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2015
U.S.
GROWTH PAUSED,
NOT STOPPED
Prospects for the New Swing Producer in the Global Oil Market
By Raoul LeBlanc and Roger Diwan
T
ILLUSTRATIONS BY
ALEX WILLIAMSON
he world oil market is undergoing a dramatic change. U.S. tight oil — sometimes called shale oil — has become
the de facto swing producer in the global market. Two factors have come together to create this new mechanism. One is OPEC’s decision not to cut production last November but rather leave things to the market. The other is the 85 percent increase
in U.S. oil output since 2008 and the potential for further increases in the future. Instead of becoming ever more dependent on oil imports, as
had been the expectation, the United States will now vie with Saudi Arabia and Russia for position as the number one oil producer in the world.
This new reality pushes a key question to the forefront: How will the recent steep drop in the price of oil affect
U.S. oil production? The U.S. rig count
fell by nearly half during the first quarter of 2015, and IHS analysis indicates
that capital expenditures in the U.S. oil
sector will be slashed by 40 percent this
year. In the face of a sharp falloff in rig
counts and big reductions in capital expenditures, many observers expected a
steep and swift fall in U.S. oil production. But U.S. production has remained
stable during the first quarter, at 9.3
million barrels per day (mbd). How
has production stayed resilient in the
face of large reductions in rig activity
and investment?
One key answer is that all wells drilled
are not created equal. Between early
2011 and mid-2014, the price of oil hovered around $100 per barrel. This led
many operators to invest in marginal
plays that are no longer viable at today’s lower prices. But the most prolific
wells in the best areas remain profitable.
The difference shows up in the “where”
of drilling activity. The Performance
Evaluator, an IHS data tool that visualizes detailed information on every oil
and gas well drilled in North America
over the past 15 years, shows that since
last fall, when prices began to fall, the rig
count in the most productive U.S. counties has only fallen by a third, while the
count in medium and low productivity counties has dropped by nearly half.
The difference between most and least
productive counties is considerable —
nearly an order of magnitude.
Effectively, low prices are culling the
herd. Activity that’s not viable at current prices is shutting down, with resources reallocated to more productive
wells. This shift allows the system as
a whole to operate more efficiently —
what the industry calls high-grading.
Fewer resources are going in, but the
amount of oil coming out has remained
the same.
In many respects, this is a classic story, with low prices driving out high-cost
producers — a textbook case of markets at work. But another factor besides
the shift of resources from less to more
productive wells is also present. As the
U.S. unconventional revolution has
scaled up, producers have drilled many
wells that have not yet been fracked.
Such drilled but uncompleted wells are
known as DUCs. With 40 percent of the
capital already spent, these wells can be
brought into production with less capital and are usually highly economic on
a forward-looking basis. IHS estimates
there are roughly 2,500 to 3,000 DUCs
in the U.S. tight oil patch today and
that converting 150 of these per month
would increase production in the second quarter of 2015 by 0.2 mbd. The
large inventory of DUCs therefore represents a significant buffer of productive
capacity that can be brought onstream
quickly and in a capital-constrained
environment. It suggests the number
to watch may not be rig count, but well
completions, which takes into account
not only new wells drilled, but also
DUCs converted to production.
IHS estimates that high-grading and
bringing DUCs online will allow the U.S.
oil industry’s capital spending to be about
30 percent more productive in 2015 than
it was last year. IHS analysis shows that
productivity gains were responsible for
the steady growth in U.S. oil production
during the first quarter of 2015. During
the second quarter, however, the impact
of reduced spending activity will begin to
be felt. Production is expected to slide to
9.1 mbd by year’s end.
As forward oil prices make clear, most
observers expect that the plateauing,
and then decline, of U.S. production in
2015 will spur a price rally, and that a
continued decline in 2016 will allow the
rally to continue. The U.S. oil system,
however, may respond more quickly
to improved conditions. A great deal of
capital is waiting on the sidelines for a
price uptick: Private equity firms have
amassed nearly $60 billion dedicated to
the oil and gas sector and stand ready
to deploy these funds. And even retail
investors are clamoring to get in at the
perceived bottom: Assets in exchangetraded funds (ETFs) focused on oil have
tripled to more than $5 billion in assets
since September.
