Frost & Sullivan’s Carl Larry examines the impact the shale oil revolution is having on storage in the us and how it is only good news for operators
Things change quickly in this industry. In Chicago they say ‘If you don’t like the weather, give it a few hours’ and this saying applies to the oil markets and the growing fascination with shale oil.
Things changed relatively quickly as crude oil production doubled from 5mm b/d in 2011 to 9.5mm b/d in 2015.
Demand for crude that runs through US refineries jumped from 15mm b/d in 2013 to tip the scales at a peak of 17mm b/d this year. If for anything, the truth is that crude oil production in the US is at record highs and consumption of that crude is also at record highs.
In the eight months that have passed in 2015, the year started with major concerns about the viability of shale crude production. As oil prices were tumbling under $60, talk in the market was that break even for shale producers was at best $50.
Recently several producers have said that in some areas they have seen break even falling to $20 in some regions. An overall estimate of where this break even number is on average, most are thinking its closer to $35 than it is $50.
A lot of factors have combined and have contributed to change the thinking about these break evens this year, in addition to cost restructuring making a major impact. There has been the reduction of labour and a lot of overspend in those areas. There has been a restructuring of cost of land on which production is being completed. There has also been an emergence of ‘walking rigs’ and more efficient oil recovery from a single site bring costs down.
Additionally, technology has been upfront and making an impact.
Technology has now helped frack producers pull more crude from a single drill site. There is a difference in materials being used, different angles of equipment and multiple frack positions within a first frack. Data mining has become as material as the frack mining. Within milliseconds of a producing well, we are getting data that is not just catching real time inefficiencies; it’s positioning the site for a major return on the longer term efficiency. As technology continues to advance, the break even for the shale oil plays are lowering.
As the breakeven levels have lowered, the American oil industry is now facing a ‘new normal’. It has now become the swing producer in the world. If OPEC is waiting for the US to pull back production, the US may not see any relief soon from lower prices. Oil has become as American of a commodity as corn. There will be no reason, outside of falling oil drilling economics, to see the industry weaken to the point that it is not maintaining more production than it needs to import.
There is still a risk that shale plays may falter. The industry is working hard to push the recovery of the US economy, but there has not been a positive year of GDP over 2%. If pressure continues to come from areas outside the US, the economy may get pushed back into a weaker recovery. If that causes demand to fade, this is when the crude oil production will find its weakness. Production cannot be expected to stay above 9mm b/d if refinery demand slides to under 16mm b/d on a consistent basis.
There is another risk to the US producer that lies on the fringe; the cost of imports compared to the US crude. The basic spread between the US crude benchmark and the foreign benchmark has seen a brief period of parity this past year, but if it is averaged out since 2011, there is a difference that has favoured the Brent by about $15. This is based on if the cost of foreign crude tumbles to a discount on a consistent basis.
GOOD NEWS FOR STORAGE
In regards to the US storage market, there is only good news ahead. The US continues to produce oil, but it is still far from all the oil that is used on a daily basis. More than 7mm b/d of foreign crude is still imported and before there is any decline in US production, that number will have to see a reduction.
The recent deal with Mexico and the US to ‘swap’ crude barrels is a step in the right direction, but more importantly, a sign that the US government is thinking about this situation. There will not be a drop in US crude oil production as long as the only alternative to meet demand is to import crude oil.
Crude in America is a benchmark that is based on storage; West Texas Intermediate (WTI) crude. This grade of WTI is priced on a financial market that delivers to storage in Cushing, Oklahoma. However, since the growth of shale oil production in America though, there has been a shift of focus away from this terminal site. This is because there is a large amount of crude that is now produced in Texas and is delivered into the Gulf Coast refineries.
Along with this, more people are now developing more storage in the US Gulf to accommodate more crude that is being delivered to other
refineries in America. Economics have already come together to ship US crude to Canada from the US Gulf.
In the North Dakota region where the first of the shale boom was seen, barrels are being pulled from that region on rail and over to refineries
in the midwest and on to the east coast. Additionally, a lot of crude has moved down to the Cushing area when the production first started to rise, but as the price of US crude has maintained a healthy discount to foreign crude, moving crude from North Dakota to the east coast has become more attractive.
This is leaving the current benchmark in a state of ineffectiveness but it is also creating more opportunity for people to explore other areas to increase storage capacity and terminal sites.
Granted, this easing with the falling price of crude once again, but as recently as earlier this year, the commodity that was hottest in the marketplace was storage and terminal space.
With the increase of crude production and even more so, refined product exports – storage and terminal space is at a premium. All markets have their ebb and flow, but as the low cost of oil continues, it is to the advantage of US producers to meet the refiners’ demands and for refiners to meet consumers growing demand.
The spread of the US benchmark WTI to the foreign benchmark of Brent, continues to see the American crude at an advantage. This advantage supports the US as the premier area to see more product produced and exported at a lower price to the consumer.
Moving ahead, more storage tanks and terminals are needed to deal with current production, but also to deal with what seems to be an inevitable move to export crude oil. Shale is here to stay and it is far from over.
The increase of only 400K b/d of domestic production from January 1 to the current levels marks the smallest increase to production since
it started climbing in 2011. It is a better outlook for shale producers as the price of oil has dipped from $60 to $40.
However, things change quickly and if a way back to the upside is found, more oil is not going to be enough.
FOR MORE INFORMATION:
This article was written by Carl Larry, director of business development – oil and gas at Frost & Sullivan, ww2.frost.com