Luncheon – May 2, 2012


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Talk: Anatomy of the Revolution in U.S. Oil and Gas Supplies

Speaker: Pete Stark, Senior Research Director and Advisor, IHS CERA RMAG

Location: Denver Marriott City Center

Description: Published in the May 2012 Outcrop, p. 18-19

Unprecedented breakthroughs in liberating production from source rocks and tight reservoirs have stimulated dramatic shifts in oil and gas supplies and market factors. The “shale gale” unlocked a 100 year supply for natural gas. But it also triggered excess production capacity and a collapse of gas prices that has forced massive adjustments across the supply chain. 2012 shapes up as a pivotal year as markets adjust to availability of abundant low-cost supplies and producing assets are consolidated by owners with long term horizons. The “great revival” of U.S. oil production is no longer in doubt. But public concerns about perceived risks from horizontal drilling and hydraulic fracturing plus lack of an energy policy cloud understanding of how to take advantage of this added bonus for energy supplies.

2012 will be difficult for gas producers who face substantial excess supplies and sub-$2.00 gas prices. March 30, 2012 gas storage stood at record high levels – 2,400 Bcf, some 750 Bcf above the 5-year average and 900 Bcf above 2011 levels. This is bearish for gas prices and third quarter production curtailments loom if summer demand does not consume the surplus gas. Long awaited reductions in gas directed drilling – especially in dry gas plays like the Haynesville, Fayetteville and parts of the Marcellus are underway. The April 4, 2012 Baker-Hughes gas directed rig count stood at 647 rigs, down 31 percent from the recent high of 936 rigs in October 2011. Six hundred or fewer gas rigs, though, will be required to rebalance the gas market. Operators are redirecting investments to liquids rich plays to take advantage of the huge spread between oil and gas prices. Drilling activity in the Bakken and Eagle Ford plays has soared beyond optimistic projections and other liquids plays are benefitting from this shift. Liquids directed drilling and production are climbing in the Permian Basin, Niobrara, Mississippi lime, Granite Wash and Woodford shale plays. Promising early results suggest the Utica play in Ohio could challenge the Marcellus shale as the poster child for the Appalachian basin. 2011 liquids production increased by 456,000 barrels per day (b/d) and expanding developments point to an increase of more than 600,000 b/d during 2012.

Scenarios indicate U.S. oil supplies could add 3.0 million to 5.5 million b/d (from 2010 levels) by 2020. The aggressive scenario hints at the possibility that North America might achieve the long desired independence from overseas oil imports. Nevertheless, substantial uncertainties about energy policies and above ground concerns must be de risked to assure the size of the prize. If properly managed, abundant, secure and affordable oil and gas supplies could be the foundation of a renaissance for U.S. industrial and economic growth.