U.S. shale production alters global oil markets

Predicting the longterm global oil supply picture used to be easy: there was never enough.

Oil was a scarce, limited resource, and demand continued to grow. Producers had to continually find new sources of oil, travel to often-remote and dangerous parts of the world to tap any source of oil that was available. Not anymore.

The U.S. shale revolution used horizontal drilling, hydraulic fracturing and an increased reliance on technology to unlock vast oil reserves throughout the United States, more than doubling the country’s production in less than a decade.

As a result, global markets were flooded, driving down prices. U.S. drilling has slowed, but production has remained steady.

“Tight oil production has changed the oil economics of the United States,” said Robert L. Kleinberg, a fellow at Schlumberger.

Kleinberg and other economists and industry leaders discussed global oil supply dynamics late last month at the Federal Reserve energy conference in Oklahoma City.

The gains were led largely by technology improvements, including longer laterals and supply chain optimization though better organization of the sand, water and other items needed during the drilling and completion operations.

Perhaps the biggest change, Kleinberg said, is mass production.

“What’s enabling that is pad drilling,” he said. “With several wellheads on a single five-acre site, you don’t need to take apart the drilling rig to drill a new well. Just creep it over 10 or 20 feet, and start again.”

While U.S. oil production is up, the Organization of Petroleum Exporting Countries and its member states are struggling with a price that is well more than the costs of getting Middle Eastern oil out of the ground, but far less than the price needed to pay for government programs.

The group is expected to soon extend production cuts into 2018.

“What’s different is how committed Saudi Arabia is to the cuts. They’re all in,” said Kevin Muerhring, senior managing director of SGH Macro Advisors. “They will do whatever it takes. They have much lower ambitions now. They’re not trying to drive the price up anymore, but they are trying to keep the price from falling again.”

Because of the OPEC cuts and production declines in several other countries, global supply and demand are moving back into balance, said Mark Finley, general manager of global energy markets at BP PLC.

He said easier-toaccess U.S. shale and tight oil has displaced many more expensive, larger, long-term projects in other parts of the world.

“There’s space for those longer-lived projects, but they have to compete,” Finley said. “The era when, ‘if I get access to oil, I’m going for it no matter what,’ is over.”