Post on 24-Jun-2018
transcript
Energy Intelligence Group IEEJ Seminar
1Copyright © 2017 Energy Intelligence Group
Trump Presidency: Impact on the US Economic Outlook and US Energy Policy
March 27, 2017
Energy Intelligence Group
Briefing
IEEJ:April 2017 © IEEJ2017
Energy Intelligence Group IEEJ Seminar
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▪Globalism in Retreat
– US election accelerated recent trends
– Global status quo under pressure
▪Trump’s Trade and Economic Policies
– Economic nationalism
– Trade agreements under threat
▪US Energy and Climate Policy Under Trump
– Energy is central to economic message
– Strong effort to reverse Obama’s climate legacy
– Trump team likely to favor US LNG exports
– Shale production stabilizing, and could return to growth
Agenda
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01Globalism in Retreat
▪ US election accelerated recent trends
▪ Global status quo under pressure
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Globalism in Retreat: Trump’s Election Accelerates Recent Trends
Challenges for global cooperation
Focus Issues
▪ Systemic Economic Risks
▪ Global Trade and Financial
Cooperation
▪ Economic Openness
▪ EU cooperation exposed during euro crisis.
▪ TPP and TTIP talks have stalled; revisions to
existing trade ties are possible.
▪ The UK’s future global trade ties are also uncertain.
▪ Climate Policy
▪ Policy Orientation of Major Powers
▪ Trump is unlikely to fulfill US climate goals, setting a
low bar for other countries.
▪ Populism could gain traction Europe this year.
▪ Great Power Relations
▪ Managing Global Conflict
▪ US-China relations are already in question.
▪ Global security concerns range from Trump’s vows
to defeat Islamic State to North Korea.
Developments and Implications
▪ 2016’s Brexit and the election of Donald Trump are only the latest signals of a general retreat from a
globalist policy orientation.
▪ International norms and institutions are being questioned, particularly as the United States aims to
reverse course on landmark agreements, such as the Paris climate accord and Iran nuclear deal.
▪ The result is widespread uncertainty over previous “givens”: US security policy, trade approach, and
foreign relations.
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Global Status Quo Under Threat: Challenges to World Order
▪ The events of 2016, especially the Brexit
vote and Trump’s election, are the latest
steps in a longer historical arc.
▪ Western, liberal ideas first rise to
prominence shaping the post-WWII global
order, but have faced growing challenges
over the past few decades.
▪ In the West, lasting damage was done by the
2008-09 financial crisis. This, combined with
underlying trends in demography, migration,
globalization and automation, forms the basis of
the current political malaise.
▪ With the status quo under pressure in
developed Western economies, alternatives are
gaining in prominence elsewhere. Authoritarian
rule looks to be on the rise.
Potential turning point in dominance of liberal democracy and capitalism
Rule-Based International Politics
Liberal Capitalist Economics
▪ A rule-based international order, built around
international institutions.
▪ Confidence in liberal democracy, and a vision
of a growing club of democratic nations.
▪ Support from the United States has played a
central role in promoting and defending this
order, even if Washington has, at times, lost
patience.
▪ Characterized by free trade, globalization,
technological innovation and accelerated
movement of ideas and labor.
▪ Globalization boosted in the 1990s by free
trade agreements such as NAFTA and the
creation of the WTO.
▪ Explosive growth in China and other Asian
economies has turbocharged globalization.
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0
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Japan Euro area US UK
GDP per Capita Growth, by Decade (average %)
1960s 1970s 1980s
1990s 2000s 2010s
Source: World Bank
Global Status Quo Under Threat: Western Model Under Pressure
▪ Key megatrends have constrained economic growth, while
contributing to political dissatisfaction and radicalization.
▪ The 2008-09 global economic crisis cast a long shadow,
including a weak recovery in the United States, and economic
stagnation along with lingering debt crises in Europe.
