Lunedì, 16 novembre, 2015
Low oil prices are finally affecting shale production. However, the shale industry continues to show a strong resiliency and it may eventually emerge as a winner in this new lower for longer scenario.
Uncertainties have mounted again in the last months around financial resilience of the industry. Production from the Lower 48 (the contiguous United States, where shale oil is produced) has peaked in March and then started to decline. Hedging programs for the next year seem not adequately replaced, while equity sales registered a marked slowdown. As far as September 2016, 16 US oil companies filed for bankruptcy, among which Samson Resources. October was long awaited as a doomsday as banks had to re-define the“borrowing bases” of hundreds of small and midsized producers according to a re-valuation of their oil and gas reserves based on current market trends.
It seems instead that the financial markets keep supporting the industry. At the beginning of October, the shares sale made by Concho and Memorial has received a warm welcome from investors. Soon after, investment bank Jefferies reported that lenders had only trimmed a total $450 million from the borrowing bases of some around 20 public oil companies: about 2% of the capital available under their reloadable credit facilities, instead of the expected 15%. This “surprisingly gentle” approach toward the business – as portrayed by Jefferies – may not necessarily avoid bankruptcy for many companies, as financial pressures remain high. However, it gives the industry new life-blood to face current difficulties.
Indeed, time is a crucial factor in this phase of the shale oil history. Oil prices are expected to raise next year to around 55-65$, as oversupply disappears. Thanks to the great efficiency improvements and cost saving measures put in place by the industry, shale is now a mid-cost production. The longer it will manage to survive, the more the burden of adjustment will be shared with other high-cost productions. Actually, the pain of low prices is widespread. Global E&P capex is down by around 100 billion dollars this year and the perspective of a lower for longer scenario will keep affecting future investment decisions. Announces of cut may eventually arise fears of future scarcity and influence prices upwards. Exploration plans have been reduced; megaprojects have been postponed or canceled, and other will come. At the same time, non-Opec non-shale output decreases because of natural oilfield depletion and the stop of unprofitable productions. The first will accelerate as the renounce of upgrading programs increases the decline rates of mature fields, mainly in the North Sea. The second may regard marginal productions, like US stripper wells. Despite they produce less than 5bbl/d each, with almost 400.000 wells all around the country, stripper wells contribute for around 11% of total US oil output. If part of this production comes off line at the end of the year, market will tighten earlier in 2016. Not last, adjustment will come by the positive reaction of demand to low prices.
With WTI around 45$ for three months in a row, the industry is certainly facing hard times but there are reasons to think it may weather the storm. By improving efficiency, shale has demonstrated it can tolerate a 50-60$ price environment, at least in the most prolific and well-understood plays like Bakken, Eagle Ford and Permian. Prices are currently not far from that confidence zone. This suggests that the path of decline may be slow and gradual (as projected by EIA) and that any small rise may alleviate the pain. Moreover, investments can quickly restart as prices go up. Indeed, it took just two months of prices close to 60$ to trigger a temporary jump in the rig count during July and August (see the figure). Not least, the industry can rely on the support of the entire US system, willing to keep fuelling the new black gold race. It is not only about finance. Halliburton decision to allow deferral payments for the rig lease is just one of the latest examples of how the oilfield service sector is sustaining the business.
Figure 1 - Rig count, Lower 48 output and WTI. Source: author’s elaborations on EIA and Baker Hughes data; WTI projections are based on consensus forecast.
Overall, the picture mayseem not so bleak. If the industry keeps resisting, it will emerge as the real game-changer of the new oil order, both in the short and long term. Its peculiar features are unprecedented and unknown in the history of the oil industry. The much smaller investment amount per well and the shorter time-to-market it requires, compared to most of the other conventional and unconventional productions, allow shale oil to quickly react to price variations, affecting global supply in the short term. With Opec (read Saudi Arabia) unwillingness to adjust production, US shale becomes the new swing production, although its effectiveness as price stabilizer still has to be fully verified/deployed and may improve over time. At the same time, by shifting from high to mid-cost production, shale oil undermines other higher cost productions in the long term. It is not a case that, just as Shell renounces to explore the Chukchi Sea in the Alaskan Arctic and to develop the Carmon Creek oil sand project in Canada, Exxon and Chevron announce plans to expand shale operations.