A new oil reality
First, let’s take a closer look at geopolitical risks. In the last 5 years, much has changed in oil-rich parts of the world, like the Middle East given the Arab Spring uprisings and ISIS challenging for territorial and political dominance. Other geographies like West Africa have also been affected, with for example Boko Haram on the march in Nigeria. However, evidence shows that concerns over possible major supply disruptions are overstated. For instance, the rise of ISIS in Iraq has coincided with a period of exceptional growth in oil output for the country, now at slightly above 4.55 million barrels per day making the country OPEC’s second-largest producer (with oil output having an average annual growth rate of 10.3% between 2010 and 2015). Nigerian output in the same period was more or less flat (a gain of 0.63%) despite Boko Haram causing mayhem and reports claiming that the group is stealing large amounts of oil directly from supply.
Another development with the potential to lower the future supply and thus increase oil price levels, is CAPEX deferrals. Wood Mackenzie estimates that investments of approximately 380 billion USD have been postponed due to the collapsing oil price, resulting in as much as 3 million barrels per day in reduced supply by 2024.
Additionally, given favorable price signals (potentially starting in May 2016 with prices hitting the 50 USD per barrel mark once more), US LTO can also step in to fill a possible supply gap. We performed a bottom-up analysis of the effect of redeployment of the idled unconventional drilling rigs today onshore in the US, with new rigs coming up only after all idled rigs have been redeployed. We modelled their production curves with conservative productivities for each LTO-rich play, not including the learning curve the last 18-24 months1. In addition, we used historic decline rates for wells as well as base production.
Our bottom up analyses show that US shale plays have the potential to increase production by as much as 6.4 million barrels per day by 2020 by reemploying idle rigs and further rig fleet expansion, and by a further 2.8 million barrels per day by 2025. Actual volumes produced will be contingent on a continuous positive price signal, i.e. levels above 50 USD per barrel on a sustained basis (however, given current shale breakeven levels, 60-70 USD per barrel is more than enough to enable production across all LTO-rich basins). These volumes would more than compensate the 3 million+ barrels per day of potential supply deficit due to delayed FID of projects – and then some.
Like to know more?
Contact Maria Fernanda Souto at firstname.lastname@example.org