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How OPEC Lost The War Against Shale, In One Chart

How OPEC Lost The War Against Shale, In One Chart thumbnail

At the start of March we showed a fascinating chart from Rystad Energy, demonstrating how dramatic the impact of technological efficiency on collapsing US shale production costs has been: in just the past 3 years, the wellhead breakeven price for key shale plays has collapsed from an average of $80 to the mid-$30s…

… resulting in drastically lower all-in breakevens for most US shale regions.

Today, in a note released by Goldman titled “OPEC: To cut or not to cut, that is the question”, the firm presents a chart which shows just as graphically how exactly OPEC lost the war against US shale: in one word: the cost curve has massively flattened and extended as a result of “shale productivity” driving oil breakeven in the US from $80 to $50-$55, in the process sweeping Saudi Arabia away from the post of global oil price setter to merely inventory manager.

This is how Goldman explains it:

Shale’s short time to market and ongoing productivity improvements have provided an efficient answer to the industry’s decade-long search for incremental hydrocarbon resources in technically challenging, high cost areas and has kicked off a competition amongst oil producing countries to offer attractive enough contracts and tax terms to attract incremental capital. This is instigating a structural deflationary change in the oil cost curve, as shown in Exhibit 2. This shift has driven low cost OPEC producers to respond by focusing on market share, ramping up production where possible, using their own domestic resources or incentivizing higher activity from the international oil companies through more attractive contract structures and tax regimes. In the rest of the world, projects and countries have to compete for capital, trying to drive costs down to become competitive through deflation, FX and potentially lower tax rates.

The implications of this curve shift are major, all of which are very adverse to the Saudis, who have been relegated from the post of long-term price setter to inventory manager, and thus the loss of leverage. Here are some further thoughts from Goldman:

  • OPEC role: from price setter to inventory manager In the New Oil Order, we believe OPEC’s role has structurally changed from long-term price setter to inventory manager. In the past, large-scale developments required seven years+ from FID to peak production, giving OPEC long-term control over oil prices. US shale oil currently offers large-scale development opportunities with 6-9 months to peak production. This short-cycle opportunity has structurally changed the cost dynamics, eliminating the need for high cost frontier developments and instigating a competition for capital amongst oil producing countries that is lowering and flattening the cost curve through improved contract terms and taxes.
  • OPEC’s November decision had unintended consequences: OPEC’s decision to cut production was rational and fit into the inventory management role. Inventory builds led to an extreme contango in the Brent forward curve, with 2-year fwd Brent trading at a US$5.5/bl (11%) premium to spot. As OPEC countries sell spot, but US E&Ps sell 30%+ of their production forward, this was giving the E&Ps a competitive advantage. Within one month of the OPEC announcement, the contango declined to US$1.1/bl (2%), achieving the cartel’s purpose. However, the unintended consequence was to underwrite shale activity through the credit market.
  • Stability and credit fuel overconfidence and strong activity: A period of stability (1% Brent Coefficient of Variation ytd vs. 6% 3-year average) has allowed E&Ps to hedge (35% of 2017 oil production vs. 21% in November) and access the credit market, with high yield reopen after a 10- month closure (largest issuance in 4Q16 since 3Q14). Successful cost repositioning and abundant funding are boosting a short-cycle revival, with c.85% of oil companies under our coverage increasing capex in 2017.

That said, the new equilibrium only works as long as credit is cheap and plentiful. If and when the Fed’s inevitable rate hikes tighten credit access for shale firms, prompting the need for higher margins and profits, the old status quo will revert. As a reminder, this is how over a year ago Citi explained the dynamic of cheap credit leading to deflation and lower prices:

Easy access to capital was the essential “fuel” of the shale revolution. But too much capital led to too much oil production, and prices crashed.  The shale sector is now being financially stress-tested, exposing shale’s dirty secret: many shale producers depend on capital market injections to fund ongoing activity because they have thus far greatly outspent cash flow.

