Despite dozens of indebted US shale companies facing annihilation over coming months as their hedge protection runs out and creditors pull the plug, veteran shale producers defiantly insist they the slump will not stop their march to become the world’s biggest supplier of oil.
With the 70 percent crash in oil prices since mid-2014, many US companies that formed by leveraging up to their necks, on the prospect of crude remaining in $100 range or going higher, will no doubt be wiped out. But this pending onslaught has not dampened the spirit of die-hard US drillers who maintain that OPEC’s price war against shale will not stop their juggernaut.
Shale has been described by veterans in the industry as a mix of “hogs and dogs”. Big companies produce most of output and will weather the storm: the dogs are mostly small, and while many are going bust, they are just fringe players. Oil giants with deep pockets are waiting to gobble up distressed assets, and America’s nimble mid-cost shale producers will have an edge when the cycle turns.
US engineers are also working out ways to double the efficiency of shale extraction to 50 percent, which would mark a big breakthrough. Meanwhile, shale producers have slashed costs since the boom days, when service fees were rocketing. While the oil price crash has stopped an extra 1.5 million bpd of shale coming on stream, producers have been remarkably resilient, cutting well costs by 40 percent. A lot of shale plays now work at $45 to $50, and the vast majority from $55 to $60. They certainly do not need the $90 envisioned by many who predict the slow death of shale.
Analysts estimate that oil and gas investment by 2020 will be $1.8 trillion less than forecast two years ago, with many mega projects being shelved or discarded. Combined with oil wells depleting at an annual rate of 3 million bpd and oil demand growing by 1.2 million bpd, this could lead to market consumption rising to 100 million bpd by 2020. Much of this increase in demand will likely be met by shale producers.
The International Energy Agency expects the US to make up much of the world’s output growth by 2020, after dropping 600,000 bpd this year, with shale production to touch13 to 14 million bpd. Industry analysts say that many shale companies will likely survive the slump and take advantage of the recovery; they will ramp up when prices pick up. Restarting production may be easier than people think. Everything is ready to go. All the ingredients are there. There is a lot of money looking for the bottom of the cycle, waiting to get back in.
Analysts say that shale will probably stabilize near $60 and then ratchet back up, long before it becomes worthwhile to launch offshore projects. Once prices get there, the Permian Basin of west Texas will come into its own. Insiders say that this ‘crown jewel’ may be as big as the giant Ghawar field in Saudi Arabia, able to produce close to 6 million bpd.