U.S. crude oil production will rise faster than expected to a near historic high by 2016, according to the Energy Information Administration (EIA), which sharply raised its annual output forecasts on Monday due to the breakneck speed of shale oil development.
The EIA’s forecasts show that shale will help oil output in the world’s largest consumer increase by 800,000 barrels a day every year until 2016, when it will total 9.5 million b/d, just below a 1970 record of 9.6 million. It will then remain above nine million until at least 2025.
The agency’s dramatic upgrade from a peak of just 7.5 million b/d in last year’s report shows how production from tightly packed shale rock has consistently confounded analysts, as higher prices and rapidly evolving technology fuel growth.
“One thing I am sure of: The technology and prices really, really matter when you look at what the likely production numbers for oil and gas are going to be,” EIA administrator Adam Sieminski told analysts. “It’s not just trying to estimate what the resource level is in the ground.”
Just a few years ago, U.S. policy makers were considering the risks of an ever-rising dependence on imported fuel. The EIA itself made barely a mention of shale oil in its 2010 outlook, focusing rather on offshore production growth.
Now the agency is struggling to get to grips with a complete reversal of that equation. The government has begun approving more natural gas exports and may consider lifting a ban on crude oil exports.
Sieminski said the government may want to consider oil swaps with Mexico, if not a total elimination of constraints.
“They might want to look at the possibility of whether it would make some sense to allow the light sweet crude to go to refineries in Mexico that need that oil and have more sour crude coming from Mexico,” he said.
“That does require a policy decision but you can see that the trends are pushing things in that direction.”
The latest EIA forecasts may stir more anxiety from members of the Organization of Petroleum Exporting Countries (OPEC) such as Saudi Arabia, which are being forced to confront a trend they initially greeted with skepticism.
The global oil cartel said in November that it may lose 8 per cent of its market share to shale in the next five years.
The EIA on Monday said OPEC’s world market share would fall to below 40 per cent in the near term but then recover after 2016. Last year it had expected OPEC’s share to remain at 40 to 45 per cent in the coming years.
While the growth rate is far more rapid than earlier expected, the EIA maintained its view from last year that output will peak this decade and then begin to decline. The sharp decline rates of most shale oil wells has fuelled some skepticism of the long-term trend from a handful of geologists.
he EIA said the United States would be pumping 7.5 million b/d in 2040, more than last year’s 6.1 million forecast.
Higher U.S. production will also help tamp down global benchmark Brent crude oil prices, which are now expected to fall to $92 (U.S.) a barrel in 2012 prices in 2017, before rising to $141 in 2040. Last year the EIA saw a fall of $96 in 2015.
U.S. oil and gas output unexpectedly reversed a long decline after companies learned how to produce from shale rock using horizontal wells that are fractured hydraulically.
This drilling-intensive method ensures more contact between a well and a reservoir while “fracking” splits the shale rock and props up the cracks with materials such as sand to encourage oil and gas to flow into the well.
But it has also raised environmental concerns over potential water pollution and earthquakes, while the drilling costs have led analysts to repeatedly worry about a break-even price for development to continue.
The EIA raised its forecast on natural gas production, also undergoing a shale renaissance, to 31.9 trillion cubic feet (tcf) by 2025 from the 28.7 tcf it had forecast last year, and to 37.6 by 2040 against the 33.2 touted earlier.
The 2040 total annual gas production number equates to just over 100 billion cubic feet a day from around 70 bcf/d now.
While oil production will plateau after 2016 and start to gradually fall after 2020, natural gas output will increase steadily, growing 56 per cent between 2012 and 2040.
“It turns out it’s easier for natural gas molecules to squeeze their way through the [fractured] cracks than crude oil,” Sieminski said. “The resource base in terms of the level of production that it would support for gas looks better at least at this point than it does on the oil side.”
While crude oil exports remain severely limited by law, natural gas exports will continue to rise. The country will become a net natural gas exporter two years sooner than the EIA had previously judged, in 2018, and a net exporter of liquefied natural gas by 2016.
Imports of liquid fuels will fall to 25 per cent of total U.S. consumption by 2016, far lower than the EIA’s previous forecast of 34 per cent by 2019, from 40 per cent today. As oil output starts to fall, the share will increase to 32 per cent by 2040, still lower than the 37 per cent it expected a year ago.
Consumption of liquid fuels will rise to 19.3 million b/d in 2025, but then slip to 18.7 million from 18.5 million in 2012. Natural gas consumption will rise to 28.4 tcf by 2025 and to 31.6 in 2040 from 25.6 last year.