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Did OPEC Create The U.S. Shale Problem?

Yet again, U.S. shale producers are benefitting from the disastrous game of chicken deployed by OPEC back in 2014. And that’s something which is at once ironic and deeply worrying.

According to the latest report from the International Energy Agency, for the first time ever more money was invested in the electricity sector than in oil and gas.  

The World Energy Investment 2017 report showed that spending on electricity was up 12 percent, and in fact surpassed the combined amount spent on oil gas and coal supply. A record high was achieved in the clean energy sector – 43 percent of the total supply investment.

 “Our analysis shows that smart investment decisions are more critical than ever for maintaining energy security and meeting environmental goals,” said Dr Fatih Birol, executive director of the IEA.

“As the oil and gas industry refocuses on shorter-cycle projects, the need for policymakers to keep an eye on the long-term adequacy of supply is more important. Even with ambitious climate-mitigation goals, current investment activity in oil and gas will have to rise from its current slump. The good news is that in spite of low energy prices, energy efficiency spending is rising thanks to strong government policies in key markets.”

The IEA is predicting that the 44 percent plunge in O&G investment between 2014 - 2016 (26 percent alone in 2016) will ease up, with a 3 percent increase this year. But that shouldn’t alleviate concerns. You need to consider who will be behind that increase.

Related: Is Wall Street Funding A Shale Failure?

The IEA reckons as much as 53 percent will come pretty much exclusively from shale investment: “The largest planned increase in upstream spending in 2017 in percentage terms is in the United States, in particular in shale assets that have benefited from a reduction in breakeven prices as a result of a combination of improvement in costs and efficiency gains.”

(Click to enlarge)

Remember the reason the U.S. shale industry is leaner and more efficient now is directly down to OPEC trying to kill it off. What’s worrying is what we know happens when shale does well – everyone else suffers. Amin Nasser, the chief executive of Saudi Aramco, said last week at the World’s Petroleum Congress in Istanbul: "If we look at the long-term situation of oil supplies, for example, the picture is becoming increasingly worrying. Financial investors are shying away from making much needed large investments in oil exploration, long-term development and the related infrastructure. Investments in smaller increments such as shale oil will just not cut it.”

Nasser added that around 20m bpd of new production will be needed to meet demand growth and offset natural decline of developed fields, however: “New discoveries are also on a major downward trend. The volume of conventional oil discovered around the world over the past four years has more than halved compared with the previous four." 

There’s debate about how accurate this sense of dread is from the Saudis, who tend towards the melodramatic at times like this. Ed Morse, Citigroup’s global head of commodities, believe the gap will be about 10m bpd and said: “That’s not a big number to replace.”

However as Nasser highlighted, the wrinkle in this is that the money is not being directed to the people who could fill the production gap. And that’s a conundrum that’s got to be answered at some point – maybe not this year, but soon in the future. The IEA warned that while there are no immediate concerns about energy security, continued low activity could change this. “The recent slowdown in the sanctioning of conventional oil fields to its lowest level in more than 70 years may lead to tighter supply in the near future. Given depletion of existing fields, the pace of investment in conventional fields will need to rise to avoid a supply squeeze, even on optimistic assumptions about technology and the impact of climate policies on oil demand.”

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  • John Sherwood on July 17 2017 said:
    Maybe OPEC is the problem and not shale.
  • jhm on July 17 2017 said:
    Anyone who is concerned about the long-term supply of oil is free to buy crude futures out to 2025. This would provide a hedge for some supplier seeking to finance a long-term project. Obviously, the futures market is not worried about this.

    The threat of peak demand is that supply can go into decline, but that prices may never rise high enough and long enough to bring supply back up to former levels. Thus, it is plausible that oil prices will perpetually remain below $60/b. If such a scenario plays out, then investors in long-term supply who need higher prices will lose badly. Now if you've got a long-term supply that breaks even at below $40/b, then by all means make that investment and hedge it too. But cajoling producers with a break even above $60/b to make long-term investments without means to hedge it is just wrong, and the financial markets should have nothing to do with it.

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