Don’t underestimate the continued improvement in drilling technology
One of the panels at the conference focused on the technological improvements in US tight oil production. While we’re all familiar with smart phones, we may not think as often of smart wells. To give just one example, thanks to fiber optic technology, engineers can now access temperature and acoustic data along every foot of the well bore in real-time. The amount of data gleaned from wells allows engineers to model synthetic wells and take some of the guesswork out of the drilling process. Decision making at the well site is starting to be more based on algorithms rather than human judgment. Additionally, processes at the drilling site are becoming more automated, which increases efficiency and improves safety. Technology improvements have supported the rapid production growth we’ve seen in the US despite a relatively modest rig count. In summation, improved technology is increasing efficiency in terms of time and costs and leading to better recovery rates (initial tight oil recovery rates were 4-5%, now recovery rates are closer to 10% with some targeting 14-15%). This has contributed to lower break-evens (one panelist cited break-evens that are $30 per barrel lower today than in 2015), which makes US oil production more competitive.
Drilled but Uncompleted Wells (DUCs) = Visible US production backlog
In his presentation, Greg Armstrong noted that most producing basins in the US have 6-9 months of inventory in DUCs. These provide some visibility to production growth, even if the rig count were to stabilize or decline. In the Permian, DUCs have become practically unavoidable in light of pad drilling, particularly with some companies drilling 20 or more wells on one pad. For example, Pioneer Natural Resources (PXD) discussed 24-well pads on its first quarter 2018 earnings call. As PXD’s management explained on the call, the 24-well pads allow them to access multiple zones or benches providing for full development of the field. The 24 wells on a single pad may be drilled over the course of years.
US expected to be net energy exporter in just a few years
As we’ve discussed before, the US is becoming a major energy exporter to the world. In 2017, the US exported crude to 37 countries, while LNG exports were sent to 25 different countries. Trafigura’s Chief Economist estimated that oil exports from the US would reach 4 MMBpd by the end of 2020, driven largely by exports of Permian crude. For reference, crude exports in March (latest monthly data) were 1.7 MMBpd. With exports increasing, the net petroleum trade for the US fell to a mere 3.7 MMBpd in 2017 – the lowest level since 1971. With continued production growth, the US is expected to become a net energy exporter in 2022 under the EIA’s reference case or by 2020 in a high oil price scenario.
Despite renewables, oil still has staying power
In his presentation, John Kemp from Reuters made an interesting point about the tendency for “old” energy sources to remain prevalent for an extended period of time. While oil consumption began in earnest in the 1860’s, he noted that oil consumption globally didn’t surpass coal until the 1950’s. Coal consumption continued to grow through the early 2000’s in the US as shown below, and globally, coal consumption has continued to grow. If history is any guide, oil consumption is likely to remain significant for the coming decades, particularly considering emerging market demand, even as renewables gain traction.