OPEC halts global shale revolution
World prices have been falling since June 2014 but the pace of the slide accelerated in November when the Organisation of the Petroleum Exporting Countries (OPEC) decided to maintain its production unchanged at 30 million barrels per day.
The slump in oil prices led to spending cutbacks across the globe, forcing players to reassess their priorities which entailed that the prospects of the shale revolution spreading beyond a select few countries dimmed. Shale oil and gas exists in large quantities in Europe, China, Argentina, US and Canada, to name just a few regions but optimism for development outside of US has vanished.
Chevron, Royal Dutch Shell, ExxonMobil have all scrapped plans to invest heavily in shale development outside of their core assets in North America. Major plans for shale in Europe, China, and Russia have all been put on hold. The reasons may not be unconnected with low oil prices as low prices make shale a lot less viable.
Shell pulls back from South African Shale projects
Royal Dutch Shell is pulling back from its shale projects in South Africa due to lower energy prices although it is still seeking an exploration license for the onshore Karoo Basin, Bonang Mohale, country manager said.
A more than halving of crude oil prices since June last year has put high cost projects such as shale gas exploration in jeopardy around the globe.
“The reason to go to a low cost holding position … is as a result of a difficult period for world (prices),” Mohale said.
Shell’s retreat is a blow to the South African government, which has been criticised by oil firms for delaying issuing exploration licenses, most notably in the Karoo, which is believed to hold up to 390 trillion cubic feet of technically recoverable reserves.
Shell has been waiting for six years for an exploration licence.
“What is of concern is regulatory uncertainty,” Mohale said. “We have waited inordinately long for licenses.”
Green groups and land owners in the Karoo, a vast semi-desert wilderness stretching across the heart of South Africa, have argued that exploring for shale by fracking, or hydraulic fracturing, would cause huge environmental damage.
US Shale oil firms brace for more pain
With the prospect of another plunge in crude prices looming after two months of stability, US shale oil producers may face another round of spending cuts to conserve cash and survive the downturn. A deeper retrenchment would have far-reaching effects.
US oil companies have slashed spending 20 to 60 percent since the price of oil fell by half from June to January, and oilfield services firms shed more than 30,000 jobs.
Debt rating agency Moody’s estimates that about a fifth of the North American exploration and production companies it follows will slash budgets by more than 60 percent this year while more than half will cut spending by at least 40 percent.
Companies have made clear they will not hesitate to trim more to avoid credit rating downgrades and further stock sell offs.
Oil firms slashed tens of billions of dollars from their capital budgets between November and February. Many have cut costs already twice and could do it again after first-quarter earnings in May.
Oil producers can save money by shrinking their rig fleets and delaying completions, which include fracking, of wells to bring them online, which accounts for 60 to 70 percent of a well’s total cost.
US output dip imminent
The Energy Information Administration (EIA) latest forecast from March sees US output peaking in May at 9.46 million barrels per day (bpd) and then dipping to 9.41 million in June.
But in a sign the drop could come sooner, the agency now expects output in two of the biggest US fields, the Eagle Ford shale in Texas and the Bakken in North Dakota, to fall in April, for the first time since it began tracking drilling in those oilfields in 2013.
Still, those initial declines, projected at around 18,000 bpd, would make only a small dent in global oversupply estimated at about 1 million bpd. Some analysts say that as soon as prices inch up companies may quickly bring their backlog of wells online, limiting any possible price gains.
In the Bakken, for example, there are 800 uncompleted wells, state officials said last week. The tally is growing as producers wait to see if low prices trigger a roughly $5 billion North Dakota production tax break in June, said Lynn Helms, the state’s top oil regulator.
While oil producers brace for more cuts, they have not given up hopes for a rebound and assure investors they will be ready to tap uncompleted wells and boost the number of rigs they operate.
US rig take the punch
The number of rigs drilling for oil in the US continued to decline, falling 41 to 825, the lowest rig count in four years, oil services firm Baker Hughes said.
Horizontal rigs, the most efficient type most often used in shale production, fell to the lowest since 2010, while less efficient vertical and directional rigs fell to the lowest since 1991 and 1993, respectively, according to data going back to 1991. Canadian oil rigs meanwhile fell by 55 to just 30, the fewest since 2009.
Despite the reduction in oil-directed rigs by over 45 percent since hitting a record high of 1,609 in October, there are few signs US production has slowed yet.
US crude futures have dropped by about 60 percent since June due to concerns OPEC and the United States are producing too much oil while demand remains lackluster, forcing US energy firms to cut spending and idle new wells.
Producers continued to cut back the most in Texas, the state with the most rigs, and in the Permian Basin in western Texas and eastern New Mexico, the biggest and fastest-growing US shale oil play.
The Organisation of the Petroleum Exporting Countries, meanwhile, said it will keep its taps open despite falling prices. More oil may soon be available from Iran as world powers work to clinch a deal with Iran over its nuclear program.
OPEC determined to crush Shale
The next few months could be some of the most defining ones in the oil price war as OPEC are determined to crush US shale in their strategy to counter the shale gas revolution head-on. OPEC seems confident that its battle plan against US shale producers will force a surrender by the end of the year.
Suhail al-Mazrouel, the Energy Minister of the United Arab Emirates said “The strategy will not change. We are telling the market and other producers that they need to be rational,” adding that OPEC will no longer move to shore up crude prices, arguing that rising North American shale oil output needs to be curbed.
“We cannot continue to be protecting a certain price. We have seen the oversupply, coming primarily from shale oil, and that needed to be corrected”, al-Mazrouel said.
By refusing to cut its own output in November and allowing prices to fall sharply, OPEC has attempted to force shale producers to curb their rapidly swelling output.
Analysts say the Shale production decline shows that OPEC is winning its fight for market share and slowing the growth that’s propelled US production to the highest in at least three decades.
“OPEC’s strategy is working, and it will be obvious in US production by midyear when growth from shale plays will come to a halt,” James Williams, president of energy consulting company WTRG Economics in London said.
OPEC is unlikely to blink and cut output. Shale oil requires a high oil price environment in order to survive. The reason is that ongoing operating costs associated with maintaining production from shale oil fields are very high. This is primarily due to the fact that shale oil wells have a very rapid rate of depletion, unlike typical conventional oil wells, where depletion rates are much steadier. The fracking process required to enable the oil to flow ultimately drives up the cost of production
One uncertainty that is always challenging to incorporate into forecasts is the rate of technological innovation. If oil and gas companies find new drilling techniques or cheaper ways of extracting Shale, the trend may change in the coming years. After all, the surge in Shale production caught most people by surprise a decade ago because no one predicted the substantial progress that would be made in horizontal drilling and hydraulic fracturing.
FRANK UZUEGBUNAM