Opec has failed to stop US shale rev­o­lu­tion

The Pak Banker - - OPINION - Am­brose Evans-Pritchard

THE cur­rent crash in oil prices is sow­ing the seeds of a pow­er­ful re­bound and a po­ten­tial sup­ply crunch by the end of the decade, but the prize may go to the US shale in­dus­try rather Opec, the world's en­ergy watch­dog has pre­dicted. Amer­ica's shale oil pro­duc­ers and Canada's oil sands will come roar­ing back from late 2017 on­wards once the cur­rent bru­tal purge is over, a cy­cle it de­scribed as the "rise, fall and rise again" of the frack­ing in­dus­try.

"Any­body who be­lieves the US rev­o­lu­tion has stalled should think again. We have been very sur­prised at how re­silient it is," said Neil Atkin­son, head of oil mar­kets at the In­ter­na­tional En­ergy Agency. The IEA fore­casts in its "medium-term" out­look for the next five years that US pro­duc­tion will fall by 600,000 bar­rels per day (b/d) this year and 200,000 next year as the so-called "frack­log" of drilled wells is fi­nally cleared and the global mar­ket works off a sur­plus of 1m b/d.

But shale will come back to life within six months - far more quickly than con­ven­tional mega-projects and off­shore wells - once crude re­bounds to $60. Shale out­put is ex­pected to reach new highs of 5m b/d by 2021. This will boost to­tal US pro­duc­tion of oil and liq­uids by 1.3m b/d to the once un­think­able level 14.4m b/d, widen­ing the US lead over Saudi Ara­bia and Rus­sia.

Fatih Birol, the IEA's ex­ec­u­tive di­rec­tor, said this alone will not be enough to avert the risk of a strate­gic oil cri­sis later in the decade, given the ex­haus­tion of ex­ist­ing wells and the dan­ger­ously low lev­els of spare ca­pac­ity in the world. "Even if there were zero growth in de­mand, we would have to pro­duce 3m b/d just to stand still," he said, speak­ing at the IHS CERAWeek sum­mit of en­ergy lead­ers in Texas. Mr Birol said in­vest­ment in oil ex­plo­ration and pro­duc­tion across the world has been cut to the bone, fall­ing 24pc last year and an es­ti­mated 17pc this year. This is a drop from $520bn to $320bn a year, far below the min­i­mum lev­els needed to keep up with fu­ture de­mand.

"It's not good news for oil se­cu­rity. Over the past 30 years we have never seen oil in­vest­ment drop­ping two years in a row," he said. "It is easy for con­sumers to be lulled into com­pla­cency by am­ple stocks and low prices to­day, but they should heed the writ­ing on the wall: the his­toric in­vest­ment cuts raise the odds of un­pleas­ant oil se­cu­rity sur­prises in the not too dis­tant fu­ture," he said. The warn­ings were echoed by Opec's sec­re­tary-gen­eral, Ab­dalla El-Badri, who said the cur­rent slump will lead to se­ri­ous trou­ble when the cy­cle turns. "It sows the seed for a very high price in the fu­ture," he said at the CERAWeek fo­rum.

Mr El-Badri said he had lived through six oil cy­cles over his ca­reer but the surge of shale oil sup­ply from the US has made this one of the most vi­cious. "It is a sup­ply bub­ble. This cy­cle is very nasty," he said. The Opec chief ad­mit­ted that the car­tel has been caught badly off guard by crash, blam­ing the wild moves on spec­u­la­tive forces with con­trol over 5m "pa­per bar­rels" on the de­riv­a­tives mar­kets. "The fun­da­men­tals have not changed that much," he said.

But Mr El-Badri sent mixed sig­nals about the real prob­lem in the crude mar­kets, let­ting slip that Opec and the US shale in­dus­try may not be able to "live to­gether" and that frack­ers will take ad­van­tage of out­put cuts in­tended to sta­bi­lize the mar­ket. "If there is any in­crease in price, shale will come back im­me­di­ately," he said. Con­trary to wide­spread as­sump­tions, the IEA re­port said Saudi Ara­bia and the Opec club will lose mar­ket share, tread­ing wa­ter as North Amer­ica and Brazil's "pre-salt" basin in the At­lantic ac­count for most of the growth in global out­put by the early 2020s. Al­ge­ria, Venezuela, Nige­ria and In­done­sia are all go­ing into de­cline.

Iran's grand plan to reach 5m b/d and re­gain its place as the car­tel's num­ber two is dis­missed as "as­pi­ra­tional". It will strug­gle to add much once it has re­cap­tured its pre-sanc­tions level of 3.6m b/d. Iran's ma­jor fields are 70 years old and need so­phis­ti­cated tech­nol­ogy, yet for­eign in­vestors are wary of tak­ing the plunge. Out­side Opec, there will be a steady ero­sion of out­put in China, Mex­ico, Colom­bia, Egypt, Oman and the North Sea, all chip­ping away at global sup­ply and leav­ing the world vul­ner­a­ble as de­mand rises by an av­er­age of 1.2m b/d each year - hit­ting 100m b/d by 2020. China's de­mand will ratchet up­wards by an ac­cu­mu­lated 2.5m b/ d even as its own out­put slips, a scis­sor ef­fect likely to tighten the global mar­ket re­lent­lessly from 2017 on­wards. The IEA re­port im­plic­itly calls into ques­tion Opec's strat­egy of flood­ing the mar­ket in or­der to crip­ple of the US shale in­dus­try.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.