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U.S. LTO Leading Worldwide Oil Growth Charge to 2022, Says IEA

The United States will be the No. 1 source of global oil supply growth to 2022 with light tight oil (LTO) from unconventional plays expanding the most, the International Energy Agency said Monday.

Executive Director Fatih Birol unveiled "Oil 2017," IEA's medium-term global oil outlook to 2022, on the opening day of CERAWeek by IHS Markit, the annual five-day energy confab in Houston. An estimated 3,000 global leaders are expected to descend on the George R. Brown Convention Center this week, including oil and gas executives, legislators and regulators and one prime minister, Canada’s Justin Trudeau.

"In our forecast period, the Americas will continue to dominate growth...The United States is the No. 1 source of extra supply, adding 1.6 million b/d by 2022. LTO output is forecast to expand by 1.4 million b/d over the period, with growth strongest in the early years before stabilizing in the absence of higher prices or further technological breakthroughs."

The global energy watchdog said global oil supplies could struggle to keep pace with demand after 2020 and risk a sharp increase in prices, unless new projects are approved soon. Worldwide, the oil supply picture "appears comfortable" for the next three years but growth slows considerably after that, Birol said. Spare production capacity in 2022 is expected to fall to a 14-year low.

Over the next five years or so, the United States is seen as the largest contributor to worldwide supply growth outside the Organization of the Petroleum Exporting Countries (OPEC) cartel. Unconventional investments should continue to surge.

U.S. Supply's 'Second Wave'

"We are witnessing the start of a second wave of U.S. supply growth, and its size will depend on where prices go," said Birol. "But this is no time for complacency. We don't see a peak in oil demand any time soon. And unless investments globally rebound sharply, a new period of price volatility looms on the horizon."

Oil demand is expected to rise in the next five years, passing the symbolic 100 million b/d threshold in 2019 and reaching about 104 million b/d by 2022. Developing countries account for all of the growth, and Asia dominates, with about seven out of every 10 extra bbl consumed globally. India's oil demand growth will outpace China by 2022. While electric vehicles are an "important factor" for oil demand, the IEA estimated they will displace only limited amounts of transportation fuel by 2022.

The United States is seen responding much more rapidly to price signals than other producers in the medium term.

"If prices climb to $80/bbl, U.S. LTO production could grow by 3 million b/d in five years," according to IEA. "Alternatively, if prices are at $50/bbl, it could decline from the early 2020s."

Lifted by increased drilling and aided by cost deflation and efficiency improvements, U.S. output is seen "expanding by nearly 1.6 million b/d through 2022, even assuming stable crude oil prices of around $60/bbl over the period," Birol said. "Roughly half the gains are expected to come from natural gas liquids (NGL) as infrastructure developments, both in terms of expanded export capacity and new U.S. petrochemical plants, support growth in coming years."

U.S. crude and condensate production is forecast to rise by 800,000 b/d, as declines in conventional production partly offset output gains from LTO formations. West Texas Intermediate crude oil prices have recovered from below $30/bbl at the start of 2016 to around $55, which sets the table for LTO production to "return to growth" in 2017.

"After hitting a low of 316 last May, the number of active oil rigs in the U.S. has risen steadily, reaching a total of 525 at the end of 2016 and 602 by the end of February. The pace of the increase picked up markedly toward the end of 2016 and at the start of 2017, as the OPEC/non-OPEC agreement to restrict output appeared to set a floor under prices, providing operators with enough certainty to increase activity."

With only the best acreage tapped in the U.S. onshore last year, operators continued to show impressive productivity gains, IEA researchers noted. "According to data from Rystad Energy, average well performance, as measured by cumulative production by well, increased by 25% in 2016. The Energy Information Administration's (EIA) Drilling Productivity Report shows similarly improvements in production per rig."

Strongest LTO Growth in 2018

Through 2022, LTO production in the onshore is forecast to see its strongest growth in 2018, according to IEA.

Because of the time lag between spudded and completed wells, which generally averages between four to six months, growth this year may be restricted to around 180,000 b/d.

"Output picks up rapidly, however, rising by more than 500,000 b/d during the course of the year to a new all-time high by end-2017. More substantial growth will come in 2018, when annual average output is expected to be 530,000 b/d higher."

