The National - News

Investing in US shale can teach Opec a thing or two about its rival

- ROBIN MILLS Robin Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

Learning is essential for big oil-producing countries to plot their response to shale

In May, just before the last Opec meeting, an enemy walked into its Vienna headquarte­rs. Often we can learn more from our enemies than our friends. Mark Papa, the chairman of Centennial Resources and legendary chief executive of the oil company EOG, was there to tell Opec about shale.

The major oil and gas producers have persistent­ly underestim­ated shale, to their detriment. In 2011, Alexei Miller, the chief executive of the Russian state company Gazprom, commented that “shale gas is a well-planned propaganda campaign” and his deputy called it “a bubble”. Qatar’s oil minister said as late as January 2014: “We do not consider the US shale gas revolution to be a game changer.”

Mr Papa was one of the leading characters in this revolution. Starting in the late 1990s, he built EOG into the United States’ fourth-largest driller, increasing its value almost 2,000 times by developing shale reservoirs in North Dakota and Texas. One of the first to spot the shift in value from shale gas to oil, EOG became renowned for its in-house technology and low production costs. Since retiring, Mr Papa was tempted back to start Centennial Resource Developmen­t, investing in Texas’s Permian Basin and turning US$500 million into $2.85 billion in two years.

Since then, Opec has awoken to the threat, but still struggles to understand shale. The production cuts that began at the start of this year have left the oil price exactly where it started and, by April, rising US shale production almost precisely offset Opec’s reduction. So Mr Papa’s expertise was welcome and it is understood that he actually forecast a lower rise in US output this year than Opec’s own analysts.

Talking to experts such as Mr Papa demonstrat­es a welcome and overdue openness. For too long, Opec’s analysts and officials relied on the reports of fringe sceptics who have repeatedly been proved wrong.

Shale production is not just another big but comprehens­ible competitor, like Brazilian deepwater oil or Canadian oil sands with discrete projects with long lead-times. Its business model is entirely different: short-term flexibilit­y; relentless improvemen­t in costs and efficiency; a continual inflow of finance; and hedging to lock in acceptable oil prices for one or two years while wells recover their costs.

The former Shell chairman Sir Mark Moody-Stuart and the former BG and Schlumberg­er chairman Andrew Gould sit on the Saudi Aramco board – but neither are shale experts. Major oil-producing countries could bring in practition­ers such as Mr Papa into advisory roles. Opec countries, via their national oil companies or strategic investment vehicles, can enter North American shale plays.

Other national oil companies have bought into North American shale assets namely India’s Gail, the Korea National Oil Corporatio­n, China National Offshore Oil Corp and Kuwait Foreign Petroleum Exploratio­n Company (Kufpec) have invested in Canada. But, with the exception of Kuwait, these are not Opec companies. Abu Dhabi National Energy Company (Taqa) is present in Canada but in convention­al, not shale, fields. Kufpec and Mubadala are natural investors for such a venture, but Adnoc or Aramco could also take part. So why should Opec countries invest in shale? They should not sink huge sums, nor expect to earn stellar returns, in a very competitiv­e business but they should not aim to lose money either. The main benefits would be threefold: to hedge; to learn; and to apply.

The hedge refers to betting on the future progress of shale. If shale production cannot keep up with demand, and prices rise, Opec investors will benefit from gains in both domestic oil revenues and their shale earnings. If, on the other hand, as currently seems the case, shale output grows rapidly and caps prices from rising much above $50 a barrel, the shale investors will at least gain from greater production volumes.

Learning is essential for big oil-producing countries to plot their response to shale. There is no substitute for being involved in the day-to-day hurlyburly of the fields in Texas or North Dakota – to be able to judge how quickly costs are rising or falling, how technology is advancing, and whether shale companies are really profitable and financiall­y sustainabl­e. That in turn would inform them on whether to try to ride out the current slump, whether to meet it with modest production cuts as now, or to boost output to bring down prices.

The third angle is applicatio­n. Opec members – Abu Dhabi, Algeria, Saudi Arabia, Venezuela – have shale resources of their own. For those whose oil production is in decline, these are worth developing. Even for those with abundant low-cost convention­al oil, the techniques of shale production are still applicable to their reservoirs. Long horizontal wells and hydraulic fracturing has led the boom in the Permian Basin, whose carbonate reservoirs are not so different from many in the Middle East.

Shale is a novel challenge for all convention­al oil producers. By getting more deeply involved, they would be better able to plot their strategies.

 ??  ??

Newspapers in English

Newspapers from United Arab Emirates