The rest of the world may not be able to replicate the set of circumstances that allowed America’s unconventional oil and natural gas revolution to take off, putting the U.S. in an advantageous position, IHS CERA’s senior director of upstream strategy said March 5.
During a conversation with SNL Energy at IHS CERAWeek in Houston, Marie Fagan said the U.S. proved to be the “perfect jump-start” for unconventional drilling because of the acceptance of risk, among other factors.
“In the U.S., we have independents that are willing to take a risk, to explore through trial and error. Supermajors can go to other countries in Europe and Asia and drill a few wells, but if they’re not successful, they’re not going to spend any more money,” she said. “We also have straight land access, where landowners not only own the land, but the mineral rights; there’s also very sophisticated oil and gas technology being used in the U.S. The American financial system is also more straightforward than other countries’.”
The combination of those factors, Fagan explained, allowed the U.S. to succeed in the new world of shale oil and gas production. They are also a combination difficult to find.
“Overseas, most countries have at least one to two of those pieces missing,” she said. “As a result, I think growth in overseas unconventional drilling will be much slower. We believe China has twice the unconventional gas reserves as the U.S., but it could take a while for them to begin to explore.”
When discussing the current low price environment for natural gas in the U.S., Fagan said unconventional drillers had become “a victim of their own success.”
“Producers have spent a lot of money and, once [the infrastructure] is in place, you might as well make some money off of it. That’s one reason that production has stayed high even though the price has crashed,” she explained. “You also have people drilling for natural gas liquids, and that’s a big part of it as well.”
Fagan said she expects production will begin to wilt as companies who had hedged well begin to see those hedges roll off.
“You’ve got a lot of producers who are still drilling in a $3/Mcf environment because they’re getting more for their gas because they hedged,” she said. “There’s nothing wrong with $4[/Mcf] or $5[/Mcf] gas. You can make a lot of money that way. But production is still too much to get there, and new sources of demand didn’t appear as quickly as people expected.”
Unconventional oil, on the other hand, appears to be in good shape for the foreseeable future.
“We think it will add 5 million barrels per day of production by 2020,” Fagan said. “The U.S. has added more oil reserves than anywhere else in the world in the last five years.”
That does not mean, however, that all unconventional oil projects are gaining favor in the current market.
“People are rethinking tight oil sands projects,” she said. “If gas stays cheap, then there may be some support for them. But if gas prices rise, producers will probably move away.”