Beyond 2018, growth in the United States is expected to taper off, as producers are unlikely to support further increases in activity "in the absence of incremental price increases and/or additional cost/technology improvements. As production rises, more wells will have to be drilled just to maintain output levels."

As the best resources are developed and less productive areas in the United States are tapped -- and as input costs such as steel, labor and sand increase -- the economics of new wells again will deteriorate, according to IEA.

"The estimate for LTO production is nevertheless higher than last year's report," IEA noted. "Not only have cost reductions and efficiency improvements over the past two years lowered the financial breakeven price for most plays, but crucially, the total resource estimate for recoverable reserves has been lifted."

The EIA's Annual Energy Outlook for 2016 increased the estimate for technically recoverable LTO resources to more than 100 billion bbl from 88 billion bbl, "which suggests that a higher number of wells will be economical at a given set of prices."

U.S. natural gas liquids (NGL) are forecast to be a leading source of non-OPEC production growth in the medium term as new export terminals and domestic petrochemical plants offer outlets for products. Production of NGLs -- including ethane, propane, normal butane, isobutane and natural gasoline -- is forecast to increase by 900,000 b/d by 2022 to 4.5 million b/d.

"The supply of NGL has expanded by an impressive 1.4 million b/d, or nearly 70%, to 3.5 million b/d over the past six years. Crude oil output grew at nearly the same rate, adding 3.36 million b/d. During our forecast period, however, the share of NGLs in total U.S. oil supplies, already at 28% (when excluding biofuels) in 2016, will increase as more liquids are stripped out of the gas stream."

Ethane Exports Fueling Growth

Ethane is set to drive NGL growth over the coming years. New deepwater export facilities in Pennsylvania (Marcus Hook) and Texas (Morgan's Point) will fuel the growth, forecasters said. Domestic demand for ethane is expected to increase as new ethylene production facilities are completed. This year, feedstock capacity at ethylene cracking plants is set to rise by the equivalent of an additional 400,000 b/d of ethane feedstock.

Meanwhile, crude and condensate production in the Gulf of Mexico is expected to average slightly below 1.7 million b/d by 2022, 80,000 b/d more than in 2016. "Spending cuts have resulted in lower activity in the Gulf, and relatively few new projects are due to come online in the coming years. Growth will taper off entirely by 2020 unless further projects are brought forward."

Canada should remain a key contributor to non-OPEC supply growth to 2022, despite the slump in prices and deferred projects. "In 2016, growth was derailed by devastating wildfires across Alberta, but, as infrastructure was largely left intact, production is set to rebound sharply in 2017, and indeed this was already seen toward the end of 2016," IEA said. "Recently completed oilsands projects, and sites already under construction, will drive growth to 2022."

Oilsands production, including upgraded synthetic crude, is forecast to expand by 900,000 b/d over the outlook period to reach 3.3 million b/d in 2022. Total Canadian oil supplies are forecast to grow by 820,000 b/d, to 5.3 million b/d in 2022, from 4.5 million b/d in 2016.

Mexico Needs Time

While Mexico has made "good progress" toward opening up of its upstream sector to foreign and domestic competition, it is going to take time for new projects to reverse the declining trend in oil output, said researchers. Mexican oil production is set to decline to a low of only 2.2 million b/d in 2019.

"From 2020 onwards, however, increased investment is set to reverse the trend,” IEA said. “Total oil production, including NGLs, is forecast to average 2.4 million b/d in 2022, only slightly lower than the 2016 average. Of this, crude oil and condensates account for roughly 2.1 million b/d."

Global oil supply could struggle to keep pace with demand after 2020, risking a sharp increase in prices, unless new projects are approved soon, however.

Within OPEC, the bulk of new supplies are expected to come from major low-cost Middle Eastern producers including Iraq, Iran and the United Arab Emirates, with declines in Nigeria, Algeria and Venezuela will decline. Production from Russia is forecast to remain stable over the next five years.

IEA also highlighted changes in international oil trade flows and investments in storage infrastructure.

"Asia will need to look beyond the Middle East to meet its growing import requirements," researchers said. "With OPEC countries focused on boosting domestic refining capacity to meet local demand and ramp-up exports of refined products, additional crude oil exports from Brazil and Canada will be higher than those from the Middle East."

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