Oil sec­tor finds it­self in a squeeze

Ris­ings costs and in­vest­ment slump to off­set US shale

The National - News - Business - - Front Page - An­thony McAu­ley am­[email protected]­ational.ae

Two of the oil in­dus­try’s most closely fol­lowed fore­cast­ers have raised warn­ing flags about pres­sures build­ing due to sharply lower in­vest­ment in the af­ter­math of the boom-bust cy­cle of the past decade. The In­ter­na­tional En­ergy Agency (IEA), the Paris-based watch­dog for the world’s largest economies, has pre­vi­ously voiced con­cern about an im­pend­ing oil short­fall be­cause of the in­vest­ment slump. But in its lat­est warn­ing, the agency says the re­mark­able re­bound in the US shale sec­tor in re­cent months risks mask­ing the con­tin­ued slump else­where.

Costs in the US shale sec­tor have fallen by half in the past two years, so that the oil price re­cov­ery since last au­tumn – spurred by out­put re­straint by Opec and some other pro­duc­ers – has en­cour­aged a re­bound of 500,000 bar­rels per day of US shale pro­duc­tion.

“This growth in US shale pro­duc­tion has be­come a fun­da­men­tal fac­tor in bal­anc­ing low ac­tiv­ity in the con­ven­tional oil in­dus­try,” the IEA said.

But con­ven­tional oil pro­duc­tion, which ac­counts for 80 per cent of the world’s to­tal out­put, is see­ing ever-dwin­dling in­vest­ment and ex­plo­ration spend­ing is fore­cast to drop again this year, the third year in a row of fall­ing in­vest­ment, the IEA said.

“Ev­ery new piece of ev­i­dence points to a two-speed oil mar­ket, with new ac­tiv­ity at a his­toric low on the con­ven­tional side con­trasted by re­mark­able growth in US shale pro­duc­tion,” said Fatih Birol, the IEA’s ex­ec­u­tive di­rec­tor, in a re­port re­leased yes­ter­day.

“The key ques­tion for the fu­ture of the oil mar­ket is for how long can a surge in US shale sup­plies make up for the slow pace of growth else­where in the oil sec­tor,” he said.

Mean­while, in a sep­a­rate re­port, oil in­dus­try con­sul­tancy Wood Macken­zie warned that the sharp in­crease in ac­tiv­ity in the US shale sec­tor has al­ready be­gun to squeeze the oil ser­vices providers – who pro­vide the rigs, pumps and other es­sen­tials of drilling – and is be­gin­ning to push costs back up.

“The re­cov­ery in oil prices and cap­i­tal-spend in­creases sig­nal the be­gin­ning of an up­ward trend in ac­tiv­ity [and] the speed of in­crease in 2017 is squeez­ing the ser­vice sec­tor, sup­port­ing our view on cost in­fla­tion,” ac­cord­ing to Jack­son San­deen, a US oil in­dus­try an­a­lyst for Wood­mac, which fore­casts costs will rise on av­er­age by 15 per cent in the US shale sec­tor this year. One of the con­se­quences of ris­ing costs is that it could push back up the oil price level at which new in­vest­ment breaks even, thus abruptly stalling in­vest­ment in the sec­tor, Mr San­deen noted. The US shale sec­tor has be­come the world’s “swing pro­ducer”, to some ex­tent, be­cause of its abil­ity to re­spond so quickly to mar­ket con­di­tions.

How­ever, the IEA high­lighted the dif­fer­ence in scale be­tween US shale plays, which it fore­casts will ex­pand by an­other 2.3 mil­lion bpd by 2022 at cur­rent oil prices, and off­shore oil sup­plies, which re­quire much larger and longer-term in­vest­ment com­mit­ments and which ac­count for about a third of world sup­ply.

Last year, off­shore in­vest­ment was only 13 per cent of the to­tal in con­ven­tional oil, down from an av­er­age of 40 per cent from 2000 to 2015, the IEA said. North Sea oil in­vest­ments alone fell by half from 2014 to just be­low US$25 bil­lion last year.

There is still plenty of dis­cov­ered oil in re­la­tion to ex­pected de­mand – the BP Sta­tis­ti­cal Re­view es­ti­mates there are about 1.7 tril­lion bar­rels of proved oil re­serves, com­pared with the IEA’s es­ti­mate of de­mand of 880 bil­lion bar­rels for the pe­riod from last year to the end of 2040.

But the dwin­dling rate of in­vest­ment still risks en­ergy se­cu­rity even in the short term, the IEA said. “It brings an ad­di­tional cause of con­cern for global en­ergy se­cu­rity at a time of height­ened geopo­lit­i­cal risks in some ma­jor pro­ducer coun­tries, such as Venezuela,” the agency said.

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