U.S. Oil Production To Top Saudi's, But Drilling Limits Loom

The U.S. will become the world's top oil producer in the next several years as more production is squeezed from shale deposits, the International Energy Agency predicted Monday.

But the nation's No. 1 status could prove temporary if fracking obstacles grow or if oil companies do not continue to find and develop new sources.

The IEA sees U.S. production of 10 million barrels per day in 2015 growing to 11.1 million in 2020. It expects output from current top producer Saudi Arabia to be 10.9 million barrels a day in 2015 but dip to 10.6 million by 2020, or less than the U.S.

The agency forecasts U.S. output will drop again to 9.2 million bpd in 2035, with Saudi production rising to 12.3 million in '35.

The outlook hinges on assumptions for prices, costs and other factors. The IEA said if no new U.S. resources are found and oil prices drop, Saudi Arabia would take first place again. The increased use of water in hydraulic fracturing also will add costs and may threaten some projects.

Public Lands Off-Limits?

When looking for new sources, drillers may have to rely more on private land, where most shale development now takes place. On Friday, the Interior Department moved to further limit drilling on public lands, proposing to close 1.6 million acres of Western federal land to shale drilling.

But U.S. oil output should top Saudi Arabia's even without access to new federal territory, said James Williams, an energy analyst at WTRG Economics.

"They're a little pessimistic," he said.

Williams doesn't think U.S. production will fall off in the later years, given that new extraction techniques could be discovered to increase output further.

The IEA is more optimistic than other agencies' forecasts. The U.S. Energy Information Administration sees output reaching 10.73 million bpd in 2020.

Production declines faster at shale formations than conventional deposits, requiring a major ramp-up in rigs and capital spending to make the IEA forecast viable, said Harry Tchilinguirian, BNP Paribas' head of commodity derivatives research.

U.S. demand, and thus output, could also be affected by refineries that upgrade their capacity to process heavier crude from Canada and Venezuela, not the lighter crude from shale, he added.

No Crystal Ball

"Trying to figure out what we're going to get next year is already difficult enough," he said. "You have to take their projections with a grain of salt.

Earl Sweet, a senior economist at BMO Capital Markets, is skeptical about the IEA forecast.

Conventional fields in the U.S. still produce more oil than shale formations do, and they've been in decline for decades, he noted.

He also doubts the IEA's prediction that the U.S. will become a net exporter of oil by 2030. Barring broad adoption of electric cars, the U.S. will remain a large net oil importer, he argued.

Still, the natural gas produced from shale represents cheap, abundant energy that could give U.S. industry a competitive edge.

Chemical makers plan to boost U.S. capacity to capitalize on the gas boom. Last week, Nucor (NUE) agreed to develop natural gas wells with Canada's Encana to lock in energy for its steel mills.

In the next decade, U.S. industry plans $65 billion to $70 billion in capital spending to exploit cheap natural gas, said Teri Viswanath, director of commodity strategy at BNP Paribas.