The Shale industry has thrived on an oil price above $100 as much of OPEC did and without much concern for the threat of falling prices, believing that $100+ would be sustainable indefinitely and they could set their budgets accordingly.
Now, looking back at the meteoric rise in Shale production, at the end of 2013 only a couple of years ago, the industry was boasting that it would impact on most OPEC members’ output within a couple of years. However, today, following OPEC’s decision to maintain output and flood the market, much of the shale industry is struggling. Over the same period, the US rig count has fallen from close to 2,000 two years ago, to just over 1,000 one year ago and now less than 500. Likewise oil output from Shale has been hit and this year the IEA estimates that output will fall by around 600,000 bpd and by early next year that figure will have fallen further to 800,000 bpd. All good news for OPEC and certainly while the price of oil remains below the $40 level. Nevertheless, the industry has learned that once oil prices move above $40, some Shale production could come back but as this has not yet been put to the test, we don’t know how quickly the industry will be able to re-mobilise itself and also what output can be expected.
All producers need to understand that trends are cyclical and not assume that whatever level prevails today will be with us tomorrow. Furthermore, no energy supply source is infinite and shale in particular has a short life span. Similarly, as the fracking process usually required to extract oil and gas from shale has become more widespread, so too have the concerns over the process. In Eastern Europe where there was thought to have been great potential to adopt fracking, such ambitions have been curtailed by regulatory controls and taxation regimes even before the price of oil collapsed to frighten off international potential investors. Elsewhere, much of Western Europe is moving against fracking in spite of the threat of gas supply cuts from Russia and again with prices so low, investors are not forthcoming and the cause has lost momentum for now. If the oil prices moves above $40 will they return?
It has been said that the industry would return to the market if the price of oil moved above $40 but looking across the market there may be some renewed interest in the US but more likely the threshold would be above $50 and closer to $60 for the shale industry to pose a real threat to OPEC and other producers like Russia and the North Sea. Furthermore, there would need to be a level of confidence that prices would be sustainable at such levels for production to be maintained. So, for today, the producers, whether conventional or Shale will be following the supply-demand ratio and only when they are assured that the market is sufficiently tight enough will they commit to further investment in new opportunities whether conventional or shale. For Saudi Arabia and fellow OPEC members, they will need to adjust their own costs and budget aspirations downwards to cope with such levels and to beware once those levels are allowed to reach $60 and above.