US shale growth could once again pave the way to an oversupplied market
 
December 2017

US shale growth could once again pave the way to an oversupplied market

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2017 was marked by a recovery in the liquids supply growth, with key contributions from shale/tight oil in the United States, as well as restarted production from Libya and continued growth from Iran.  Next year, liquids supply is expected to grow further, paving the way to an oversupplied market, which can again exercise downward pressure on oil prices. This article explains the key industry topics from this year, highlighting short-term supply and demand growth, exploration success and spending trends.

Liquids demand grew by ~1.5 million bbl/d in 2016 (compared to 1.8 million bbl/d in 2015), and the demand growth is expected to be around 1.7 million bbl/d this year. The liquids supply in 2016 was flat year-over-year, while this year it is expected to grow by around 730 kbbl/d.

The United States, Iran, and Libya are key contributors to the positive supply additions this year, with combined liquids production from these countries growing by almost 1.5 million bbl/d. For Iran, the lifting of sanctions is estimated to give an additional supply of 0.4 million bbl/d year-over-year, with largest contributions from the Ahwaz Asmari, Marun and Gachsaran fields. Liquids production in the United States is estimated to grow by around 0.6 million bbl/d in 2017, reversing the previous year’s decline.

Shale/tight oil accounts for the majority of the growth, with key contributions from the Permian plays, followed by offshore deepwater projects. Similarly, Libya is expected to contribute around 0.4 million bbl/d in liquids supply growth this year, having resumed production on key fields such as El Sharara, Bu Attifel, Elephant, Waha and Sarir.

In 2018, Rystad Energy estimates the liquids supply to grow around 1.9 million bbl/d, which incorporates the extension of the OPEC cut agreement until December 2018. The United States is expected to be by far the largest contributor to the liquids supply growth next year, with 1.6 million bbl/d, while production from Brazil and Libya is expected to grow by 270 and 180 kbbl/d, respectively. The rest of the growth is expected to come from Canada and Iran. The return of OPEC volumes after the current cut agreement has expired, coupled with continued strong output growth from NA shale, could result in an oversupplied market in 2019, again putting downward pressure on oil prices.

Figure 2 shows the global discovered conventional volumes by month from January 2012 until November 2017. Since 2012, global exploration performance has been continuously decreasing. In 2016, total discoveries reached a record low volume; only around 8 billion boe was discovered. At the same time, average monthly volumes stood at around 700 million boe, compared to average monthly resources of well above a billion boe in the preceding years. Moreover, the hydrocarbon split of discovered resources has shifted more towards gas, as more gas-condensate fields have been discovered over the past couple of years.

2017 is currently expected to be an even more disappointing year for the exploration industry. Year to date, the average monthly level of discoveries is trending around 580 million boe, and thus the total discovered volumes are anticipated to reach around 7 billion boe. It should also be noted that the projected performance is very much supported by two large discoveries made in May 2017, the most successful month since August 2015.

In May, we witnessed the discovery of a large deep-water Yakaar gas field in Senegal operated by Kosmos Energy, as well as Gorgon, an offshore gas discovery in Colombia operated by Anadarko. Together these fields added nearly 2 billion boe to the market. Since May, almost 2.5 billion boe of additional resources have been discovered. 

Figure 3 shows global E&P investments (capital and exploration expenditures) from 2010 to 2025 split by region. Rystad Energy’s forecast as of December 2016 is also depicted on the chart. Total investments have been growing steadily until 2014, reaching $900 billion. As a consequence of rapidly falling oil prices that followed, upstream expenditures decreased by 24% in 2015 and 25% in 2016.

The declining trend is anticipated to continue this year, with the bottom forecasted to be reached in 2018 at the level of $510 billion. In December 2016 we were more optimistic about the E&P industry’s investments going forward. However, since the increase in the oil price that the industry hoped for did not materialize, companies had to re-evaluate budgets and continue to cut investments on the least profitable projects. Rystad Energy now believes that investments this year will end up at a similar level to 2016, $512 billion.

North America remains the most affected region by the oil price collapse. E&P expenditures have fallen by more than 30% per year during 2015-2016. The decline in the region has been very much driven by the shale segment, where cuts in drilling activity and overall level of well costs have been significant. Nevertheless, 2017 is expected to be a year of change for the North American market. Investments are seen to increase by 18% this year followed by an 8% CAGR until 2025.

Further, largely as a result of the postponement of major discoveries and cuts in drilling levels, expenditures in other regions globally will continue to decrease this year. Rystad Energy currently forecasts that following gradually increasing oil prices in the medium term, investments will start to show a slow recovery from 2019 onwards. The growth will, however, be much slower than previously expected, and thus total E&P expenditures will roughly return to the level of 2014 only by 2025.

Conclusion

After a challenging year in 2016, 2017 is expected to set an upward trend on the production side with around 0.7 million bbl/d liquids addition expected. The return of NA shale is the primary driver of the production increase this and next year, and coupled with recovery in OPEC output forecasted in 2019, it can contribute to continued market oversupply, extending the prevailing low oil price environment. On the investment side, recovery is not expected until 2019 with nearly all regions experiencing a decline in expenditures well into 2018.