Shale oil output anchors a record growth in U.S. production

Drawing on growing output from the Bakken and Eagle Ford shale plays, U.S. crude production averaged 6.4 million barrels a day last year, a gain of 800,000 barrels daily over 2011 -- the largest annual increase since the birth of the U.S. oil industry in 1859, the Energy Information Administration said yesterday.

EIA's "Short-Term Energy Outlook" for January, the first with forecasts for 2014, projects U.S. crude oil output rising solidly to 7.3 million barrels a day this year and 7.9 million barrels daily the following year.

The federal agency's forecast for natural gas production is not as bullish. Production from shale gas plays has been propping up overall gas output in the lower 48 states, EIA noted.

Even though active gas rigs last month were half the number at the beginning of 2012, EIA foresees gas output rising this year to nearly 70 billion cubic feet per day, before tailing off slightly in 2014.

The agency expects natural gas prices to move up slowly to $3.90 per million British thermal units (approximately 1,000 cubic feet) in 2014, signaling a continuation of the lower prices that are undermining natural gas development but helping consumer and business heating and power bills.


"The rig count [for dry gas wells] has been coming off for some time," said EIA Administrator Adam Sieminski. Despite that, gas output continued to grow last year. "Companies still had cash flow sufficient to keep working. Wet gas production paid to continue work in some areas," among a host of other factors, he said.

"It looks like we're finally kind of coming to the end of that story. All of the reasons companies had for continuing to drill [gas] wells are beginning to come off," Sieminski said.

One major question mark is what will happen to wells that have been drilled but not completed and connected for delivery. "If gas prices come back up toward the $4 level we're looking to get near in 2014, what we might find is that companies might possibly be able to bring gas back on-stream, with a lag," he said.

Some investment decisions, such as whether to drill oil or gas wells, "can be made pretty quickly depending on what the markets look like and what the prices are," Sieminski said.

"If prices move up, I think there is probably enough resource base out there in the natural gas area to bring gas back again in volume at relatively reasonable prices, and quickly," he added.

EIA's monthly natural gas production survey, issued Monday, reported that overall gas output in the lower 48 states increased by 2 percent between October 2011 and October last year. But the gain was due to deliveries from newer shale gas regions in states like Pennsylvania, which are lumped together in an "other states" category in the EIA 914 survey.

The "other" figure was up 16 percent over the year, while output in states like Texas, Louisiana and Oklahoma -- the industry's historic leaders -- was flat or down.

Sieminski's comments about the latest EIA report show how volatile the outlook for gas and oil production has become because of the changing dynamics of shale play production.

EIA anticipates that the price of Brent-grade crude oil -- the global benchmark price -- will drop from an average of $112 per barrel last year to $105 this year, and just over $100 in 2014. With about two-thirds of the gasoline price being determined by crude oil prices, EIA expects gasoline prices to drop from an average of $3.63 last year to $3.44 this year and $3.34 in 2014.

"That is fairly decent news for consumers," he said.

The agency is also counting on more pipeline capacity to be built to Gulf Coast refineries from Cushing, Okla., the terminal site for the U.S. West Texas Intermediate (WTI) crude oil grade, relieving a transportation bottleneck in the midcontinent region. That would allow WTI prices to close the gap with the higher Brent world oil price, he said, helping boost U.S. oil producers that get the WTI price.

Decisions loom on petroleum exports

Rising oil production and competitive prices are boosting exports of petroleum products, he said. "The U.S. is now a net product exporter after many years of the other way. We have quite a bit of diesel fuel and some gasoline going to Latin America and Europe," he said. U.S. exports of petroleum products averaged 3.1 million barrels a day in the first 10 months of 2012, triple the daily average in 2002.

Exports of petroleum products -- like exports of liquefied natural gas -- worry consumer advocates in Congress who fear the shipments will raise pump and product prices. Sieminski said that crude products exports in fact are increasing the efficiency of U.S. refining operations, which tends to lower product costs here. The exports also improve the U.S. current account balance and strengthen the dollar, analysts note.

If U.S. crude production continues to grow, U.S. policymakers will soon face decisions about whether to allow greater crude oil exports, Sieminski said.

"There are lots of rules on oil exports that go back for many years. There are national security issues, there are environmental issues, and there are economic issues that all come up and are going have to be balanced by policy markets," he said.

"Given the growth in light sweet crude oil production -- that's what you get from these tight oil plays like Bakken and Eagle Ford -- we are very shortly going to be faced with no place to move those crudes without some very significant changes in transportation in the U.S.," he said.

More crude will have to go to the Gulf Coast and East Coast refineries, he added. "That's an issue I think policymakers are going to be faced with pretty quickly: what to do with the light sweet crude oil growth that is going to exceed what we need."

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