Sept. 08–The Permian Basin and other U.S. shale plays will continue to steer the global oil industry for years. But experts warned Friday that the “new Saudi Arabia” isn’t the answer to every oil industry question.
Petroleum experts gathered at the Federal Reserve Bank of Dallas to discuss energy’s role in the economy and what comes next. The third annual Energy and the Economy conference was co-sponsored with the Kansas City Fed; combined, those two districts account for 50 percent of U.S. oil production.
Panels featured discussions of everything from sanctions on Iran to militants in Nigeria. Discussions and questions, however, continued to circle back around to the oil fields of West Texas and eastern New Mexico, that region’s strengths and its limitations.
There are red flags everywhere in the energy world. Production from former oil powerhouse Venezuela has plummeted. Sanctions on Iran will tighten the world’s oil supply. Pipeline constraints in the Permian Basin are squeezing some producers.
Despite those concerns, experts said the oil market has reached a state of equilibrium, after a period of oversupply. But Dallas Fed Chairman Robert Kaplan said there are reasons to be cautious.
“It is also our view that in the next few years, it is very likely that we may well get into a global undersupply situation,” he said.
Global demand continues to grow, while oil companies have spent less on “long-life projects,” Kaplan said. The industry has instead relied on shale oil, which producers can ramp up and down quickly, to fill the gap.
“A number of you are advising us to be skeptical whether shale production will be sufficient to keep up with the growth in global demand,” Kaplan said.
In the short term, the Permian Basin is expected to keep oil prices in check even with its pipeline constraints. Linda Capuano, administrator of the U.S. Energy Information Administration, said prices are expected to hover around $70 next year thanks to production increases in just a few countries.
“We expect almost all the growth in 2019 to come from the United States, Canada and Brazil,” she said. “This strong growth in global supply is expected to help moderate pricing.”
The EIA forecasts that U.S. crude oil production will grow by 1 million barrels per day next year. Almost 70 percent of that growth is expected to come from the Permian Basin and Eagle Ford.
“Next year, one out of every three barrels of crude oil growth in the world is expected to come from Texas and New Mexico,” Capuano said.
Mark A. Schwartz, head of scenario planning at S&P Global Platts Analytics, said it’s not necessarily pipeline capacity or similar constraints that will force the Permian Basin and other shale plays to plateau.
“It’s just the arithmetic,” he said.
Shale wells produce most of their oil in the first few years. Schwartz said a 15 percent annual decline rate is typical when averaged over the first five or six years.
U.S. shale oil production hit about 7 million barrels per day this year, which makes that decline substantial.
“We have a million [barrels] a day decline that we have to offset, just to stay in place,” Schwartz said. “That number continues to get bigger and bigger.”
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