Famed energy guru Daniel Yergin was heard touting shale’s resilience at the World Economic Forum in Davos this week. In his comments, Yergin conceded that American shale producers are facing a dismal 2016 as they struggle to stay profitable at a time when crude is trading just above $30 per barrel. But he made the point that the logistics and economics of fracking make the shale industry more likely quickly to rebound when the global glut is eventually absorbed. Ambrose Evans-Pritchard writes for the Telegraph:
Daniel Yergin, founder of IHS Cambridge Energy Research Associates, said it is impossible for OPEC to knock out the US shale industry though a war of attrition even if it wants to, and even if large numbers of frackers fall by the wayside over coming months.
“The management may change and the companies may change but the resources will still be there,” he told the Daily Telegraph. The great unknown is how quickly the industry can revive once the global glut starts to clear – perhaps in the second half of the year – but it will clearly be much faster than for the conventional oil.
“It takes $10bn and five to ten years to launch a deep-water project. It takes $10m and just 20 days to drill for shale,” he said, speaking at the World Economic Forum in Davos.
U.S. shale production is one of the key contributors to the oversupply in today’s oil market, but the dual technologies that set off the boom—hydraulic fracturing and horizontal well-drilling—make for relatively expensive operations when it comes to per barrel costs. As such, most analysts expected American output to drop significantly in the face of falling prices. This expectation likely helped form the Saudi strategy of coercing OPEC into not scaling back production, under the thinking that these smaller U.S. shale producers would be forced by market conditions to make the necessary cuts themselves—cuts that would eventually send prices back up.
That hasn’t happened exactly in the way the Saudis expected, in large part because of the shale industry’s remarkable inventiveness and its ability to find new ways to cut costs and boost efficiency. But it remains the case that $30 oil isn’t sustainable for much of America’s shale industry, and we are likely to see overall U.S. output continue to taper off in the coming months.
Yergin’s point is nevertheless well-taken. Fracking may be more expensive to produce per barrel, but, as he points out, its start-up costs are lower. If and when prices start to go back up, it will be small, nimble shale producers—not oil majors or petrostates operating conventional plays—who will be able to get back on the horse the fastest. You can bankrupt a company, but you cannot kill a resource. The development of fracking technology, a technology that will only get better and cheaper, is driving a long-term change in the way oil markets work.