• 3 hours Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 7 hours Russia, Saudis Team Up To Boost Fracking Tech
  • 13 hours Conflicting News Spurs Doubt On Aramco IPO
  • 14 hours Exxon Starts Production At New Refinery In Texas
  • 15 hours Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 1 day Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 1 day Oil Gains Spur Growth In Canada’s Oil Cities
  • 1 day China To Take 5% Of Rosneft’s Output In New Deal
  • 1 day UAE Oil Giant Seeks Partnership For Possible IPO
  • 1 day Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 2 days VW Fails To Secure Critical Commodity For EVs
  • 2 days Enbridge Pipeline Expansion Finally Approved
  • 2 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 2 days OPEC Oil Deal Compliance Falls To 86%
  • 2 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 2 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 2 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 3 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 3 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 3 days Aramco Says No Plans To Shelve IPO
  • 5 days Trump Passes Iran Nuclear Deal Back to Congress
  • 5 days Texas Shutters More Coal-Fired Plants
  • 5 days Oil Trading Firm Expects Unprecedented U.S. Crude Exports
  • 6 days UK’s FCA Met With Aramco Prior To Proposing Listing Rule Change
  • 6 days Chevron Quits Australian Deepwater Oil Exploration
  • 6 days Europe Braces For End Of Iran Nuclear Deal
  • 6 days Renewable Energy Startup Powering Native American Protest Camp
  • 6 days Husky Energy Set To Restart Pipeline
  • 6 days Russia, Morocco Sign String Of Energy And Military Deals
  • 6 days Norway Looks To Cut Some Of Its Generous Tax Breaks For EVs
  • 6 days China Set To Continue Crude Oil Buying Spree, IEA Says
  • 6 days India Needs Help To Boost Oil Production
  • 7 days Shell Buys One Of Europe’s Largest EV Charging Networks
  • 7 days Oil Throwback: BP Is Bringing Back The Amoco Brand
  • 7 days Libyan Oil Output Covers 25% Of 2017 Budget Needs
  • 7 days District Judge Rules Dakota Access Can Continue Operating
  • 7 days Surprise Oil Inventory Build Shocks Markets
  • 7 days France’s Biggest Listed Bank To Stop Funding Shale, Oil Sands Projects
  • 7 days Syria’s Kurds Aim To Control Oil-Rich Areas
  • 8 days Chinese Teapots Create $5B JV To Compete With State Firms
Alt Text

Russia And China Continue To Boost Oil Ties

The Russia-China alliance is strengthening…

Alt Text

3 Stocks To Play Today’s Hottest Market

Big automakers have jumped on…

Alt Text

Oil Prices Spike On Middle East Tensions

Oil prices jumped upwards on…

Ag Metal Miner

Ag Metal Miner

MetalMiner is the largest metals-related media site in the US according to third party ranking sites. With a preemptive global perspective on the issues, trends,…

More Info

U.S. Shale Is Too Adaptive For The Saudis To Kill

U.S. Shale Is Too Adaptive For The Saudis To Kill

 Saudi Arabia is taking a massive gamble on the world oil markets. Their “pump at any price” policy has driven oil down to below $50 per barrel and, so far, appears to be having the desired effect of squeezing out marginal producers, particularly in the shale industry, unable to cover costs at that level.

Every spike above $50, as happened last week, is met by a wave of hedging from shale companies. Late last week, U.S. producers locked in new production at north of $50 for 2016 and 2017 delivery. As prices reached about $53, any further rise was limited by sellers locking in prices. Even so only some 11 percent of expected 2016 production is forward sold according to IHS Energy, quoted in Reuters.


Source: Financial Times

The Saudis had hoped they could drive down the price enough to squeeze out higher cost upstarts in the U.S. shale industry. Indeed, the U.S. government is quoted in the FT reporting that, after adding 1 million barrels per day per year of production in every year since 2012, next year will see the first decline, from 9.3 million bpd to 8.9 million bpd. Related: Airstrikes Have Yet To Stop ISIS Oil Industry

Emptying the Prince’s Trust Fund to Strangle the Shale Drillers

This has been achieved by Saudi Arabia at a high price though, as more than $1 trillion of future investment spending has been shelved across the globe and between 250,000 and 300,000 workers have lost their generally high-paid jobs there.


