U.S. oil production hit an 18-year high in November, thanks to a shale oil drilling boom that has revitalized domestic production. In fact, the International Energy Agency recently predicted the U.S. could overtake Saudi Arabia as the world’s largest oil producer by around 2020 and become a net oil exporter by 2030. But in a recent interview, Credit Suisse Global Head of Energy Research Jan Stuart told The Financialist those predictions may be a bit premature. Here’s what he had to say:
The Financialist: Is the International Energy Agency’s prediction that the U.S. will overtake Saudi Arabia as the world’s largest oil producer by around 2020 and become a net oil exporter by 2030 realistic?
Jan Stuart: Here at Credit Suisse, we’ve done an awful lot of our own research, and we think we have better insights into what the companies are actually doing and think that they can do. We published an in-depth report early in September, and the conclusion was that, a) we don’t know enough yet, and b) from everything that we know now, the United States might very well overtake Saudi Arabia as the biggest oil producer. In volume terms, it might even outpace Saudi Arabia before 2020.
However, given the size of the reservoirs, the effort entailed in getting this stuff out of the ground and the fact that there are very steep decline rates associated with these type of reservoirs, we don’t think that we can keep on growing ad infinitum. We think that we reach a plateau just shy of (peak) oil demand in the United States, and therefore the U.S. will probably never reach net export status.
The Financialist: Why does your forecast differ from the IEA conclusions regarding U.S. export prospects?
JS: The IEA always has to make a caveat as to normal practices, stable politics and moderate pricing. We know that none of those things can be counted on. We suggest that much of this effort is acutely sensitive to prices, meaning that if we get an episode of lower prices, we’re going to get much less drilling and producing, and production will come down. If we’re going to have an episode of super high prices, the industry will go into overdrive and produce significantly more. In other words, we don’t think there’s anything like a straight line about these types of projections.
Nor, as I said, do we fully know what ultimately can be achieved. Investors think we are too pessimistic and underestimate what the industry can deliver, but we talk with the industry itself. Those with the most visibility, the greatest experience, the most acreage, the most business — they are significantly more pessimistic than we are about what ultimately can be produced in this country.
Let’s say we believe we can drive crude oil production from about 5.5 million barrels a day in 2011 to something like 10.3 million barrels a day by 2020, a rough increment of almost 5 million barrels a day. The institutional investors think that number is more like 12 – 13 million barrels a day. The industry’s most optimistic scenarios involve aggregate production of no more than 7.5-8 million. Industry says we have already made very significant efficiency gains, and the scope for further efficiency gains has been sharply reduced. Other observers project efficiency gains similar to those that have been made in the last 10 years in natural gas drilling.
The Financialist: Do new production technologies make U.S. oil production more price sensitive?
JS: Yes. The cost of producing oil using the new methods is significantly higher than the producing oil from conventional reservoirs in the conventional way. Roughly speaking, we think for the industry to have an investment case, we need to see a West Texas Intermediate price well north of $80 in the next couple of years, and that over time, the necessary WTI price is lowered or reduced to something like the low $70 a barrel range, as the industry builds up very significant cash flows.
Others likely assume that the industry can deliver these returns at something like $40-$50 a barrel. We think that’s very wrong. You need to invest very significant amounts of money to deliver this upstream performance. Without adequate pricing, you’re not going to continue to invest.
The Financialist: How do high decline rates play into the forecast?
JS: When you simply do the sums, by 2020 in our opinion, something like one-third of U.S. oil production will be susceptible to or will be declining at rates well over 10% per annum. If that’s the case, to sustain that production, you need to replace what’s been declining. Over time, you need to replace a larger share of your base load. It’s a little bit like a treadmill effect — you have to run harder to stay in place.
These reservoirs are enormous, with a huge surface extent. But you still need to have enough places to drill and get the next couple of barrels out. We’re assuming very significant efficiency gains; we’re assuming very significant technology developments; we’re assuming we’ll discover more new fields. With all these assumptions, we get to numbers that fall short of the United States becoming the new Middle East, but they’re very significant nonetheless. Even if you don’t become an exporter, you will be importing much less than you had been or you ever thought you would.
*Interview edited and condensed for space.
Read Part 2 of The Financialist’s interview with Jan Stuart here.