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Rapid shale oil supply likely to disappoint in coming years: oil industry veteran

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Rapid shale oil supply likely to disappoint in coming years: oil industry veteran

Houston — US oil production from shale and unconventional sources will grow in the future, but the rate will likely be less than most widely accepted sources currently predict, a well-respected industry veteran said Tuesday.

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After more than 4 million b/d of oil production growth from 2010 to early 2015, US output growth "disappointed" in 2017 and will probably continue to do so near-term, Mark Papa, long-time CEO of big US shale producer EOG Resources and currently CEO of small-cap Centennial Resource Development, said in webcast remarks at the UBS 2018 Global Oil and Gas Conference in Austin, Texas.

The reason: lack of geologic top-tier acreage, Papa, who left EOG at the end of 2013, said.

"If you look at each month of the EIA [US Energy Information Administration] production growth, it's been essentially flat for nine of the past 13 months," he said. "We had 500,000 b/d versus early predictions of around 650,000 b/d."

Also, US petroleum inventories so far this year have "built hardly at all" relative to the five-year average, he added: "We're clearly under supplied on a US basis."

Papa conceded his opinions are in the minority, as he predicts around 950,000 b/d of total US oil production growth this year compared with the EIA and International Energy Agency projecting around 1.3 million-1.4 million b/d. The agencies' figures are based on fourth quarter 2017 to Q4 2018 projections.

In addition, the Gulf of Mexico, where production has grown by roughly 80,000 b/d year over year in the last few years, could see flat or the start of declining production growth in 2019 and further declines in subsequent years.

That is because exploration investment in that arena essentially stalled in 2015 to the present, due to an industry downturn when operators turned their attention to onshore shale that brings quicker payback, versus years of pricey upfront costs before the first Gulf of Mexico barrel is produced.


Meanwhile, two of the US onshore's so-called "Big Three" oil plays -- the Eagle Ford Shale and Bakken Shale -- have largely had their best Tier 1 acreage already drilled, much of it during relatively low oil prices that averaged about $48/b during 2015-2017. The third big oil play, the Permian Basin of West Texas and southeast New Mexico, is currently in its prime but that won't last forever.

In the Eagle Ford, located in South Texas, and the Bakken in North Dakota/Montana, "my estimate is that about 70% of the good quality drilling locations have already been drilled," Papa said. "So you're left ... with Tier 2 and Tier 3 qualify geologic locations and there's a really steep drop-off in the amount of oil you get per well with those locations."

Even though technology and well completion techniques have improved per-well yields, "that doesn't offset bad rock," he added.

Papa oversaw the founding of Centennial, which is focused on development in the western Permian which is also called the Delaware Basin, in October 2016.

At its peak in early 2015, the Eagle Ford was producing about 1.7 million b/d, and currently produces about 1.389 million b/d of oil, according to S&P Global Platts Analytics, which estimates an average 1.706 million b/d next year, rising to 2.024 million b/d in 2022.

Production dropped through most of 2015 and 2016 because of an industry downturn that saw oil prices fall to half their mid-2014 levels of over $100/b.

Papa does not believe the Eagle Ford or the Bakken, which encompasses most of the Williston Basin's current 1.238 million b/d of oil production, will ever again experience the rapid growth rates of 2010-2015. The Bakken hit its recent peak of 1.301 million b/d in December 2014 according to Platts.

"You'd have to get WTI to $80-$90/b to get the kind of growth numbers EIA and IEA are currently predicting," he said.

Instead, Papa believes current higher US oil prices north of $70/b will generate a spurt of capital into what he calls the "shale machine," but this time the resulting production will not glut the market and tank oil prices as in 2014 since demand is robust and production declines are occurring in many countries such as Venezuela. Currently also, oil companies are being prudent in their capital spending, stung by events of the last few years and pressure from shareholders to return capital to them in the form of higher dividends and share buybacks.

Papa also believes there will be a continued but gradual "positioning away" from plays such as the Niobrara Shale in Colorado and the SCOOP/STACK in Oklahoma by independent oil companies, since those areas do not show as much growth as the Big Three.

"I expect by the August [earnings conference] calls, to see some independents temper their 2018 growth forecasts," Papa said. "They'll couch it in terms of unavailability of service equipment, difficulty getting crews or logistical issues, but that will be code for 'I'm having disappointing well results because I'm having to drill Tier 2 and 3 geologic locations'."

--Starr Spencer,

--Edited by Irene Tang,