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Crude Economics
The Oil Beyond OPEC’s Control

In the same week that Saudi Arabia and Russia proposed freezing production, many of the world’s biggest oil exporting nations have had their credit ratings slashed. These are tough times to be in the business of selling oil, and even if OPEC+Russia are able to succeed in their plan to freeze production and induce a rebound in prices (an unlikely feat, due to Iran), there are plenty of producers that this coalition can’t control. Take, for example, U.S. shale, which Bloomberg reports would see a resurgence if prices recover:

Shale output will come back if oil prices rise to $50 a barrel, Ian Taylor, chief executive officer of Vitol Group BV, the world’s largest oil trader, said in an interview before the Saudi-Russia deal was announced. “It looks clear that a lot of the oil that’s probably going to be shut down in the next year or so because it is simply too low a price, some of it could come back,” he said.

But if and when prices start to rebound, whether that happens as a result of a pick-up in demand (hard to imagine, given China’s slowing growth) or OPEC coordination to reduce supply, U.S. shale producers won’t have to go to great lengths to restart production. After all, they’ve been drilling but not yet fracking wells for months now, producing what’s come to be known as a “fracklog,” which is set to flood the market with new supplies just as soon as market prices make it profitable to restart operations. Bloomberg continues:

The cheapest and quickest way for shale companies to increase output would be to tap the fracklog. Almost 4,000 wells have been drilled but are still waiting to be hydraulically fractured so they can produce, according to Bloomberg Intelligence analysts William Foiles and Andrew Cosgrove. If the fracklog were reduced by just 170 wells a month, it could add 400,000 to 600,000 barrels a day, Cosgrove said.

American shale companies aren’t the only producers outside of OPEC control, either. Oil projects can involve billions of dollars in investment before they start producing, and there are a number of projects that were conceived of before the price drop that are poised to start producing in the next few years. Reuters reports:

Around 3 million barrels per day (bpd) of oil production is set to come on stream in 2016 from projects whose development started as early as 2013, according to Oslo-based consultancy Rystad Energy. These projects will add a further 1.5 million bpd in 2017, with around two-thirds of the production coming from offshore developments.

OPEC controls 40 percent of global oil production, and though the Saudis may have found common ground with Russia, the rest of those non-OPEC producers don’t seem likely to play ball with the cartel. Whether its upstart shale firms, oil majors, or petrostates (as is the case with Iran), producers around the world have their eyes set on one thing—market share—and they’ll boost output at the first chance they get. If OPEC does manage a production freeze, it will be giving a window of opportunity to those suppliers eager to expand.

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  • Andrew Allison

    The reason that prices are low is that there’s too much supply. Just how, in the face of essentially static demand, will maintaining production at current levels increase prices?

    • Jim Sweet

      It won’t. The point here is that OPEC no longer can decide prices. OPEC is pragmatically dead.

  • Jacksonian_Libertarian

    None of this takes into account the improving technology of the Shale Oil developers. The developers are finding cost saving across the entire range of their operations. Remember that Shale Oil started to see serious development 6-7 years ago when oil was at $60/barrel. And since then they have brought in more powerful faster drilling rigs, walking rigs and multiple wells per site, more powerful faster pumps and increased sand injection 3 fold, new chemicals and coated sands are boosting production, data mining offers huge improvements in production, and fracking is still very inefficient with 80% of the production coming from 20% of the fracked well, indicating that there is at least 300% more oil that could be produced with superior methods, and that every well that has already been fracked can be added back onto the Fracklog to be re-fracked with superior methods when its production falls to nearly nothing in 5-7 years, without even the need for drilling a 40%+ cost savings. Crunching the numbers shows that if a well is profitable at $60/barrel and improved fracking produces 4 times more oil, then the same well will be profitable at $15/barrel. There is huge room for improvement with the American Shale Oil developers, and their competitors in OPEC and Russia will be unable to match them and in fact most are seeing their costs increase as old wells and equipment are inefficient and require more maintenance.

    • Jim Sweet

      Thanks for the info. Is the geology of US fracking fields easier overall than foreign deposits? I’ve read that European fields are harder to frack efficiently.

      • Change60

        I’ve read the Chinese shale fields are harder as well. For reasons I’ve not understood.

    • Change60

      At the time the Saudi’s opened their spigot an attempted to flood the market, I thought they would lose. They ignored competitive pressures upon innovation, two attributes still found in the American oil industry.
      For the Saudi’s this must be a frightening time given they know the US won’t defend them from either Russian or Iranian subversion if not direct attack. At the same time, the US holds the whip hand in oil production. A nightmare for the Sunni’s.

      If the US were smart, they’d go all out to export oil and gas to Japan and Europe and look to break into markets world wide and take share from the Sunni’s.

      • DJ9r

        Natural gas, perhaps. But I’d rather see the U.S. sit on our domestic oil, and save it for a rainy day. I know, it sure won’t do the producers/jobs here any good, but they can continue to drill wells and ready production, against that future day we all know is coming when oil prices begin to significantly rise again.

        We should happily buy and use their cheap oil while we can, and save ours for the future, when prices rise due to increased demand or supply challenges. If we can cover our own needs in the future, we will never have to put up with oil price/supply threats from anyone, anywhere, ever again.

  • Change60

    What could Russia and Iran do to take production off the market sufficiently to increase oil prices no matter what the frackers do?
    Get ride of the competition. Obama is quite pliable to Russian and Iranian demands, perhaps the targeted destruction of Saudi oil complexes? A naval blockade at the mouth of the Gulf to some number of tankers taking Saudi or Kuwaiti crude? Who would make them stop?

  • CptNerd

    The nice thing about the current situation, the more oil the Russians and OPEC pump, the less they have in the future, and the more valuable ours will be then when we do start fracking again. Our oil isn’t going away at millions of barrels per day.

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