A price upturn in late 2015 could lead
to what is now an unexpected outcome.
It would unleash large tranches of capital — and further DUC conversions —
which could, in turn, maintain or even
To Readers
The rapid drop in oil prices and continuing
geopolitical and economic uncertainty are buffeting
both the energy industry and many countries and will
continue to have a significant impact on the world
economy in 2015.
These developments raise critical questions: How
will the oil-price collapse affect the energy industry and
the global economy? What will be the price path from
here? Is the United States the new “swing producer”?
What will happen to energy demand, with the United
States growing robustly and a mixed outlook in Europe
and China? How will geopolitical upheaval, with trouble
breaking out in multiple global hot spots, affect energy
production? Are there new transformative innovations
on the horizon that could have an impact like hydraulic
fracturing has had over the past decade? And what role
will policy and regulation play, especially leading up to
the Paris climate talks next December?
This special section, Turning Point: Energy’s New
World, addresses several key issues at the heart of the
current energy picture:
• The future prospects for oil production in the
United States in light of today’s low prices;
• The rise of utility-scale solar and distributed
electricity;
• The implications of Europe’s new Energy Union.
Tomorrow’s special section will examine how
low oil prices are also causing turbulence for producers of liquefied natural gas (LNG); the missing money
problem in the electric power sector; options for the
oil industry to cut exploration and production costs;
and why China’s energy demand is now growing more
slowly than it was even a few years ago.
We are pleased to partner again in these special
sections with The Wall Street Journal during the 34th
IHS Energy CERAWeek conference, April 20-24, in
Houston, Texas. CERAWeek is recognized as the preeminent gathering for the global energy industry. This
year’s conference will feature presentations and interactive sessions by more than 250 senior executives,
government officials, thought leaders and IHS experts.
We anticipate attendance of nearly 3,000 participants
from more than 55 countries. Join us online at
www.ceraweek.com
As we embark on our 34th CERAWeek conference,
we invite you to share in new perspectives on the
energy future through the insights in these pages.
Daniel Yergin
IHS Vice Chairman and
Chairman of IHS CERAWeek
Author of The Quest and The Prize
@DanielYergin
grow 2016 capital expenditures. Under
this scenario, which IHS deems the
mostly likely one, production growth
would resume, driving U.S. oil output up
by half a million barrels per day by the
end of 2016. With inventories already
swollen from the 2015 global surplus,
such a sizeable increase in U.S. production could very well lead to another
price decline. This raises the specter of a
W-shaped recovery: a price rally, which
triggers more investment, and another
production increase, which sets the
stage for the next price drop.
On the other hand, something expected may not actually happen. There is
little prospect of low oil prices driving a
rebound in demand. Fuel-tax policies in
advanced economies dampen the impact of oil price fluctuations, and many
emerging economies are taking advantage of current low prices to wean themselves from fuel subsidies.
On the supply side, the Gulf
countries — in particular Saudi Arabia,
the de facto leader of OPEC — can be
expected to continue their strategy of
maintaining market share, patiently
waiting for low prices to reduce highcost production. But with U.S. tight oil
in the position of swing producer, the
global oil market is more volatile than it
was in the era of OPEC price guidance.
For the next few years at least, the price
fluctuations of recent months could
become more common.
Raoul LeBlanc and Roger Diwan are Vice Presidents
at IHS Energy Insight–Financial Services.
About IHS
www.ihs.com
IHS (NYSE: IHS) is the leading source of
insight, analytics and expertise in critical
areas that shape today’s business landscape. Businesses and governments in
more than 150 countries around the globe
rely on the comprehensive content, expert
independent analysis and flexible delivery
methods of IHS to make high-impact decisions and develop strategies with speed
and confidence. IHS has been in business
since 1959 and became a publicly traded
company on the New York Stock Exchange
in 2005. Headquartered in Englewood,
Colorado, USA, IHS is committed to sustainable growth and employs about 8,800
people in 32 countries around the world.
