July 25, 2011

Mid-Continental U.S. Oil Production to Soar, Says Barrons

In a bullish piece on the mid-continental refiners, Barron's relates some interesting predictions about expected increases in oil production in the mid-continent, including such areas as the Bakken region of North Dakota, the Permian basin in Texas, and the Alberta oil sands. One analyst estimates that mid-continental production will grow from 4.7 million barrels a day now to 7.6 mbd by 2020; another says that the spread between West Texas Intermediate and Brent could reach $50 in 2012.

Oil from these regions is flowing through pipelines into the middle of the country, but can't easily reach the Gulf, Pacific or Atlantic coasts, where higher world-market oil prices prevail. There is ample pipeline capacity to bring oil into the center of the country, but limited capacity to take it out. All the trapped oil is giving mid- continent refiners a cheap crude source.

There are plans for pipelines to bring crude out of the mid-continent to the Gulf Coast. The planned Keystone XL pipeline would run from Canada to the Houston area with capacity of more than 500,000 barrels per day, but environmental opposition could kill Keystone and potentially delay other pipelines. There isn't enough other transportation to move out a sizable amount of oil.

Paul Sankey, Deutsche Bank's energy analyst, wrote recently that the spread between WTI and Brent crude "can stay wider for much longer than the market currently anticipates." He argues that oil production in Canada and the mid-continental U.S. could rise by 300,000 barrels per day each year through 2020. Current daily production is 4.7 million barrels per day, potentially increasing to 7.6 million barrels per day by 2020. Morgan Stanley's Calio says the gap between WTI and a Gulf Coast crude similarly priced to Brent could get as wide as $50 per barrel in 2012, given all the new domestic and Canadian production.

Even as politicians debate U.S. energy policy, oil and natural-gas companies have been actively drilling in the continental U.S. As a result, gas production has surged in recent years, depressing prices, while oil output also has increased, lifting U.S. production to near a 10-year high despite declining output in decades-old Alaskan fields and drilling restrictions in the Gulf of Mexico. . . .

Credit the surge in crude supply to so-called unconventional oil sources in shale formations in the Bakken and Permian regions that are being accessed through horizontal drilling and controversial hydraulic fracturing, or hydrofracking techniques like those used in tapping large new domestic sources of natural gas. The Bakken region, for instance, could be producing one million barrels a day in five years, triple the current output. Oil production from the Alberta oil sands also is rising steadily and flowing south. . . .

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Platts says that an even bigger play exists in the Monterey Shale in California, not mentioned in the Barron's piece:
In the Energy Information Administration's recently released "Review of Emerging Resources," the federal agency pegs the Monterey play at 15.42 billion barrels of technically recoverable oil, compared to the Bakken's 3.59 billion and the Eagle Ford's 3.35 billion.

The Monterey shale overlaps much of California's traditional crude producing regions. It generally runs in two swaths: a roughly 50-mile wide ribbon running length of the San Joaquin Valley and coastal hills, and a Pacific Coast strip of similiar width between Santa Barbara and Orange County.

Add to the mix an improved regulatory climate with faster permitting, an uptick in rig counts, and increased interest from independents, and California's oil fields have become "a great place for investors to look," McPherson said. "Their day in the sun is about to come."

Challenges persist, however, such as community resistance to new drilling. . . .

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