Three years ago, the US shale oil boom appeared to be over, apparently starved to death when OPEC flooded the market with cheap oil.
As prices plummeted from over $100 to $40 a barrel, shale oil quickly became uneconomic.
In just under a year, more than 130 US shale producers, from Pennsylvania to North Dakota, declared bankruptcy, leaving tens of thousands of American oil workers without jobs.
But the highly cyclical nature of the energy sector, and a rebound in oil prices to more than $60 a barrel, have helped revive the fortunes of most US shale producers almost as quickly as they stalled.
Last month, the US Energy Information Administration predicted that American oil output would soon surpass 10 million barrels per day (bpd), eclipsing a previous record in 1970 when conventional US oil production peaked.
Next year, the US is on target to outstrip Russia and Saudi Arabia to become the world’s largest oil producer, and will become a net energy exporter within five years, the Paris-based International Energy Agency has forecast.
Adapt to survive
One reason credited with helping the US shale sector quickly reverse its fortunes was the determination of producers. Many of them kept pumping oil despite going bust, while smarter drilling techniques boosted their chances of survival.
“US producers made inroads in terms of lowering costs and boosting drilling efficiencies so they were able to focus production on core shale ‘sweet spots’ to prevent a dramatic decline in production during the downturn,” Divya Reddy, an energy analyst at the world’s largest political risk consultancy, the Eurasia Group, said.
Reddy said many producers have been able to hedge at $55+ a barrel levels which support shale’s continued growth.
The recent oil price rebound was fueled by OPEC agreeing in late 2016 with several non-member states — including Russia — to limit oil supply, to help drain excess inventories and boost prices. That agreement, which remains in place until the end of the year, inadvertently gave American shale a vital shot in the arm.
Analyst Robert Rapier credits the first wave of shale oil for moderating prices at the gas pumps over the past decade.
“If the US shale boom hadn’t occurred, the world would have been living with $100+ oil since 2007,” he said, referring to how oil prices skyrocketed as a result of the financial crisis.
He believes the sector’s resurgence “slows down OPEC’s plan to return inventories to normal levels,” and will likely help keep prices in check for now.
A a new report from the Oxford Institute for Energy Studies (OIES) suggests US shale production will keep oil prices within a tight trading range of $60 to $75 per barrel for the next few years. Any price rise would boost shale’s fortunes, which would add enough supply to force prices back down, according to OIES’ forecasts.
The Eurasia Group’s Reddy expects that shale will be boosted by “efficiency gains and some consolidation in the sector in the hands of financially stronger companies [that] will put a floor under any possible fallout.”
Rising oil demand from a growing global economy will also be a boon to US shale producers. But doubts remain over whether OPEC’s production discipline deal will hold, amid compliance issues from some countries.
“Eventually — probably next year — OPEC will need to consider a phased unwinding of the cuts, which will prove difficult to manage neatly — and without a consequent price dip,” warned Reddy. Once again, any major price fall would weaken the viability of US shale.