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Total U.S. production rising at fastest pace in 98 years
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Pipeline bottleneck in Texas set to ease by end of 2019
The map lays out OPEC’s nightmare in graphic form.
An
infestation of dots, thousands of them, represent oil wells in the
Permian basin of West Texas and a slice of New Mexico. In less than a
decade, U.S. companies have drilled 114,000. Many of them would turn a
profit even with crude prices as low as $30 a barrel.
OPEC’s bad dream only deepens next year, when Permian
producers expect to iron out distribution snags that will add three
pipelines and as much as 2 million barrels of oil a day.
“The Permian will continue to grow and OPEC needs to learn to
live with it,’’ said Mike Loya, the top executive in the Americas for
Vitol Group, the world’s largest independent oil-trading house.
The
U.S. energy surge presents OPEC with one of the biggest challenges of
its 60-year history. If Saudi Arabia and its allies cut production when
they gather Dec. 6 in Vienna, higher prices would allow shale to steal
market share. But because the Saudis need higher crude prices to make
money than U.S. producers, OPEC can’t afford to let prices fall.
Cartel Decision
Even so, Saudi Arabia’s output swelled
to a record this month, according to industry executives. That means
the three biggest producers -- the U.S., Russia and Saudi Arabia -- are
pumping at or near record levels.
A similar scenario unfurled in 2016, when Saudi output
rocketed just before OPEC agreed to cuts. This time the cartel’s 15
members, and allies including Russia, Mexico and Kazakhstan, will
discuss the possibility of their second retreat from booming American
production in three years.
OPEC helped create the monster that
haunts its sleep. After it flooded the market in 2014, oil prices
crashed, forcing surviving U.S. shale producers to get leaner so they
could thrive even with lower oil prices. As prices recovered, so did
drilling.
Now growth is speeding up. In Houston, the U.S. oil
capital, shale executives are trying out different superlatives to
describe what’s coming. “Tsunami,’’ they call it. A “flooding of
Biblical proportions’’ and “onslaught of supply’’ are phrases that get
tossed around. Take the hyperbolic industry talk with a pinch of salt,
but certainly the American oil industry, particularly in the Permian,
has raised a buzz loud enough to keep OPEC awake.
Price Tumble
“You’ve
got an awful lot of production that can come in very economically,’’
said Patricia Yarrington, Chevron Corp.’s chief financial officer. “If
you think back four or five years ago, when we didn’t really understand
what shale could do, the marginal barrel was priced much higher than
what we think the marginal barrel is priced today.’’
That shift makes shale resilient to a price tumble. After
touching a four-year high in October, West Texas Intermediate, the U.S.
benchmark, has fallen by more than 20 percent.
Only a few months ago, the consensus was that the
Permian and U.S. oil production more widely was going to hit a plateau
this past summer. It would flat-line through the rest of this year and
2019 due to pipeline constraints, only to start growing again -- perhaps
-- in early 2020.
If that had happened, Saudi Arabia would’ve had
an easier job, most likely avoiding output cuts next year because
production losses in Venezuela and sanctions on Iran would have done the
trick.
Instead, August saw the largest annual increase in U.S.
oil production in 98 years, according to government data. The American
energy industry added, in crude and other oil liquids, nearly 3 million
barrels, roughly the equivalent of what Kuwait pumps, than it did in the
same month last year. Total output of 15.9 million barrels a day was
more than Russia or Saudi Arabia.
Rail Cars
The growth was
possible because oil traders decided not to be stymied by the dearth of
pipelines. They used rail cars and even trucks to ship barrels out of
the region. But pipeline companies unexpectedly increased capacity, in
part because they added chemicals known as “drag reduction agents’’ to
increase flow. A new pipeline came online earlier than anticipated, and
with three more expected between August and December next year,
production is poised to soar.
“The
narrative has shifted significantly,’’ said John Coleman, a
Houston-based oil consultant at Wood Mackenzie Ltd. “Six months ago, the
market expected the bottleneck to ease in the first quarter of 2020.
Now, it expects it in the second to third quarter of 2019.’’
Knowing that more transportation would be available next year, Permian companies are drilling wells but, for now, aren’t fracking many of them. Those wells are becoming a reservoir of ready-to-tap production once the new pipelines -- Gray Oak, Cactus II and Epic -- come online.
“We’re going to see a re-acceleration of well completions in
the Permian in the second half of 2019,’’ said Corey Prologo, head of
oil trading in Houston at commodity merchant Trafigura Group Ltd. “The
pipelines are going to fill up very quickly.’’
The only obstacle
for another surge is export capacity, as most of the incremental output
will need to ship overseas. With terminals nearly full, Permian barrels
could end piling up in the ports of Corpus Christi and Houston.
Transportation Bottlenecks
Even
so, few in Houston, or in Midland, Texas, the hub of the Permian
region, believe that growth will be anything but gangbusters next year
because of the clearing of transportation bottlenecks.
“It will be a series of events throughout 2019 that occur,’’
said Jeff Miller, chief executive officer of Halliburton Co., the
world’s biggest provider of fracking services. “But it’d be easy to see,
as we finish the year, things being perfectly normal.”
By the end of 2019, total U.S. oil production --
including so-called natural gas liquids used in the petrochemical
industry -- is expected to rise to 17.4 million barrels a day, according
to the U.S. Energy Information Administration. At that level, American
net imports of petroleum will fall in December 2019 to 320,000 barrels a
day, the lowest since 1949, when Harry Truman was in the White House.
In the oil-trading community, the expectation is that, perhaps for just a
single week, the U.S. will become a net oil exporter, something that
hasn’t happened for nearly 75 years.
Saudis Concede
Saudi
officials concede that the tsunami is coming. OPEC estimates that to
balance the market and avoid an increase in oil inventories, it needs to
pump about 31.5 million barrels a day next year, or about 1.4 million
barrels a day less than what it did in October.
Global oil demand
has so far absorbed the extra U.S. crude barrels, limiting the impact on
prices. The loss of output from Venezuela and to a lesser extent, Iran,
even allowed Saudi Arabia, Russia and a few others to boost production.
But for the cartel, U.S. shale remains as intractable as in the past.
In
early 2017, Khalid Al-Falih, the Saudi oil minister, told an industry
forum that Riyadh has learned the lesson that cutting production “in
response to structural shifts is largely ineffective.’’ The kingdom
would only make one-time supply adjustments to react to “short-term
aberrations,” he said, and otherwise allow “the free market to work.”
Nearly two years later, Al-Falih has lost enough proverbial
sleep. He’s about to make a U-turn. He’ll battle what increasingly looks
like a structural problem: booming U.S. production.
— With assistance by Kevin Crowley, Catherine Ngai, and Dave Merrill
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