Over the past decade, the United States has doubled its oil production to 12.3 million barrels per day. By becoming the biggest oil producer worldwide and starting to consolidate as a larger exporter, it begins to play a more dominant role in the global market.
In mid-September, the Middle East was shocked by reports of a series of drone strikes that caused fires at two oil facilities owned by Saudi Aramco at the Abqaiq and Khurais districts, in eastern Saudi Arabia.
The oil market immediately reacted and crude prices went up by 20% in the first session after the attacks.
But the initial rise was followed by a slight decline in prices, following announcements made by the United States Energy Department and U.S. President Donald Trump regarding the use of the Strategic Reserve and the possibility of facing a scenario of reduced Saudi crude supplies.
The relative calm shown by the top crude consumer is the result of having managed, in recent years, to increase its production capacity to historic highs, which has enabled it to significantly reduce its dependence on supplies from traditional exporters, making it less exposed to geopolitical vicissitudes in the Middle East and other conflict areas.
Is the Number One Consumer Also the Top Exporter?
In June of the present year, the United States briefly overcame Saudi Arabia as the number one oil exporter worldwide, according to a report published by the International Energy Agency in September.
While the American giant only surpassed the Saudis momentarily, this milestone is a reminder to the producers that competition for market share is getting tougher, the IEA said.
Indeed, the United States left two major oil producers behind – keeping in mind it also exceeded Russia –. Furthermore, this event has a significant geopolitical effect. After all, while Saudi Arabia is the de facto leader of the OPEC, Russia is the leader of the cartel’s allied producers. Together, they have pushed a production curb plan to try to boost sluggish prices, weighed down by higher supply and declining demand.
Slow but Sustained Growth
Although U.S. shale oil has peaked over the past months, overall production has continued to grow year after year, adding to the current production glut in the market.
The recent Short-term Energy Perspective published by the U.S. Energy Information Administration (EIA) indicates that in mid-2019, the rise of U.S. crude production had stagnated. In June, it stood at just 45,000 barrels per day (bpd), higher than in December 2018.
Most oil experts expected the explosive production hike to continue throughout this year and up to 2020. The rise has been quite slow this year.
Nonetheless, according to the agency, even with slower production growth, U.S. oil exports are expected to increase in the near future, as the restrictions on crude exports from the Permian Basin to the Gulf Coast are lessened.
Shale Oil as the Launching Point
The EIA says in its report that the United States crude production will reach an average 12.2 million barrels per day (bpd) in 2019, up by 1.2 million from 2018. Moreover, and according to said report, the output growth outlook will be raised by one million bpd in 2020, standing at 13.2 million bpd.
The rise of shale oil and gas production has effectively turned the United States into the world’s largest O&G producer, changing the energy sector both in the country and abroad.
Shale is a sedimentary formation that contains oil and gas and lacks sufficient permeability for these hydrocarbons to be extracted using conventional methods; therefore, new technologies become necessary. The new method consists of injecting high-pressure water mixed with special sands into the ground so that the hydrocarbons trapped in the rocks can flow to the surface.
According to a detailed analysis of U.S. energy policies published by the IEA in mid-September, the shale oil revolution and subsequent rise of U.S. oil and gas output have changed the country’s vision from a scarcity approach to one that seeks to maximize growing exports and the development of new technologies.
On the other hand, a report prepared by the Energy Information Administration published on that same month indicates that crude production will increase by 74,000 barrels per day at seven major shale formations, standing at 8,843 million barrels per day by October.
Nearly all of these 74,000 barrels will come from the Permian Basin, which covers parts of western Texas and southeastern New Mexico. However, shale oil extraction in the regions of Anadarko and Eagle Ford is expected to see a slight monthly decline, the report says.
The Rise of the Permian Basin
The production hike at the Permian Basin, the largest in the country, was driven by the shale oil boom that helped the United States become the world’s top producer, above Saudi Arabia and Russia.
The Permian Basin is a large sedimentary basin of approximately 250 miles wide and 300 miles long across west Texas and southeastern New Mexico. It includes the highly prolific Delaware and Midland sub-basins and stands out thanks to its rich oil, natural gas, and potassium deposits.
Drilling in the area began in the 1920s. Since then, there have been many highs and lows with regards to production levels.
Recently, several factors, including high oil prices and new technologies, have led to a rise of drilling activity in the area.
E&P companies are now drilling at greater depths to add new zones, make bigger fractures, reduce the space, and even drill horizontally. They have also benefitted from new technologies.
Hydraulic Fracturing: A Matter of Cost
In this sense, the growth of U.S. oil production – and particularly at the Permian Basin – has had a technological ally: The evolution of fracking in the past decade.
Fracking is the process by which producers can extract natural gas and oil trapped within shale formations, generally found more than a mile under the Earth’s surface.
Unfortunately, fracking has been denounced for its alleged negative impact on health and security. While the advocates of this technology assure that these statements are completely false, public policymakers in several states imposed onerous restrictions on fracking, which increases the costs and delays production growth.
But, despite the opposition, fracking has transformed the U.S. long-term energy outlook and helped make this nation the greatest energy producer in the world.
Hydraulic fracturing enabled U.S. energy companies to produce large amounts of oil and natural gas.
Impact on the Global Market
In this scenario, the oil market is already fighting oversupply and the U.S. is about to flood the market with much more.
Over the past decade, the United States has doubled its oil production to 12.3 million bpd, becoming the world’s top producer. However, it has so far lacked the infrastructure necessary to transport the crude from the oilfields – especially Texas – to the global market.
In this sense, August marked a huge shift for the industry with the beginning of operations of the Cactus II de Plains All American Pipeline, a pipeline with a capacity of more than 670,000 barrels per day that connects the Permian Basin to Corpus Christi, Texas, and from there to the rest of the world. The Cactus II and the 400,000-bpd Epic Midstream pipeline are just the beginning of the things to come. During the first week of September, thanks to Cactus II and EPIC, crude exports from Corpus Christi hit a new record.
The new pipelines are expected to carry more crude from Texas to the Gulf Coast, and from there it can be shipped all over the world. More U.S. oil could help lower prices, especially is the China-U.S. trade war continues to suppress the demand.
More and Better Infrastructure
Increasing the pipeline’s capacity will help unblock a Permian bottleneck. Citigroup predicted this could double its production by eight million barrels per day in 2023.
As these pipelines are built, it will be necessary to increase their export capacity. The capacity of U.S. oil export facilities is being expanded throughout the Gulf Coast, in Texas and Louisiana. The United States will soon have an average capacity to export 6 million barrels per day and is expected to have even more.
All of this new oil creates a dilemma for the OPEC. Saudi Arabia, the cartel’s de facto leader, and partner Russia have lowered production to help stabilize prices. Even with the loss of a significant part of Venezuelan oil and at least 2 million barrels per day from Iran, there is a large volume of crude.
U.S. production growth indeed stabilized in mid-2019, after going up by 11 million barrels per day a year ago. In spite of it, this nation is moving toward a more dominant role in the global oil markets with each barrel shipped from the Gulf Coast.
A New Leader Is Emerging
In this context, the United States is poised to become a net exporter. It already exports diesel, gasoline, and other fuels. According to weekly government data, the U.S. exported 5.3 million barrels of refined products and 2.8 million barrels per day of oil in early September.
Meanwhile, South Korea became the top U.S. oil buyer at 650,000 million barrels, according to Citigroup. The country is followed by Europe, Canada, India, and China.
With greater supply on the way and additional infrastructure under construction, the United States is emerging as a dominant force in the oil market.
You will find this and many other articles in issue #29 of Energía16
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