Shale will take Opec cut but no longer needs it

Gulf Times Business - - BUSINESS -

US shale’s re­sponse to Opec’s de­ci­sion to cut sup­ply and boost prices: We’ll take it, but we don’t need it.

In 2014, the US oil in­dus­try’s fate seemed to rest in the hands of Opec min­is­ters who were flood­ing the mar­ket with cheap oil in a push to oblit­er­ate them. Now, the group is in full re­treat, agree­ing to cut out­put to keep their own economies healthy even as US pro­duc­tion con­tin­ues to surge.

The move came in a week in which oil fell to near $50 a bar­rel, a price that four years ago would have pan­icked US drillers. But since then, shale ex­plor­ers have cut costs, boosted frack­ing ef­fi­ciency and made wells longer and more pro­duc­tive. The re­sult: Break evens for a 30% profit have been al­most halved to just $45 a bar­rel in the pro­lific Per­mian Basin.

“The shale in­dus­try can now thrive in a $50 oil world,” David Deck­el­baum, a New York-based an­a­lyst at Cowen & Co, said by phone. The Opec de­ci­sion to sup­port prices over $50 in the US “un­der­writes most of the in­dus­try.”

US oil pro­duc­ers are now gen­er­at­ing 11.7mn bar­rels of oil a day, about a third more than in 2014, with al­most half the num­ber of rigs. And last week, the in- dus­try be­came a net ex­porter for the first time in 75 years.

To be sure, the breakevens com­pa­nies of­ten cite don’t nec­es­sar­ily mean pro­duc­ers will be pump­ing big prof­its at $50-a-bar­rel oil. They ex­clude cor­po­rate ex­penses and land ac­qui­si­tion costs, which can be sub­stan­tial. Still, they re­main strongly in­dica­tive of the “drill or no drill de­ci­sion,” said Ian Nieboer, an an­a­lyst at RS En­ergy Group who sees the US pump­ing an ex­tra 1mn bpd in 2019.

“The full pace and ca­pa­bil­ity of the US in­dus­try is not yet com­pletely ap­pre­ci­ated” by Opec and its al­lies, Nieboer said in an in­ter­view. “Every­body is still catch­ing up to how ef­fi­cient this in­dus­try has be­come.”

Oil pro­duc­ers in the US are “breath­ing a sigh of re­lief” as a re­sult of the Opec agree­ment, said Saudi Ara­bia’s oil minister Khalid al-Falih said at a news con­fer­ence in Vienna on Fri­day. Low oil prices are “not good for the US econ­omy,” al-Falih said, ad­ding that Amer­ica now has “more at stake” along­side Saudi Ara­bia be­cause US oil out­put has in­creased.

In 2014, wells drilled in the Per­mian, home to a third of US out­put and the world’s fastest-grow­ing ma­jor oil field, needed a price of $86.10 a bar­rel to turn a 30% profit, ac­cord­ing to Cal­gary-based RS En­ergy Group. Now that fig­ure is $45 a bar­rel, giv­ing pro­duc­ers in­cen­tive to drill at cur­rent prices. The story is sim­i­lar story for the Ea­gle Ford in south Texas and the Bakken in North Dakota.

Opec and their al­lies, in­clud­ing Rus­sia, met in Vienna on Thurs­day and Fri­day. The agree­ment they made was to re­move 1.2mn bpd from the mar­ket, with Opec it­self shoul­der­ing 800,000 bar­rels of the bur­den. Fol­low­ing the an­nounce­ment, oil in New York jumped by as much as 5% to $54.22 a bar­rel.

An oil pump is seen op­er­at­ing in the Per­mian Basin near Mid­land, Texas. Break evens for a 30% profit have been al­most halved to just $45 a bar­rel in the pro­lific Per­mian Basin.

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