U.S. shale boom tested as
sub-$90 oil threatens drillers
ISAAC ARNSDORF NEW YORK (Bloomberg) 10/08/2014
The U.S. shale boom is producing record amounts of new oil as demand weakens,
pushing prices down toward levels that threaten to reduce future drilling.
Domestic fields will add an unprecedented 1.1 MMbopd of output this year
and another 963,000 in 2015, raising production to the most since 1970, according
to the U.S. Energy Information Administration. The Energy Department’s statistical
arm forecasts consumption will shrink 0.2% to 18.9 MMbopd this year, the lowest
since 2012. More supply from hydraulic fracturing and horizontal drilling,
and less demand, are contributing to the tumble in West Texas Intermediate
crude. The U.S. benchmark is down 18% since June 20 and fell below $90/bbl
on Oct. 2 for the first time in 17 months.
“If prices go to $80 or lower, which I think is possible, then we are going
to see a reduction in drilling activity,” Ralph Eads, vice chairman and global
head of energy investment banking at Jefferies LLC, which advised 38% of U.S.
energy mergers and acquisitions this year, said in an Oct. 1 interview. “It
will be uncharted territory.”
WTI declined to as low as $87.39/bbl today on the New York Mercantile Exchange,
heading for the lowest close since April 17, 2013. It traded at $87.87/bbl
at 11.39 a.m. in London. Prices in domestic fields such as North Dakota’s
Bakken shale are several dollars lower because transportation bottlenecks
raise the cost of reaching refiners.
Lower Oil
The EIA cut 2014 and 2015 crude price forecasts on Oct. 7 because of rising
production and falling consumption. WTI will average $94.58 next year, down
from a September projection of $94.67. The outlook for Brent oil, the benchmark
for more than half of the world’s crude, was lowered to $101.67 from $103.
U.S. output reached 8.7 MMbopd in September, the most since July 1986, the
EIA said. U.S. demand is down because Americans are driving less and using
more fuel-efficient cars, according to the EIA.
Shale oil is expensive to extract by historical standards and only viable
at high-enough prices, Ed Morse, Citigroup Inc.’s head of global commodities
research in New York, said by phone Sept. 23. Oil from shale formations costs
$50/bbl to $100/bbl to produce, compared with $10/bbl to $25/bbl for conventional
supplies from the Middle East and North Africa, the Paris-based International
Energy Agency estimates.
“There is probably something to the notion that if prices fell suddenly
to $60/bbl, the production growth would turn negative,” he said.
Brent crude could drop to $80/bbl before triggering a slowdown in investment
from U.S. shale-oil drillers, Fitch Ratings said in a report.
Price War
As U.S. supply rises and imports decline, the Organization of Petroleum
Exporting Countries may be heading for a price war, according to Frankfurt-based
Commerzbank AG. OPEC’s September output rose to a one-year high of 30.935
MMbopd.
Saudi Arabia, the world’s largest exporter, reduced selling prices on Oct.
1, signaling it is prepared to let prices fall rather than cede market share,
according to Commerzbank. OPEC accounts for about 42% of world supply, according
to London-based BP Plc, Europe’s third-largest oil company.
The SIG Oil Exploration & Production Index, a gauge of the shares of
21 U.S. oil and gas producers, has dropped 17% since Aug. 29, compared with
a 1.9% decline in the Standard & Poor’s 500 Index of equities.
“There is some concern in the market broadly that ultimately the chickens
of declining demand and increasing supply will come home to roost,” Bobby
Tudor, chairman and CEO of Tudor Pickering Holt & Co., an energy-focused
investment bank in Houston, said in a Sept. 23 phone interview. Tudor was
previously a partner with Goldman Sachs Group Inc.
Fewer Deals
Capital market transactions that would have been done three or six months
ago will probably be postponed because of the downturn, Grant Porter, vice
chairman in Barclays Plc’s energy group, said in an Oct. 2 phone interview.
Barclays is the biggest adviser to U.S. energy companies selling shares this
year, data compiled by Bloomberg show.
U.S. output is rising as companies are now getting more wells out of each
rig and more oil out of each well, said Eads, whose team includes 26 technical
experts. In the Permian basin of West Texas, the country’s largest onshore
field, there are twice as many rigs but five times as many wells, according
to Eads.
Each rig in the Permian added a record 171 bbl of new oil a day in October,
up 21% from a year ago, EIA data show. In Texas’ Eagle Ford, each rig is getting
536 new barrels a day, up 20%, according to the agency.
‘Holy Toledo’ “The thing that blows me away is every day somebody walks
into my office with some new project, and I say ‘Holy Toledo,’” said Eads,
who was a fraternity brother at Duke University with Chesapeake Energy Corp.
co-founder and former CEO Aubrey McClendon. “It’s unreal. We see that once
a month.”
Globally, second-quarter consumption grew the least since 2011, according
to the IEA. The adviser to industrialized countries cut its demand forecasts
last month by 0.2% for this year and 0.1% for 2015.
The slowdown is “nothing short of remarkable,” the IEA said in a Sept. 11
report. It attributed the decline to slowing economic growth in China and
Europe. Higher U.S. production and Libyan exports are contributing to ample
supply, the agency said.
Advances in freeing natural gas from miles-deep shale rocks drove down prices
86% in April 2012 from the 2008 high. Prices peaked at $15.78 per million
British thermal units in 2005 and dropped to a low in 2012 as shale resources
pushed U.S. output to new highs.
Trading Oil
Oil prices are harder to move because crude trades more globally than natural
gas, according to Stephen Trauber, vice chairman and global head of energy
at Citigroup in Houston. While oil can be carried on ships, trucks and pipelines,
gas has to be frozen before it can cross oceans.
Crude prices might not fall enough to shut in production. About 70% of U.S.
reserves would remain economic with global prices at $75/bbl, according to
Wood Mackenzie, an industry consultant based in Edinburgh.
OPEC also may prevent further declines because members need high prices
to support social spending. Saudi Arabia needs $87.63/bbl to balance its
budget, compared with $66.50 for the United Arab Emirates and $92.96 for
Iraq, the International Monetary Fund estimates.
LNG Exports
The U.S. has approved four facilities to liquefy gas for exports. While
the U.S. prohibits most crude exports, finished products such as gasoline
trade freely. Producers are lobbying to loosen the rules for crude too.
The last time the U.S. had a domestic oil boom was in the 1980s, following
the Arab embargo. It ended when new supplies overwhelmed the market. Prices
dropped to $9.95/bbl in April 1986 from $32.35 the previous August, and the
annual average stayed below $30/bbl until 2000.
“What always happened is you’d get too much oil and gas and the price
gets too cheap and you quit drilling -- can’t make money,” T. Boone Pickens,
founder and chairman of BP Capital LLC in Dallas, said in a Sept. 15 phone
interview. “You break the price down and you’ll stop the boom right quick.”
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