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Page added on October 8, 2015
Shale Drives Uncertain New Geoeconomics of Oil
The emergence of fracking has modified the global market for fossil fuels. But the plunge in oil prices has diluted the effect, in a struggle that experts in the United States believe conventional producers could win in the next decade.
The U.S. oil industry had peaked – when the discovery of new deposits and output from existing wells begins to fall – which made the country more dependent on imports. But the equation was turned around thanks to the new technique.
The innovative technology of hydraulic fracturing or fracking and the discovery of large deposits of shale gas and oil, along with massive investment flows, led to predictions that the United States would become autonomous in fossil fuels this decade. But these forecasts have been undermined by the drop in prices.
“The world is entering a new era of uncertainty in the geoeconomics of oil,” said David Livingston, an associate in the Energy and Climate Programme of the U.S. Carnegie Endowment for International Peace. “It is far from certain that the notoriously volatile oil market will become less cyclical.”
The analyst told IPS that as a result of domestic U.S. demand, “Companies will lose spare capacity, between what they can produce and what they produce, which is important, because the market is determined by that capacity.”
After 2003 international oil prices climbed, to 140 dollars a barrel in 2008, when the global financial crisis brought them down.
This decade they rallied, to around 100 dollars a barrel. But they have fallen again since late 2014, to about 40 dollars a barrel.
That means U.S. producers, in particular shale gas producers, are facing extremely low prices, overproduction, a lack of infrastructure for storing the surplus and a credit crunch for the industry’s projects, even though prices have gone down.
In addition, China’s economic slowdown and Europe’s stagnation are hindering the recovery in demand for energy.
The development of shale oil and gas has also put the U.S. industry on a collision course with the members of the Organisation of the Petroleum Exporting Countries (OPEC), especially since one of its widely touted objectives is to reduce imports from that bloc.
Since November 2014, OPEC has kept its production quotas stable, as part of a strategy imposed by the bloc’s biggest producer, Saudi Arabia, aimed at keeping prices low and discouraging the development of shale deposits, which are much more costly to tap into than the organisation’s conventional reserves.
In late 2014, the Norwegian consultancy Rystad Energy put the cost of producing a barrel of shale oil in the United States at 65 dollars a barrel, which means the industry is operating at a loss. The average cost of extracting a barrel of conventional oil in that country is 13 dollars, compared to five dollars in the Gulf.
For Miriam Grunstein, a professor at the Centre for Economic Research and Teaching (CIDE) in Mexico, the outlook is very uncertain.
Fracking involves the massive pumping of water, chemicals and sand at high pressure into the well, a technique that opens and extends fractures in the shale rock deep below the surface, to release the natural gas. Environmentalists warn that the chemical additives are harmful to health and the environment.
The process generates large amounts of waste liquids containing dissolved chemicals and other pollutants that require treatment before disposal, as well as emissions of methane, a potent greenhouse gas.
This has led to widespread public opposition to fracking in U.S. communities where exploration for shale gas is going on.
“There are doubts for several reasons. First of all, due to the low prices,” she told IPS from Mexico, which has begun to explore its significant reserves of shale gas.
“Although it has forced many companies to improve their operating capacity, reduce investments and achieve greater efficiency, they are in an environment where they have to look for markets, in Europe or Asia. But that requires liquefaction infrastructure, which implies major investments,” she added, referring to the current situation faced by shale gas producers.
In June, the United States produced 9.3 million barrels per day of crude oil, about half of which was shale oil, according to data from the Energy Information Administration (EIA).
The prospects for the industry are beginning to look less promising. In its Drilling Productivity Report published in late August, the EIA projected a fall in shale gas production in September, for the first time this year, to 44.9 billion cubic feet per day.
The agency stressed that output from new wells is not enough to offset the decline in existing wells.
For Livingston, “OPEC as an institution – and Saudi Arabia, its leader – is likely to emerge from this paradigm shift stronger than before in many ways. With its new strategy – one born out of necessity – the kingdom is emphasising market share, rather than price, while also moving to delegate the burden of balancing the world oil market to the U.S. shale industry.”
The United States would become the new “swing producer”, although without achieving the same power as the Gulf producers in influencing the market.
In the long run, total U.S. oil production will tend to drop, according to EIA projections. In 2020, crude oil production is expected to stand at 10.6 million barrels per day; in 2030, 10.04; and 10 years later, 9.43.
In the case of shale gas, projections are favourable, but at higher prices. In 2020, the country should be producing 15.44 trillion cubic feet per day; 10 years later 17.85; and in 2040, 19.58.
In total, the EIA forecasts that the country will produce 28.82 trillion cubic feet per day of natural gas in 2020; 33.01 in 2030; and 35.45 in 2040.
But the average price will go up. This year, the Henry Hub reference price for U.S. natural gas has stood at 2.93 dollars per million British thermal units (Btu), the heat required to raise the temperature of one pound of water.
The price should go up to 4.88 dollars per Btu in 2020; to 5.69 in 2030; and to 7.80 in 2040.