▪ However, the economic malaise has deeper roots, starting with
demographic change, especially in Japan and continental
Europe.
▪ The demographic mismatch with faster-growing populations in
the Middle East, Latin America and Africa is creating huge
migration pressures.
▪ Concerns over immigration are part of a broader critique of
globalization and its consequences. While adaptable, educated
employees have often benefited, less-skilled manual workers
have seen jobs move to cheaper overseas locations.
▪ Even where manufacturing has stayed in place, increased
automation and efficiency have reduced manpower
requirements (see US example to the right).
▪ Taken together, these trends have coalesced into a wave of
widespread dissatisfaction with mainstream politics.
Advanced Western economies face growing headwinds
9.1%
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1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
US Manufacturing Sector (2009=100)
Real Output Employment
Source: St. Louis Federal Reserve
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02Trump’s Trade and Economic Policies
▪ Economic nationalism
▪ Trade agreements under threat
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Trump’s Worldview
▪ Trump’s populist platform has resonated
strongly with the white working class,
who feel their identities are under attack.
– Economic nationalism was a key theme
of his campaign, and it comes across
clearly in his policy priorities.
– He seeks to reverse the damaging
effects of globalization for the working
class, with trade viewed as a key factor.
▪ Trump appeals to the nativist and
xenophobic impulses of his voters by
focusing on “radical Islam” and other
threats coming from abroad.
– He also has adopted an isolationist
stance, with his “America First” message.
▪ Trump has criticized Obama’s climate
policy on economic nationalist grounds,
and sees stepped up fossil-fuel
investment as a central priority.
Economic nationalism
Art of the Deal• In a zero-sum world,
deal-making is about
winners & losers
• Belief in Trump’s own
deal-making skill
Revive US
Economic Power• Reverse damaging
effects of globalization
• Booming economy to
boost jobs, incomes
Government
is the
Problem• Reduce taxes
• End onerous
regulations
• Not the role of
government to
choose winners
America
First• US interests
must come first
in international
dealings
• Strength is the
key to peace
“Winning” in
deal-making
and diplomacy
Policies tend to
benefit
corporations,
rather than
workers
Economic
nationalism
Ideal of Trump
as only man
capable of
fixing
government
Trump Worldview: Guiding Ideas
Make
America
Great
Again
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Trump is Centralizing Authority
▪ Trump’s first two months in office show that he
is centralizing authority. He is keeping decision-
making on key issues within a small circle of his
family members and several close advisors.
▪ The White House seems determined to limit the
capacity and autonomy of government
agencies.
– Trump’s first budget aims for enormous cuts at
the EPA, State Department and many other
agencies.
– The White House is deliberately under-staffing
various departments—with many vacancies at
the “under-secretary” level.
– There are still no press secretaries at many
government agencies, and no regular press
briefings. This reflects Trump’s efforts to freeze
out, and even delegitimize, the media.
▪ When a crisis occurs globally (for example a
war or economic crisis), under-staffing and
policy drift will make it harder to respond
effectively.
Effort to cut funding and eliminate staff at government agencies
-40 -30 -20 -10 0 10
EPA
State and USAID
Agriculture
Labor
Corps of Engineers
Health and Human Services*
Commerce
Education
Housing and Urban Development
Transportation
Interior
Overseas war ops./disaster relief
Others
Energy
Small Business Administration
Treasury**
Justice
NASA
Social Security*
Veterans Affairs
Homeland Security
Defense
Trump's Proposed 2018 Budget(% change from current spending)
Source: Office of Management and Budget
*Does not include spending on entitlement programs **Does not include interest payments on federal debt
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Trump’s Challenges
Trump’s Challenges
▪ Trump has challenged traditional Republican
approaches on trade, social issues, foreign
policy and many other areas. But he is
constrained by the Republican agenda in
Congress.
▪ Trump likely would prefer to focus on
infrastructure, trade and jobs. Those were the
issues that propelled him to the White House,
and won support from working class voters.
