Low crude oil and natural gas prices have led to a worldwide drop in energy production, but the United States aims to expand exports as global demand continues to grow. While U.S. crude oil production is on the decline, natural gas production is showing signs of strength, according to a recent report by the Energy Information Administration (EIA).
U.S. crude oil production is projected to decrease from an average of 9.4 million barrels per day (bpd) in 2015 to 8.7 million bpd in 2016 and to 8.2 million bpd in 2017, according to EIA’s monthly Short Term Energy Outlook (STEO) released March 8. By contrast, U.S. natural gas production declined from November to December 2015, but overall production is expected to grow in the next couple years.
Natural gas is expected to fuel the largest share of electricity generation in 2016 at 33 percent, compared with 32 percent for coal, according to the EIA report. This would be the first time that natural gas provides more electricity generation than coal on an annual average basis. In 2017, natural gas and coal are both forecast to fuel 32 percent of electricity generation.
In December, the EIA reported total marketed production of natural gas averaged 78.7 billion cubic feet per day (Bcf/d), a 0.4 percent decline from its November level. Production in the Marcellus states (Pennsylvania, Ohio and West Virginia) increased from the previous months, partially offsetting declines in Texas, Louisiana and western states. EIA survey data, which include all of 2015, indicate marketed natural gas production averaged 78.9 Bcf/d in 2015, an increase of 4 Bcf/d (5.4 percent) from 2014.
The EIA projects growth will slow to 0.9 percent in 2016, as low natural gas prices and declining rig activity begin to affect production. In 2017, however, forecast production growth increases 2.1 percent, as forecast prices rise, industrial demand grows and liquefied natural gas (LNG) exports increase.
The agency also expects U.S. natural gas production growth in the forecast period will reduce demand for natural gas imports from Canada and will support growth in exports to Mexico. The EIA expects natural gas exports via pipeline to Mexico to increase because of growing demand from Mexico’s electric power sector coupled with flat natural gas production in Mexico. EIA data projects LNG gross exports will increase to an average of 0.5 Bcf/d in 2016, with the startup of Cheniere’s Sabine Pass LNG liquefaction plant in Louisiana, which sent out its first cargo in February. The administration projects gross LNG exports will average 1.3 Bcf/d in 2017, as Sabine Pass ramps up its capacity.
The EIA projects HGL production at natural gas processing plants will increase by 200,000 bpd (5.4 percent) in 2016 and by 300,000 bpd (8 percent) in 2017. Expected additions of natural gas processing and distribution infrastructure contribute to forecast HGL production growing at a faster pace than the natural gas streams from which it is produced. Planned terminal builds and expansions and a growing ship fleet will allow more U.S. ethane, propane and butanes to reach international markets, with forecast net HGL exports averaging 1.1 million bpd in 2016 and 1.4 million bpd in 2017.
Regarding crude oil production, the STEO forecast reflects an extended decline in Lower 48 onshore production driven by persistently low oil prices that is partially offset by growing production in the federal Gulf of Mexico.
The EIA estimates that crude oil production in February averaged 9.1 million bpd, which was 80,000 bpd below the January level. The administration estimates total U.S. production has fallen 0.6 million bpd since April 2015, to an average of 9.1 million bpd in February, with the entire production decline coming from Lower 48 onshore.
With WTI prices currently below $40 per barrel and projected to remain below that level through the first half of 2017, the EIA expects oil production to decline in most Lower 48 onshore oil production regions. The expectation of reduced cash flows in 2016 and 2017 has prompted many companies to scale back investment programs, deferring major new undertakings until a sustained price recovery occurs.
The prospect of higher interest rates and tighter lending conditions will likely limit the availability of capital for many smaller producers, giving rise to distressed asset sales and consolidation of acreage holdings by more financially sound firms, according to the STEO. Lower onshore investment is anticipated to reduce the count of oil-directed rigs and well completions in 2016 and 2017.
