In any commodity market, the marginal supplier makes hay when the sun shines. Oil prices are rampant, but tight oil is not behaving quite as expected. I caught up with R.T. Dukes, Head of US Lower 48 oil supply.
So R.T., tight oil production is surging on higher oil prices?
Yes, but from the jump in prices in 2016/17. Volumes are currently 5 million b/d – that’s up 1.6 million b/d in 24 months. The growth is mainly from the Permian, which is now producing just over 3.2 million b/d in total. Two million b/d of that is tight oil, which has doubled from the lows.
The growth has come faster than we expected because of the rapid rate of investment. The horizontal rig count targeting tight oil jumped from ~250 in May 2016 to 622 by the end of 2017, and we are seeing the production flowing from these wells coming through this year. But we expect activity to tail off in 2018.
The oil market’s marginal producer slows with prices rising?
It’s counterintuitive, but there are good reasons. The Permian is still the prize basin containing the majority of the low-breakeven tight oil plays and biggest sweet spots. The outlook for medium-term growth is very promising, and we expect the Permian will be the engine that drives the doubling of tight oil volumes to 10 million b/d by the mid-2020s.
But short-term, there are physical constraints – there’s only 3.4 million b/d of pipeline capacity.