IHS is a registered trademark of IHS Inc. All
other company and product names may be
trademarks of their respective owners.
© 2015 IHS Inc. All rights reserved.
This special section was prepared by
IHS research staff and did not involve
The Wall Street Journal news organization.
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2015
UTILITY-SCALE SOLAR
2010 VS. 2014
By Alex Klein
GLOBAL SOLAR PHOTOVOLTAIC
NET CAPACITY ADDITIONS
IN GIGAWATTS (GW)
THE BIG NEW THING IN RENEWABLES
T
he solar industry is going through both a transformation and a rebalancing. Distributed rooftop installations have grabbed headlines, and solar panels on houses are a prominent sign of the technology’s improving economics. In part because of the visibility of rooftop solar, distributed generation is now touted
in some circles as the basis upon which to design the power grid of the future. But even as rooftop solar
has grabbed most of the attention, the real story of late has been the rise of ground-mounted, utility-scale
solar projects, which in some cases cover swaths of land as large as thousands of football fields. For the past
half-decade, centralized solar power stations have served as the solar industry’s primary engine of growth.
That is likely to be the case for the immediate future as well.
Annual installations of power generation capacity based on solar photovoltaics (PV) have increased for
nine consecutive years. Total global solar-installed capacity was only 3 gigawatts (GW) in 2004. IHS estimates that by the end of last year, installed solar capacity worldwide had grown to approximately 165 GW,
fifty-five times the amount in place just a decade prior. Excluding hydro, solar now accounts for approximately half of annual renewables investment and about 15 percent of total annual investment in power
generation equipment worldwide. The sums involved are significant — in 2014, roughly $100 billion was
spent to add solar capacity.
During the past decade of growth, the costs of solar have continued to fall. The cost to manufacture a
solar module is roughly one-tenth what it was a decade
ago. The first wave of cost declines were supported by a
shift to low-cost manufacturing centers and overcapacity, especially in China, which became the world’s largest supplier of solar panels. More recently, efficiency
improvements and progress with ancillary technologies
like tracking systems, which allow solar panels to follow
the sun’s path across the sky, have produced additional
long-term reductions in cost. Increased R&D spending
by leading manufacturers has produced transparent
road maps that create the prospect of continued cost
improvements in coming years.
As costs have fallen and supportive policies have been
adopted, large-scale solar power stations have emerged
as the main beneficiary. A decade ago this would have
seemed unlikely as the small, modular nature of a solar panel appeared mainly suitable for use in distributed
and remote applications. But utility-scale solar projects
have accounted for the majority of the year-over-year
growth in the global solar industry over the past four
years. Utility-scale solar represented 12 percent of total
solar capacity added in the world in 2010 but accounted for about 50 percent of the capacity added last year
(see chart).
Annual additions of small-scale, distributed solar capacity, meanwhile, have been relatively flat for the past
four years. The geographic distribution of small-scale
solar additions has shifted as well, moving from Europe,
where subsidies for solar have been scaled back, to other
regions, where supportive policies have been adopted.
Europe accounts for most of the distributed solar capacity installed in the world to date, but has experienced
three consecutive years of declining solar additions, adding about 8 GW in 2014, only one-third of what was added
at its peak in 2011. Elsewhere, distributed solar has begun to pick up, albeit from a small base, most notably in
Japan. Distributed solar additions there have increased
four-fold since 2011.
Just 10 years ago, in 2005, no utility-scale solar PV plant
anywhere in the world was larger than 10 megawatts.
Today, a project under construction is slated to generate
600 megawatts from over 3,000 acres of California desert.
When this project goes online, it will be the largest solar
facility in the world. By the end of 2014, 50 GW of utilityscale solar power was operating worldwide, up from a
mere 3 GW just five years prior.
Why has utility-scale solar grown more quickly than
distributed systems in recent years? Utility-scale plants
can be better oriented towards the sun and more easily installed with tracking systems. As a result, they tend
to produce far more energy per unit of capacity installed.
