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Why The US Won't Surpass Saudi Arabia As Largest Oil Producer

 November 15, 2012 10:01 AM

(By Mani) The International Energy Agency's World Energy Outlook (WEO) says the US could overtake Russia and Saudi Arabia before 2020 to become the world's largest oil producer.

The WEO finds that the extraordinary growth in oil and natural gas output in the United States will mean a sea-change in global energy flows. In the New Policies Scenario, the WEO's central scenario, the United States becomes a net exporter of natural gas by 2020 and is almost self-sufficient in energy, in net terms, by 2035.

North America emerges as a net oil exporter, accelerating the switch in the direction of international oil trade, with almost 90 percent of Middle Eastern oil exports being drawn to Asia by 2035, the report said.

The prediction bodes well for top U.S. oil companies such as Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX) and ConocoPhillips (NYSE: COP).

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However, several Street analysts were skeptical about the U.S. oil dominance.

"We don't think the US can become the largest oil producer in the world," Deutsche Bank analyst Paul Sankey wrote in a note to clients.

The biggest weakness of the IEA report is that it struggles with price, cost and returns. The report uses a single starting oil price, the IEA crude oil import price (averaged $108 per barrel (bbl) in 2011). Three IEA scenarios, basically high, base and low (depending on different government policies) for 2020 are as follows: high $128/bbl, base $120/bbl, low $113/bbl.

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"So the difference in high and low scenario vs base in 2020, is ~$7/bbl. That,we would say, given the margin of error in all things energy statistics, is as good as the same price," Sankey noted.

Equally, there is no assumption for a key consideration over the factor that the US oil price will continue its total disconnection from the global oil price (currently $22/bbl discounted for the same quality barrel of crude) given a crude export ban in place, and likely to stay there under Obama (and Republicans support "energy security" too) for four more years to 2016.

Meanwhile, US light sweet crude demand is falling, as is gasoline demand. So, US supply growth, certainly at the 600kb/d annual incremental growth implied by the IEA, will overwhelm demand, and so price, and so returns, and so spending. The growth cannot be sustained.

In addition, the analyst sees the settling in difference in Brent versus West Texas Intermediate (WTI) with an export ban as being between the Saudi oil price target ($110/bbl Brent) and the marginal cost of US oil supply (around $90/bbl WTI, possibly $100 longer term as US geology for marginal oil growth seems to be getting tougher).

So, with a higher cost marginal cost of supply and high declines, the US will have a $20/bbl, at best $10/bbl lower price. Based on the relative performance of the stocks this year, US E&P investors are losing tolerance for value destruction.

"In short, a prediction that the US will become the world's largest oil producer is a self-defeating proposition," Sankey added.



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