The Wolfcamp Shale and America's Energy Independence

Updated April 2017

With oil prices remaining well below highs experienced prior to 2014 and with OPEC's production constraints deal actually resulting in higher U.S. oil production levels, recent news from the United States Geological Survey would suggest that oil supplies will continue to be problematic for producers who are awaiting a return to the $70 to $80 per barrel level last seen in mid-2014.

Despite the predictions that non-conventional and, by extension, total oil production levels in the United States would plummet in the current low price environment, production has remained fairly robust.  Here is a graph from the U.S. Energy Information Administration showing how domestic oil production levels have fared over the past 30 plus years:

Here is the ungraphed weekly production data from the beginning of 2012:

Domestic oil production peaked at 9.61 million barrels per day during the first week of June 2015 and fell to a low of 8.428 million barrels per day during the first week of July 2016.  While this 12.3 percent drop would seem significant, at more than 8.4 million barrels of oil per day, production is still far higher than it was prior to the mid-2014 price "cliff".  In fact, during the first week of March 2017, oil production increased, hitting a high of 9.088 million barrels per day.

Obviously, supply is continuing to put downward pressure on prices, particularly when oil demand looks like this:

The International Energy Agency predicts that oil demand growth is set to rise by only 1.2 million barrels per day in 2016 thanks to dropping demand from the Americas and China.  This is down from demand growth of 1.8 million barrels per day in 2015.

Now, let's look at the real subject of this posting, a recent announcement from the United States Geological Survey that has the potential to put further downward pressure on oil prices in the future.  According to the USGS, a formerly traditional play that was exploited using vertical wellbores, the "Wolfberry" play that encompasses Mississippian, Pennsylvanian and Permian strata, now forms  the largest estimated contiguous resource that has ever been assessed by the USGS.  In total, the Wolfcamp shale of Midland Basin in Texas' Permian Basin contained an estimated mean of 20 billion barrels of oil, 16 trillion cubic feet of natural gas and 1.6 billion barrels of natural gas liquids.  This resources are classified as continuous, undiscovered and technically recoverable resources according to the following definitions ;

continuous - oil and gas that is dispersed throughout a geological formation rather than existing as discrete, localized occurrences.  Exploitation of these reserves require special recovery techniques including horizontal drilling and hydraulic fracturing. 

undiscovered - resources postulated, on the basis of geologic knowledge and theory, to exist outside of known fields or accumulations. Included also are resources from undiscovered pools within known fields to the extent that they occur within separate plays.

technically recoverable - those resources producible using currently available technology and industry practices. USGS is the only provider of publicly available estimates of undiscovered technically recoverable oil and gas resources.

Here is a map showing the outlines of the contiguous estimated Wolfcamp shale resources:

To date, more than 3000 horizontal wells have been drilled at completed in the Wolfcamp in the Midland Basin; additionally, since the Wolfcamp shale is present in the Delaware Basin portion of the Permian Basin, reserves may be higher than the current assessment shows.

Here is a table showing the fully risked assessment results for all six continuous assessment units of the Wolfcamp shale in the Midland Basin:

If you are interested, the entire USGS report can be found here.

To help you put these numbers into context, here is a table showing the most recent U.S. proved oil, condensate and natural gas reserves for 2013 - 2014:

In 2014, for the first time since 1972, U.S. oil proven reserves exceeded the 39 billion barrel mark or just under twice the mean technically recoverable reserve estimate for the Wolfcamp.  

The recent analysis by the United States Geological Survey shows us how significant the Wolfcamp shale play could become as part of America's move toward energy independence and how exploitation of this resource could impact the very delicate supply - demand global oil market balance in the future.  Given that the mathematical odds of a global recession are growing by the day, a return to the halcyon days of triple digit oil prices look increasingly unlikely.

  

The Continuing Problem with Oil Inventories

Updated November 2015

A recent "Today in Energy" posting by the U.S. Energy Information Administration very succinctly explains the reason why oil prices have dropped over the past year and why it is unlikely that the oil market fundamentals will change any time soon.  

Here is a graphic showing global inventory levels for oil and petroleum liquids in millions of barrels per day since January 2008 along with the price of Brent crude:

As you can see on the dark brown bars, oil inventory has been steadily positive since August 2014.  This tells us that global production of both oil and hydrocarbon liquids has outpaced the growth in consumption.  In fact, for the first seven months of 2015, total global liquids inventories have grown by an average of 2.3 million barrels per day, the highest level since 1998 when oil prices collapsed as shown on this chart:

The EIA provides the following data for 2014 and 2015:

2014

Global petroleum liquids consumption growth: 1.2 million BOPD

Global petroleum liquids production growth: 2.3 million BOPD

Average global consumption rate: 92.4 million BOPD

2015 (to the end of July 2015)

Global petroleum liquids consumption growth: 1.2 million BOPD

Global petroleum liquids production growth: 2.9 million BOPD

Average global consumption rate: 93.3 million BOPD

Here is a graphic showing the same data along with a graphical representation of the buildup in global petroleum liquids inventory:

The sources of petroleum liquids supply have changed.  In 2014,  global liquids production growth was from countries outside of OPEC, including the United States, with OPEC production levels actually dropping.  In 2015, increased production levels of petroleum liquids has come from both OPEC nations (up 0.9 million BOPD in 2015) and non-OPEC nations (up 2.0 million BOPD in 2015).

