US tight oil 'cannot overcome gravity': IEAOREANDA-NEWS. May 04, 2016. US tight oil production ‘cannot overcome the law of gravity', IEA chief economist Laszlo Varro says in an interview with Argus. Edited highlights follow:

How is the lower oil price environment affecting supply and demand?

Low oil prices did trigger a measurable amount of demand growth. But it is also fair to say that the price impact on demand is significantly weaker than it used to be. The only really large oil market where lower prices directly fed through to end-users was the US. We had some demand pick-up, but most of the rebalancing will have to come from supply.

How is the lower oil price environment affecting investment?

Companies are cutting investment in three broad categories. One is US light tight oil (LTO). We have been impressed by the resilience of the US industry, both from the technological and financial points of view. They have technological resilience because they have been reducing drilling and hydraulic fracturing costs to a remarkable extent. And they also have financial resilience. In the first quarter of 2016, with \\$30-40/bl oil, with all the credit ratings agencies putting the US shale industry on watch, the US shale independents raised more than \\$10bn of fresh capital. They are playing their cards very well, but they cannot overcome the law of gravity. They are retrenching to the hotspots where activity is still happening, but there is no doubt that the short-term outlook is a significant decline for oil.

Then you have a second category of investment cuts, which are long-term, difficult mega-projects. Probably, it is more appropriate to speak of delays than investment cuts, because in most cases the companies that are involved — this is the field of super-majors essentially — are not stating that they are never going to do the projects, but they are saying: ‘This is on hold'.

Companies are cutting investment in normal field management and field development operations. When companies cut investment to the bone on secondary field development and enhanced recovery of existing assets, it shows up in the depletion rate of existing production. In this category, very often there is a geological window of opportunity — this is the time when you can do your enhanced recovery project. You miss this window of opportunity because of investment cuts, and the oil stays underground forever, and the ultimate recovery rate will be affected. We believe that investment will pick up as early as 2018, for US LTO output to come back and by 2020 reach a higher production level than the 2015 peak. Mega-projects are much more dependent on the long-term evolution of the energy policy environment.

Is the current level of investment enough to meet future oil demand?

There is absolutely no doubt that the current level of investment will not meet demand growth [to 2020]. With current investment cuts, if we do not invest more than we are investing today, we will actually see a significant physical decline in production.

How would a wave of bankruptcies in the US shale industry affect output?

US bankruptcy legislation creates a very strong incentive to continue to operate the assets. If there is a low marginal cost asset that generates positive cash flow, the incentive is to continue to operate it and to try to minimise the loss for creditors and investors. The sad fact is that not all shale plays are created equal. The US has some absolutely exceptional ones such as Marcellus for gas or Permian for LTO. But the US has some plays that are average or below average.