When OPEC decided not to cap output in 2014, flooding the market with oil, it was trying to drive higher-cost producers – most notably U.S. shale – out of profitability range. It succeeded in contributing to the oil glut, collapsing the oil prices, and hurting many U.S. shale plays and producers who were waiting for better times before returning to activity.
However, this strategy spectacularly backfired on OPEC’s biggest producer and de facto leader Saudi Arabia, which started to book budget deficits amid the low oil prices, with deficit an unthinkable concept five years ago.
The recent U-turn in OPEC and Saudi strategy – cutting back output to try to draw down oversupply and prop up oil prices – comes with a caveat: at higher oil prices, higher-cost producers - U.S. shale in particular – have more economic reasons and profit-making motivation to increase drilling and M&A activity.
And the U.S. producers are already doing it, recent figures and deals show. They survived thirty-dollar oil, and are emerging leaner, more efficient, and able to respond more quickly to oil price fluctuations. They proved they were and are “more resilient to low oil prices than many analysts had anticipated,” as the EIA said as early as in August last year.
Meanwhile, Saudi Arabia seems unfazed from this possible rebound in U.S. shale, judging from one of the latest comments by its Oil Minister Khalid al-Falih. The Saudis still believe (or at least al-Falih says so) that current oil prices at around $50 are still not enough to herald a significant rebound of US shale production.
At the World Economic Forum in Davos earlier this week, al-Falih said that he expects costs for the U.S. drillers to go up in the long term, after the “supply industry has been decimated”. The balancing of the market in 2017 will also include inflation on the cost of doing business, the Saudi oil minister said. In addition, North America has tapped the most prolific plays so far, but as “demand goes, they would go to the more expensive, more difficult, less prolific areas of the shale and I think they will find that they need higher prices,” al-Falih said. Related: What Stopped The Oil Rally Dead In Its Tracks?
Speaking to CNNMoney's John Defterios, the Saudi oil minister said:
“I don’t lose sleep that shale is going to come and overwhelm us. I don’t think it will.”
While the Saudi official is sleeping tight, tight oil production in the U.S. is recovering, estimates by various organizations show. One tight oil play in particular has seen a lot of activity and is expected to continue its upward trend: the Permian.
Earlier this week Exxon Mobil said it would pay up to $US6.6 billion to more than double its acreage in the superstar shale area. This came on top of last year’s deals in the Permian, which helped the U.S. oil and gas mergers and acquisitions tally soar to $69 billion in 2016. The industry has been quick to adapt and secure primary drilling sites profitable at US$50 oil and buy existing production, Houston-based oil and gas research firm PLS Inc. has said in a report.
Energy consultancy Wood Mackenzie said in an analysis last week that the Permian Basin attracted almost one-quarter of the global M&A spend 2016, and dubbed the rush for the basin ‘Permania’. The Permian attracted $20 billion in deals last year, with investors lured by “breakevens as low as $40 per barrel, stacked pay potential, large volumes, upwardly trending well economics and the flexibility to adapt to a changing market”, Wood Mac said.
Permian’s oil production is on the rise and the combined crude production in the seven most prolific areas in the U.S. is expected to increase by 41,000 bpd from January to stand at 4.748 million bpd in February, the EIA said in its latest Drilling Productivity Report. Output in the Permian alone is seen rising by 53,000 bpd to come in at 2.180 million bpd. Related: OPEC Head: Oil Inventories Already Dropping From High Levels
The higher oil prices from the past two months – stoked by OPEC’s deal and Saudi comments, among others – are one of the reasons for the recovery of U.S. production, which the EIA sees will average 9 million bpd this year, or 110,000 bpd more than last year. The other is the more efficient industry that has emerged from the lower-for-longer price environment.
“Whether it be shorter drilling times or larger amounts of oil produced per well, there is no doubt that U.S. shale industry has emerged from the $30/bbl oil world we lived in a year ago much leaner and fitter,” the International Energy Agency (IEA) said in its January Oil Market Report on Thursday.
Saudi Arabia’s oilmen may not lose sleep over U.S. shale resurgence, but it looks like they may have underestimated the shale resilience yet again.
By Tsvetana Paraskova for Oilprice.com
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