As an example, a utility-scale plant in the southwest U.S.
can have a utilization factor — the total amount of energy
the plant generates as a percentage of its full capacity — of
greater than 32 percent. The utilization factor for a typical rooftop system in the same region is, by contrast, only
22 percent. That means a utility-scale plant can produce
up to 50 percent more electricity for roughly the same
amount of photovoltaic capacity. Additionally, utilityscale systems are less expensive to install, due to economies of scale in system design and construction. The costs
of acquiring land for utility-scale plants are also typically
lower than those associated with finding and convincing
property owners to host distributed systems.
Across much of the world, electricity generated by solar
PV at any scale still costs more than conventional power.
But solar is now competitive with oil-fired generation in
even modestly sunny places, and oil is still the dominant
fuel in many remote, isolated or island markets. Solar is
also increasingly competitive with natural gas-fired generation outside of the U.S. The reason? The shale revolution has kept U.S. gas prices low, but elsewhere, gas is
typically more expensive. Because of their lower costs,
large ground-mounted plants are expected to account for
the majority of solar installations in coming years, as PV
modules become cheaper and new countries embark on
policies supporting renewable energy.
Distributed generation, however, could still surprise.
Even though small-scale systems carry a cost premium,
governments have tended to favor them. And in some
densely-populated areas, there is simply not enough land
for utility-scale systems. There are also huge swaths of the
developing world with limited access to electricity, where
small-scale, distributed power systems could be more
economically viable than building out hundreds of miles
of transmission lines to reach remote populations. With
battery storage costs also beginning to fall, such regions
may be able to bypass solutions involving a single centralized grid.
The next few years are likely to reveal how much potential distributed solar has over the long term. But for now,
utility-scale solar is the new big thing in renewables.
Alex Klein is Director of Renewables Research
at IHS.
UTILITY > 5 MW
COMMERCIAL < 10 kW-5 MW
RESIDENTIAL < 10 kW
4.7
2.0
3.3
2014 TOTAL
2010 TOTAL
35.6 GW
16.7 GW
13.5
11.4
SOURCE: IHS
17.4
Special
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2015
Energy security,
solidarity and trust
An energy union of research,
innovation and competitiveness
A fully integrated
internal energy market
Decarbonization of the economy
Energy efficiency as a contribution
to the moderation of demand
ILLUSTRATION BY ALEX WILLIAMSON
By Shankari Srinivasan and
Catherine Robinson
I
n March 2014, Russia wrested control of Crimea from the Ukraine. A
month later, Donald Tusk, then the
Prime Minister of Poland, floated the idea of a European Energy
Union. The primary objective of
Tusk’s proposal was to reduce Europe’s
reliance on energy imports from Russia,
particularly natural gas. A key element of
Tusk’s vision was that a single European
body would assume responsibility for
purchasing gas from Russia.
In February of this year, the European
Commission (EC) — akin to the U.S.
government’s executive branch — put
forward a formal proposal for establishment of an Energy Union. But the
Energy Union proposed by the EC
this year looks very different from the
one envisioned by Tusk in April 2014.
Security of supply is now just one of five
dimensions, rather than the primary
objective (see illustration). One of the
aims, nevertheless, is to constrain the
role of natural gas in Europe.
Three of the dimensions — energy
security, competitiveness and a low
carbon economy — have long been
cornerstones of European energy policy. But two of the dimensions are new:
energy efficiency and completing the
internal market. They are not novel in
themselves, as they were previously
considered enabling mechanisms. But
their new prominence, as aims in their
own right, is a departure from the past.
The focus on energy efficiency and the
internal market is in part a reflection of
Europe’s growing emphasis on security
of supply, which has become increasingly apparent over the last year. It is also
a sign that the EC believes the existing
approach is not working.
