As the lines of supply and demand move closer, offshore crude oil production will regain a seat as a major contributor to the U.S. supply mix, and now could be the time to invest.
Speaking at the Association of Energy Service Companies annual winter meeting in San Antonio on Feb. 22, Peter Miller, executive chairman of DistributionNOW, an energy equipment provider, said offshore production has fallen from 28 million barrels per day to 21 MMbbl/d amid a three-year lack of investment as focus turned to prolific shale plays.
However, shale production depletions and the loss of offshore oil production is heading the U.S. into a "train wreck," he said.
"Basically, we have shut offshore production down for three straight years, losing 7 MMbbl/d, while we produce about 10 MMbbl/d out in shales," Miller said. "If we stay on this same track, you are going to see a complete train wreck for oil prices and the general economy. There will be a tremendous demand for oil."
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Investment funds have been going to the capital-intensive shale and renewables industries. "If we don't get offshore going again, any increase in demand is going to get us in trouble in as little as two or three years, while in the long term, what goes on offshore is going to have a very, very significant impact into 2021 and 2022," Miller said.
In its World Energy Outlook released in November 2017, the International Energy Agency said oil demand will continue to grow to 2040, albeit at a steadily decreasing pace as sustainable energy growth rises. The IEA said upstream oil and gas investment will remain a major component of a secure energy system, even in a scenario where sustainable energy grows.
Miller said it is a fallacy to think that renewables will replace crude oil demand anytime soon. "The people who believe that demand for oil and gas is going to go down are absolutely incredible," he said. "I would venture it is not going to be for anyone's lifetime in this room."
The United States accounts for 80% of the increase in global oil supply to 2025, the IEA said. According to the U.S. Energy Information Administration, tight oil production will remain the leading source of U.S. crude oil production, accounting for about 65% of cumulative domestic production from 2017 to 2050.
Miller said the industry could find itself in "a situation where we are going to be very undersupplied in the oil business. While shale production might go up to 14 MMbbl/d, which is a big increase, if you are losing offshore production, the lines of supply and demand will come together quicker and quicker," he said.
In its Annual Energy Outlook 2018 released in February, the EIA said it sees tight oil production leveling off to between 11.5 MMbbl/d and 12.0 MMbbl/d as tight oil development moves into less productive areas and well productivity declines.
Miller said depletion rates underscore the problem, as offshore operations will be the "key swing producer" that shale cannot replace."Depletion is the really ugly secret of the world," he said, noting that the 28 MMbbl/d that was being produced offshore just three years prior is three times as much as shale production. "And shale depletion levels are 75% every year. The replacement ratio shows what has happened offshore; you are replacing only about one-third of what you are using."
While it can take as few as seven weeks for a shale project to begin operation, an offshore project takes about seven years from start to finish.
"If you are not investing today, it is going to come back and bite you," Miller said.

