The issues start with how much new supply can get to market.
Experts at an April 3 conference organized by the Center for Strategic & International Studies and the National Capital Area Chapter, US Association of Energy Economists said predictions of potential new supply run from 2 to 11 million barrels a day. In 2011, the US produced just under 5.7 million b/d.
Matt Marshall, Manager, Energy Analysis, Bentek Energy, said oil from shale “potentially could displace all the foreign crude in Louisiana and Texas refineries.”
A Complex Web of Pipeline Issues
But Lou Pugliaresi, President, Energy Policy Research Foundation, said the pace of new well development is being threatened by “chokepoints,” oil pipelines that are at capacity or don’t extend into areas of new production, which range along the Rockies, the Appalachians, the Mid-continent, California and the Southeast.
Hill Vaden, Senior Analyst, US Upstream Research, Wood Mackenzie, said producers in North Dakota’s Bakken shale, rather than take a $12/barrel discount for oil sold in North Dakota, have started shipping by rail to get a $16/barrel premium in Louisiana because pipelines to the Gulf Coast refineries are not available. Pipeline shipping is historically cheaper than rail.
Don Santa, President & CEO, Interstate Natural Gas Association, said pipeline building necessarily lags well development. Pipelines are multi-decade investments, he said, and builders must have guaranteed long-term customers, whereas drillers can quickly decide a field isn’t productive enough and move on in a year or two.
In addition, Santa said, under US law, the Federal Energy Regulatory Commission oversees natural gas pipeline permitting and exercises eminent domain, allowing new pipelines to be built in 2-4 years. Pipelines for other products, including the natural gas liquids and oil that are now driving shale drilling, must be permitted state by state, and take longer, he said.
Sarah Emerson, President, Energy Security Analysis Inc., said, “I can almost guarantee you that we will not produce 9 million b/d” more, as some forecasters predict. She said substantial new supply will drive down prices and limit new drilling.
Moreover, she said, “refiners are in the middle,” and crude suppliers elsewhere would lower prices if US refineries began importing less of their product. Since US shales produce light, sweet crude, they will displace similar crude from Africa, not heavier crudes from the Middle East. “We will continue to import from the Persian Gulf,” she predicted.
Both economics and environment may limit new shale drilling.
Brenda Pierce, Program Coordinator, Energy Resources Program, US Geological Survey, said many of the potential shales are in arid regions, posing a supply challenge for water-intensive fracking.
Yusuke Kuwayama, a Fellow with Resources for the Future, said fracking water use is not out of line, on a per-Btu basis, with other fuel retrieval methods, but fracking does use the water in big chunks. Casing failures that pollute groundwater and poor handling of flowback water leading to surface contamination produce resistance to the technology in local communities.
“A tidal wave of NGLs” – Van Leeuwen
On the economic side, the new oil supply always comes with some mixture of natural gas liquids and dry gas, and the combination may limit some plays, said Tyler Van Leeuwen, Project Manager, Advanced Resources International. Even though drillers are moving to “wet” shales to get more oil, he said, incidental natural gas production continues to rise, and producers have a “tidal wave of NGLs.”
He and several speakers questioned whether NGL markets have become saturated and prices there are starting to decline.
For oil, current world and US prices exceeding $100 a barrel justify virtually all shale drilling, said Timothy Dove, President & COO, Pioneer Natural Resources, and producers can make reasonable profits down to about $80. If prices drop into the $60s/barrel, he said, producers will have to recalculate investments.
Vaden said drilling in “core areas” of new shale plays has proven “massively productive” and drillers may break even at “$30 to $60 a barrel.”
Ironically, the US may get vast new supplies just as Americans are finding ways to reduce their voracious demand for oil. US consumption has been dropping since 2005, due to increased use of substitutes like biofuels, the recession, and tightening auto mileage standards. Most experts forecast a continuing demand decline.
To read the first of this two-part series, click here.