EIA predicts reduction in proven reserves for 2015 because of low prices

Oil jack and gas valve
Source: DollarPhotoClub

On Friday, the U.S. Energy Information Agency (EIA) published its first ranking of the top 100 oil and natural gas fields since 2009. The newly-released ranking is for the year 2013 and it shows a marked increase in proven reserves in both crude oil and natural gas. However, as proven reserves are defined as estimated quantities of oil and gas that are recoverable under existing economic and operating conditions, the agency predicts that the data for the current year will show a decline in resources.

The results of the ranking, quite predictably, showed the emergence of the biggest shale plays such as the Marcellus, the Bakken, and the Eagle Ford. Fields in the Marcellus and Eagle Ford plays appear at the top of the list in their respective categories, while in 2009 the Marcellus fields were ranked in the bottom half of the list, and Eagle Ford fields (discovered in 2008) did not appear in the top 100 at all. Alaska’s Prudhoe Bay, previously the oil field with the largest amount of reserves, fell to third, behind fields in the Eagle Ford and Permian Basin.

Interestingly, EIA predicts that the amount of proven reserves of oil and gas is likely to decline in its assessment for 2015 (the agency is currently collating data for the 2014 report). This is because price changes can have a significant effect on companies’ ability to produce and therefore the proven reserves, and the agency assumes that the decline in oil prices of the recent months will have a downward effect on the reserves.

EIA top 100 oil fields
Source: EIA

The EIA says: “prices that will be used for determining proved reserves for 2015 are forecast to be much lower. Nearly a third of the way through 2015, first-of-the-month average price for WTI for the first four months of the year is $50.49/bbl, a 47 per cent decline from the 2014 price. This could result in reduced proved reserve additions and possibly some reduction in previously identified proved reserves for 2015 because some projects would become uneconomic.”

Not everybody agrees, though.

Speaking to The Daily Telegraph, Steve Mueller, head of Southwestern Energy, the fourth biggest producer of gas in the US, swept aside any claims that the US fracking industry is in serious trouble, insisting that drilling costs are coming down so fast that his company – and others – are staying a step ahead of falling prices.

EIA top 100 gas fields
Source: EIA

The one factor that EIA does not mention in its prediction is innovation in technology that brings the costs down and unlocks deposits that were previously thought unreachable or uneconomical. This is why, for many months, while the rig count in the U.S. declined, the production continued to increase.

“Rig efficiency was flat for thirty years but since then we’ve cut by five times. We have set in motion something that you can’t deny and is irresistible,” Mr Mueller said.

He gave the example of the Marcellus Shale – a new kid on the block in 2013 – but not long afterwards believed by some to be in decline. Now, this formation alone produces 113 BCM a year, which is roughly equivalent to Russia’s exports to Europe through the Nord Stream, Yamal, and Brotherhood pipelines.

Mr Mueller said it had taken his company 17 days to drill a 2,600 ft well as recently as 2007. It has just drilled a 5,400 ft well in six days. “The new technology is amazing. We have a drill-bit with a chip inside that makes its own changes,” he said.

The numbers seem to bear that out. According to EIA’s own estimates, despite the 50 per cent decline in crude oil prices that occurred in the second half of last year, U.S. petroleum production still increased by 3 quadrillion Btu (1.6 million barrels per day) in 2014. Natural gas production — largely from the eastern United States — increased by 5 quadrillion Btu (13.9 billion cubic feet per day) over the past five years.

This increased capacity for production, at a time when oil prices still are much lower than where the were a year ago, is not necessarily a good thing and leads many companies to hold on to drilled wells, without producing them. This ‘fracklog’, as it is called, is said to be quite substantial and might keep the productivity of hydrocarbons at a lower level that otherwise would be possible. There are those, however, who argue that it is only a minor factor in the context of the cycle’s dynamics, and for global oil price formation, this factor is negligible.

Who is right? We might have to wait and see.

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