OPEC Should Still Be Worried About American Energy

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Why can't OPEC get a good night's sleep? Because North America is experiencing an energy revolution that can't be slowed. 

The cartel
For decades OPEC has been able to control global energy markets by manipulating production levels to keep prices elevated. During the 1970's, OPEC was able to choke off America's oil supply and slow down our economy. Now states like North Dakota, Texas, and others are trying to put an end to America's dependence on OPEC.

North Dakota
North Dakota is home to the Bakken play, which has enabled production in the region to surge from ~100,000 barrels of oil per day to possibly hitting over 1 million bpd sometime next year.

Continental Resources (NYSE: CLR  ) is the largest leaseholder in the Bakken with 1.2 million net acres, which is almost triple its 2007 level. Continental Resources plans on making the most out of the play by drilling deeper.

Previously Continental Resources saw 20 billion barrels of recoverable oil (24 billion in oil equivalent) in the Bakken at a 3.5% recovery rate with 557 billion barrels of oil in total. Now Continental Resources sees 903 billion barrels of oil in total in the Bakken, with 32 billion-45 billion barrels of it being recoverable depending on the recovery rate (which ranges from 3.5%-5%).

Continental Resources sees more recoverable oil in the Bakken because instead of just drilling down to the first level of the Three Forks play, it has expanded its operation to go all the way down to the fourth level of the Three Forks.

Continental Resources should be scaring the pants off of OPEC: If one play alone can house that much crude then America won't need to keep shipping in ~4 million barrels of crude oil a day from OPEC.

From 2007 to 2012 crude oil imports are down ~1.4 million bpd from OPEC, and going forward that number will keep getting smaller and smaller. This should have OPEC worried that it will no longer have a stranglehold on oil production and that it won't be able to control prices anymore.

Continental Resources plans on tripling its production from 2012 to 2017, with the Bakken lending a big helping hand. Other plays are also causing OPEC to fret, such as the Permian Basin.

Really, 50 billion?
Pioneer Natural Resources (NYSE: PXD  ) sees the Spraberry/Wolfcamp play in the Permian Basin housing ~50 billion barrels of oil equivalent. Combined with the Delaware Basin's ~8 billion boe of recoverable oil, the Permian Basin is going to give OPEC a massive headache. 

The Permian Basin is the second largest oil field in the world, second only to Saudi Arabia's Ghawar and ahead of Kuwait's Burgan. The importance of the Permian Basin can't be understated. Currently it is pumping out 1.2 million barrels of oil a day, and that is forecasted to hit 3 million barrels a day by 2025.

To get to that level Pioneer Natural is going to lend a helping hand, increasing its rig count in the region from 12 currently up to 50 by 2018. Pioneer Natural is also using better drilling techniques to maximize the potential of each well.

Pioneer Natural is going to drill deeper laterals than the usual ~8,300 feet. Pioneer Natural plans on spending an extra 20% on ~20 wells in 2013 to drill laterals of ~10,000 feet, which will boost the ultimate recovery rate per well somewhere between 40%-60%.

The higher the recovery rate the more oil that can be pulled out of the ground, which decreases the need for OPEC imports and increases the amount recoverable reserves for E&P players. Pioneer Natural's plan for deeper laterals will allow it to tap into an additional 7 billion barrels of oil equivalent, which would be ~650% higher than its proven reserves at the end of 2012.

What makes that all the better is that the production mix is roughly 70% crude, 20% NGL, and 10% gas. OPEC has no way of stopping that train.

Pioneer Natural plans on capitalizing on this great growth story by quadrupling the number of rigs in the area and drilling deeper. This bullish combination makes Pioneer Natural both a headache for OPEC and a strong growth story.

Final thoughts
OPEC imports a ton of crude oil to the U.S., but now one of its major sources of profit is slipping away. If you factor in these two plays alone the U.S. will be importing 2 million barrels less of crude oil a day (assuming constant consumption rates), which is why OPEC can't seem to get a good night's sleep.

Another company giving OPEC trouble
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DocumentId: 2714510, ~/Articles/ArticleHandler.aspx, 9/27/2016 4:57:58 PM

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