• Energy and Income Advisor
  • Conrads Utility Investor
  • Capitalist Times
  • Twitter
  • Seeking Alpha
  • Roger S. Conrad

Growing Oil Production, Growing Pains

By Peter Staas on Jan. 10, 2014
Shale production by basin

The shale oil and gas revolution has changed the US energy landscape dramatically, enabling the nation to grow its domestic crude-oil production for the first time in decades.


Source: Energy Information Administration, Energy & Income Advisor

And thanks to the Energy Information Administration’s (EIA) monthly Drilling Productivity Report, we can now quantify basin-specific production and quantify the extent to which unconventional plays–the Bakken Shale, the Eagle Ford Shale, the Haynesville Shale, the Marcellus Shale, the Niobrara Shale and the Permian Basin–contribute to US oil and gas production.

The prolific Bakken Shale and Eagle Ford Shale have driven production gains over the past five years, while accelerating drilling activity in the Niobrara Shale has started to drive output growth from this emerging play (about 15 percent on a year-over-year basis).

Output from the Permian Basin has leveled off, though many industry observers expect volumes from this region to ramp up next year; producers plan to do more horizontal drilling in the area now that their understanding of how to exploit the multiple plays in this area has improved.

Along with hydraulic fracturing, horizontal drilling is one of the innovations that have enabled operators to extract oil, natural gas and natural gas liquids from low-permeability shale formations. This technique involves drilling a horizontal segment off the vertical shaft to expose more of the well to the field’s productive horizons.


Source: Energy Information Administration, Energy & Income Advisor

The rapid development of the six shale oil and gas plays included in the EIA’s monthly Drilling Productivity Report means that these onshore basins now account for almost 50 percent of US crude-oil production–up from 23.7 percent at the beginning of 2007. Together, the Bakken Shale and the Eagle Ford Shale accounted for about 27 percent of domestic oil output in October 2013.


Source: Energy Information Administration, Energy & Income Advisor

What’s the biggest threat to the shale oil and gas revolution?

Forget fears of a regulatory crackdown on hydraulic fracturing; insufficient downstream capacity is the biggest challenge on the horizon.

With additional pipeline and rail capacity eliminating regional takeaway and delivery constraints, the biggest bottleneck facing the shale oil and gas revolution has moved downstream: US refineries can only process so much light-sweet crude oil–the grade that predominates in the nation’s shale plays.

This upsurge in production has displaced imports of crude oil exhibiting an American Petroleum Institute gravity that’s greater than 35.1 degrees.


Source: Energy Information Administration, Energy & Income Advisor

US imports of light crude oil declined by almost 32 percent between 2010 and 2012 and tumbled another 33 percent in the first nine months of 2013, raising questions about when domestic production will overwhelm refining capacity. The Gulf Coast is at particular risk, with a flood of crude oil headed to the Houston area.

Our commodity outlook for the coming year calls for a downdraft in the price of light-sweet crude oil on the Gulf Coast–perhaps to less than $85.00 per barrel. Such a move would give investors an opportunity to add shares of high-quality upstream names that have low production costs and the best acreage. However, the timing and magnitude of this move remains uncertain.

Subscribe today to receive a sample issue of EIA
  • Live Chat with

    Elliott and Roger on Jul. 27, 2017

  • Portfolios & Ratings

    • Model Portfolios

      Balanced portfolios of energy stocks for aggressive and conservative investors.

    • Coverage Universe

      Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.

    • MLP Ratings

      Our assessment of every energy-related master limited partnership.

    • International Coverage Universe

      Roger Conrad’s coverage of more than 70 dividend-paying energy names.

    Experts

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Peter Staas

      Managing Editor: Capitalist Times and Energy & Income Advisor