In mid-2014, the EC issued two major reports emphasizing the importance
of energy efficiency. Both highlight the
role of energy saving as a way to improve
Europe’s energy security. In one of the
reports, the EC proposed a binding 30
percent energy-efficiency target by 2030,
with the aim of reducing European gas
demand. The Commission emphasized
that every 1 percent of energy savings
would reduce gas imports by 2.6 percent. Of particular note are proposals
for improving the efficiency of build-
EUROPE’S
ENERGY UNION
DOES IT END DEPENDENCE
ON RUSSIA?
ings, especially residential buildings, of The Commission is also concerned
which more than 40 percent are heated about the slow pace of grid interconby natural gas.
nection and lagging market liberalizaThe second new priority in the Energy tion in some member countries. The
Union proposal is completion of the Commission hopes to address many of
internal market — that is, creating a these issues next year with measures
truly single market for
that will lead to a truly inenergy within Europe,
tegrated European power
independent of namarket.
The
tional frontiers. One
Another goal is develdriver for this is growopment of an integratEuropean
ing concern in the EC
ed, EU-wide natural gas
about inconsistencies
market. This would likely
Energy
created by conflicting
require additional gas
Union
national energy polipipelines and new storcies, particularly the
age facilities, but it would
proposal
patchwork of support
serve to link the markets
schemes for generaof Eastern and Southern
builds on
tion capacity and reEurope with those of
newables. Over the past
Western Europe and
the existing
half-decade,
Europe
bring more flexibility into
policy
has added a massive
the system. This could
amount of new renewhelp to even out the price
framework
able power generation
differentials that currentcapacity. The power
ly exist between Eastern
to address
sector is still adjustand Western Europe and
ing to this transformaalso make Europe more
known areas
tion. The transmission
resilient to any disrupof concern.
system is struggling to
tions in supply. But it
cope with the sizeable
would not alter the source
addition of renewables,
of Europe’s gas, around
which provide power
one-third of which would
only intermittently. Wholesale prices continue to come from Russia.
have fallen, even as prices paid by powThe Energy Union’s emphasis on efer consumers have risen steeply, to pay ficiency and establishment of a single
for €50 billion in support for renewables European market implies an increased
provided last year. Rising power prices role for Brussels. This is likely to trighave spurred worries about European ger opposition from some member
competitiveness in global markets. states. Implementation of the Energy
Union will therefore take time. The
Commission recognizes this reality and
is taking a long view.
The meaning of an Energy Union
has evolved significantly over the past
year. Does the current proposal help
to meet Donald Tusk’s original aim of
reducing Russian gas imports? Even
if a European-wide authority to buy
Russian gas is established, it is unlikely
to lead to a reduction in the volume of
gas imported from Russia. In addition,
getting member countries to cede purchasing power to a central European
buying authority would be a tall order.
So that aspect of Tusk’s plan was never
really feasible. The Energy Union has
put the idea of a central buyer to the
side. But over the long term, the emphasis on efficiency and creation of a
single European energy market could
incrementally reduce dependence on
Russian imports and make Europe as
a whole more resilient in the face of
supply disruptions. For example, if the
Energy Union leads to increased grid
interconnections, it may allow Europe
to cope better in the case of a cutoff of
external energy supplies. And it will
also decrease variation in energy prices
across the region.
The Energy Union proposal does not
represent a major new strategic roadmap for Europe’s energy policy. Rather,
it builds on the existing policy framework to address known areas of concern.
Most importantly, it sets out the EC’s
long-term vision for the future.
What the Energy Union proposal reveals is the change in Europe’s attitudes
toward natural gas. Previously, gas was
seen as a key ingredient in the transition
to a low-carbon future. But since the crisis in the Ukraine, natural gas has instead
come to be seen increasingly as a source
of geopolitical concern. With growing
anxiety about supply security, and continued opposition to fracking to develop
its internal shale gas resources, Europe is
moving away from natural gas. The shift
from gas means a doubling down on efficiency and renewables as the pillars of
Europe’s energy future.
Shankari Srinivasan is Vice President and Head
of Research and Consulting for Power, Gas,
Coal, and Renewables–Europe and Middle East
at IHS. Catherine Robinson is Senior Director for
Gas, Power, Renewables–Europe at IHS.
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