OPEC’s worries about the booming U.S. oil production have increased significantly with the big three oil companies’ interest in shale. Exxon Mobil, Royal Dutch Shell, and Chevron are planning $10 billion of investments in shale in 2017, a quantum leap compared to previous years. All the naysayers who doubted the longevity of the shale oil industry may have to modify their forecasts.
OPEC lost when they pumped at will as lower oil prices destroyed their finances, and now they are losing their hard-earned market share as a result of cutting production. Shell’s declaration that they can “make money in the Permian with oil at $40 a barrel, with new wells profitable at about $20 a barrel” is an indication that Shell is here to stay, whatever the price of oil.
The arrival of the big three oil companies with their loaded balance sheets is good news for the longevity of the shale industry.
The oil crash, which started in 2014, pushed more than 100 shale oil companies into bankruptcy, causing default on at least $70 billion of debt, according to The Economist. Even the ones that survived haven’t been very profitable, according to Bloomberg, which said that the top 60 listed E&P firms have “burned up cash for 34 of the last 40 quarters”.
Therefore, during the downturn, the smaller players had to slow down their operations, but this will not be the case with the big three.
“Big Oil is cash-flow positive, so they can take a longer-term view,’’ said Bryan Sheffield, the billionaire third-generation oilman who heads Parsley Energy. “You’re going to see them investing more in shale”, Bloomberg reported.
The majors are attempting to further improve the economics of operation. Shell said that its cost per well has been reduced to $5.5 million, a 60% drop from 2013. Instead of drilling a single well per pad, which was the norm, Shell is now drilling five wells per pad, 20 feet apart, which saves money previously spent on moving rigs from site to site.
Shell is not the only one. Chevron expects its shale production to increase 30% every year for the next decade. Similarly, Exxon plans to allocate one-third of its drilling budget this year to shale, and it expects to quadruple its shale output by 2025.
“The arrival of Big Oil is very significant for shale,” said Deborah Byers, U.S. energy leader at consultant Ernst & Young in Houston. “It marries a great geological resource with a very strong balance sheet.”
$30 billion has been spent on land acquisitions in the Permian basin since mid-2016, which is a favourite among oil companies.
Considering the new projects and the resurgent shale boom, Goldman Sachs expects oil output to increase by 1 million barrels a day year-on-year. The outcome is an oversupply in the next couple of years.
“2017-19 is likely to see the largest increase in mega projects’ production in history, as the record 2011-13 capex commitment yields fruit,” the U.S. investment bank said in a research note, Reuters reported.
The U.S. Energy Information Administration expects the U.S. oil production to top 10 million barrels by December 2018, a level only surpassed in October and November 1970.
OPEC is running out of options.
By Rakesh Upadhyay of Divergente LLC