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Moderate price environment expected
ConocoPhillips economist anticipates continuing production efficiency improvements putting a cap on oil prices into the future
Alan Bailey Petroleum News
With global oil production continuing to become increasingly efficient, the price of oil is likely to remain in the $60 to $80 per barrel range in the long term, Helen Currie, ConocoPhillips chief economist, told the Alaska Support Industry Alliance on Jan. 18. Despite an anticipated increase in global oil demand, a price range more toward $100 at the upper end would bring too much oil into the market, she said. In fact, as production has improved in efficiency, analysts’ oil price outlooks have been on a consistent downward trend in recent years, she commented.
ConocoPhillips, with a drive to remain competitive under long-term average oil pricing, requires projects to have a cost of supply not exceeding a $40 West Texas Intermediate price, if those projects are to be competitive within the company’s project portfolio, Currie said.
A bumpy year Currie characterized 2018 as “a bit of a bumpy year” for the oil price, with the price peaking at around $85 for a week or so in October, before falling sharply through November. A continuing drop in December reflected a general investment sell off, with stocks and bonds also losing value in response to downward trending global manufacturing indicators. As the Brent oil price trades for $62 and West Texas Intermediate sits around $52 to $53, “we may be at the bottom, at least for a while,” Currie said. In fact, the fundamentals for the oil market suggest that the market is now in balance, she said.
The expectation is that the OPEC and non-OPEC countries will continue with their restraint on oil production, maintaining that balance between supply and demand.
“We saw very good compliance from all those countries throughout 2017 and 2018,” Currie said.
Long-term outlook In the longer term, OPEC will continue to be prominent in the global oil supply, with much OPEC production growth coming from a few Middle East countries, Saudi Arabia in particular. Non-OPEC oil producing countries other than the United States should see fairly stable output, despite dire warnings about sharp production declines as a consequence of a lack of investment in the industry following the 2014 oil price crash. As the cost structure of the industry fell, those production cuts did not happen, Currie said. In fact, there has been a cost reset over the past three or four years, enabling projects, many of them offshore, to be economic.
Currie said that ConocoPhillips expects this trend to continue, with the non-U.S., non-OPEC producers playing a prominent role in global oil supplies.
US tight oil ConocoPhillips expects the largest component of U.S. production to be tight oil, especially from the Permian basin. There is plenty of opportunity for further growth in U.S. tight oil. However, the company also sees growth prospects in Alaska. Innovation is still being developed in the Permian and other tight oil basins - ConocoPhillips is taking learnings from tight oil and applying them on the Alaska North Slope and in deepwater projects, Currie said.
It is possible to apply much data analytics in optimizing tight oil developments, given the large number of wells from which data can be gathered, and to the fact that there are now 10 years of development experience. Well efficiency is improving and will continue to improve, Currie said.
“We have improvements that we can still make and that will help us to be more competitive in a moderate price environment,” she said.
Targeting export market Given that refineries in the US are already running close to their full capacities, much of the growth in U.S. oil production will be targeted to the export market, Currie suggested. Currently, at least a dozen projects have been proposed to alleviate bottlenecks in U.S. ports and pipeline systems for moving oil for overseas markets. And there is no shortage of customers for U.S. tight oil in Europe and Asia.
“So over time we see U.S. barrels being able to make it to the water and make it to those foreign buyers,” Currie said.
Demand growth for oil is expected to continue in the long term, but with a decelerating rate of growth in the 2020s, as electric vehicles come into the transportation fleet, for example.
“This change is occurring,” Currie said. “It will primarily affect gasoline demand first. Eventually we will start to see some other types of penetration in some of the other oil products.”
Natural gas Currie also commented on the global market for natural gas. Current interest focuses on the manner in which this market has moved from being very regional to more global, she said. Much of that global trade is now in the form of liquefied natural gas, with the bulk of the growth in the trade being in the form of LNG transported on the water. And everybody agrees that there is much growth to come in the global gas trade.
While the North American gas market, the largest consumer market, is expected to continue to grow, key growth areas are in Asia, in particular India and China, but also in the Middle East.
The key to North American exports will be the vast quantity of shale gas in the region. There have been huge gains in productivity in the shale gas industry. This has enabled production growth to continue, despite a falling Henry Hub market gas price, Currie said.
“We think that kind of trend is going to continue and is going to keep the gas market very well supplied,” Currie said. And Henry Hub prices are not expected to go above $4.50 in the long term, with pricing on the low side expected to be in the low $3s. As with oil, given the huge numbers of wells being drilled, a high price environment is not sustainable because it would drive too much production.
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