Since global liquids inventories started to build in August 2014, there has been a significant change in   the difference between futures prices and near-term petroleum liquids contracts, increasing from nearly zero in 2014 to between $5 and $10 per barrel.  This reflects the increased cost of growing storage needs and the increased supply of oil.

In the coming months, the EIA expects that crude oil production in the United States will begin to drop as companies respond to lower oil prices and reduce drilling levels.  The latest EIA data shows that U.S. crude oil production has actually risen from 8.7 million BOPD in 2014 to 9.3 million BOPD in 2015 but will drop to 8.8 million BOPD in 2016.  Estimates this that U.S. production averaged 9.4 million BOPD for the first eight months of 2015, actually rising by 100,000 BOPD than the average production rate during the fourth quarter of 2014 despite the fact that the U.S. oil-directed rig count has declined by 60 percent on a year-over-year basis.  This will have an impact on the global level of inventory accumulation which is expected to slow from its current level of 2.0 million BOPD to 1.5 million BOPD in Q4 2015 and to below 1.0 million BOPD in 2016.  That said, the EIA forecasts that Brent crude prices will average only $54 per barrel in 2015 and $59 per barrel in 2016 with the price for West Texas Intermediate averaging about $5 less per barrel than Brent crude.

This data suggests that the oil industry is unlikely to see a quick turnaround, particularly if the global economy continues to show signs of slowing.  While the growth rate in petroleum liquids storage will slow over 2015 - 2016, inventories will continue to accumulate, particularly if Iran adds additional supply.  This suggests that the global oil market could be in for a repetition of what happened in 1998 and that there will be continued downward pressure on prices, at least over the medium-term.

The World's Oil Market and How History Repeats Itself

Updated August 2015

As a petroleum geoscientist, I can quite clearly remember the downturns in the oil industry over the last three decades.  One of the worst occurred in 1986 when the price of oil very rapidly fell from $30.81 in November 1985 to $11.58 in July 1986.  The streets of many oil-centric cities in North America were awash with laid-off geoscientists, engineers and support staff, many of whom were never able to return to the industry that they had spent years in university training for.  From what we can see now, there are many parallels between what happened in 1986 and what is happening in today's oil market.

Here is a chart showing what happened to the price of oil in the years between 1982 and 1991:

Over the 9 months between November 1985 and July 1986, the price of oil fell by 62.4 percent.  While the price recovered to $21.36 in July 1987, it didn't retrace all of its losses until Saddam Hussein decided to invade Kuwait, an action that pushed the price up to $35.92 in October 1990 for a short period of time.  Basically, the price of oil remained at a depressed price for a full five years and would likely have remained depressed for a longer period had hostilities not broken out in the Middle East.

What caused the oil price collapse of 1986?  According to research by Dermot Gately at New York University, the 1986 price collapse was the direct result of a decision by Saudi Arabia and some of its OPEC counterparts to increase their share of the oil market by ramping up production.  Unlike today, by ramping up their oil production levels, the Saudis and their peers were able to avoid major revenue losses because the decline in oil prices were offset by increases in output.

It is interesting to look at what was happening to the demand for oil in the years leading up to the 1986 oil price decline as shown on this graph:

Oil demand increased fairly rapidly before the 1973 - 1974 price increase, grew less rapidly during the years from 1973 to 1978, then fell 10 percent during the years from 1979 to 1983 and rose only slightly from 1983 to 1985.  A series of recessions during the 1970s and early 1980s caused economic havoc in the world's economy, much of it related to oil price shocks during the 1970s which had a dampening effect on oil consumption rates.

Now, let's look at what was happening to the production of oil in the years leading up to 1986 as shown on this graph:

As you can clearly see, OPEC's share of the world's oil production had dropped significantly over the years between 1970 and 1985, falling by 40 percent between 1979 and 1982 alone.  This occurred largely because of increasing production from non-OPEC nations including Mexico, the United Kingdom and Norway (North Sea) and the Soviet Union and China.  During this timeframe, production from the United States actually fell by 7 percent between 1970 and 1985 and, without the impact of Alaskan oil, American oil output would have fallen by 25 percent over the fifteen year period.

When both supply and demand for oil in the mid-1980s are taken into consideration, it is clear that OPEC was forced to reduce its output to support prices as shown on this graph:

Between 1979 and 1985, each OPEC member country cut its output by at least 20 percent with Saudi Arabia and Kuwait each cutting their oil production by 60 percent and Libya cutting its oil production by almost 50 percent.

There are some key parallels between what happened in 1986 and what has happened to the world's oil markets over the past few weeks.:

1.) Growth in the demand for oil is levelling off and is likely to remain modest given the slowdown in China's economy and the near-recessionary economic growth levels in Europe.  

2.) Growth in the supply of non-OPEC oil is significant, thanks to the oil sands and tight oil.

3.) While Saudi Arabia has not increased production, it has decided not to cut production in the face of rising non-OPEC-sourced oil. 

While I am convinced that the world's oil supply-demand balance is very delicate and that the supply could swing quickly if both oil sands and tight oil production drops in the face of sub-economic prices and that the demand for oil could rise quite quickly if the entirety of the world's economy returns to a healthy state, there are significant parallels between what happened to the oil market in the years between 1985 and 1991 that suggest that we could be in for an extended period of depressed oil prices, particularly if we see a return to Great Recession-style economic contraction.