EIA: 60% Permian Basin oil production growth by 2030

 A fracking rig on the Permian Basin in West Texas.

A fracking rig on the Permian Basin in West Texas.

U.S. to be a net exporter of oil & gas by 2022

Last week the U.S. Energy Information Agency released its Annual Energy Outlook for 2018, with projections to 2050. The report is a comprehensive guide to American energy consumption and production, useful for orienting us in the new global energy marketplace reshaped by the U.S. oil boom

The EIA’s long-term forecasts come at a moment when there are mixed signals in the oil market. Will 2018 be a strong or a weak year for oil prices? On the one hand, U.S. oil production reached 10M bpd sooner than expected, causing the EIA to revise its production estimates—now the country is expected to surpass 11M bpd sometime this year, instead of late last year, plateauing between 11.5M bpd and 11.9M bpd. The Baker Hughes rig count registered 975 rigs on Feb. 9, up 29 rigs from the week prior. West Texas Intermediate (WTI) crude prices, the American oil benchmark, fell 7.6% from its high of around $65 per barrel last week. It’s logical that a faster-than-expected rise in supply should lead to a price drop.

Goldman Sachs warned in a research note today that “Most importantly, investors remain unconvinced U.S. producer discipline will hold,” i.e., that shale frackers will create another over-supply and crash the price again. “That supply growth needs to be constrained voluntarily, even in the face of a more constructive demand outlook still leaves investors more focused on other metals and mining, where there is greater confidence in China policy-driven supply constraints,” wrote the investment bank. 

On the other hand, despite the increase in supply, oil consumers continue to draw down inventories—demand for oil and the economic fundamentals that drive the consumption of oil remain healthy. Despite sharp drops in stock markets around the world last week, investors did not seem to panic. Traditional havens like gold and oil did not see a spike in price from investors fleeing the equity markets—that stability suggests that most investors believe the drop is a small, somewhat healthy correction and not an indication that the global economy (a proxy for oil demand) is in trouble. OPEC still plans on extending their production cuts through 2018, which could deplete those stockpiles faster and give a further tailwind to oil prices. So which is it?

This morning Stephen Schork spoke on Bloomberg TV about oil prices: “The crude oil bulls in this market for the last three years have always tried to downplay or simply ignore the rise in North American oil production,” Schork said. “So even from November 2016 to November 2017, the last month for which we have the monthly data, we have the absolute fact that U.S. production—shale growth production—has outpaced the decline in OPEC production by 7%. So there’s actually more oil being put on the market by the U.S. than there is being taken off by OPEC. So essentially we’re in the midst of the correction… the paradigm has changed over the last three years, we were essentially looking at a market that was bound in between the mid-50s on the high end to the mid-40s on the low end. I’ll venture that we’ve moved 10 dollars higher now, going through to the new year. That is to say, the high of the market is looking to be around the mid-60s, the low in the market, well, if the previous resistance was in the mid-50s, then today’s support is in the mid-50s,” said Schork.

If Schork is right, then American shale production will continue to grow through 2018: the last time OPEC tried to starve American producers out of the market, they developed innovative new drilling technologies, robots, and sensors to maximize output and reduce costs, dropping their break-even point from $70 per barrel to $50. The New Yorker reported in January that production in the Permian Basin has doubled in the past five years, to 2M bpd, and the break-even point of a fracked well in the region has dropped to as low as $25 a barrel. 

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So where will the growth happen? The EIA outlook projects regional growth in onshore oil and gas production out to 2050. The ‘Southwest’ region, comprised of West Texas and Eastern New Mexico, will see the biggest growth, from around 2.5M bpd per year to over 4M bpd in the 2030s; production in the ‘Dakotas/Rocky Mountains’ region will also grow to over 2.5M bpd. The EIA projects that onshore Gulf Coast production will be restored to 2015 levels at around 2M bpd by roughly 2025 and then stay flat for decades. 

One constraint on future Permian Basin production growth might be a shortage of truck drivers. The EIA’s outlook calls for 60% production growth from the region around the Permian Basin by the 2030. Drivers who were summarily laid off after the 2015 oil bust weren’t eager to return to the volatile sector, and now rates are high enough to significantly affect production costs. As The New Yorker reported, every fracking rig requires 1,200 truckloads of equipment and supplies to set up, and as economist Sam Tibbs told FreightWaves last year, every operating rig is associated with a demand of 1.1M truckload miles. 

The Energy Information Agency’s 2018 outlook forms a fairly strong argument that oil industry observers have started to build stable models of the way the new global marketplace works. There will always be unpredictable events that have effects on prices—like the crack in the North Sea Forties pipeline, or Venezuela’s cratering production—but the larger forces shaping the market are now well understood. In all but two cases modeled by the EIA, the United States will become a net exporter of oil and gas by 2022, and to make that happen, we will see at least ten years of very strong growth in the Permian. Truckload carriers, shippers, and 3PLs would do well to position themselves for a long-term play in that region. 

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