Oil & Gas UK Economic Report 2015

US Oil Production Expected to Peak in 2015 Analysis of the oil price collapse has naturally focused on the US ‘shale revolution’ and the change in OPEC market strategy against the background of a marked slowdown in world oil demand growth in 2014. Between 2010 and 2014, US crude oil production rose from 5.5 million barrels per day (mb/d) to 9.5 mb/d as tight oil output from shale formations grew steadily. The effect of this investment-led increase in US output was to reduce US import demand and to intensify competition among crude oil suppliers in international markets, especially those in the Atlantic Basin forced to look for new buyers in Asia. Since crude prices began to fall in mid-2014, the key question in oil markets has been the extent and speed of response from US tight oil production. The monthly data from the US Energy Information Administration (EIA) is beginning to provide some answers but market opinion remains divided over the sustainability of US tight oil output at an oil price of $40-60/bbl for WTI (West Texas Intermediate).

US oil-directed drilling declined by 60 per cent between October 2014 and mid-2015. However, total US tight oil production continued to rise until April 2015, sustained by existing financial hedging of cash flows, renewed cost reduction in drilling and well completion, and a focus on more productive plays. From April, output in the prolific Bakken and Eagle Ford regions started to decline but the larger Permian region had yet to record any reversal. The EIA is now forecasting a modest decline in total US crude production in 2016 for the first time since 2008, coupled with an average Brent price of $54/bbl in 2015 and $59/bbl in 2016. OPEC Holds Firm to New Market Strategy OPEC’s decision in November 2014 to maintain its production and restore its market share marked a decisive moment in its recent history. The change of market strategy to put pressure on high-cost sources of non-OPEC supply was confirmed in June 2015 when OPEC maintained its official ceiling of 30 mb/d and continued to produce at more than 31 mb/d, almost 2 mb/d more than the underlying demand for its crude oil needed to balance the short-term market.

Figure 2: US Crude Oil Production

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Alaska Gulf of Mexico Lower 48 Onshore

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Total Production (Billion boe)

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2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: EIA (Short Term Energy Outlook August 2015)

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ECONOMIC REPORT 2015