The focus of drilling and production activities will be on the core areas of major tight oil plays, the EIA reports. In these areas, falling costs and ongoing technological and process improvements in rig, labor and well productivity are anticipated to lead to faster rates of well completions and less-rapid production declines relative to other Lower 48 onshore areas. The ongoing gains in learning-by-doing, cost reductions and rig and well productivity are expected to enhance the economic viability of these areas and to be adopted in other regions, incrementally reducing the breakeven costs of oil production in more marginal areas.
The EIA expects U.S. crude oil production to decline from 9.1 million bpd in the first quarter of 2016 to an average of 8 million bpd in the third quarter of 2017. Production of 8 million bpd would be 1.7 million bpd below the April 2015 level, which was the highest monthly production since April 1971. Production is expected to begin increasing modestly in the fourth quarter of 2017, as productivity improvements, lower breakeven costs and anticipated oil price increases are expected to end more than two years of declines in the Lower 48. The forecast remains sensitive to actual wellhead prices and rapidly changing drilling economics that vary across regions
Projected crude oil production in the Gulf of Mexico rises during the EIA’s forecast period, and oil production in Alaska falls. Production in these areas is less sensitive than onshore production in the Lower 48 states to short-term price movements and reflects anticipated growth from new projects in the Gulf of Mexico and declines from legacy fields in Alaska. Late in 2015, ConocoPhillips brought two projects online in the Alaskan North Slope that have tempered production declines in the region. Several projects in the Gulf that began operations or that will begin operations in 2014-2016 will push up production from an average of 1.5 million bpd in 2015 to 1.9 million bpd in the fourth quarter of 2017.
Liquid Fuels Consumption
Total U.S. liquid fuels consumption increased by an estimated 290,000 bpd (1.5 percent) in 2015, according the EIA STEO. Liquid fuels consumption is forecast to increase by 90,000 bpd (0.5 percent) in 2016 and by an additional 160,000 bpd (0.8 percent) in 2017.
Motor gasoline consumption increased by an estimated 240,000 bpd (2.7 percent) in 2015 to an average of 9.2 million bpd, the highest level since the record 9.3 million bpd in 2007, according to the EIA. Although total nonfarm employment and total highway travel have increased by 2.9 percent and 3.7 percent, respectively, since 2007, improving vehicle fuel economy continues to hold gasoline consumption in check throughout the forecast period. Gasoline consumption is forecast to increase by 90,000 bpd (1.0 percent) in 2016, as a forecast 2.1 percent increase in highway travel because of employment growth and low retail prices is partially offset by continuing increases in vehicle fleet fuel economy. In 2017, gasoline consumption is forecast to fall by 10,000 bpd
In 2015, the EIA report shows jet fuel consumption increased by an estimated 70,000 bpd (4.7 percent). Forecast jet fuel consumption is mostly unchanged through the forecast period, with improvements in average airline fleet fuel economy offsetting growth in freight and passenger travel.
Consumption of distillate fuel, which includes diesel fuel and heating oil, fell by 60,000 bpd (1.5 percent) in 2015, and it is expected to fall by an additional 50,000 bpd (1.1 percent) in 2016. Stronger economic and manufacturing growth in 2017 contributes to distillate fuel consumption growth of 110,000 bpd (2.9 percent).
Hydrocarbon gas liquids (HGL) consumption is forecast to increase by 20,000 bpd (0.8 percent) in 2016, as increased ethane consumption more than offsets decreased propane, butanes and natural gasoline consumption. In 2017, forecast HGL consumption increases by 30,000 bpd (1.4 percent). Nearly all of the forecast growth in HGL consumption results from the expected startup of six ethane-consuming petrochemical plants in 2017. New HGL export terminal capacity allows net exports of propane, which increased by 190,000 bpd in 2015, to grow by 140,000 bpd in 2016 and by 100,000 bpd in 2017.
The EIA estimates that global consumption of petroleum and other liquid fuels grew by 1.3 million bpd in 2015, averaging 93.7 million bpd. The STEO shows that global consumption of petroleum and other liquid fuels is expected to grow by 1.1 million bpd in 2016 and by 1.2 million bpd in 2017.
Tags: April 2016 Print Issue, Cheniere’s Sabine Pass LNG, ConocoPhillips