Opinion: Are US Drillers Actually Making A Comeback?
20 May 2015
by Nick Cunningham of Oilprice.com>
Is US shale about to make a comeback? Oil prices have rebounded strongly since March. The benchmark WTI prices soared by more than 36 percent in two months, and Brent has jumped by more than 25 percent. There is a newfound bullishness in the oil markets—net long positions on Brent crude have hit multi-year highs in recent weeks on a belief that US supply is on its way down.
That was backed up by recent EIA data that predicts an 86,000 barrel-per-day contraction for June. The Eagle Ford (a loss of 47,000 barrels per day) and the Bakken (a loss of 31,000 barrels per day) are expected to lead the way in a downward adjustment.
But that cut in production has itself contributed to the rise in prices. And just as producers cut back, now that prices are on the way back up, they could swing idled production back into action.
A series of companies came out in recent days with plans to resume drilling. EOG Resources says it will head back to the oil patch if prices stabilize around $65 per barrel.
The Permian is one of the very few major shale areas that the EIA thinks will continue to increase output. That is because companies like Occidental Petroleum will add rigs to the Permian basin for more drilling later this year. In fact, Oxy’s Permian production has become a “sustainable, profitable growth engine,” the company’s CEO Stephen Chazen said in an earnings call. Oxy expects to increase production across its US operations by 8 percent this year. Diamondback Energy, another Permian operator, may add two rigs this year.
Other companies—including Devon Energy, Chesapeake Energy, and Carrizo Oil & Gas—have also lifted predicted increases in output for 2015.
In the Bakken, oil production actually increased by 1 percent in the month of March, a surprise development reported by the North Dakota Industrial Commission.
Taken together, momentum appears to be building in the US shale industry.
But let’s not get ahead of ourselves.
The US oil rig count has plummeted since October 2014, falling from 1,609 down to 668 as of May 8 (including rigs drilling for gas, the count dropped from 1,931 to 894). That is a loss of 941 rigs in seven months. Just because a few companies are adding a handful of rigs does not mean that the drilling boom is back. It takes several months before a dramatic drop in the rig count shows up in the production data. The EIA says production will start declining this month—but further declines in production are likely.
Moreover, even if US producers do come swarming back to the oil fields and manage to boost output from the current 9.3 million barrels per day, that would merely bring about another decline in oil prices. Lower prices would then force further cut backs in rigs and spending. The effect would be a seesaw in both prices and the fortunes of upstream producers.
As John Kemp over at Reuters notes, that is not an enviable position to be in. Much has been made about the geopolitical and economic influence that shale drillers have snatched away from OPEC. The oil cartel has lost its ability to control prices, the thinking goes. Now, the US is the new “swing producer,” and with it comes influence and prosperity.
But if oil companies oscillate between cutting back and adding more rigs as the price of oil bobs above and below the $60 mark, they won’t exactly be raking in the profits. Worse yet, EOG and Oxy may be profitable at $60, but there are a lot more drillers in the red.
In other words, there is still a supply overhang. In order for oil markets to balance, a stronger shake out is still needed. That means that the least profitable sources of production—drillers that have loaded up on debt to drill in high-cost areas—have yet to be forced out of the market. The drilling boom is not back yet.
Nick Cunningham is a Washington DC-based writer on energy and environmental issues.
With the Chiites VS Sunnites wars expanding in the Middle-East and North Africa, it would be wise for USA. Mexico and Canada to increase drilling, Oil extraction and build more North-South and West-East pipelines.
Posted by: HarveyD | 20 May 2015 at 01:13 PM
Wiser yet would be to expand research and development in renewables.
Posted by: Paroway | 20 May 2015 at 05:38 PM
And even more wise would be to do both more renewable and more domestic drilling. We cannot deploy renewables fast enough to sequre the energy we need when the energy flows from the middel east is lost to ISIS's destruction of the civilizations in that area. For US, Canadian and Norwegian production to keep increasing we need 100 USD per barrel again otherwise it will fall rapidly as it currently does. In due time ISIS continued conquest will make sure oil will be back at 100 USD or more. They just need to destroy Libya's and Iraq's oil fields and move on to take the arab peninsula. What the West should not do is to waste more resources on the middle east by sending weapons at our expense, bombing at our expense and traning useless armies at our expense. The islamic world can't be saved because the West's constant interference has made the incumbent governments unfit for ruling themselves. Let it fall, let them them fight it out internally and we should focus our resources on making other ways to get our energy, that is, more renewables, more fraking, more deep see drilling and more arctic drilling. Renewables will eventually take over but that will take many decades. The middel east does not have a dacade. I think most of it will be destroyed in the next 10 years or so.