This is the key ingredient of what Goldman calls the shift to a new “structural deflationary change in the oil cost curve” as shown in chart above. As such, there is the danger that tighter conditions will finally remove the structural pressure for lower prices. However, judging by recent rhetoric by FOMC members, this is hardly an imminent issue, which means Saudi Arabia has only bad options: either cut production, prompting higher prices and even greater shale incursion and market share loss for the Kingdom, or restore the old status quo, sending prices far lower, and in the process collapsing Saudi government revenues potentially unleashing another budget crisis.

Zerohedge



33 Comments on "How OPEC Lost The War Against Shale, In One Chart"

  1. tita on Tue, 21st Mar 2017 10:24 am 

    “demonstrating how dramatic the impact of technological efficiency on collapsing US shale production costs has been”
    Correction:
    “demonstrating how dramatic the impact of collapsing oil prices on US shale production costs has been”

    In short, demand for oil services collapsed because of the price. The offer vs demand effect led to a collapse of prices. No technological advance, just economics.

  2. Cloggie on Tue, 21st Mar 2017 11:38 am 

    Welcome to the third carbon age.

    https://www.thenation.com/article/third-carbon-age/

    Depletion no longer plays a role any time soon. Instead the Paris Accords will dictate the path towards renewable energy. Since Europe has rejected shale it needs to follow the renewable energy path. China will chose a mix. America will lag behind and concentrate on old oil glory (MAGA).

    Erdogan in Turkey can count his blessings as the US will lose interest in the ME, or what’s left of it, so he can take over, and given the nod by KSA.

  3. rockman on Tue, 21st Mar 2017 11:50 am 

    tita – “No technological advance, just economics.”. Exactly. Eagle Ford Shale wells are being drilled just as they were two years ago with the same equipment run by the same companies. Besides lower costs adding to the mirage of improved efficiency companies are not drilling the poorer prospect they could when oil prices were higher.

    Natural selection (aka survival of the fittest) works in the oil patch just as it does on the Serengeti plains. LOL.

  4. GregT on Tue, 21st Mar 2017 1:01 pm 

    “Instead the Paris Accords will dictate the path towards renewable energy. Since Europe has rejected shale it needs to follow the renewable energy path. China will chose a mix. America will lag behind and concentrate on old oil glory (MAGA).”

    Global warming and climate change are planetary issues Cloggie, not regional issues.

    “As the agreement provides no consequences if countries do not meet their commitments, consensus of this kind is fragile. A trickle of nations exiting the agreement may trigger the withdrawal of more governments, bringing about a total collapse of the agreement.”

    Seems to me that the largest contributor of greenhouse gas emissions has already opted out. How do you propose that EU member states embracing alternate electricity power generation will in any way limit GMT rise to 1.5ºC? Especially given:

    “Although not the sustained temperatures over the long term to which the Agreement addresses, in the first half of 2016 average temperatures were about 1.3 °C (2.3 degrees Fahrenheit) above the average in 1880, when global record-keeping began.”

    https://en.wikipedia.org/wiki/Paris_Agreement

    Sorry Cloggie. Much ado about nothing. Too little, too late.

  5. Cloggie on Tue, 21st Mar 2017 1:47 pm 

    Global warming and climate change are planetary issues Cloggie, not regional issues.

    That’s an open door, but waiting for the slow movers is not an option. The ones who achieve the transition first will be able to put tariffs on dirty products produced by others. If one sheep is over the dam, more are bound to follow.

    Sorry Cloggie. Much ado about nothing. Too little, too late.

    It is never too late to buy suntan oil.

    Seriously, what do you propose? Do nothing and wait for the collapse and 6B die and only the smart ones in their Canadian doomsteads survive?

  6. Anonymous on Tue, 21st Mar 2017 2:43 pm 

    More fake ‘news’. ‘OPEC’ was never waging any kind of ‘war’ against shale in the first place. ‘OPEC’ didn’t wake up one morning and decide it would be a good idea to wage some kind of oil price war with uS frackers.

    This entire narrative that uS propagandists have woven on this issue is 100% false. If any of this really had been ‘OPEC’s’ goal, to damage the uS oil cartel economically, that is to say, wage economic war, then the uS would have militarily attacked them, or at the very least, launched massive regime-change ops against the ‘OPEC’ nations. The fact the uS has done neither, except complain about this ‘OPEC v uS frackers’ in uS oil cartel industry publications, tells you all need to know.