Source: Financial Times

The kingdom itself will see its $246 billion 2014 oil and gas revenue fall by about 45 percent and will rack up a government budget deficit of $130 billion this year compared to 2013’s surplus of $48 billion. The Saudi government has ample central bank reserves, some $370 billion according to the FT, but they are rapidly burning through the next generation’s wealth as they pacify domestic unrest with generous subsidies and social programs. Related: Current Oil Price Rally Will Fizzle Out Say Analysts

Oil Market Reshalience

To think that the ruling elite of Saudi Arabia can drive the entire U.S. shale industry out of business, though, is a fallacy. Marginal producers such as the UK’s North Sea will see new fields shelved and some closed never to be reopened, while Arctic and deep-water reserves are not likely to be economically viable for years, if ever. The U.S. shale industry plays to a different tune as a recent FT Briefing by Spencer Dale explained.

First, and I paraphrase, shale oil is likely to respond far more quickly to changes in prices than conventional oil production. The lead times between investment decisions and production of U.S. shale can be measured in weeks, rather than the years taken for conventional production. And the life of a shale well tends to be far shorter than that of a conventional well, with production typically falling by as much as 70-80 percent in the first year.

As such, as prices fall, investment and drilling activity will quickly decline and production will soon follow. But as prices recover, U.S. shale is likely to bounce quickly back. In this respect, shale oil becomes the new swing producer, whether U.S. shale companies like it or not.

The Banking Equation

Second, U.S. shale producers are far more exposed to the vagaries of the banking system. Relative to the major national and independent oil companies that dominate conventional supplies, shale producers are much smaller, more highly geared and most are dependent on a continuous flow of borrowing to fund the investments needed to maintain production levels. As prices fall, banks are less willing to lend, curtailing investment. The current wave of hedging can be seen, in this light, as an attempt by those that have moved down the cost curve to protect their ongoing borrowing costs by locking in profits at a low, but still profitable, level. Related: Oil Sands Down But Far From Out

Third, shale has introduced manufacturing-like processes into the oil industry. The same rigs are used to drill multiple wells using the same processes in similar locations. This differs from the large-scale, bespoke engineering projects that typify many conventional oil projects.

Lean and Mean

As with many repeated manufacturing processes, U.S. shale is generating strong productivity gains. Productivity growth in U.S. shale, as measured by initial production per rig, averaged in excess of 30 percent a year between 2007 and 2014. Lean manufacturing, if you like. To what extent this process can continue remains to be seen, but the current low prices are certainly driving innovation in a way that $100 prices did not.

In the medium term, this drop in exploration and production is painful for workers, suppliers and investors in the sector, but it is worse for conventional producers where closed production may never be restarted. Rather than drive out U.S. shale production, Saudi Arabia is ensuring that it becomes ever more competitive. The real casualties will be deep water and remote high cost producers like the UK, Russia, Brazil and so on.

By Stuart Burns

More Top Reads From Oilprice.com:

Back to homepage

Leave a comment
  • Lee James on October 16 2015 said:
    Mideast producers formerly said of $100 crude, "the price is about right." Maybe they reconsidered and decided $100 crude is a bit on the greedy side. Maybe the world really can not afford that price. Perhaps it drives too much "oil curse" in some countries. Instead of building a better life for their citizens, a country can get into excesses and cross-border mischief with that kind of oil money.

    I'm of the opinion the Saudis know what they are doing. High-polluting U.S. unconventional petroleum production is rightfully dampened down. After all, we are the world's least clean with air and water resources when we rely on unconventional extraction methods. And we're the world's highest cost producer for that incremental barrel of fracked or deep-water fossil fuel.

    Things are right-sizing in fossil fuel production. Really, the whole world is getting with a different energy supply program. Even Texas is, despite appearances and political posturing.

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News