Fate of world oil and natural gas
American crude oil production will break new records this summer, exceeding 9.5 million barrels per day and then moving up to 10 million. Once at 10 million, the U.S., along with North American (Canadian) imports of over 3 million barrels, will be at the gate of oil energy self-sufficiency, with less than 20 percent overseas imports to go.
Now here's the hard part: at what price, or supply-demand scenario? Saudi Arabia is about to sell 5 percent of Saudi Aramco, expecting demand growth at 1 percent per annum. After the IPO sale, this should raise $145 billion to support diversification of its economy. A Middle East Silicon Valley? Not so fast: see what happened to the great Wellington Hedge Fund, which has lost everything betting on future "Facebook" start-ups.
Ultimately, oil in Saudi Arabia would still have reserves to bail out losses on Silicon Valley venture capital bets. In short, Saudi spare or excess capacity to dominate its own world demand forecast is on standby. Argentina shale oil and work-over of the Gulf of Mexico, along with deployment of onshore shale technology and the opening of the Russian Arctic with join-venture partners with technology play (horizontals and stimulation) know-how, and these are some reasons behind a 2019 Second Downturn, which appears likely.
OPEC must have higher revenue from the current cutback of production strategy, or it will return to production-at-will. Few of the Permian-Delaware Basins plays, overly valued in asset acquisitions today, will have wells to produce at $34 a barrel. Projections of oil price stability at $40 a barrel for Permian producers at a recent meeting in Roswell will depend on how many super-prolific wells there are, and who owns them as cash-flow matters. World oil confronts excess supply and its impact on price.
Some will argue supply and demand "balance" in hopes of higher revenue. But California, with its waiver to set automobile miles-per-gallon performance requirements, is set for 2025 by removing 12 billion barrels of oil, or three years of Permian-Delaware production.
Natural gas in the San Juan Basin and the Rocky Mountains depends on new markets as coal-fired electricity substitution finds its bottom. New markets for New Mexico translates to Mexico where current projects approach cross-border connections with 450,000 cubic feet. Mexico imports 80 percent of American natural gas exports and requires much more. This, and Union Pacific rail crossing into Mexico with non-fuel trade, is the future of New Mexico economic development and natural binational relations. Take notice, Washington.
The Permian Basin-Delaware Basin (New Mexico) theoretical bottleneck will not occur as new high volume pipelines to the Houston Ship Channel are in preparation for business within 18 months. The natural gas from Eddy and Lea Counties will go to the Waha System in Texas, and then to the Gulf Coast, partly for Liquid Petroleum Gas (LNG) usage and for Mexico and Europe. Two natural gas pipelines from the Permian to the Gulf Coast are now committed with nearly 3400 bcf, as well as a third in the near future, if needed. There is no longer a bottleneck transport condition for associated gas in the Permian-Delaware Basin.
New Mexico natural gas to Asia via LNG in Mexico must compete with the LNG world supply and demand, which is unstable in price because the buyers prefer spot transactions against long-term contracts needed to finance LNG facilities. Also, a new market entry in LNG must prepare for price discounting from existing suppliers in the Middle East and around the Pacific Rim to overcome a marginal Panama Canal transport cost differential, and to protect market share. Finally, the federal government must make an exception to allow domestic natural gas to leave the country for re-export to Asia as LNG.
The Pacific Ocean LNG price war and instability scenario outlook of last year, based on oversupply, await a 2017 end-of-year wrap-up, free from illusions of an Asian LNG market connected to the surprise election of Donald Trump.
Natural gas prices approach $3.80 to $4 per thousand cubic feet from here to early next year. With the Permian-Delaware Basin flow of natural gas to the east coast and Mexico, prices should be supported. Small independents in the San Juan Basin would start drilling conservatively again.
The OPEC decision to extend the production-cut agreement to reduce output is the last "shock" to raise prices from OPEC. With an extension, however, prices of crude oil move up in a trading response that will be short. The "fundamentals" of the commodity market, which sets the price of oil, ultimately take over. How much surplus world oil is there? How is storage of oil affected? Is there market validation for compliance reports from OPEC? The extension duration depends on a "balance" of supply and demand, which is continuously pushed into the future by shale or light-tight oil production a day-long drive from the Four Corners.
These are the issues in the oil commodity market that lead to the making of a 2019 Second Downturn in oil, which this writer presented as a speaker at the Interstate Oil and Gas Compact Commission Conference in Oklahoma City three weeks ago. As part of a fate of world oil presentation, a new trading range of $50 to $38.65 per barrel was released. The natural gas outlook is optimistic in contrast.
The Second (oil-led) Downturn is unavoidable after 10 million barrels per day production, led by the "Americans" (Southwest and Dakota producers) and driven by the financial imperatives of private equity, amid a "credit bubble" in the national economy, which is now a "black swan" probability in financial circles. An unprecedented event, which consultants and operators did not see coming. August 2014?
Daniel Fine is the associate director of New Mexico Tech's Center for Energy Policy. The opinions expressed are his own.