OPEC Stalls Shale Revolution

OPEC Stalls Shale RevolutionOPEC Stalls Shale Revolution

The resilience of US shale producers has surpassed all expectations, as they have wrung extra efficiencies out of their operations and pulled rigs back to the most prolific sections of existing plays.

The shale sector's ability to cut costs and sustain their output in the face of plunging prices has been extraordinary and a testament to the entrepreneurial spirit and technical skill of the independent producers, John Kemp wrote for Reuters.

Shale producers are justifiably proud of their ability to survive the perfect storm that has hit their industry since the middle of 2014. But it should not disguise the fact that the collapse in oil prices has paused the shale revolution, with the sector's focus shifting from growth to survival.

The revolution cannot be reversed. Techniques once mastered will not be unlearned. And adversity has forced shale drillers to become more efficient. If and when prices rise, shale output is very likely to start increasing again and from an even lower cost base.

For the time being, however, lower prices have stunted shale's growth in the US and slowed its spread around the rest of the world.

In North Dakota, the oil boom has stalled as low prices have brought formerly rapid production growth to a standstill since the end of 2014. State oil output grew at a compound average rate of just 0.38% per month over the last 12 months, according to records published by the Department of Mineral Resources.

By contrast, production increased at a compound rate of 2.37 per month in the 12 months before prices started to crash in June 2014.

Output has been flat at 1.2 million barrels per day since the end of 2014, the deepest and most protracted pause since the shale revolution began in the state in 2005. If production had continued rising on its pre-June 2014 trend, output would now be 330,000 bpd higher at 1.52 million bpd.

 OPEC Complex

Some analysts question whether the Organization of Petroleum Exporting Countries is winning its price war against high-cost producers.

They point to resilience in shale production in North Dakota and Texas, as evidence that OPEC's strategy has had only limited success.

But the correct comparison is with what would have happened if prices had remained at the pre-June 2014 level of over $100 per barrel and OPEC had cut its own production in a bid to support them. In that case, North Dakota production would probably have grown to over 1.5 million bpd by now and reached almost 1.7 million bpd by the end of 2015.

For the United States as a whole, crude and condensates production would have hit 11.3 million bpd by the end of 2015 if it had continued increasing along the pre-June 2014 trend. Instead, the US Energy Information Administration predicts production will end the year at around 9 million bpd.

The gap of more than 2 million barrels between actual and pre-June 2014 trend output illustrates why prices could not have remained above $100 and the crash was necessary to rebalance the market. The gap is also an indication of OPEC's success shutting in shale production growth and pushing the oil market onto a new trajectory.

 Dingy Outlook

The oil market remains oversupplied, but the oversupply would have been far worse if prices had not fallen by more than half over since the middle of 2014.

Some countries, including Venezuela and Iran, have indicated OPEC should cut production and aim for a price of $70 or even $80 per barrel. But while most shale producers are struggling with prices below $50, many are ready to start increasing output again if US crude prices hit $60 or $70, which would worsen oversupply in the short run.

There has been a lot of speculation about which countries are the intended target of Saudi Arabia's and OPEC's decision to maintain output, allow prices to fall and curb high-cost production.

US shale producers (authors of the shale revolution), Russia (for geopolitical reasons) and Venezuela (also for geopolitical reasons) have all been mentioned.

But Saudi and OPEC officials have been careful to say their target is to restrain "high-cost" production rather than shale.

In any event, Saudi Arabia and OPEC cannot target any particular group of producers. The pain of low prices is widespread. OPEC has no control over who buckles first.

By increasing their efficiency, shale producers have pushed more of the adjustment onto non-OPEC non-shale producers in the North Sea, the Arctic, deepwater, megaprojects and frontier areas, as well as weaker members of OPEC in Latin America and Africa.