U.S. Is Poised to Overtake Russia as Largest Oil-and-Gas Producer

The U.S. is poised to overtake Russia as the world’s single largest producer of oil and natural gas combined this year, a startling shift that is reshaping energy markets and eroding the clout of traditional petroleum-rich nations.

Shale-rock formations of oil and natural gas have fueled a comeback for the U.S. that was unimaginable a decade ago. Russia meanwhile has struggled to maintain its energy output and has yet to embrace the technologies such as hydraulic fracturing that have boosted U.S. reserves.

The increase of U.S. energy output in recent years has been widely discussed. But a Wall Street Journal analysis of global data shows that the country is on track to pass Russia as the world’s largest producer of oil and gas this year—if it hasn’t already.

“This is a remarkable turn of events,” said Adam Sieminski, the head of the U.S. Energy Information Administration. “This is a new era of thinking about market conditions, and opportunities created by these conditions, that you wouldn’t in a million years have dreamed about” not long ago, he said.

U.S. imports of natural gas and crude oil have fallen 32% and 15%, respectively, in the past five years, narrowing the U.S. trade deficit. And since the U.S. is such a big consumer of energy, the shift to producing more of its own oil and gas has left a lot of fuel supplies available for other buyers. Nations that rely on peddling petroleum for their economic strength and political clout face dwindling market power as a result.

Many analyses of energy markets look only at crude oil. But Russia and the U.S. also are major players in natural-gas markets, where they far outproduce countries such as Saudi Arabia.

The U.S. last year tapped more natural gas than Russia for the first time since 1982, according to data from the International Energy Agency, which tracks global energy statistics. Russia’s exports have been crimped by rising competition and the economic slump in Europe. Russia forecasts that its gas production will increase slightly in coming years, but its forecast for this year is below current U.S. production.

And the U.S. is catching up in the race to pump crude. Russia produced an average of 10.8 million barrels of oil and related fuel a day in the first half of this year. That was about 900,000 barrels a day more than the U.S.—but down from a gap of three million barrels a day a few years ago, according to the IEA.

The amount of crude from the Bakken oil field in North Dakota and the Eagle Ford shale formation in South Texas continues to rise rapidly, while Russian output has increased modestly over the past three years. The Russian government predicts oil output will remain flat through 2016, while natural gas ticks up 3%.

Pinpointing exactly when U.S. production will pass—or has passed—Russia’s is difficult without up-to-the-minute data. But if Russia’s oil and gas wells flowed at the same rates as they did last year, total U.S. production would have surpassed them on a daily basis this summer, according to a Journal analysis of data from the IEA and the Energy Information Administration.

The shift has raised concerns in Moscow that U.S. crude supplies will crowd out Russia’s oil exports.

“Russia looks like the main loser in the global market,” said Tatiana Mitrova, of the Russian Academy of Sciences’ Energy Research Institute. More than 40% of Russia’s budget comes from oil-and-gas related duties and taxes, she said.

The institute has forecast that Russian oil exports could fall 25% to 30% after 2015, reducing gross domestic product more than $100 billion.

To be sure, Russia is believed to have one of the world’s largest, untapped oil-bearing shale formations, creating the potential for a surge in production.

And not everyone in Russia sees a threat from the U.S. The head of one the country’s largest energy companies, OAO Gazprom, OGZPY -1.55% has called expanding U.S. shale output “a bubble that will soon burst.”

A similar view was expressed Tuesday by the head of the Organization of the Petroleum Exporting Countries, who said in an interview that the U.S. oil boom from shale will run out of steam by decade’s end.

Saudi Arabia remains the world’s largest supplier of crude oil and related liquids. As of July, Saudi Arabia was pumping 11.7 million barrels a day, according to the IEA. Russia was second, at 10.8 million barrels, while the U.S. was third, at 10.3 million. Each of the three pumps more than twice the daily output of such major producers as Canada, Venezuela and Nigeria.

Even optimists in the U.S. concede that the shale boom’s longevity could hinge on commodity prices, government regulations and public support, the last of which is problematic. A poll last month by the Pew Research Center for the People and the Press found that opposition to increased use of fracking rose to 49% from 38% in the previous six months.

Other risk factors: a global economic contraction would depress oil and gas prices, leading companies to slow production. And drilling in shale is expensive and more complex than conventional exploration, leading to concerns that a market downturn could take a large bite out of U.S. output.

So far, most companies aren’t dialing back, even though they need access to enormous amounts of capital to pay for the deep wells required to tap dense rock formations.

Much of the growth in fossil-fuel production comes from companies that need to sell shares, take on debt or sell assets to plug a gap between spending and their revenue. According to an estimate by Barclays PLC, 50 major U.S. oil and gas explorers needed to raise $50.3 billion last year to close that gap.

Plenty of private-equity funding and overseas investment remains available, industry experts say and debt remains relatively cheap.

“The dollars needed have never been larger,” said Maynard Holt, co-president of Houston-based investment bank Tudor, Pickering Holt & Co. “But the money is truly out there. The global energy capital river is flowing our way.”

U.S. energy producers also are drilling more efficiently and cutting costs in other ways. Some companies have said that the amount of oil and gas produced by shale wells isn’t dropping as fast as predicted.

Ken Hersh, chief executive of NGP Energy Capital Management LLC, a private-equity fund with $13 billion under management, said the immense amounts of oil and gas uncovered in recent years indicate that the U.S. energy boom could last a long time.

“It is not a supply question anymore,” he said. “It is about demand and the cost of production. Those are the two drivers.”

Wall Street Journal