    This entire narrative is as fake as rockmans endless claims that the credit for uS oil drilling 2008-2016, could be credited, in part or in whole, to someone called ‘Barack obomber’.

  7. ________________________________________ on Tue, 21st Mar 2017 2:44 pm 

    Paris will dictate climate change? Like daylight savings time? France is more gay than Holland. Hitler should have sent all of them to the furnace. Would increase global warming a little. This bitch needs to warm up.

  8. Apneaman on Tue, 21st Mar 2017 3:00 pm 

    Half a metre of rain in a day floods north coast community of New Italy

    http://www.abc.net.au/news/2017-03-20/half-a-metre-of-rain-in-a-day-floods-north-coast-communities/8369174

  9. Apneaman on Tue, 21st Mar 2017 3:01 pm 

    Massive ocean DIE OFF foreshadows the era of global human population collapse

    http://wakingscience.com/2017/03/massive-ocean-die-off-foreshadows-era-global-human-population-collapse/

  10. Apneaman on Tue, 21st Mar 2017 3:01 pm 

    Carbon dioxide levels rose at record pace for 2nd straight year in 2016 – “The rate of CO2 growth over the last decade is 100 to 200 times faster than what Earth experienced during the transition from the last Ice Age”

    http://www.desdemonadespair.net/2017/03/carbon-dioxide-levels-rose-at-record.html

  11. Apneaman on Tue, 21st Mar 2017 3:04 pm 

    Frailest-Ever Winter Sea Ice Facing a Cruel, Cruel Summer

    https://robertscribbler.com/2017/03/20/frailest-ever-winter-sea-ice-facing-a-cruel-cruel-summer/

  12. GregT on Tue, 21st Mar 2017 3:52 pm 

    “It is never too late to buy suntan oil.”

    It is too late to buy suntan oil, when one already has skin cancer.

    “Seriously, what do you propose?”

    The First Law of Holes

    If you find yourself in a hole, stop digging……

  13. Midnight Oil on Tue, 21st Mar 2017 4:03 pm 

    Faster is better….chill Mr Ap…
    The faster we go, the more the Economy grows, the more money is made and profits soar…
    See, you just need to put Trumpet’s lenses on your eyes.
    Boy, but Shortonoil claims everything is under control….the fossil fuel industry is going out of business….Don’t hold your breath.

  14. rockman on Tue, 21st Mar 2017 4:15 pm 

    “This entire narrative is as fake as rockmans endless claims that the credit for uS oil drilling 2008-2016, could be credited, in part or in whole, to someone called ‘Barack obomber’.” What’s fake about it? The stats are undeniable: During President Obama’s term the US oil patch experienced its greatest expansion in history. And given the countless claims that the POTUS, any POTUS, has such a dominating control over the country’s economy, including the oil patch, obvious the great rtun we had was to his credit. The collapse began when it finally hit home that he was leaving office.

  15. Apneaman on Tue, 21st Mar 2017 4:35 pm 

    Apparently, many still do not understand what “too late” means. People claim to have taken physics courses but have no concept of inertia.

    Another flashflood (huaico) yesterday afternoon in the town of Viru in Peru.

    https://www.youtube.com/watch?v=pIT7Dk76K7M

    Aerial view of the inundated city of Trujillo (some miles north of Viru) which saw its stongest “huaico” (so far) on Sunday (it was its sixth in just a week)

    https://www.youtube.com/watch?v=lj-qe7ublPQ

    As the AGW incidences and doomy data mounts, the MSM is getting quieter. Out with a whimper.

  16. Boat on Tue, 21st Mar 2017 9:01 pm 

    Tita, rock,

    So why is production up double to almost quadrupled per well over the last 3 years in the same areas? You need to keep track of the Eia drilling productivity report. Comes out around the 13th every month.
    Tech is what made it happen. Double to triple the sand, double to triple the water, more perforations bunched closer together etc. They may have fracked for decades but methods keep changing.

