United States Oil and Gas Industry Update Quarter 4 2011

Includes 3 FREE quarterly updates.

BMI View: Unconventional shale gas and tight oil production continue to make waves in the US market,
drastically altering domestic energy supply and demand and price dynamics. This trend is set to continue,
though we expect the lion’s share of production growth to be focused on liquids over the next five years given
that low natural gas prices are rendering a swathe of more marginal plays uneconomical. While the gradual
upturn in the business cycle is set to lift demand, we expect most growth to focus on gas as utilities take
advantage of low prices to boost gas-fired generation. Oil demand is set to continue falling as high prices and
growing energy efficiency hit consumption.
The main trends and developments we highlight in the US oil and gas sector are:
- According to our forecasts, the boom in US unconventional liquids production is set to combine
with higher output from the Gulf of Mexico (GoM) to push total liquids supply (crude oil,
NGLs, other liquids and refinery gains) to 10.95mn b/d in 2012. By 2016, we anticipate that total
liquids output will have hit 11.99mn b/d.
- Oil demand growth is set to remain negative despite the slow recovery in the macro-economy
(BMI’s latest forecasts point to average real GDP growth of 2.0% in 2012, rising to 2.1% in
2013). We estimate a fall in consumption of 0.6% and 0.1% in 2012 and 2013, respectively.
Demand growth will remain below trend over the course of the forecast period (to 2021) as the
US energy market reduces its energy intensity. We expect total oil demand of 18.73mn b/d in
2012 and 18.91mn b/d by 2016.
- The shale gas revolution in the US saw total output soar 6.3% in 2011, to approximately 651bn
cubic metres (bcm). However, this unconventional boom has created a supply glut, forcing
prices down to 10-year lows. Gas producers have therefore started shutting in non-associated
wells and are endeavouring to channel capital expenditure (capex) towards liquids-rich plays
where possible. We therefore estimate a sharp fall in gas production growth in 2012. Our
forecast is somewhat below consensus, with total gas output set to rise just 3.0% (EIA 3.52%) to
670.79bcm. With prices set to remain well below their five-year average over the medium term,
we do not anticipate dramatic growth in gas output. In 2016 we anticipate total production of
685.65bcm.
- Sluggish economic growth will see most gas demand growth come from the power sector, where
low gas prices are pushing utilities away from coal-fired generation. Indeed, in April 2012,
monthly coal and natural gas generation were equal for the first time since the agency started
compiling data in 1950. We expect the rise in natural gas-fired generation to drive an increase in
consumption from 722.10bcm in 2012, to 732.12bcm by 2016.
US Oil & Gas Report Q4 2012
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- Changing dynamics in the US gas market have drastically reduced the US’s import burden. We
expect the total oil and gas net import bill to hit US$331.25bn in 2012, falling to just
US$257.19bn by 2016 and US$241.28bn in 2021.
- The most dramatic shift is taking place in the natural gas market where surging production is
reducing the import burden dramatically. We expect net imports of 51.31bcm in 2012, falling to
just 4.27bcm by 2021. Perhaps in light of this collapse, the US Federal Energy Regulatory
Commission (FERC) granted a landmark export permit to Chenier Energy for its Sabine Pass
facility on April 17 2012. The plant, which has now received a final investment decision (FID)
and the green light to begin construction, is set to begin operations by 2016/2017 with exports
totalling 16mn tonnes per annum (tpa), or approximately 22.08bcm. This has now been factored
into our forecasts and we expect net LNG imports to fall from 6.05bcm in 2012, to just 3.61bcm
in 2015. From 2016, the US should become a net-exporter of LNG with the approval of further
export facilities a major upside risk to our forecasts.
- There has been a great deal of activity in the US midstream segment as operators react to
changing North American supply dynamics. We expect further midstream consolidation to occur
– particularly in crude oil and natural gas liquids (NGL) processing, transportation and storage
surrounding emerging tight oil and shale plays.
- In the downstream segment, US refiners on the east coast have been suffering due to high
feedstock prices and falling gasoline demand. The Marcus Hook facility remains shut, reducing
total refinery capacity by 178,000b/d. However, the future is brighter for the 335,000b/d
Philadelphia refinery after the facility was acquired by the Carlyle Group. The 185,000b/d
Trainer facility was also rescued by a white knight when it was acquired by Delta Airlines in
Q212. We therefore anticipate total US refinery capacity will fall by just 178,000b/d to 17.60mn
b/d in 2012, before recovering to 17.79mn b/d by 2016.
At the time of writing, we assume an OPEC basket oil price for 2012 of US$107.1/bbl, falling to
US$99.10/bbl in 2013.