Morse told attendees that he “thinks the chances are close to 100 percent that the U.S. will be supplying 100 percent of its energy requirements for power generation and transportation.”
Currently, U.S. crude oil production is at 8 million barrels per day, 1 million more than the same time last year and 2.5 million BOPD more than 3 years ago. Rising production, now at the highest level since the late 1980s, are contributing to a growing debate on whether or not to lift the ban on crude oil exports from the U.S. Providing additional support to allow exports, production in the U.S. is expected to average 9.2 million BOPD in 2015 according to the Energy Information Administration, the statistical arm of the U.S Energy Department.
At present, U.S. oil exports are banned with the exception of crude to Canada and several isolated instances granted by the Department of Commerce. Exporting refined petroleum products, however, is allowed, and output is increasing – so much, that for the first time since 1949, the U.S. has become a net petroleum product exporting country surpassing Russia as the world’s largest refined petroleum exporter.
With a looming crude oil supply glut in California, Asian markets have become more attractive, particularly for Alaskan North Slope Crude. With a considerable amount of Mexican crude already being exported in the Pacific and a west coast surplus, revising the decades old ban could facilitate sales to Asia.
New shale oil technology and associated production growth has become a catalyst for the exporting debate.
In addition to rising production levels for crude, other contributing factors include lower demand as a result of a still stagnant economy – one that requires less imported energy. U.S. demand, now 2 million BOPD lower than it was in 2005, can be partly attributable to the recession. Other influencers include better vehicle fuel efficiency or CAFE standards, and continued advancements in shale-based drilling technology.
The supply, rather than demand side, is the more encouraging of the two as a result of advancements in tight oil extraction technology. Tight oil production in the U.S. averaging 3.22 million BOPD in the fourth quarter of 2013, according to U.S. Energy Information Administration estimates. That, combined with conventional production, pushed overall domestic crude oil production in the U.S. to an average of 7.84 million BOPD, 10.4 percent of total world crude oil production.
Two of the top shale oil formations in the U.S. – the Eagle Ford of Texas and Bakken in North Dakota and Montana – are being capitalized on by drillers. In February 2014, 63 percent of total U.S. tight oil production came from those two plays. In North America as a whole, 91 percent of tight oil production occurred in the U.S. with the remaining 9 percent from Canada.
In February 2014, North Dakota and Montana produced almost 1 million BOPD of crude oil from tight oil formations, accounting for 28 percent of total U.S. tight oil production that month. In North Dakota, a condensed four-county area that includes Dunn, McKenzie, Mountrail and Williams counties make up approximately 85 percent of the state’s production.
North Dakota, pumping more light sweet crude than ever before and exceeding the 1 million BOPD mark for the first time in April, currently ranks second in the country in oil production. Unquestionably, it will continue to be instrumental in supporting the movement toward an energy independent U.S.
Texas oil production, still leads the way amongst all states. At 3.181 million BOPD in February 2014, it produces three times more oil than North Dakota, and three times more than it produced as a state in February 2010. Like the Roughrider State, increased production levels are being largely driven by horizontal drilling in extensive shale reserves like the Eagle Ford.
There are a number of factors that will impact production levels and influence the actual time line needed for the U.S. to achieve energy independence. Growth potential and sustainability of domestic crude oil production will be influenced by uncertainties in key assumption areas including well production decline rates, lifespan, geological extent and technological improvement. Not only will this apply to the Eagle Ford and Bakken, but in other active plays as well as those yet to be drilled.
Estimated ultimate recovery for shale formation wells remains one of the more difficult factors to predict creating a degree of uncertainty when attempting to project U.S. tight oil production. The rate of technology advances and effect drilling costs will have on their application will impact projections and the production model analysis. Conceptually, the rate of advancement in drilling technology may be outpacing the National Energy Modeling System, meaning national energy independence could in fact occur by the year 2020.
Still, with much of the growth attributable to unconventional drilling, even more variables will come into play in the years ahead. The number of new wells needed to offset depletion rates for existing wells, remains high. In the Bakken alone, it will take 2,500 new wells this year to sustain production at the 1 million BOPD level, according to International Energy Agency. Cost of production and price for crude oil will be key influencers, affecting the number of active drilling rigs in the state, and wells drilled in shale plays around the country. If the price for crude softens, new well creation may slow, and result in production declines.
If pricing for crude oil on a global basis remains at or near current levels, the U.S. will likely continue to see increasing domestic production and predictably, fewer crude oil imports. According to the Census Bureau, crude oil imports declined by 9 percent last year, to 2.8 billion barrels, the lowest since 1995 and 17 percent lower than in 2010.
The declining petroleum gap the country is now experiencing, can be largely attributed to advanced shale oil drilling techniques.
Understandably, there is great interest in domestic oil production and the key drivers that will influence the path it takes in the years ahead. While shale drilling comes with a number of uncertainties including higher drilling costs compared to conventional extraction, it will likely continue to lead the growth charge.
Barring new regulatory measures that might deter the rapid rise in tight oil production or any other unforeseen circumstances, shale oil drilling will continue to play a significant role in positioning the U.S. as an energy independent nation in the years ahead.
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