  17. GregT on Tue, 21st Mar 2017 9:54 pm 

    Boat,

    You do realize that you arguing with somebody who makes his living in the oil patch, and besides, the economics of the POD are basic common sense.

    Kind of like multiplying 97 x 12.

  18. Boat on Tue, 21st Mar 2017 10:29 pm 

    greggiet,

    Learn how to google fracking technology web sites and you might learn what is happening. Fracking tech is constantly changing.

    So what number do you like to reference when talking about world oil consumption for a year. When projecting demand growth what do you add to that number. You recently posted you thought there was 35 years of oil left. Why don’t you show how you got there. I say there is a min of 50 years. Tech will supply access to more oil than that 50 years. Throw in electric cars and that 50 years looks smaller and smaller in the rear view mirror.
    When looking out 30 years it’s hard to tell winners in tech. Hydrogen/battery semis may be common. Google it.

  19. GregT on Tue, 21st Mar 2017 10:58 pm 

    Boat,

    The tech, and the resources, were both there when I worked in the oil patch back in the 1980s. It wasn’t until prices climbed north of $100/bbl that both the tar sands, and fracking became feasible. As said above “No technological advance, just economics.”

    “So what number do you like to reference when talking about world oil consumption for a year.”

    The numbers made available by every single publication world wide. What numbers do you like to reference?

    “When projecting demand growth what do you add to that number.”

    The numbers made available by every single publication worldwide. What numbers do you like to reference?

    (If this is some kind of a game, so far it seems like fun)

    “You recently posted you thought there was 35 years of oil left.”

    The IEA posted 2 1/2 years ago the amount of known reserves on the planet, recoverable or not. At rates of consumption of 2 1/2 years ago, using basic arithmetic, (I understand how difficult that is for you) it worked out to 37.5 years of oil still left in the ground.

    “Tech will supply access to more oil than that 50 years.”

    Much of those 37.5 years worth of reserves are not recoverable with current technologies, or prices.

    “Throw in electric cars and that 50 years looks smaller and smaller in the rear view mirror.”

    Over 50% of all electricity word wide is generated with fossil fuels, and ‘throwing’ in 3 billion automobiles will take much longer than 50 years. Besides, you won’t be here anyways.

    “When looking out 30 years it’s hard to tell winners in tech. Hydrogen/battery semis may be common.”

    Batteries are energy storage devices, not energy sources, and semis require a huge amount of infrastructure (derived from oil), as well as economies of scale.

    Economies of scale require exponential growth.

    Infinite exponential growth in a finite environment is a physical and mathematical impossibility. I would work on your times table first, before trying to understand more complex ideas.

  20. Anonymous on Tue, 21st Mar 2017 11:26 pm 

    Greg, watching that exchange of yours with googletard is not unlike watching a physicist trying to explain quantum mechanics to a not-particularly-bright monkey.

    Im not trying to be mean to monkeys here, there are plenty of monkeys that are far more intelligent than boat is.

  21. GregT on Tue, 21st Mar 2017 11:39 pm 

    What really blows my mind Anonymous, is that he just can’t figure out when to stop. He’s like dealing with a 2 year old, except that most 2 year olds eventually grow up.

  22. dkb on Wed, 22nd Mar 2017 6:40 am 

    Been an awfully cold winter and spring seems to be rather cool too. There are snowdrifts out there that are ten to sixteen feet deep this winter. What was about a 3 or 4 foot drift two weeks ago morphed into a 7 footer after the last snow and wind.

    I have never seen snow drifted in so deep, an 8 foot drift is not a problem anywhere where there is shelter belt. A lot of snow all the way to the North Pole. I saw an abandoned farmyard with a 15 foot tall drift in the middle of it all. It is amazing how much snow is still on the ground. It’s like a glacier, you can walk on top of 7 foot tall drifts and it supports your weight.

    Never have seen anything.like it.

    The world consumes maybe some 95,000,000 barrels of all oil and condensates in a day, give or take some more.

