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Global Shale Revolution On Hold

Global Shale Revolution On Hold

Along with the rest of the energy world, we have been closely tracking rig counts (now down 40 percent from last fall) and other data to try to determine where the oil markets are heading. This week, the Energy Information Administration reported that production is finally set to decline in several key U.S. shale regions; a long-awaited development. The Eagle Ford, Bakken, and Niobrara shales are expected to see a combined 24,023 barrel-per-day decline in production in April, the first significant dip in output since oil prices collapsed last year. The monthly data may be a bit obscured by the fact that the Permian basin is expected to see production increases of 21,254 barrels per day. Overall, total U.S. production may stay flat. There is still a great deal of uncertainty about the next few months, but with declines beginning in the Eagle Ford and Bakken especially – two critical regions that drove the U.S. shale revolution – there appears to be light at the end of the tunnel for the oil glut.

The Federal Reserve caused a bit of a ripple in the oil markets this week when it appeared to slightly slow plans to raise interest rates later this year. The Fed lowered its estimate for the federal funds rate this year and next, an indication that it will not let its foot off of the gas pedal in terms of loose money. With low inflation and still room for labor markets to heal, the Fed sees no reason to pull back too quickly. Loose monetary conditions push up oil prices, so WTI and Brent rallied a bit this week on the news (after falling significantly). WTI closed out the week around $45 and Brent at $55 per barrel. Related: U.S. Shale A Marginal, Not Swing Producer

Oil prices are leading to spending cutbacks across the globe, forcing multinationals to reassess their priorities. Some of the biggest oil companies are starting to pack up and leave certain countries that are no longer worth the risk. That means that the prospects of the shale revolution spreading beyond a select few countries are dimming. Shale oil and gas exists in large quantities in Europe, China, Argentina, the United States and Canada, to name just a few regions. But optimism for development outside of North America (and perhaps Argentina) has vanished. Chevron (NYSE: CVX), Royal Dutch Shell (NYSE: RDS.A), ExxonMobil (NYSE: XOM) have all scrapped plans to invest heavily in shale development outside of their core assets in North America. Major plans for shale in Europe, China, and Russia have all been put on ice. The reasons go beyond low oil prices, although low prices make shale a lot less viable. In Poland, test drilling returned very poor results. Russia is suffering under western sanctions, making investment risky. The anti-fracking movement has made public policy hostile in the rest of Europe as well. As the oil majors retrench and cut back, the global shale revolution has been put on hold. Related: Majors Could Be The Big Winners Of The Oil Price Crash

Reuters reported this week that Russia may be forced to delay the construction of a major natural gas pipeline to China. The deal, which was announced last year amid great fanfare, would see natural gas pumped from Siberia to eastern China. But inside sources told Reuters that the Russian government is considering putting off the $55 billion “Power of Siberia” project in order to finish a separate pipeline that would connect existing Russian gas fields to western China. In public, the Russian government insists the Siberian project will be completed on schedule by 2019, and that Gazprom is already starting to prepare the route for construction. The “Power of Siberia” project is a cornerstone of Russian President Vladimir Putin’s plan to build up its energy exports to Asia as it finds increasingly hostile customers to its west.

Energy analysts are eagerly watching the negotiations between the P5+1 nations and Iran, which are bumping up against a deadline at the end of March. The two sides have made significant progress towards a deal, but there are still several outstanding issues. One of the sticking points is how quickly sanctions on Iran would be lifted if a deal can be forged over its nuclear program. Iran insists on immediate sanctions relief, while the west wants verification from the International Atomic Energy Agency that Iran has a “clean bill of health.” Such assurances from IAEA nuclear inspectors could take years however. The potential of a deal and the timing of the removal of sanctions go far in determining how quickly Iran is able to ramp up its oil exports. A grand bargain between the two sides could see Iran send an additional 1 million barrels of oil per day to international markets, likely pushing down oil prices. Stay tuned. Related: British Gov. Puts North Sea Oil On Life Support

The British government, in a desperate attempt to keep its flailing oil and gas sector afloat, proposed new tax cuts this week. The oil and gas sector has been petitioning the government for some tax relief, arguing that it suffers under burdensome taxes that make oil and gas production increasingly uneconomical. The North Sea is in decline, and the collapse in oil prices threatens to be the nail in the coffin. The tax cuts will reduce the supplementary tax on oil and gas from 30 percent down to 20 percent, and older fields will get some extra relief as well. This comes at a time when the iconic Brent oil field is nearing the end of its life, symbolizing the waning importance of the North Sea to global oil supplies. Now producing just 1,000 barrels per day, Brent is no longer the massive field it once was, raising questions about Brent as an international benchmark. The market for Brent futures is still one of the most important. Nevertheless, the disappearance of actual Brent crude, along with other sources of North Sea oil, hastens the day in which other benchmarks – such as Dubai – surpass Brent in their importance.

On March 20, the Obama administration released new regulations on hydraulic fracturing that occurs on public lands. The Department of Interior, which oversees the vast acreage under federal control, published new standards for well casing, water disposal, and the disclosure of chemicals. The industry has opposed federal intervention, arguing that states are best equipped to regulate shale development. But the new rules will only affect drilling on federally controlled lands, which account for 11 percent of natural gas production in the U.S., and just 5 percent of oil production.

By James Stafford of Oilprice.com

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  • zipsprite on March 20 2015 said:
    I am confused by the comment that the Fed postponing hikes in interest rates supports higher oil prices. It seems to me it would be just the opposite since higher rates makes financing drilling more expensive and also lures more capital into safer treasuries etc. Could someone explain how rate hike pushes oil higher?
  • zipsprite on March 22 2015 said:
    Correction: Could someone explain how DELAYING rate hike pushes oil higher?
  • BenedictGomez on March 23 2015 said:
    @zipsprite - oil is priced in USD, so a lower USD = higher oil prices.

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