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Frack Baby Frack
Ingenuity Saving Shale, Stymying Saudis

Low oil prices were supposed to cripple American shale companies, but so far the industry is proving to be surprisingly resilient. The New York Times reports:

The Norwegian oil giant Statoil…is experimenting here in the Eagle Ford shale field with a host of new drilling tools and techniques.

It is trying out different grades of sand to blast along with water and chemicals to better loosen the hard rock deep underground and increase a well’s production, and varying the depths of wells to squeeze out even more oil. It is using new well chokes that technicians can operate remotely from a computer or even a smartphone to quickly adjust flows to maximize production without overtaxing pipelines…Even as the company cut the number of rigs it runs here from three to two since last year, it has managed to lift production by one-third, a feat that would have been unimaginable a few years ago. […]

[A] majority of the major companies are managing to survive by increasingly using techniques traditionally more common to manufacturing plants than to oil fields to achieve economies of scale…Using rigs that can move on tracks or legs, they are drilling and completing several wells at a time, slashing the time it takes to drill each well.

The Saudis have pushed for OPEC inaction in the face of falling oil prices these last ten months, seemingly content to endure the budget deficits these discount prices are incurring in the hopes of squeezing out upstart, high-cost U.S. shale producers. Just a month ahead of the cartel’s meeting, the Saudis seem confident that this strategy is working, with one official telling the FT that “[t]here is no doubt about it, the price fall of the last several months has deterred investors away from expensive oil including US shale….”

But this plan relies on American fracking firms being unable to profitably drill at current prices, and we’re seeing many companies innovating processes and implementing ways to produce more with less. True, the Energy Information Administration just cut back its forecasts for American production this year and the next, but it still predicts that U.S. output will grow by 530,000 barrels per day (bpd) in 2015, and by 20,000 bpd in 2016. In other words, the Saudis haven’t stopped shale, they’ve merely slowed its advance.

The Saudis have strong-armed the rest of OPEC’s petrostates into playing a game of chicken with fracking, but they haven’t seem to have included our ability to get better at fracking in their calculations. Saudi Arabia can hold out for a while yet on the back of its massive sovereign wealth fund, but the rest of OPEC isn’t so well prepared, which should make for an interesting round of discussions at the cartel’s summit next month. In the mean time, the U.S. fracking industry will be busy trimming the fat. Shale, it seems, is still hale.

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  • Jon Robbins

    I don’t buy the premise. Why should Saudi’s keep prices low to counter fracking? They can drive some small producers out of business. But eventually they will have to let prices rise and then the fracking will come back. What’s the point?

    A concerted attack on Iran and Russia makes much more sense as a Saudi motivation.

    • f1b0nacc1

      While I agree with most of your analysis, let me offer a possible Saudi motivation:
      They believe if they can drive the small fry out of business, a price rise won’t bring them back. Remember, these are not very economically smart people, and their experience with western companies is primarily with large megacorps that wouldn’t consider the marginal revenues from price rises worth it. It isn’t as if they live in a highly competitive marketplace normally, after all. They are used to cartels and fixed pricing models…
      With that said, I completely agree that a concerted attack on the Iranians and the Russians is a far more viable explanation,, but I wouldn’t rule out simply economic ignorance as a CONTRIBUTING factor as well.

      • JR

        I respectfully disagree with your point that these are not economically smart people, IF we are talking about oil. I think Saudis’ desire to keep oil prices down is 99.99% due to their desire to hurt Iran economically. Pretending it is about US shale is a convenient cover for them. Don’t get me wrong, I do believe they consider shale to be an economic competitor, but economic competitor is not in the same bracket as mortal enemy.

        • f1b0nacc1

          Actually we don’t disagree. Like you, I believe that the Saudis see the Iranians (and to a much lesser extent the Russians) as an immediate problem that must be dealt with by any means at their disposal, and are taking steps to do so. That is the primary motivation behind their production strategy.
          With that said, I don’t necessarily believe that they understand the dynamics of the American shale producers, and don’t understand how a distributed market can respond. They have no experience with it (and they are hardly alone in this respect), and thus may believe that if they can destroy the frackers that they won’t have to worry about them in the future. This is hardly a central part of their strategy, and not even one that I think is workable in the long run, but I wouldn’t be surprised if they (incorrectly) see this as a potential bonus from their long term campaign.

          • JR

            Wait, did we just have a reasonable disagreement, listened to each other’s argument, and agreed that we both have a valid point. Wow, man, this is some trippy sh!t. Can’t we call each other a buffoon at least? Just to keep up appearances? 🙂

          • f1b0nacc1

            We will just have to try harder in the future!

  • Kevin

    What choice do they have? If the Saudis cut production 50% woukd the price double or more? If not their revenues and net would decline if they cut production, unless they can truly get the rest of OPEC, Russia, Mexico, etc to go along with them rather than engage in massive cheating.

    • Andrew Allison

      The Saudis have made it perfectly clear that they will cut producion ONLY in conjunction with the other members of OPEC. It’s those other members who have to decide whether they are better off maintaining or reducing production. The reality is the the US

  • Jacksonian_Libertarian

    As I have been saying all along, American Shale Oil developers are exposed to the “Feedback of Competition” that forces continuous improvements in Quality, Service, and Price in a free market. The State owned oil monopolies of the OPEC Government monopolies don’t have the “Feedback of Competition” to inform them of better ways of doing things, nor do they have the motivation to change that the “Feedback of Competition” forces on companies to remain in business. People hate change and will go to great lengths to avoid making any changes.

    • Pete

      Plus, innovation is a foreign concept to OPEC members.

  • Andrew Allison

    This is a recording: the proposition that US fracking it the target of the Saudi policy is ridiculous on its face! They probably know more about the business than any of the commentators, and it’s a matter of public record that US production is increasing, not decreasing.

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