    95,000,000 x 365 = 35,040,000,000 barrels of oil equivalent each year.

    There is a lot of oil, natural gas, palm oil, all of it. You’re gonna miss it when it’s gone, you don’t know what you’ve got ’til it’s gone.

    If there are 2950 gigabarrels recoverable and 1250 are gone, 1700 remaining of what can be drilled and pumped, you can derive how many years of oil are left.

    Might be more, but it will cost an arm and a leg. Remains to be seen. There are plenty of arms and legs in warehouses all over the world, don’t need any more anymore.

    If there are 1,700,000,000,000 barrels of recoverable still there, then divided by 35,040,000,000 (yearly consumption), with some math, you can get a good look at the numbers, they can tell a story, it would look like there are 48.75 years of oil in the ground at this time. Providing all of the numbers are modeled correctly.

    When you are consuming 95,000,000 barrels per day, the drilling and pumping never cease.

    Add 48.75 years to 2017.25, you arrive at the number 2064.

    That’s a leap year, so there is an extra day of oil consumption before it all goes kaput.

    Shale oil production gained market share, close proximity to where it has to go helps. Somebody is going to buy shale oil, always. While it lasts.

  23. dkb on Wed, 22nd Mar 2017 6:48 am 

    Addition mistake. Not 2064, no, not at all, it is the year 2066, not a leap year, but you’ll have two more years of burning more oil!

  24. shortonoil on Wed, 22nd Mar 2017 7:18 am 

    OPEC lost??

    Here are the recent profit and loss statements of eight of the largest oil companies in the US.

    http://finance.yahoo.com/quote/cvx/financials?ltr=1 [Chevron P&L 14-16]
    http://finance.yahoo.com/quote/XOM/financials?ltr=1 [EXXON P&BL 14-16]
    http://www.redmayne.co.uk/research/securitydetails/financials.htm?tkr=RDSB [Shell P&L 12-15]
    http://www.marketwatch.com/investing/stock/BP/financials [BP P&L 12-16]
    http://amigobulls.com/stocks/COP/income-statement/annual [ConocPhilips P&L 12 -16]
    http://www.marketwatch.com/investing/stock/HES/financials [Hess P&L 12 – 16]
    http://amigobulls.com/stocks/EOG/income-statement/quarterly [EOG P&L 15 -16]
    http://finance.yahoo.com/quote/apc/financials?ltr=1 [Anadarko P&L 14-16]

    If the US petroleum industry going broke is OPEC losing, someone has some explaining to do. At this rate these outfits aren’t going to last another three years.

  25. Midnight Oil on Wed, 22nd Mar 2017 8:57 am 

    After these oil giants go belly up, they will be consolidated and essentially nationalized to continue output by any means available.
    Of course, the scapegoat, there will HAVE to be one, will be the “environmentalists” with an alleged leftist, liberal, world government agenda. Trumpets massive military apparatus will be in place to apprehend alleged guilty parties to haul them off to the labor rehab educational camps to correct their demeanor.
    Yes, Mein Führer, there is a plan, I can walk.

  26. rockman on Wed, 22nd Mar 2017 9:03 am 

    Boat – “So why is production up double to almost quadrupled per well over the last 3 years in the same areas?” Mucho thanks, amigo! Great observation supporting my statement. Increased productivity of INDIVIDUAL WELLS always increases when prices significantly fall…both conventional and unconventional. Of course, total production decreases as the poorer quality wells ARE NOT DRILLED.

    As far as drilling in the same area extreme variations in productivity can occur over short distances especially in fracture plays like the shales. A well making 3X its cost can immediately offset a well that depletes before it produces 1/2 its cost. A personal experience: 8 years y company was founded to drill for deep NG. Prices were $5+/MCF and we spent $200 million the first 3 years. And as prices began to slide the wells we did drill were more productive then the earliest wells. But we drilled much fewer wells. Eventually we found very few prospects worth drilling when prices dropped below $3/MCF. But those few wells found much more NG. And then prices fell towards $2/MCF. And guess what: we have not drilled an unsuccessful NG prospect in almost 3 years. Of course, we haven’t drilled a NG prospect in 3 years. LOL.

