AM-14-40 Has the Boom Gone Bust?

Description:

The tremendous success of tight oil growth in the US has led to the question of how long this trend might continue. There are a number of ways the North American tight oil boom might go bust such as a drop in global oil price levels (e.g., Brent collapse due to emerging market downturn, supply side upside) or a significant widening of the differential between global oil prices and inland realizations There is not much US producers can do to influence global oil prices and Wood Mackenzie believes the supply/demand fundamentals and non-market (e.g., political tensions, monetary policy) dynamics around the global oil market keep the price environment well above many tight oil play breakeven economics. Thus, sustainable breakeven prices depend more on the basis differential between the relevant pricing point (e.g., Cushing, St. James) and each respective play. These basis differentials can have crude oil quality differences and transportation cost elements. A single play can have multiple refining values and transportations costs. A producer may realize a higher netback by selling their crude oil to a refining centre with higher transportation costs. There has been considerable volatility of North American crude oil differentials over the last three years. The volatility is driven by logistics constraints and relief, as well as diverse production growth areas and rates. A key concern within the industry is whether there will be sufficient crude oil logistics capacity to meet the growing production profiles of the US and Canada. If sufficient logistics capacity were to fail to materialize, there is a risk basis differentials could widen to the point of making incremental drilling uneconomic and thus stall production growth. Crude markets are becoming more complicated with growing price points, costs of various modes of transportation, and variable qualities of LTO (light tight oil). As the growth in LTO challenges the ability of refinery configurations to absorb more light crude oils, relative price discounts have the potential to grow over time. The issue of the tight oil boom going bust comes down to whether these US crude oil basis differentials could deepen enough to disrupt expected drilling programs. Almost all LTO proven reserves are commercially viable at today's prices. Even if global oil prices fell toward $75/bbl, over 70% of US tight oil reserves would remain economic.