“The bubble won’t explode, but it will progressively deflate. At current prices, we would see a relatively quick shrinking of capital availability for the shale sector, because those companies are producing at a loss,” said Livingston.
Grunstein said: “Saudi Arabia’s aim is to keep the United States from becoming a major exporter. The strong markets exert the most pressure. If demand does not recover, the demand-price ratio is awkward. Consumption is needed, and I don’t see where it would come from.”
Livingston said one option is to review the 1970s-era ban on exporting U.S. crude oil, because “If production rises, refineries can’t process it and therefore new markets are needed.”
14 Comments on "Shale Drives Uncertain New Geoeconomics of Oil"
BobInget on Thu, 8th Oct 2015 11:22 am
Everyone, or it seems so, does a teenager eye-roll when ever I bring up Venezuelan exports as a thing of the ‘past’. Folks stop reading when I wrote Putin was planning an OPEC coup.
Mention tens of millions of oil war refugees and
not a single person finishes one of my posts.
If I bring up Canada’s ‘Energy East’ existing pipeline, its ho hum.
At least a dozen times I tried to point out oil,
not religion, the prime suspect in what amounts
to the third world war for control of that single resource.. Not a single poster comes on to argue the point(s).
When posting EIA’s weekly storage and consumption repore, we are met with blank stares.
Why do you all care is shale is a dead letter or simply lost? If this bidness is too complicated,
try taking pictures of your dinners and posting that.
I get the feeling most here wish oil would simply ‘go away’ so they can get on with prepping.
In fairness, no one ever commented on oil refugees, Unless to bash a US President or
industry.
This web site could be a lighthouse on the web.
Saudi Arabia is spending billions on US public relations just to shine up shit.
At least this site is free.
rockman on Thu, 8th Oct 2015 3:28 pm
Once again the ignorance of folks who confuse the cost of PRODUCING a bbl of oil production and the cost of DEVELOPING a bbl of oil production. It does not cost $65/bbl to produce a bbl of oil from an EXISTING shale well. More on the order of $10/bbl or less. Developing a new bbl of production by drilling a new shale well might cost $65/bbl. Maybe a bit more or a bit less.
And while a KSA conventional bbl of oil might cost $12/bbl TO PRODUCE Ican assure you developing new oil reservoirs would cost a good deal more. And there’s even the question of much NEW production might be available for the KSA to develop.
As pointed out elsewhere US shale producers are generating about a net $35/BILLION per year from existing wells. And that’s $35 billion of positive cash flow. But doesn’t mean the average well has or hasn’t made a profit. I’ve produced many tens of $millions of positive cash flow from wells that never recovered their oost.
And again the same question: why would ghe KSA give up hundreds of $BILLIONS in future revenue in an effort to decrease US shale production? Might gain market share but why would that be important to any company in any business? Easy: to increase their revenue of course. The KSA revenue today is about half of what it used to be. So if that their plan it Oil&Gas bviously failed. Which should indicate that the KSA “flooding” the market to hurt US producers is rediculous. idea. The KSA is sufferibg more today from the low oil prices then are the US shale player: about 2 to 3 times as much lost revenue.
And some folks think that was an intentional plan t
by the KSA. Even simple math eludes some folks. LOL.
Boat on Thu, 8th Oct 2015 4:58 pm
Ok Bob I will take that on.Everyone, or it seems so, does a teenager eye-roll when ever I bring up Venezuelan exports as a thing of the ‘past’.
Venezuela government is rather poor at managing oil fields. They didn’t keep up the investment needed with the latest technology to keep growing their production. Instead they skimmed to deep off the top and spent like fools to get reelected.
Investment in oil fields is very high. Venezuelen oil fields will make a comeback someday when oil prices are high. I doubt until then.
You never said what a Putin coup was unless I missed it. If it doesn’t mean cutting production to get prices up. It will mean little. I don’t think the little man could pull it off.
When posting EIA’s weekly storage and consumption repore, we are met with blank stares
I read the eia and the iea and imf and look at the baker hughes drilling report every week. there are about 6 other oil sites i check on also.
Getting toshale oil. the Middle give and take away. Geopolitics was the reason Iran, Iraq, Lybia lost oil production. Just for fun let’s all blame GW. That is what created the $100 oil and the onset of the fracking revolution. Now Iraq is producing more than when Saddam was in charge. Saudi producing more, Russia, Iran gained a million recently, US added around 5 mbpd. So there is the glut.
The frackers are not the only ones hurt. If you look at the world drilling rig count you will see than more international drillers have shut down than in the US. Time will tell who can deliver the cheapest oil in a couple years. They all are adjusting to the lower price.
Boat on Thu, 8th Oct 2015 5:04 pm
Rock,
Most people only care what the price is at the pump.
I think the Saudi is happy about shutting down close to 3,000 drillers world wide. Along with the rest of the worlds lowest cost producers. Low cost vrs. highest cost. If you think world instead of country this is no big deal.Go consumer/paybacks.