▪ Instead, Republicans in Congress are
embroiled in trying to reform the US health care
system. This is a risky endeavor, and if the
Republican health care plan turns out badly, it
will diminish Trump’s leverage and his
momentum.
▪ The same could be true with tax reform.
Trump vs. The Republicans
Trump essentially ran as a third party candidate, but must govern as a Republican
Deep internal divides in
Republican Party
Differing priorities
between Trump and Republicans
Trump unpopularity
reduces leverage
Near-zero support from Democrats on
key issues
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Trump Promises Rapid Growth, but Agenda Conflicts with His Party
▪ Trump has promised to unleash breakneck economic growth and add 25 million jobs in the next
decade.
▪ But his policy prescriptions favor businesses, rather than workers, signaling a continued belief in
“trickle down economics.” Priorities include cutting taxes and curbing regulations, and stimulating
infrastructure investment, but also challenging global supply chains through protectionist measures.
Infrastructure spending is a lower priority for Republicans in Congress
▪ Simplification of tax code, and large tax cuts for
both households and firms.
▪ Cut top tax rate from 39.6% to 33%. Corporate
tax rate would fall from 35% to 15%, and would
apply to partnerships and sole proprietorships.
▪ No changes to Medicare or Social Security.
Tax Policy
▪ Spur $1 trillion in transport, water, power, and other
infrastructure investment in 10 years, with aim of
adding millions of jobs.
▪ Offer tax credits and public-private partnerships to
fund plan, although key areas will fail to attract
private investors.
Infrastructure Investment
▪ Overhaul Dodd-Frank Law regulating banks, to limit
regulations and oversight by the Federal Reserve
and the Securities and Exchange Commission
(SEC).
▪ Ease regulations for small banks and credit unions.
Financial Sector Regulation
▪ Ties many lost blue collar jobs and declining
wages to expanding global trade.
▪ Calls for “fair” trade deals, by securing better
terms for US workers and punishing violators.
Trade Policy
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Trump’s War on Trade
▪ Trump campaigned on the misleading idea that
he could boost the US economy and protect
American jobs by renegotiating “bad” trade
deals and punishing trade cheaters.
▪ Trump wants to encourage firms to set up
manufacturing plants in the United States rather
than abroad, and eliminate the trade deficit.
▪ His advisors have a misguided belief that trade
deficits drag down growth.
– Trade surpluses or deficits are not inherently good or
bad.
– The US maintains its trade deficit because it has a
capital account surplus, due to enormous capital
inflows.
▪ These mercantilist policies, combined with
Trump’s self-image as a master negotiator and
deal-maker, suggest the US is serious about
attempting to re-negotiate Nafta and other trade
deals.
▪ Trump officials have attacked the trade policies
of China, Mexico, Japan and Germany—four of
its five largest trade partners.
Trade policy will be a top priority for the Trump White House
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Chin
a
Canada
Me
xic
o
Jap
an
Germ
any
S.
Kore
a
UK
Fra
nce
India
Ta
iwan
United States' Top 10 Trade Partners in 2016US$ bn
Imports Exports Trade Balance
Source: US Census Rank order of overall trade
Trump Worldview: Why US is
“Losing” in Trade
▪ States with Value Added
Tax (VAT) have unfair tax
advantage
▪ Currency manipulation by
China, Japan, EU
▪ “Cheating” under WTO
rules
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The Risks of Trump’s Approach to Trade
▪ Trump’s proposals have signaled that Washington may discard
long-established rules governing trade.
– Proposals in Congress for “border adjusted taxes,” as well as
some of Trump’s proposals for “defensive tariffs,” may be illegal
under WTO rules.
▪ China and Mexico collectively account for 30% of total trade with
the United States. If a trade war erupted between the United
States and “just” these two countries, the economic shockwaves
would likely result in a global recession.
