An oil well and storage tanks in Belfield, N.D., are in the Bakken shale formation.JIM WILSON/The New York Times
U.S. oil production from shale formations such as the Bakken in North Dakota and Eagle Ford in Texas would remain economically viable even if world crude prices drop by as much as 30 per cent from today's levels, a U.S. analyst says.
The industry that has revolutionized North American energy supply faces numerous risks, including the potential for weak markets, transport constraints and the inability of technology to keep up with demand, though none currently looks like it could force a halt in drilling for the light, tight oil, said Skip York, analyst at Wood Mackenzie, the international energy consultancy.
Mr. York pointed out that the Organization of the Petroleum Exporting Countries cuts production to keep international benchmark Brent crude above $100 (U.S.) a barrel and most of the world's conventional oil has a break-even price of around $90.
"With Brent crude oil pricing in the late-2013 range of $108 per barrel of oil in early 2014, almost all tight oil proven reserves are commercially viable. Even if global oil prices fell toward $75 per barrel, over 70 per cent of U.S. tight oil reserves would remain economic," he said in a presentation to a conference in Florida.
A bigger influence on tight oil is the pricing spread between where it is produced and where it is priced, given the constrained pipeline network in North America that is also limiting volumes of Canadian crude that can move to markets in the United States.
He pointed out that U.S. and Canadian crude production is forecast to increase by six million barrels a day by 2025, which demonstrates the importance of increasing overall transport capacity.
"If sufficient logistics capacity don't materialize, there is a risk that crude basis differentials could widen to the point of making incremental drilling uneconomic, therefore stalling production growth," Mr. York said. "However, as we've seen in the last 18 months, not all of that volume needs to move by pipeline, as rail has rapidly come onstream."
Surging U.S. crude output has prompted calls from the energy sector and its supporters for Washington to relax restrictions on exporting supplies. Such a move may not eliminate the price spreads that are based on transport or discounts on some of the crude to account for differences in quality.
Still, the gap between U.S. oil prices and Brent is likely to narrow as a result, he said.
Jeffrey Jones