Low oil prices wreaked havoc with US shale producers, but increasingly the industry appears to be adapting successfully to new market conditions.
The rise in oil prices over the past six months has come as a blessing for the battered US shale producers. Oil prices have risen more than 50% since January, giving a glimmer of hope to the US oil industry that the worst of the oil crisis might finally be behind them. Moreover, it forced the shale producers to adapt by reducing production costs and increasing efficiency.
According to data publicized by Reuters, the decline rates of oil wells in the most productive fields in the US—the Permian and Bakken Basins – were almost halved over the past several years. In practice, this means that shale people will get more bang for their buck; due to a slower decline of the wells, they will have to drill fewer new wells to sustain output and therefore lower their capital demands.
See EIA Cuts Global Oil Demand Forecast
After months of consecutive falls, the number of rigs has been increasing since May and companies expect additional growth if oil prices remain at $50 levels. In addition, Norwegian energy consultancy Rystad Energy’s newest estimates reveal that the US holds more recoverable oil reserves than Russia or Saudi Arabia. More than 50% of reserves belong to unconventional shale oil.
Low Oil Price Has Been Both a Blessing and a Curse for the Shale Industry
The key towards a survival of the US shale industry currently lies in its ability to raise money to finance its renewed activity. One of the shale’s weak spots was always its dependency on capital inflow and high level of debt. In the world of high oil prices and lax capital markets, this did not matter so much. However, since the oil price crashed two years ago, financing has become the industry’s central problem. Bond sales of US independent energy companies are currently at its lowest level in more than a decade, and the markets are still not convinced enough to devote fresh capital to new energy projects, despite the brighter outlook that came with higher prices of oil.
A breath of fresh air could come from another side, though. After the slump in prices, many oil giants such as Exxon and Chevron mothballed expensive offshore and Arctic projects and turned their attention towards cheaper and more feasible shale projects in the United States.
No Clear Winner of the Oil Price War
So who has won in this war of oil giants after all? It is probably a tie. Although the Saudis caused damage to the US shale, they also blew a hard hit to the global oil industry, while at the same time they managed to preserve their market share, but at a heavy price in terms of oil revenues. The real question, however, is not whether the House of Saud is able to keep oil prices (and consequently US shale production) subdued for a prolonged period of time, but how long they can do it without endangering a fiscal and social stability of the Desert Kingdom and other OPEC members. Despite its ambitious Vision 2030 program, Saudi Arabia will stay dependent on oil income to subsidize its social programs for many years to come. Achieving restructuring at $50-60 price levels without swift and potentially painful reforms would prove a real challenge to the Saudi regime.
On the other hand, Riyadh has done a huge favor to the US shale industry by forcing it to adapt and change its business philosophy. OPEC will remain an important and hopefully responsible, factor in oil markets, but it will have to accept the fact that the circumstances have changed over the past five years. Both the ascent of shale oil, and initiatives to reduce global carbon footprint will impose an enormous strain on the Cartel and its members, which are still a long way from having diversified economies.
