Slight Decline Noted In US Shale Oil Industry – Analysis


Crude oil production from major US shale plays is expected to drop in December 2015 by 118 thousand barrels per day compared to November and will reach the figure of 4.95 million barrels per day, said the US Energy Information Administration (EIA) experts.

Earlier, Russian Energy Minister Alexander Novak also said that the decline in shale oil production became a steady trend of recent months.

“When prices plummet, investment runs low. The number of drilling rigs in the United States reduced: a year ago there were 1,600 drilling rigs, now only about 600. That means that the number of drilling rigs reduced by more than 50%. In the last three months shale oil production decreased by 300 thousand barrels,” he said, stressing that shale oil is losing its ability to influence the global market.

In turn, Igor Sechin, the Executive Chairman of Rosneft, noted that the United States has a whole set of factors that shape the development of a competitive oil market.

“These are financial sources, financial derivatives, stock exchanges, a developed system of oil and gas pipelines and a large number of contractors that multiply the effect of the industry on the whole economy,” he explained.

At the same time, Igor Sechin reminded that the total debt of only 25 US companies involved in shale oil extraction is about 150 billion dollars.

“It is estimated that the existing hedging mechanisms and extended credit secured by inventory at low prices may persist, although to a lesser extent, up to 2017,” the head of the Russian state company added.

Leonid Bershidsky, Bloomberg View contributor, also stressed that the creditworthiness of the oil companies, both small and large, has declined substantially.

“In the second quarter of 2015, 83% of US onshore oil producers’ operating cash flow was used for debt servicing ― about twice the level of early 2012,” he noted.

Commenting on the current state and recent trends in the US shale oil industry, Nikolay Ivanov, Head of the Energy Markets Division at the Institute for Energy and Finance, expressed the opinion that the United States from the world’s biggest importer of energy resources becomes increasingly self-sufficient state in terms of energy.

“US shale gas and oil production became a great surprise for the world market as well as for all analytical and research agencies, including the Energy Information Administration ― the main independent investigative arm of the US government, which forecasts become the basis for the entire energy policy of the country,” he said in an interview with “PenzaNews” agency.

According to him, such production was a result of the explosive growth of the technologies efficiency, when every new improvement led to a multiple increase in productive capacity and reduced costs.

“Therefore, the industry continues to expand even in the face of low prices for oil and gas. And there is yet no limit to the improvement of technology and efficiency,” the expert said.

At the same time, in his opinion, many companies intentionally reduce production in order not to sell the extracted oil at a price they consider unfair.

“They hope that in competition with Saudi Arabia the victory will be for the American high-tech production,” Nikolay Ivanov said, adding that the US has become the second balancing supplier at the global oil market.

Howard Rogers, Director of Natural Gas Research Program at Oxford Institute for Energy Studies, also reminded that as with US shale gas a few years earlier the speed of production growth in US shale oil has surprised many observers.

“This along with slowing demand in Asia and OPEC’s desire to maintain market share has been a major contributor to lower oil prices which fell around November 2014. Most observers have been surprised that since the price collapse, US oil production has only recently began to decline,” the analyst noted.

The main reason for that from his point of view was that the producers focused on their best drilling locations in the face of lower oil prices.

“Moreover, many producers had hedged or sold production forward for up to around a year on the futures market, and many producers had lower production costs than had been assumed ― especially when service company margins were squeezed after the oil price fall,” the expert explained.

Nevertheless, he suggested that we may start to see some further reduction in the production as hedging prices are now lower and many companies have built up high debt levels.

At the same time, according to David Hughes, earth scientist and research manager at the Geological Survey of Canada, the decline in the industry has already begun.

“Production of shale oil in the US is falling due to the drop in price and associated drop in rig counts. The rapid growth in oil production from shale has been part of the oversupply problem in world markets, leading to lower prices. Declining US production will help rebalance the market and lead to higher prices,” Canadian scientist said.

Meanwhile, according to him, US shale gas has had no effect on global prices so far as there is no liquefied natural gas (LNG) export market yet.

“The first LNG export terminal is set to come on stream later this year or early next year. This will likely have minimal effect on the global market in terms of prices,” the expert noted.

However, in his opinion, sale production will be important in the longer term.

“But high decline rates and increasing costs as sweet spots are depleted will require ever escalating capital inputs which will require higher prices. High quality shale plays are relatively rare, hence longer term production from known shale plays will fall dramatically by 2040,” David Hughes said.

In turn, Michelle Foss, Chief Energy Economist, Bureau of Economic Geology’s Center for Energy Economics, University of Texas, also pointed to the fact that the US shale oil production has started to decline.

“We expect around 1.5 million barrels per day decline over 2016 or so ― not only from shale, but other oil producing locations as well. Most companies have announced delays or cancellations on offshore, especially deep water projects. Generally speaking, as companies pull back on spending, output from US fields will drop and decline rates in some locations will accelerate,” the analyst explained.

However, she recalled that the shale oil has allowed the United States to significantly reduce imports of this resource.

“Before drilling for shale oil accelerated, the US imported more than 50% of oil supply. With our shale production growth, imports dropped to about 40%. So the biggest impact we have on global energy is how much oil we buy from abroad. If we take less oil from international producers or exporters, those barrels have to find a home somewhere else or price will drop. The problem is that there is not much demand for oil elsewhere in the world relative to supply,” the economist said.

She added that prospects of this industry development are pretty uncertain.

“Industry response when price falls as it has is always slow. However, given that expectations are starting to solidify around a ‘lower for longer’ oil price scenario, we expect next year, especially first half, to be worse than today in terms of industry reactions,” Michelle Foss said.

In her opinion, companies will be forced to lay off more people, sell assets, and consolidate.

“Companies cannot continue to operate business as usual ― they have to make decisions, take action, move on. […]Our shale oil production blossomed under some rather unique circumstances, especially with regard to investment flows ― the high degree of interest in owning shares of oil companies, participating in investment funds for oil drilling in the US, and so on. Money has been pretty cheap. Those things are going to change,” the American expert concluded.

Penza News

News agency PenzaNews is Russian independent information project, which supplies a steady stream of news. The website is constantly updated to bring the top stories from the city of Penza and the Penza region. The Analysis center of the agency covers important political, economic, cultural and other significant events in Russia and abroad.

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