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Commentary: Is it only a question of when the US once again becomes a net oil exporter?

(Note: Commentaries do not necessarily represent the position of ASPO-USA.)

In a recent Radio Free Europe/Radio Liberty interview with Daniel Yergin, the interviewer had the following rather remarkable question, “How will the fact that the United States is going from an oil importer to a net oil exporter change its foreign policy calculations?” The underlying premise--that the US would soon be a candidate for membership in OPEC--was not challenged by Mr. Yergin, and he talked about the implications of a steady increase in US and North American oil production.

Given the apparently widespread view that it is not if, but when, that the US becomes a net oil exporter, I thought that it would be a worthwhile exercise to examine the challenges facing the US oil and gas industry, as an ever greater percentage of US oil and gas production comes from very high decline rate oil and gas wells, especially in the context of what has been a post-2005 decline in Global Net Exports of oil (GNE).

ExxonMobil put the annual decline rate from existing wellbores in the 4%/year to 6%/year range a few years ago. For the sake of argument, let's assume that the decline rate from existing US oil wells was about 5%/year in 2008, when the US hit a recent low crude oil production rate of 5.0 million b/d. Of course, the 2005 Gulf Coast hurricane damage contributed to the 2004 to 2008 decline in production. In this paper, I am using the EIA’s definition of crude oil, which is crude + condensate.

Let's assume that US crude oil production averages 7.5 million b/d in 2013, and let's make (in my opinion a conservative) assumption that the decline rate from existing US oil wells averages 10 percent/year over the next 10 years, as an increasing percentage of US production comes from high decline rate shale/tight plays.

At a 10 percent /year decline rate, in order to simply maintain a production rate of 7.5 million b/d out to 2023, the US oil industry would have to replace the productive equivalent of every single oil field in the United States of America--everything from the Thunder Horse Complex in the Gulf of Mexico, to the Eagle Ford Play, to the Permian Basin, to the Bakken Play to the North Slope of Alaska.

Or let me put it this way, at 5%/year decline rate, in 2008 the US lost 250,000 b/d per year due to declining production. At a 10%/year decline rate and a production rate of 7.5 million b/d, we would lose 750,000 b/d this year due to declining production.

In other words, a 50% increase in net production plus an increase in the decline rate from 5 percent /year to 10 percent /year would lead to a tripling in the volume of crude oil production lost every year due to production declines from existing wellbores.

Assuming an annual loss of about 750,000 b/d from existing wellbores, the gross increase in production would have to exceed 750,000 b/d in order to show a net increase in production. For example, let's assume that we average 7.5 million b/d in 2013, and let's assume that we lose 750,000 b/d from existing wellbores this year. In order to show a net increase of 0.25 million b/d from 2013 to 2014 (from 7.5 to 7.75 million b/d), the industry would have to show a gross increase in production of 1.0 million b/d, which would be the production from new wells in 2014 that were not producing in 2013.

In regard to the possibility of becoming crude oil self-sufficient, probably the simplest way to look at the US supply and demand situation is to focus on crude oil production versus refinery inputs.

Let’s use the above assumptions, to-wit, annual US production of 7.5 million b/d in 2013, with an overall decline rate from existing wellbores of 10 percent/year. The decline rate will probably continue to increase, but for simplicity, let's assume that it averages 10 percent/year. As noted above, in order to maintain a constant 7.5 million b/d production rate out to 2023, given a 10 percent/year decline rate, we would have to replace the productive equivalent of 100% of current US crude oil production.

We are currently processing about 15 million b/d of crude oil in US refineries. A portion of the refined product is exported, and then we have refinery gains plus biofuels plus natural gas liquids, but let's ignore all of that and focus on crude oil production versus refinery inputs. Currently, we are producing about half of the crude oil inputs into US refineries, and importing the other half.

If we want to produce, in 2023, 100% of the crude oil that we currently process in US refineries, based on the above assumptions (especially a 10 percent /year decline rate), we would need to add the 7.5 million b/d, in order to offset declines, plus add another 7.5 million b/d over 10 years, for a total of 15 million b/d of new production, or about 1.5 million b/d per day per year for 10 years. And of course, once we reach the 15 million b/d level, assuming a 10%/year decline rate, we would need 1.5 million b/d of new production, every year, just to maintain the 15 million b/d production rate.

