Who threatens OPEC and the oil price
- Written by Laurentiu Rosoiu
There are one few clues that can still convince investors that OPEC is still the player setting the oil price direction. The evolution of the US oil and gas industry is not at all one of them! On the contrary, it is among the signs showing that the global balance of power on this market has changed, and the United States is a more active and, seemingly, a more important player than all the other oil and gas producers combined. This happens despite the fact that, given the size of the deposits, the balance is unfavourable to the Americans.
Without claiming to lead the game on the world oil market, through industry dynamics, through its flexibility and its unequalled innovation and adaptation capability, the United States tangles the dealings between the ‘heavy’ players; this happens not due to the existence of thousands of billions of barrels of oil in deposits, but to the fact that the industry, through the spectacular development of hydraulic fracturing technology and the exploitation of alternative resources, has delivered the US, in the last decade, the characteristics of a ‘swing producer’; namely the ability to quickly and naturally bring a significant plus of production on the market at times when oil prices rise and the ability to stop production and preserve resources when they are low. We are actually talking about a continuous restructuring process of the American shale industry (through bankruptcies, asset, people and technology transfer) which, on the whole, gives that exact result: higher production when prices increase and lower production when prices fall!
A very important feature of this process, and which has the capability of influencing the market over long-term, is that every new production surge and every ‘mini-crisis’ of the industry (due to falling prices - bankruptcies and restructurings) brings, on the background of continuous technological advances, an increase in productivity and efficiency. This leads to the constant decrease of the breakeven thresholds of this type of exploitation. According to statistics published in early 2017 by Rystad Energy - one of the world’s leading independent oil and gas industry independent consultants, during 2013-2017, the profitability thresholds for shale exploitations have fallen from an average from about USD 80 to about USD 35 - the downward trend is recorded across all major blocks in the US.
This is, therefore, one of America’s greatest strengths in the dispute with the world’s largest oil producers, very likely to become a perpetual ‘cap’ for oil price hike and, through the latest developments, a likely explanation for the markets negative reaction to the OPEC agreement at the end of May 2017. Thus, at the end of the first three months of 2017, in four of the largest areas of shale exploitation in the USA (EFS, Bakken, Permian and Niobrara), the number of horizontal drilling wells was of 335, by 100% more than the low level recorded in May 2016 - according to the same Rystad Energy statistics.
At the same time, according to another study completed by PricewaterhouseCoopers, of the USD 73 billion - the value of mergers and acquisitions by US companies in Q1 2017 (by 160% more than a year ago), about USD 24.6 billion were transactions involving shale deposits exploitations; these figures, but not only, show that the shale industry is on a growing cycle, with higher likelihood of continuing to increase the output in the near future. These are the issues that have made investors consider as insufficient the production capping recently agreed by OPEC, which will reduce the chances of spectacular price increases, almost regardless of the coordinates set by any similar decisions in the future.