Tight oil growth will never be as rampant in future

Oil&Gas Materials 27 October 2020 12:03 (UTC +04:00)
Tight oil growth will never be as rampant in future

BAKU, Azerbaijan, Oct.27

By Leman Zeynalova – Trend:

Tight oil growth will never be as rampant in future, Trend reports with reference to Wood Mackenzie.

Linda Htein, Head of US L48 Analysis at Wood Mackenzie believes that any new peak in tight oil production will be lower than prior forecasts.

“First, we’re in a new age of austerity. Operators today are under extreme duress from banks and shareholders simply to generate free cash flow. Some are even framing a new business model that limits reinvestment to 65 percent to 80 percent of operating cash flow compared with as much as 120% in the recent past. Any surplus cash will be used to pay down debt or returned to shareholders.

Second, there’s zero appetite for risk. Drilling inventories have been reduced to the core; secondary benches and exploration won’t feature in spending plans.

Third, there’s little likelihood of the kind of quantum leap in efficiency and cost reductions we saw last time around – not with the oil field services sector on its knees.

Fourth, there’s heightened policy risk with the presidential election next month. Before this year’s price crash, the sector flourished as the Trump administration systematically reversed rules on the broader energy market imposed during previous administrations.

A win for Joe Biden could mean stricter limits for gas flaring and leakage on federal land. It could also mean no new federal land being opened up for drilling, although that is expected to have very little impact on total production. Infrastructure projects will likely be susceptible to delays, take longer to execute and cost more. In any case, ESG pressures are growing and may prove to be far more consequential for tight oil’s future.

Fifth, the sector consolidation that’s been sparked by the downturn will lead to less investment, not more. The industry needs fewer players. Combinations like ConocoPhillips/Concho Resources and Pioneer Resources/Parsley – the third- and fourth-biggest tight oil deals so far this downturn – will reduce costs, improve efficiency and boost resilience.

But refocusing on the core of a combined drilling inventory will mean fewer new wells and further reductions in capital budgets for 2021. Higher cash flow for each barrel produced perhaps – full circle back to Linda’s first point – but less cumulative tight oil production.

Despite these impediments, we expect US tight oil production to start growing again as oil prices recover, though little or no growth will come through before 2022. We forecast US L48 oil volumes climbing to 11.7 million b/d in 2027. That growth is based on WTI averaging in a range of US$50 to US$60 per barrel for 2021, which depends on a sustained recovery in global oil demand. The new tight oil peak is 0.8 million lower than we forecast a year ago and comes two years later,” said the analyst.


Follow the author on Twitter: @Lyaman_Zeyn