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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