To meet the 1.5 million b/d per year rate, in order to be crude oil independent by 2023, in round numbers we would need to add--every single year--the combined current productive equivalent of the Bakken Play + the Eagle Ford Play. Or, we would need to add, over 10 years, the productive equivalent of the 2012 crude oil production from Saudi Arabia + Iraq + Kuwait.

This exercise illustrates why peaks happen, and it shows why production declines are inevitable. On the upslope of a production increase, new oil wells can offset the declines from existing wellbores, but with time, new oil wells can no longer offset the increasing volume of oil lost to production declines.

And of course the overall decline rate from existing US gas wells is almost certainly even higher than for oil wells.

We are currently averaging about 66 BCF/day (billion cubic feet per day) in dry natural gas production in the US (EIA). If we assume an overall 20%/year decline in natural gas production from existing wellbores, the industry would have to put online the productive equivalent of 100% of current US dry natural gas production over the next five years, in order to maintain a production rate of 66 BCF/day.

So, based on a 10%/year decline rate for oil wells and a 20%/year decline rate for gas production, in order to just maintain a crude oil production rate of about 7.5 million b/d and a natural gas production rate of 66 BCF/day, in round numbers the industry would have to add the productive oil equivalent of one new Bakken play every year and the productive gas equivalent of more than two Barnett Shale plays--every single year, year after year.

Globally, the dominant trend we are seeing is a post-2005 decline in Global Net Exports of oil (GNE), which I define as the combined net oil exports from the top 33 net oil exporters in 2005, as the developing countries, led by China, so far at least have consumed an increasing share of a post-2005 declining volume of GNE. Of course, this means that developed net oil importing countries like the US have to make do with a declining share of a declining volume of GNE. And the US is still dependent on imports for about half of crude oil processed in US refineries. The post-2005 decline in GNE, combined with increasing demand from developing countries were, in my opinion, the primary factors that contributed to global annual (Brent) crude oil prices more than quadrupling from $25 in 2002 to $112 in 2012.

Currently rising US crude oil production is very important, but in all likelihood we will see a continuation of the “Undulating Decline” pattern that we have seen in US crude oil production since it peaked in 1970--set against the backdrop of what will probably be a continuing pattern of developing countries, led by China, consuming an increasing share of a smaller post-2005 supply of Global Net Exports of oil.

In fact, recently released EIA data confirm a continuation of a pattern that we have seen since 2002, to wit, China and India have been consuming a steadily increasing share of GNE. At the 2005 to 2012 rate of decline in the ratio of GNE to China and India’s combined net oil imports, in only 17 years China and India alone would theoretically consume 100% of global net exports of oil.

For more information on Global Net Exports of oil, following is a link to my recent paper on the Export Capacity Index concept.

For a concrete example of how the Export Capacity Index (ECI) concept works, consider two countries that are widely considered to be critically important sources of future crude oil production: Brazil and Iraq. If we extrapolate the 2008 to 2012 rate of decline in Brazil + Iraq's combined ECI ratio (the ratio of liquids production* to consumption), they would collectively approach zero net oil exports in about 20 years.

Given Brazil’s status as a net oil importer in 2012, even if we count biofuels, it’s instructive to consider what the conventional wisdom was just a few years ago regarding Brazil. In April, 2009 Bloomberg published a column discussing the prospect for Brazil continuing “to take market share away from OPEC.”

We should keep case histories like this in mind when we read in the media about the “Fact” that the US will soon be a net oil exporter, and while there are always uncertainties in forecasting future trends, we can be certain of three objective facts: (1) All oil fields, sooner or later, peak and decline; (2) Global crude oil production is the sum of discrete oil fields that peak and decline and (3) Given an ongoing production decline in an oil exporting country, it is an mathematical certainty that unless domestic consumption in that oil exporting country falls at the same rate as the rate of decline in production, or at a faster rate, the resulting net export decline rate will exceed the production decline rate and the net export decline rate will accelerate with time.

*EIA data, production = total petroleum liquids + other liquids (mostly biofuels in the other liquids category)

The Export Capacity Index (ECI): A New Metric For Predicting Future Supplies of Global Net Oil Exports 

April, 2009: OPEC Cuts Thwarted as Brazil, Russia Grab U.S. Market 

Jeffrey J. Brown is a licensed professional geoscientist. He is responsible for the discovery of several oil and gas fields in West Central Texas, and currently manages an exploration program searching for oil and gas fields in this region. Jeff has conducted analysis of Peak Oil issues for many years, and has authored numerous articles with a special emphasis on global oil exports.

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