    And one more time: there has been ZERO IMPROVEMENT in drilling/frac’ng tech in the two few years (in case I missed it please describe the new tech being used today). Both are being done by the same companies with the same equipment and personnel. What has happened is longer laterals and many more frac stages using THE SAME TECH as had been used for some time.

    No different then cattle breeding: slaughter the poorer quality stock (stick the weaker prospects in the file cabinet) and feed the remaining bulls a high protein diet (drill laterals longer with more frac stages) so they can f*ck day and night producing better calves (produce wells with better recovery).

    Decades ago they once bred petroleum geologists the same way. LOL. Actually true to a degree: petgeo’s were often the sons of successful petgeo’s. The sons of unsuccessful petgeo’s would run as far away from the oil patch as possible. With the boom/bust cycles happening so quickly now that breeding program is no longer practical.

  27. rockman on Wed, 22nd Mar 2017 9:18 am 

    “If the US petroleum industry going broke”. The “US petroleum industry” is not going broke. There are companies going under while other companies are adding reserves (as they buy out the weak ones) at prices much lower then they’ve been able to do for many years.

    ExxonMobil receiving lower revenue is not the definition of “going broke”. While making less revenue today then 2 years ago it’s making a sh*t load more oil revenue then it was a dozen years ago. And no one was saying XOM was “going broke” back then, were they?

    XOM et al thrive on adding to their reserve base. Additions that will eventually provide nice revenues as prices inevitably increase. Just as they have since the market bottomed out at $30/bbl.

  28. rockman on Wed, 22nd Mar 2017 9:30 am 

    And speaking of oil revenue: in 2004 the US oil patch grossed $230 million per day. In 2016 it averaged almost $400 million per day. Granted a lot of capex was borrowed to make that gain. OTOH we are making $60 BILLION more per year then in 2004.

  29. shortonoil on Wed, 22nd Mar 2017 10:37 am 

    “If the US petroleum industry going broke”. The “US petroleum industry” is not going broke.

    When the price fell 57%, gross income fell 57%; the asset value of the industry fell 57%. Assets = Income/ ROR (just like a saving account). That happened in 2½ years. That is going broke at warp speed.

  30. rockman on Wed, 22nd Mar 2017 12:38 pm 

    “Going broke means running out of money last time I looked. Today the US oil patch is grossing about $150 BILLION PER YEAR. Of course there’s debt, salaries and capital budgets to fund. But the US is netting a significant amount of revenue to do that. Revenue that is less then it was a few years but not ZERO REVENUE leading to “going broke”. And still netting significantly MORE REVENUE then it was before the shale boom began.

    IOW if the oil patch wasn’t “going broke” in 2004 (when no one was making such claims) then it’s not “going broke” today.

    Hopefully folks recognize that such phrases as “going broke” are used instead of actual statistics. And for a good reason: the quantitative data doesn’t support such qualitative spin.

  31. Northwest Resident on Thu, 23rd Mar 2017 1:04 am 

    Piling on more debt continuously while profits decline is going broke.

  32. Northwest Resident on Thu, 23rd Mar 2017 1:09 am 

    Boat talking about fracking technology like it is “the answer” to an industry going bust.

    “I am tired of hearing about the unbelievable impact of technology on collapsing U.S. shale production costs. The truth is that these claims are unbelievable. The savings are real but only about 10% is from advances in technology. About 90% is because the oil industry is in a depression and oil field service companies have slashed prices to survive.”

    http://www.artberman.com/shale-cost-reductions-are-10-technology-and-90-industry-bust/

    “Fracking technology will save the oil industry” is a cornerstone of the Big Lie that is being told to hook suckers like Boat and reel them and their money in for the kill.

  33. Rockoil on Thu, 23rd Mar 2017 1:44 am 

    I cannot find that ExxonMobil was making making a sh*t load more oil revenue then it was a dozen years ago. Its revenue in 2004, or 12 years ago, was higher than it was last year, in 2016. The trend is down and going out of business. The Oil price is not going up either. Its going down.

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