– Even if a trade war is averted, a decision by Trump to step back
from the US’s decades-long role of promoting trade liberalization
will limit medium-term global economic growth potential, and
weaken US leadership on global economic policy.
▪ Abandoning the Trans-Pacific Partnership (TPP)—the regional
trade grouping that excluded China—has opened the door for
Beijing to emerge as a champion of trade liberalization.
▪ But replacing the United States with China—a juggernaut, but
still lacking the scale of the US economy—as the engine of
global trade flows could limit economic growth.
More aggressive policies and shirking of rules create risk of trade wars
Trump’s Trade Architects
▪ Peter Navarro, head of Trump’s
new National Trade Council, is
an unorthodox economist, who
was little-known before being
tapped by Trump. Most of his
recent writing has focused on
China, which he accuses of
currency manipulation and other
tactics designed to boost exports
and undermine trade partners.
▪ Wilbur Ross, Commerce
Secretary, will play a key role in
trade policy. A private equity
billionaire, Ross seems an
unlikely figurehead for Trump’s
populist economic agenda.
Some key Trump advisors,
especially Navarro, seem
unfazed about destabilizing the
existing global trade order.
Indeed, they think such a break
is necessary.
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Trade Agreements Under Threat
Growing obstacles to trade cooperation
Key Global Trade Initiatives Under Threat
TPPTrans-Pacific
Partnership
Days after taking office, Trump issued an executive order that withdrew the
US from TPP negotiations, and promised to pursue bilateral deals instead
that will “promote American industry and protect American workers.” TPP
was signed in February 2016 but has not been ratified by the US Congress.
Asian economies may now look to the Regional Comprehensive Economic
Partnership (RCEP), including China and India.
NaftaNorth American Free
Trade Agreement
Trump has pledged “to get a better deal for American workers,” potentially
including tariffs on some goods imported from Mexico and Canada. If they
do not agree, Trump threatens the United States will withdraw altogether.
Commerce Secretary Wilbur Ross says he wants to begin renegotiations in
the coming weeks.
TTIPTransatlantic Trade
and Investment
Partnership
The prospects for TTIP were already dimming after a 14th round of
negotiations concluded in mid-July with major differences still to be worked
out. Public support for the deal has fallen with the rise of anti-trade rhetoric
on both sides of the Atlantic. Trump’s election is widely seen as the death
knell for TTIP.
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Questions over US Role in Pacific Security
▪ Trump’s election has raised doubts over the US role in security
in Asia. But even before Trump, US commitment to Asian affairs was
called into question.
▪ The much-heralded “pivot to Asia” under Barack Obama failed to
translate into concrete policies.
▪ During his campaign, Trump criticized large US troop
deployments in South Korea and Japan, suggesting that Asian
states need to do more to ensure their own security.
▪ He has signaled that Washington is less committed to providing
global goods, including maritime security.
▪ The US-Japan alliance has anchored the regional security
framework for decades, but a reduced US commitment to
Japanese security is a possibility.
▪ Freer US-Japan trade may be stifled. But Trump’s market
orientation and vows to cut regulations favor US oil and gas
output and exports. This could support Japanese energy
security goals, including diversified supplies and pricing.
Trump questions the core tenets of Pax Americana and maritime security in Asia
Energy Security in Asia: The
Washington-Beijing Rivalry
▪ There is a tendency to view
Pacific security issues as a
zero-sum competition between
Washington and Beijing.
▪ It is quite possible that the
Trump administration will end up
following a path of greater
confrontation with China in trade
and security matters, raising the
risk of escalations in the East
China Sea and South China
Sea.
▪ But if Pax Americana in the
Pacific appears to be eroding
over the medium to longer term,
the Asian states may find they
need to work much more closely
on energy security issues.
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03US Energy and Climate Policy Under Trump
▪ Energy is central to economic message
▪ Strong effort to reverse Obama’s climate legacy
▪ Trump team likely to favor US LNG exports
▪ Shale production stabilizing, and could return to growth
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▪ Trump has vowed to roll back regulations. But in
reality, the federal government does not pose many
obstacles to access, and states regulate most
unconventional activity.
