The New US Oil Boom – Shale Oil is Reshaping the US Market

Shale oil is rewriting the US’ decades-old energy storyline of falling crude production and rising import dependence. The use of hydraulic fracturing and horizontal drilling, which revolutionised the natural gas sector by enabling commercial production of shale gas, is now making its mark on US oil output. The energy industry is scrambling to accommodate this reversal of fortune.

With US crude prices at around $100/bl and natural gas prices at 10-year lows, drillers have migrated hundreds of rigs to shale oil formations.  Refiners are reconfiguring plants to handle the domestically produced light, sweet crude. Pipeline companies and rail operators are expanding networks to carry the new supply from south Texas’ Eagle Ford shale and North Dakota’s Bakken shale.

Environmental concerns over the chemicals used in the hydraulic fracturing process are raising regulatory uncertainty. But the possibility of tighter regulation has so far done little to dent the prospects of the tight oil boom.

US crude markets are evolving in ways thought impossible a decade ago, and highly unlikely just a couple of years ago.  Domestic oil production has increased so quickly that infrastructure is struggling to catch up and using railways, barges and trucks to move crude has become commonplace in markets that had, for years, been confined to pipelines.  US crude imports are declining at an accelerated rate and, by the middle of this year, virtually no spot cargoes of light sweet crude may be imported by US Gulf coast refiners.

The regional crude surplus is, for now, being exported only in the form of products and NGLs, because most crude exports are effectively banned. The idea of the US exporting crude depends more on US foreign and defence policy than on supply, which is coming on stream in abundance from worked-over mature fields in the Permian basin, as well as from onshore shale formations from Texas to North Dakota.

Even the way in which crude business is conducted is no longer a simple proposition. The light sweet WTI crude benchmark has become so disconnected from global markets that crude buyers and sellers are having to execute transactions in creative ways to minimize their exposure to risk.  US crude production will climb to 6.7 MM b/d by 2020, up by 20 percent from 5.6 MM b/d in 2011, US agency the EIA says.  On top of this, US NGL output of 2.2 MM b/d will rise to 2.8 MM b/d, the agency says, as shale production includes a lot of NGLs.  And EIA forecasts are regarded as conservative.  The rise in output is largely the result of rapidly increasing production from shale formations such as the Eagle Ford and Bakken.  And Canadian oil sands  producers are expected to supply 3mn b/d by 2020, twice the level seen in 2010, industry trade group the Canadian Association of Petroleum Producers says.