US Shale Oil at an Inflection Point

Published: December 13, 2015

Editor’s Note:

The Jadwa Investment firm in Riyadh publishes a host of important analyses on the Saudi economy including a number of reports on global energy issues. Today we provide for your consideration a report from October that updates their detailed analysis of the outlook for unconventional oil and gas production. This report addresses the “US Shale Oil at an Inflection Point.” You can find the summary here and the complete report at the link.

[Complete report with key charts at this link (English and Arabic)]

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US Shale Oil at an Inflection Point

Summary

  • This report follows up on a comprehensive analysis we published on the US tight/shale oil back in December 2013 (please see: The outlook for unconventional oil and gas production).
  • In a period of high oil prices between 2010-2014, many smaller US exploration and production (E&P) companies took advantage of cheap and readily available financing to cover capex costs to expand shale oil production.
  • US shale oil production continued to increase, year-on-year, even as oil prices tumbled 50 percent, from mid-2014 onwards, as timely hedges in oil prices combined with continued access to finance and increased operational efficiency helped to bring down breakeven costs of shale drillers.
  • Going forward, sustained drops in production are expected as oil hedges expire, financing from secured lending is tightened and the high yield debt market becomes too expensive.
  • There will not be a collapse in shale oil production as a period of sector consolidation, via global integrated oil companies and private equity, ensures that shale oil remains a key player in the global oil market going forward.
  • Aside from shale oil, the lower oil price environment will also impact global oil supply, with capex cuts in major integrated oil companies leading to tighter oil markets from 2017 onwards.
  • Although the fight for market share will lead to lower short term oil revenue, Saudi Arabia is likely to be the main beneficiary when global oil markets become tighter and prices rebound by 2020.
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OVERVIEW

We published a comprehensive analysis of the US tight oil (often referred to as shale or unconventional oil) back in December 2013 (please see: The outlook for unconventional oil and gas production). In this report we documented, amongst other things, the rapid development of tight oil, which jumped from virtually nothing in 2004 to around 5.4 million barrel per day (mbpd) by mid-2015. Tight oil in the US currently represents 51 percent of total US oil production and has been the main source of year-on-year production growth in the country from 2008 onwards (Figure 1). Since publishing the report back in 2013, the global oil market has witnessed massive change, specifically through oil prices dropping by 50 percent since July 2014. Whereas previously the global oil industry viewed $100 per barrel (pb) as the norm, we are now in a period of volatility and uncertainty, with the concept of $100 pb having been firmly banished and not likely to return any time soon. As a result, in the context of lower global oil prices, we see it necessary to revisit the topic of US unconventional oil and gas and refresh our conclusions and findings from our initial report on tight oil.

The oil price fall, which started in mid-2014, will provide the key timeline in our ‘before and after’ analysis. Through analysis of key indicators in the US unconventional sector, such as production, rig counts, company financials and forecasted year-on-year growth, before mid-2014 and contrasting it with analysis a year later, in mid- 2015, we will be able to present a clearer outlook of the future of US unconventional oil and what implications this has for Saudi Arabia’s own oil policy, both in the immediate and longer term.

[Complete report with key charts at this link (English and Arabic)]

Source: Jadwa Investment

Fahad M. Alturki
Chief Economist and Head of Research
falturki@jadwa.com

Asad Khan
Senior Economist
rkhan@jadwa.com

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