NatGas Use in Electricity Generation Soars through 2040: EIA Report

The U.S. Department of Energy’s Energy Information Agency released its newest comprehensive report today, its Annual Energy Outlook 2016. As to the agency’s projections for oil and gas prices and production levels, the report summarizes what its models show as follows.

After 2017, U.S. oil production increases as prices rise

Total U.S. oil production in the AEO2016 Reference case falls from 9.4 million barrels per day (b/d) in 2015 to 8.6 million b/d in 2017.

After 2017, the total production grows to 11.3 million b/d in 2040 as real (2016 dollars) crude oil prices recover from an annual average of less than $50/barrel (b) in 2017 to more than $130/b in 2040.

Oil Prices Go Up after 2017: EIA

Source: EIA

The Lower 48 states lead the increase in crude oil production, which results largely from higher oil prices, continued advances in industry practices, and further development of technologies that reduce costs and allow for increased recovery of tight oil resources. The Bakken, Western Gulf Basin (including the Eagle Ford play), and Permian Basin lead the continued development of tight oil resources in the Lower 48 states in the Reference case.

With the recent decline in oil prices, tight oil production shows the largest reduction, from 4.9 million b/d in 2015 to 4.2 million b/d in 2017, before increasing to 7.1 million b/d in 2040.

After 2017, higher oil prices, as well as ongoing exploration, appraisal, and development programs that expand operator knowledge about producing reservoirs, could result in the identification of additional tight oil resources and the development of technologies that reduce costs and increase oil recovery. In the Lower 48 states, offshore production (which is less sensitive to short-term price movements than onshore production), increases to 2.0 million b/d in 2021, led by new deepwater projects in the Gulf of Mexico, including the Heidelberg and Appomattox fields that are scheduled to begin operations in 2016 and 2017, respectively. After 2021, Lower 48 offshore crude oil production declines to roughly 1.6 million b/d in 2030 and remains at about that level through 2040, as production from newly developed fields is offset by declines in legacy fields.

Lower 48 onshore crude oil production using CO2-enhanced oil recovery increases from 0.3 million b/d in 2015 to 0.7 million b/d in 2040 as oil prices rise and affordable sources of CO2 become available. Both onshore and offshore production in Alaska continue to decline, from a total of nearly 0.5 million b/d in 2015 to less than 0.2 million b/d in 2040.

U.S. natural gas production continues to rise despite low or moderately rising prices

Oil Prices Go Up after 2017:  EIA

Source: EIA

Total U.S. dry natural gas production increases in the Reference case from 27.2 trillion cubic feet (Tcf) in 2015 to 42.1 Tcf in 2040, while average annual U.S. natural gas prices at the Henry Hub (in 2015 dollars) remain at about $5.00/million British thermal units (Btu). Although natural gas prices remain relatively low and stable, projected development of natural gas resources in shale gas and tight oil plays, tight gas, and offshore increases as a result of abundant domestic resources and technology improvements.

Production from shale gas and tight oil plays leads the increase in natural gas production in the Reference case from 13.6 Tcf in 2015 to 29.0 Tcf in 2040, as their share of total U.S. dry natural gas production grows from 50% in 2015 to 69% in 2040.

Oil Prices Go Up after 2017:  EIA

Source: EIA

Shale gas and tight oil plays are resources in low-permeability reservoirs. They include the Sanish-Three Forks Formation beneath the Bakken, Eagle Ford, Woodford, Austin Chalk, Spraberry, Niobrara, Avalon/Bone Springs, and Monterey formations. U.S. offshore natural gas supply, after declining from 2015 to 2016 to around 1.4 Tcf, remains stable from 2015–20 in the Reference case, then falls to 1.2 Tcf in 2023, reflecting declines in production from legacy offshore fields.

After 2027, as increased production from new discoveries offsets the decline in legacy fields, offshore natural gas production increases to 1.7 Tcf in 2040.

Growing natural gas demand in the industrial and electric power sectors and increasing exports of liquefied natural gas (LNG) place upward pressure on domestic natural gas prices. Improvements in drilling technology allow production to keep pace with demand (both for domestic consumption and for export), resulting in relatively stable prices throughout the projection period.

Technology improvements increase U.S. production from tight and shale formations

Growth in U.S. oil and natural gas resources (proved reserves and technically recoverable resources) and cumulative production have averaged 1.8%/year and 2.5%/year for crude oil and natural gas, respectively, from 1990–2005, and 3.6%/year and 3.1%/ year from 2005–15.

Examples of technology improvements include better rigs and drill bits that can drill wells faster at lower unit costs, improved hydraulic fracturing techniques that expose more of the rock to the well, better control of the drill bit path, and better offshore rigs and platforms that can reach great depths and handle extreme pressures and temperatures. Multi well pad drilling and improvements in logistics also have contributed to the cost reductions. These technology improvements have allowed, and are likely to continue to allow, the expansion of tight and shale gas production.

The Reference case incorporates assumptions about changes in upstream technologies and industry practices in developing tight oil, tight gas, and shale gas plays. The plays are divided into two tiers, with different aggregate technology change rates depending on their levels of development, which are based on the potential effects of future breakthrough technologies on resource recovery rates and drilling and operating costs, particularly in areas that are less developed.

Download the EIA’s Annual Energy Outlook 2016 here.

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