Davy on Thu, 8th Oct 2015 5:22 pm
Boat, the Putin coup in my opinion is his move into the Middle East. Oil prices will likely respond positively for Russia and Iran with increased conflict there.
Putin is a brilliant in many ways. Yet, it is a big gamble what he is doing for Russia and the global community. We are at the brink of WWIII. Ukraine and Europe are a playground. This is the real thing. It is a wide open desert and a great place to play war games.
Who knows the U.S. And Russia might become friends prosecuting war together. I know one thing no one enters the Middle East with an army and not pay for it. Maybe Russia will set an example of success but I doubt it. Syria is a destroyed nation that will suck treasure and blood.
In any case war is failure so if Russia sets an example it is still of failure. I am sure it will be better than the 12 years of U.S. Failures. Not hard to beat that though.
Boat on Thu, 8th Oct 2015 5:35 pm
Davy,
I don’t see Russia being friends of the US. Are they not bombing the rebels the US support? And the US bombs the rebels Isis supports.
Truth Has A Liberal Bias on Thu, 8th Oct 2015 5:44 pm
Putin the opportunist. He turned Ukraine down to a low simmer but he can turn it back up to boil anytime he wants. Syria is up to full boil. His game is to keep the US jumping from crisis to crisis while he adjusts the temperature dials to keep US off balance, looking stupid and bleeding resources. With China doing the same in their arc and Iran pulling strings in Iraq and Afghanistan you can bet it’s not long until USA has a collective seizure and shits the bed.
http://www.geopoliticalmonitor.com/putin-the-opportunist/
GregT on Thu, 8th Oct 2015 6:49 pm
It was the US that brought Ukraine, Iraq, Afghanistan, and Syria to a boil Truth. Not the Russians.
apneaman on Thu, 8th Oct 2015 8:09 pm
Niice 6 min summary
WWIII – Syria, Russia & Iran – The New Equation
https://www.youtube.com/watch?t=319&v=W3ZLYUvAZvs
Truth Has A Liberal Bias on Thu, 8th Oct 2015 9:06 pm
@greg you should read what I write more carefully. I didn’t say Putin brought Ukraine to a boil. I said he turned it down to a low simmer. And it is Putin who will turn it up again to a boil when it suits him.
Is everybody on this site an illiterate fucking imbecile?
apneaman on Thu, 8th Oct 2015 9:10 pm
Truth, what was that part about Putin broiling again????
GregT on Thu, 8th Oct 2015 10:16 pm
Truth you wrote
“His game is to keep the US jumping from crisis to crisis while he adjusts the temperature dials to keep US off balance”
Those crises were caused by the US Truth, not by the Russians. If anything it is DC that is keeping Russia jumping from crisis to crisis. Not the other way around.
“Is everybody on this site an illiterate fucking imbecile?”
No, there are only a few of you. Most here are aware of what is really going on.
apneaman on Thu, 8th Oct 2015 10:27 pm
Greg, I would not take Truth completely seriously, I think he is having a bit of a laugh. Reminds me of someone.
rockman on Thu, 8th Oct 2015 11:06 pm
Boat – Why would shutting down drillers by causing lower oil prices make the KSA happy? It certainly isn’t making them more money: at the current price the would loss hundreds of $billions in revenue.
Second, the KSA has drilling projects which have had dconomic balue degraded just like every other operator. IOW how many projects has the KSA cancelled. Folks who think the KSA is sitting on a big collection of projects that can be developed cheaply are wrong. For instance drill Deep Water wildcars in the Red Sea isn’t going to be cheap.
And again lets stop confusing who are and who aren’t “low cost” producers of EXISTING WELLS. I’ve seen no actual data proving that the LIFTING COSTS of the KSA is less then that of the typical shale player. And AGAIN folks: please stop confusing the cost to bring on new oil production with the cost to produce existing wells. I have a well in La producing 400 bopd and it’s costing me $2 per bbl to produce it every month. But that isn’t what it cost to drill and complete that well. I challenge anyone to show me data inducating the KSA has any wells that are that inexpensive to PRODUCE.
And back to the point some folks are refusing to acknowledge: as a result of lower oil prices the KSA is losing more revenue then all the US shale producers COMBINED. Significantly more. Low oil prices have had the same negative effect on the economic value of NEW projects for the KSA as it all other operators.
Again this ain’t rocket science: it very basic Econ 101. Destroying half the revenue stream of the KSA is not a good thing for them. Negatively impacting the economic justification of future oil development projects of the KSA is not a good thing for them. Of course when oil prices increase to former levels those projects will again become viable…as will every US shale well not being drilled today. The KSA having to draw out hundreds of $billions from their piggy bank to keep their citizens content is not a good thing for them. In that sense US dhale producers have it better off then the KSA because they don’t have such an obligation. They couldn’t care less if the federal govt has sufficient income to medt the needs of its citizens: that ain’t their problem.