US Drillers vs. OPEC: The battle intensifies

OPEC and lower global oil prices delivered a one-two punch to the drillers in North Dakota and Texas who brought the US one of the biggest booms in the history of the global oil industry.

Now they are fighting back. The drillers are leaning on new techniques and technology to get more oil out of every well they drill, and furiously cutting costs in an effort to keep US oil competitive with much lower-cost oil flowing out of the Middle East, Russia and elsewhere.

Spurred by rising global oil prices US drillers learned to tap crude trapped in shale starting in the middle of last decade and brought about a surprising boom that made the US the biggest oil and gas producer in the world. The increase alone in daily US production since 2008, nearly 4.5 million barrels per day, is more than any OPEC country produces other than Saudi Arabia.

Drilling in shale, also known as “tight rock,” is expensive because the rock must be fractured with high-pressure water and chemicals to get oil to flow. It became more expensive as the drilling frenzy pushed up costs for labor, material, equipment and services. In a dash to get to oil quickly, drillers didn’t always take the time to use the best technology to analyze each well.

When oil collapsed from $100 to below $50, once-profitable projects turned into money losers. OPEC added to the pressure by keeping production high, saying it did not want to lose customers to US shale drillers. OPEC nations can still make good profits at low oil prices because their crude costs $10 or less per barrel to produce.

To compete, drillers have to find ways to get more oil out of each well, pushing down the cost for each barrel. Experts estimate that shale drillers pull up just 5 percent to 8 percent of the oil in place.

Schlumberger sees prudence for Shale

Prudence will be the new normal for the US shale oil industry, which has quickly abandoned its heavy-spending ways in the face of sliding crude prices, Schlumberger Ltd, the world’s No.1 oilfield services provider, said.

Spending cuts already announced by producers, to the tune of 25 to 60 percent, have dropped the rig count by 45 percent since late 2014, and output will soon decline or flatten out so prices can recover, Schlumberger’s Chief Executive Paal Kibsgaard said.

US oil prices have fallen by 50 percent since June to around $46 per barrel as Saudi Arabia and OPEC try to push higher cost producers out of the market. At the time of $100 oil, some US highly-leveraged US players were known for their intensive CAPEX budgets. That may change forever.

Outside of North America, Schlumberger expects the oil and gas industry’s international spending on exploration and production to drop by 10 to 15 percent in 2015, continuing a trend seen last year.

The rebalancing would come in part from less supply but also stronger demand in a market currently oversupplied by about 1 million barrels per day.

Drilling activity to rebound in 2016

Drilling activity across the global oil and gas industry could return to 2014 levels next year, according to a new report from research firm Wood Mackenzie.

Wood Mac said that although the oil and gas industry is currently responding to the low oil price environment, with exploration budget cuts in 2015 expected to average 30 percent, drilling activity in 2016 is set to recover as many explorers seize their chance to drill at lower costs.

Wood Mackenzie estimates that exploration deflation will average 33 percent by 2016, with like-for-like costs falling by 19 percent.

“Only about half of these gains will be enjoyed during 2015 as contracts unwind and operators take time to adopt new practices. We expect the full benefit during 2016, unless oil prices recover quickly. Deflation at this rate could allow any companies that hold spending flat into 2016 to fund 50 percent more exploration versus 2014. Even those with cuts of around the average 30 percent may see their 2016 activity bounce back to 2014 levels,” the report said.

FRANK UZUEGBUNAM