Opec greases the wheels of US shale boom

Among many bold promises made on the presidential campaign trail, Donald Trump pledged to unleash an “energy revolution” that would release vast riches from America’s shale oil reserves. It is doubtful that he expected Saudi Arabia to do the job for him.

Yet, since the Saudi-led Opec cartel agreed to cut oil production in November, the US shale industry has been boosted to levels not seen since 2014.

“The shale boom is back,” Norbert Ruecker, head of commodities research at Julius Baer, said. “Over the coming one and a half to two years, we’re probably going to be back at the previous high levels of production.”

The first US shale boom, which lasted from 2012 to 2014, took advantage of oil prices that hovered around the $100 mark. By the end of 2014, however, oil had plunged below $50, and a year later, was close to $25.

The price collapse was orchestrated by Opec. Its 13 members pumped and pumped to create an oil glut that pushed down prices, knowing this would make it uneconomical to extract oil from shale. However, the price fell too far, and Opec members suffered. In November, they and 11 other nations including Russia agreed to cut production for the first time in eight years. The oil price has since held around $50, despite concerns that Opec members would not adhere to their promises.

The US is thought to hold the world’s largest reserves of shale oil, with about 80 billion recoverable barrels, according to the last count by the US Energy Information Administration. Britain, in stark contrast, holds less than 1 per cent of that amount: about 700 million barrels. Shale oil accounts for about 52 per cent of all oil production in the US.

The EIA last week forecast US shale oil production would climb in April at its highest rate in five months. Production is expected to rise by 109,000 barrels per day to nearly 5 million.

All over the US, dozens of oil rigs are coming back online every month. The count has increased for nine straight weeks, figures published yesterday by Baker Hughes, the oilfield services company, showed. There are now 631 active oil rigs in the US, more than double the number at the end of 2016. The EIA expects that output next year will surpass a record set in 1970.

The Permian basin, America’s largest shale field, is leading the recovery. Only the massive Ghawar field in Saudi Arabia is believed to hold more oil. In November last year, the US Geological Survey estimated that the Wolfcamp deposit in the Permian field could hold 20 billion barrels of oil, making it the largest shale deposit discovered in the country.

US oil majors are planning to spend billions of dollars on the region in the coming years, with Chevron alone targeting an additional 900,000 barrels of shale oil per day. The EIA expects the Permian field to pump a record 2.3 million barrels per day next month, compared with 2 million a year ago.

“The momentum, and how quickly the shale industry has turned around, is probably one of the biggest surprises of the last year,” Mr Ruecker said. “I’ve never seen such a rapid industry cycle. In the first quarter of 2016, the whole industry was in despair. We were wondering which companies would survive. By the fourth quarter, we were talking about which were growing the fastest.”

At the peak of the 2014 boom, the break-even cost on a barrel of US shale oil was $60. Today, the figure is nearer $30, research by Rystad Energy, a consultancy, suggests. In some places, the break-even cost is just $15 a barrel, which compares favourably to Saudi Arabia’s $9, Iran’s $10 and Iraq’s $11.

Analysts credit the sharp fall in production costs to the near-destruction of the industry. As the oil price plunged, squeezing profit margins on shale oil to the point they became losses, the companies involved were forced to cut costs. Three years on from the boom, fracking is a leaner and fitter operation.

“What has reignited the US shale oil industry has really been the recovery in oil prices,” said Michael Hulme, who runs a €680 million commodities fund at Carmignac. “Also, when business dries up for fracking companies they have to cut costs to keep equipment working.”

Despite the positive sentiment, a second boom is likely to limit growth in oil prices. Domestic crude stockpiles soared to 8.2 million barrels at the start of this month, more than four times what analysts were expecting. Oil prices fell by more than 5 per cent.

Further, a new battle with Opec is on the horizon. If Opec thinks that US shale producers are taking advantage of its production cuts, the November deal could quickly fall apart. To that extent, Opec producers led by Saudi Arabia began talks with big US shale producers this month about moderating output.

Rosneft, the Russian oil major, has also weighed in. “US shale oil output has become and will remain a new global oil price regulator for the foreseeable future,” the company said. There was a “significant risk” that the Opec deal would not be extended, Rosneft said, “partially because of the main participants but also because of the output dynamics in the United States”.

Harold Hamm, the shale oil entrepreneur, said that the expansion of US shale needed to be done “in a measured way”


Behind the story
The equipment used in the world’s oilfields today is decidedly high-tech (James Dean writes). Schlumberger, the world’s largest oilfield services company, makes a drill bit that is guided on its underground journey by global positioning satellites. However, more brutish methods are being employed by frackers to recover more oil out of the rock below.

To extract oil from shale, frackers pump a mix of water, chemicals and sand down pipes that have been drilled deep underground. The high-pressure mixture is released from outlets in the pipes into the surrounding rock, causing it to fracture. This releases the oil from within the rock, which is then sucked to the surface by reversing the flow of the fluid and sand mixture.

When oil prices fell after the end of the first US shale boom, oilfield service companies were forced to increase the effectiveness of fracking to decrease the cost of extraction. They found that the most effective way of doing so was to pump more fluid and sand down the pipes at higher pressure, using increasingly powerful fracking pumps such as those made by Weir, the British engineering company. Frackers are expected to use 50 per cent more sand this year than they did in 2014.

Several companies are experimenting with microwaves to release oil from shale. In theory, a blast from a high-intensity microwave beam would liquefy oil trapped in shale rock, allowing it seep into a pipe before it is drawn to the surface. The technique, if proven, would do away with the waste associated with using a liquid and sand mixture.