US shale producers add to India's luck with oil

With shale oil production returning to growth this year, major turnaround in oil prices is unlikely

The National Democratic Alliance government came to power in May 2014 with big luck in oil. The stunning fall in oil prices, from a high of $115 a barrel in the beginning of that year to under $35 a barrel at the end of February 2016, relieved Finance Minister Arun Jaitley of two big worries: inflation and subsidies.

India, which is 82 per cent dependent on imports for oil, saw its petroleum import bill, including oil and petroleum products, rising 9 per cent to $80.3 billion on the back of a 7 per cent increase in volume of imports and a 3 per cent in prices.

The latter happened because of the Organisation of Petroleum Exporting Countries (Opec) and its allies, including Russia, making a production cut deal in December 2016 for the first time in 15 years. Eyebrows of Indian leaders started furrowing when benchmark Brent crude reached $55.86 a barrel at the end of January, even while they went on reassuring the public that there was nothing to worry till oil had breached $60 a barrel.

US oil production returning to growth this year, helped by a smart recovery in the shale industry, has sustained a surplus situation, putting pressure on prices to the benefit of a major importing country like India. According to Baker Hughes, the world’s largest oil field services company, the number of rigs drilling for oil in the US has more than doubled in the past year. Not only that, the surge in inventory of drilled but uncompleted (DUC) wells in America’s major shale basins, including Permian and Bakken, also exercises bear pressure on the market.

A DUC well is one where a hole is made into a shale rock but where fracking hasn’t begun to get oil out. Once oil crosses a certain level and infrastructure, particularly pipeline for oil evacuation is in place, expect oil and gas to gush out from a large number of DUC wells. Those expecting a major turnaround in oil fortunes will be making a mistake if they don’t take into account what could happen with DUC wells maturing.

Didn’t the pledge of Opec and non-OPEC countries to curb production late last year as a way to bolster teetering oil prices — from a high of over $100 a barrel in early 2014 they were down to below $30 a barrel in early 2016 — yield the desired price rises, and in the process encourage increased investment in the US oil industry? The International Energy Agency foresees a 53 per cent upswing in investment into US shale oil this year alone.

Referring to the US, several experts have said the results of investments in late 2016 and in the first quarter of this year are now seen as production rolls through. Thanks to a spurt in drilling in shale oil rich areas, the US oil production in 2018 would be a record above 10 million barrels a day. In the unlikely event of oil prices taking a major leap, next year’s US production will be a lot more than is officially forecast.

It has been seen more than once that extraction of oil from rock formations by way of hydraulic fracturing using a mixture of water, chemicals and sand picks up when oil prices remain firm. The opposite happens when oil falls in a bear grip. While this remains the case, the sector has seen phenomenal technological advances in recent years, leading to massive drilling efficiency gains. The shale industry has achieved technology breakthroughs, allowing drilling of multiple wells from the same spot and horizontal wells.

Besides making shale oil production a viable proposition at sub $45 a barrel, technological advances have ensured that fracking is no longer a dirty word. Earlier, fracking bore the stigma that it could be the cause of chemical contamination of water and tremors in surrounding areas of a drill. In fact, on the strength of the newly earned environment friendliness tag for fracking, a UK energy company is to bid for licences for exploration and extraction of oil and natural gas below Artesian Close Industrial Estate in London’s Willesden. The company believes that hydraulic fracturing of the deposit could potentially meet 12 per cent of London’s energy needs. But the litmus test for the company will be in getting the residents of the prime London location agree to fracking.

Much to the concern of Opec, particularly Saudi Arabia for which the principal source of revenue is oil and gas, shale operators have prepared themselves through efficiency and productivity improvements to operate in a $40 a barrel price environment. This is good news for India. President Donald Trump’s policy of energy dominance, which is to take the form of boosting oil and gas production for domestic use and exports, is not music to Opec ears.
 

Oil analysts are in consensus that the market has grown immune to stories of any supply side discipline or discipline breaches. Therefore, looking over to the demand side, the waning demand in China, the world’s biggest crude importer, will likely keep oil prices low for long.

Amin Nasser, CEO of the world’s largest energy company, Saudi Aramco, does not believe that shale oil development in the US and other countries will compensate for recession in investment in fossil fuel exploration, development of new large oilfields and related infrastructure. The oil industry claims that as much as $1 trillion investment in oil and natural gas has been lost in the wake of global oil glut and low prices. Nasser goes on to remind that the “volume of conventional oil discovered around the world over the past four years has more than halved compared with the previous four.”