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Why Oil Markets Worry About The Permian's 'Unknown Unknowns'

This article is more than 6 years old.

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How dependent are oil markets on tight oil? The Permian’s ‘unknown unknowns’ are the worry.

What’s the most unexpected outcome three years on from the price crash? There are a few contenders. OPEC’s zealous adherence to production restraint is right up there. US tight oil is another, briefly inconvenienced by low prices but now embarking on a second great phase of growth.

The resilience of non-OPEC production outside the USA is also a serious candidate. No fireworks, but producers have performed little miracles in holding production up. This large group of countries produced 41 million b/d in 2014; our latest global forecasts show they have held that level in the three years since. How did they do that?

There have been heavy casualties from low prices, among them three of non-OPEC’s big producers. Mexico’s production of 2.2 million b/d in 2017 is 20% down on 2014 (and 13% lower than we forecast back then). China’s at 3.8 million b/d is 8% down, and 6% below what we’d forecast. Africa as a region has not fared well, production in 2017 10% below forecasts.

Some producers though have adapted remarkably well to lower prices. Russia is the poster child. Production will reach an all time high of 11.7 million b/d in 2017, up 0.6 million b/d on 2014 in spite of faithful support of OPEC cuts. The new peak has been achieved by intensified drilling on brown field projects, and the weak rouble boosting margins. Canada too has done well, producing 0.4 million b/d more than expected. Currency has been a factor, but so too the emergence of Duvernay liquids with break evens competitive with US tight oil plays; as well as better up time from oil sands projects. The North Sea has also surprised, the UK leading the way with aggressive cost cutting helping to lift production.

The net effect of these downs and ups is that non-OPEC production outside the US has held up well. But can it last? We think so. Our latest forecasts suggest that production from this group of countries will be pretty stable at over 40 million b/d well into next decade initially supported by modest decline rates, later by some new development projects. But impressive as flat is in the circumstances, it’s still 2-3 million b/d lower than we’d forecast in 2014. Many higher cost projects have fallen by the wayside, resulting in big downgrades to longer dated forecasts with Brazil, Kazakhstan and Africa suffering the most.

Growth in oil demand will have to be met from elsewhere. Our Macro Oil team’s latest supply/demand balance suggest USA and OPEC will do battle for contestable demand that will climb to over 5 million b/d by 2024. We reckon US tight oil captures the lion’s share, as much as 90%, as production doubles from 4.9 million b/d in 2017 to 9.6 million b/d by 2024. OPEC’s increased share could be limited to less than 1 million b/d.

The global market is becoming increasingly dependent on US tight oil, a resource theme the industry is still getting to grips with. ‘Known unknowns’ have already surfaced that cast doubt as to recovery rates – a higher-than-expected gas oil ratio experienced in some wells; and parent/child well issues. Growth might also be constrained by shareholders demanding that independents rein back from volume-driven targets.

Our tight oil forecasts continue to shift as we learn more with each well, each month, in each play. The Eagle Ford and Bakken together account for almost half of current US tight oil production. But we have new doubts that these plays will offer long-term commercial drilling inventory as operators move out beyond the sweet spots. We’ve downgraded the rate of growth in both plays significantly from the mid-2020s. Into their place steps the Permian, which happily looks better with each well drilled. We’ve materially upgraded forecasts, principally for the Wolfcamp, and as a result our overall forecasts for tight oil are broadly unchanged.

But the known unknowns serve as a warning that we cannot be blasé about tight oil’s ability to deliver. Much now hangs on the Wolfcamp. There are more than likely ‘unknown unknowns’ out there too. And if there are, there’s not another Permian ready to step in; and conventional options will take time to crank into action.

Read more from Simon here.