Regulatory Rollback
Energy Sector is Central to Trump’s Economic Message
▪ Trump is much more sympathetic to fossil-fuel industries than the Obama administration. He can also expect support for his agenda from a Republican-majority Congress.
– Democrat and environmentalist opposition is likely to flare up externally.
– Fierce hostility can be expected on the ground, and in the courts, in opposition to activity such as drilling and pipeline construction.
▪ Market forces drove the last decade’s domestic boom (and subsequent bust) first in gas and then oil, and also lie behind the demise of coal. The industry has been a victim of its own success.
▪ Trump’s suggested reforms may allow the US hydrocarbon sector to cut costs and boost output, but in so doing will likely add to the abundance in the global opportunity set.
▪ The main challenge for the oil and gas industry in the US today is economics, not access or excessive regulations.
Oil and gas companies have a strong ally in the White House
▪ Trump wants to reverse Obama-era initiatives, and
end or undermine the Paris Agreement and Climate
Action Plan, while weakening the EPA.
Climate Policy Reversal
▪ Trump has limited ability to open new federal areas
(offshore the East Coast and Alaska, for example)
until the next five-year OCS plan (2022-2027).
Opening Federal Areas
▪ Trump signed an executive order to speed up
Keystone XL and has backed the controversial
Dakota Access pipeline.
Infrastructure Approvals
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Climate Policy: Reversal of Obama Agenda
▪ It is clear that Trump intends to reverse
course on Obama-era climate measures. In
these aims he is very likely to enjoy the
support and encouragement of Republicans
in Congress.
▪ Trump is likely to focus on what he dislikes
about climate policy: excessive regulation
imposed by bureaucrats at home (especially the
Environmental Protection Agency, or EPA) and
abroad (under the Paris Agreement).
– Trump wants the EPA to play a much
narrower role in environmental protection.
– His stated desire to withdraw from the Paris
Agreement reflects his mistrust of
international agreements and bodies.
▪ Republicans in Congress have largely opposed
efforts to restrict emissions, and Congress may
even push for harder, faster action than the
White House.
Congress expected to support broad attack on regulating emissions
Issue Possible Actions
Paris
Agreement
▪ Trump has promised to “cancel” the Paris
Agreement on Climate Change.
▪ The US will likely refuse to participate and
implement its pledges, and will cut funding for
decarbonization programs.
EPA
Powers
▪ Trump’s budget proposal would cut EPA
funding by 31%, eliminating funding for nearly
all climate research and energy efficiency
programs.
▪ The new EPA head is a climate change
skeptic, who sued the agency numerous
times.
Clean
Power Plan
▪ Trump and congressional Republicans are
largely united in their opposition to Obama’s
Clean Power Plan (CPP), which governs
power-sector emissions.
▪ Trump’s proposed budget would eliminate the
EPA’s funding for CPP implementation.
CAFE
Standards
▪ CAFE standards, governing emissions for cars
and light trucks, are due to tighten (to 54.5
mpg by 2022-2025). But a recent White House
decision gave the EPA a chance to review this
target until 2018.
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Anticipated US LNG Export Capacity Additions, 2017-2020(million tons per year)
Source: Energy Intelligence, based on company presentations
- Sabine Pass T5
- Corpus Christi T2
- Corpus Christi T1
- Freeport T3
- Freeport T2
- Freeport T1
- Cameron T3- Cameron T2- Cameron T1
- Cove Point T1
- Sabine Pass T4
- Sabine Pass T3
- Sabine Pass T2
- Sabine Pass T1
- Elba Island
US LNG Exports: Political Support Should Remain Strong
▪ The Trump administration seems unlikely to block efforts to export more US LNG. Trump, and
Energy Secretary Rick Perry, both have a pro-industry outlook, and certainly seem to favor exports.
