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EnergyFuelNews

Big oil price jump predicted by report if fracking ends in US

With the gains that Sen. Bernie Sanders has made in the race to be the Democratic nominee for president, and with Sen. Elizabeth Warren still in the race, a question coming into greater focus is: What happens if the U.S. bans fracking?

The issue has arisen enough that a panelist on last week’s Nevada debate asked Sanders about his promise to ban fracking immediately upon taking office. Warren has made a similar vow.

It’s questionable just where presidential authority to take that step would come from, though a ban on fracking on federal lands certainly seems within the prerogatives of the president. Additionally, using federal power to block new pipelines, new export facilities and generally just make life difficult for the shale industry could effectively result in a ban on all fracking, even though the majority of it now is done on private lands. And another factor: The shale industry is highly dependent upon a heavy flow of bank capital to keep up with its frenetic need to drill wells to sustain its production. A fracking ban, even if there were questions surrounding its legality, could make bankers reluctant to take on the risk of lending to an industry that the president is waging war against.

Source: EPRINC.Tight oil generally is the term for oil produced via fracking.

A new report written by longtime energy analyst Michael Lynch, a distinguished fellow with the EPRINC energy analysis firm, spells out just how big of an impact on energy markets a ban could have. And from the perspective of the trucking industry, it’s not good: significantly higher prices and a drop in drilling activity that would impact those parts of the trucking ecosystem that now service the shale-driven oil patch.

Among the key findings in the report:

  • There would be a decline in U.S. production of petroleum liquids from shale of 6 million barrels per day by the end of 2022. The U.S. now produces roughly 13 million barrels per day of crude and about 3.9 million barrels per day of natural gas liquids (NGLs) like propane and butane. Those are considered petroleum, though the focus tends to be on how much crude the U.S. is producing. The 6 million barrels cited by Lynch’s study would come off the total of crude and NGLs.
  • Natural gas production would fall by roughly 11 billion cubic feet per day. In 2018, the last full year for which data is available, the U.S. produced approximately 83 billion cubic feet per day.
  • The report was reluctant to estimate the price tag for a fracking ban. But after going through the difficulty the world would have replacing the lost oil output from the U.S. under such a ban, the report foresees a price in a few years of between $80 and $100 per barrel. WTI crude, after Tuesday’s trading, was under $50 a barrel; Brent was a bit under $55 a barrel.
Source: EPRINC

The report is not an apocalyptic screed. For example, it doesn’t just assume a ban would reduce production by the amount of oil now being produced by fracking. It assumes that some capital in the petroleum industry would be redeployed to producing oil through more conventional drilling, an activity that has received less capital because shale wells are more productive (though not necessarily more profitable).

But even a shift to conventional wells isn’t going to be enough to make up for the lost output from the current supply from fracking operations.

The report notes that conventional wells’ output declines at a rate of 6-10% per year, but a shale well declines by 5-8% per month. (Lynch’s italics) Shale drilling has far less geologic risk than conventional drilling — if you stick a hole in a shale formation, you’re highly likely to find hydrocarbons, which is not the case with conventional drilling — but its rapid decline rate means you have to drill aggressively just to keep up with the falling output.

What if the U.S. oil and gas industry shifted to conventional drilling because of a ban; would the slower rates of decline negate the lost production from shale? The report is clear: It wouldn’t.

Since U.S. drilling has declined in certain basins, it gives Lynch the opportunity to see what happened to the overall decline rate as weaker wells were abandoned and more productive wells with slower decline rates were pursued. The drop in the rates of decline, according to the report, was minimal.

Eventually, maybe the slower rate of decline overcomes the loss in production. But “it seems reasonably safe to accept that a termination of all fracking will not see a significant reduction in the decline rate over the course of only 24 months.”

The 6 million-barrel-per-day drop in oil output sees a decline to 6.5 million barrels per day of shale oil output in 2021, after a Sanders or Warren presidency “banned” fracking through whatever means, and a further decline to 3 million barrels per day in 2021. That is from a 2020 base of 9.2 million barrels per day, which was 800,000 barrels per day more than it was in 2019.

But the report lays out specific month-by-month figures; for example, the 3 million-barrel-per-day average for all of 2022 doesn’t reflect the fact that the report’s forecast is that output would be just 2.1 million barrels per day by the end of the year.

That decline would come in an oil market where, as the report notes, spare capacity is only 2.8 million barrels per day and it is pretty much all in the hands of two countries: Saudi Arabia and Iraq, though the latter has a relatively small number. To replace the lost U.S. production “would require an emergency investment program which seems unlikely to be enacted.”

The end result: a world that is short supply of about 3-million barrels per day. There are some mitigating factors, the report notes. For example, a Democratic president might ease sanctions on Iran, allowing its production to increase from the 2.2 million barrels per day it is estimated to have produced in January back toward the 3.3 million barrels per day it produced in October 2018. Sanctions also could be eased on Venezuela, though that country’s industry is in crisis for reasons that go far beyond U.S. sanctions.

But “even in the most optimistic scenario, there would be no spare capacity in the global oil market and post-2023 declines in U.S. shale oil production would increase the pressure,” the report said. “As a result, it seems all but certain that prices would rise to between $80 and $100 per barrel and perhaps higher.”

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John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.

One Comment

  1. A medium to large increase in diesel prices due to a fracking ban would drive more capacity out of the market than we’ve seen in a long time. MANY MANY more per week would go under than we’ve seen in the last 6 months.

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