Posted by: Account Deleted | 21 May 2015 at 02:41 AM
Well said Henrik.
Those feelings are shared by many. The barbaric Sunnites VS Chiites wars in the Middle-East still has a very long way to go.
How can you stop it from spilling over to Africa, Asia, Europe and the Americas?
Where will the Chiites and the non-Sunnites (non-IS) go?
Will the majority of the 1+B Sunnites (in the 5 continents) join the IS extremists group?
Posted by: HarveyD | 21 May 2015 at 04:51 AM
Harvey ISIS is not a real problem for the West as terror attacks in the West by ISIS or other islamist groups are causing no harm at any level that matters for our economy and our military is fully capable of stopping any attaks from ISIS territory. They have no airplanes and rokets that can reach us. If they conquer any nuclear facility or airport in the middle east we can drop some bombs on it to make sure they can't weaponise it. Trafic deaths and common day accidents are far more important for our welfare. ISIS is only effective at war. The areas they control are decaying into stoneage societies that cannot sustain the current population. Most people will dye of hunger and deseases. The more teritory they take the more obvious that fact will become and that will end their popularity among muslims all over the world. In the end it is back to the survival of the fittests and ISIS is not on the list of long-term survivors as they can only destroy. They cannot create and the latter is nessasary for long-term survival. Also the West and China only need to secure its own sources of energy. Once we have done that by converting to renewable energy and our own drilling at much higher oil prices we will not need to trade anything with the reast of the world for any economic reasons. Each country must solve their own problems including dealing with terror. The new world order is that the West no longer rule the world because it is too big with too many people and it was an error to think that we should rule it in the first place.
Posted by: Account Deleted | 21 May 2015 at 06:32 AM
Henrik, unless we are prepared to do a lot more damages, ISIS may keep on winning grounds and recruit many more aggressive Sunnites extremists from 100+ countries. They will soon have US built planes and all kind of weapons left behind by Irak's running away so called army.
Many of the US trained Irak/Syria Sunnites pilots and soldiers may switch side and fight/fly for ISIS sooner than expected. Giving more US anti-tank (1000+) missiles to Irak is like a gift to ISIS
Helping, recruiting and re-arming the Kurds to do the job could be one of the best winning solution. Of course the Kurds would end up with the 'de facto' country they deserve. Turkey, Irak, Iran and Syria would not like it.
Asking Iran to openly use their (Chiites) armed forces to push (Sunnites) ISIS out of Irak would also work but could have dire consequences.
That conflit will expand to Yemen, Jordan, Lebanon, other Golf Middle East States and North Africa countries. Oil production would then drop and international oil price would go up.
It is the right time for USA, Mexico and Canada to increase oil reserves and re-activate drilling and oil sands extraction.
Posted by: HarveyD | 21 May 2015 at 10:00 AM
The oil and gas industries are already being subsidized at the rate of $5.3T/year. Is it justified to receive more subsidies?
Posted by: HarveyD | 21 May 2015 at 12:01 PM
Harvey I agree that the Kurds deserve our help in terms of arms, training and airpower. The Kurds do not hate us and they also have the will to fight for their own territory. Pretty much all other ethnic and religious groups in the middle east (apart from the dwindling number of Christians) either deeply hate the West and our culture of democracy and mutual respect for each other's differences or they have no will to fight for their own territory. So why should we fight for them?
I am sorry to say it but I am unable to empathies with people who hate us and have no fighting spirit. They are simply not worthy of our help in any regard no matter how much they suffer from ISIS governance and terror. The only problem the West has with ISIS taking over the Arab peninsula is that we will have to do more drilling in our own shale, deep see and arctic at much higher global oil prices and to use much more renewable technology. I am fine with that. It is about time we do that. The oil price that will enable this development is 100 USD or more per barrel and we will get that as the war escalates in the Arab countries.
Posted by: Account Deleted | 24 May 2015 at 08:48 AM
At $100/barrel or so for oil and equivalent for Gas and Coal, fossil fuel industries should not expect or receive direct or indirect subsidies. The right to dig should be auctioned to the highest offer with a decent floor price.
End users (us) should pay the full cost + fair profit margins.
Agree with you that we should leave the Middle-East fight their own wars. Mexico, USA and Canada do not need their Oil and Gas. We can produce enough to meet our combined needs, specially if we introduce more efficient ICEVs and a lot more HEVs, PHEVs, BEVs and FCEVs.
The $$$B currently spent on Oil wars could be used to accelerate vehicle electrification in the 3 countries and reduce the use of fossil fuels
Posted by: HarveyD | 26 May 2015 at 06:45 AM