▪ It is possible that the Department of Energy (DOE) could move back to a “conditional approval”
process for LNG exports to non-FTA countries.
▪ One potential challenge in the near term is staffing at the Federal Energy Regulatory Commission
(FERC). Normally there are up to five commissioners, but at present there are only two. They do not
have quorum to issue final decisions.
General pro-export policies apply to the oil and gas sector as well
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Tax Reform Could Have Deep Impact on Refiners
▪ Proposals for a “border adjustment” tax could have a major impact on the oil sector. For US refiners,
imported crude would become more expensive, but exports of refined products would be exempt
from taxes.
– The goal is to reduce US crude imports, and to provide more incentives for domestic production.
– Those refineries that cannot export refined products will probably have to pass on the higher costs to their
customers. So presumably, US pump prices will rise.
▪ Backing for this border adjustment tax in Congress appears to be fairly weak. Trump has not yet
committed to support it.
But support for the proposed “border adjustment” tax seems to be weak
More disadvantaged
▪ East coast and West Coast refiners are dependent on crude
imports
▪ Mid-continent refiners expanded coking capacity several years ago,
and cannot export
Better able to adjust
▪ Gulf Coast refiners with coking capacity are optimized to import
heavy crude from countries like Venezuela, Mexico and the Middle
East.
▪ But the Gulf Coast refiners have more options: better access to
domestically produced crude, and lots of export capacity.
Impact of a “Border Adjustment Tax” on US Refiners
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US Shale Rig Counts
WillistonEagle FordDJ-NiobraraCana-WoodfordPermian (Right)
Source: Baker Hughes
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US Shale Productivity (b/d per rig)
Bakken
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Niobrara
Permian
Source: EIA
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US LTO: Cumulative Changes in Oil Output Since July 2014(mb/d)
Permian Eagle Ford
Bakken Niobrara
Utica Haynesville
Marcellus Total
Source: EIA
US Shale: Production Begins to Stabilize
▪ US shale production has stabilized and activity
is beginning to increase—but in response to
prices rather than policies.
▪ Opec’s action to manage markets provided an
opportunity for producers to hedge forward
production.
– Project economics in the Permian have held up
despite the price pressure.
– But the increase in January price levels was
sufficient to support increased activity in all
basins.
▪ Soaring productivity rates per rig and
plummeting costs have played a key role.
Increases in efficiency reflect using the best
crews on the best rigs, but also durable
measures such increasing the use of proppants
and sand.
▪ The completion of drilled but uncompleted wells
(DUCs) has also helped to mitigate declines,
especially in the Bakken and the Eagle Ford.
US output begins to stabilize due to the prolific Permian Basin and increasing rig efficiency
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Oil Prices and Permian Rig Count
WTI ($/b, Right)
Permian Rig Count (Left)
Source: Baker Hughes, Reuters
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Cumulative Shale Rig Count Changes Since Oct. 7
Permian
Eagle Ford
Cana-Woodford
Williston
DJ-Niobrara
Source: Baker Hughes
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US Shale Wells Drilled and Completed, and Total DUCs
Bakken Eagle Ford
Niobrara Permian
Total
Source: EIA
US Shale: On the Cusp of a Return to Growth
▪ Looking forward, US shale production appears
to be on the precipice of a return to growth in
2017, even at current or near current price
levels.
▪ Permian growth looks to build upon its recent
strong performance.
▪ Activity in other basins is likely to increase, but
should remain muted compared to the
production boom in 2011-2014.
▪ US shale production for 2017 will be largely
immune to any further price pressure, should oil
prices continue to weaken.
– Project economics have improved more
significantly than in other E&P play types.
– Hedging of future production guarantees
companies minimum needed returns.
▪ The inventory of drilled but uncompleted wells
(DUCs) provides further room for production
growth at current price levels.
Conditions appear ripe for shale to return to growth in 2017 at current price levels
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