Shale bonanza means US oil production at a 50-year high | Business| Economy and finance news from a German perspective | DW | 20.02.2018
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Shale bonanza means US oil production at a 50-year high

As shale oil makes a comeback, the United States could outstrip Russia and Saudi Arabia to become the world's biggest oil producer. But is this new boom in black gold sustainable?

Three years ago, the US shale oil boom appeared to be over, apparently starved to death when OPEC flooded the market with cheap oil.

As prices plummeted from over $100 (€81) to $40 a barrel, shale oil production — the drilling and hydraulic fracturing (fracking) of unconventional oil deposits found in shale formations — quickly became uneconomic.

In just under a year, more than 130 US shale producers, from Pennsylvania to North Dakota, declared bankruptcy, leaving tens of thousands of American oil workers without jobs.

But the highly cyclical nature of the energy sector, and a rebound in oil prices to more than $60 a barrel, have helped revive the fortunes of most US shale producers almost as quickly as they stalled.

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Last month, the US Energy Information Administration predicted that American oil output would soon surpass 10 million barrels per day (bpd), eclipsing a previous record in 1970 when conventional US oil production peaked.

Next year, the US is on target to outstrip Russia and Saudi Arabia to become the world's largest oil producer, and will become a net energy exporter within five years, the Paris-based International Energy Agency has forecast.

Adapt to survive

One reason credited with helping the US shale sector quickly reverse its fortunes was the ragged determination of producers. Many of them kept pumping oil despite going bust, while smarter drilling techniques boosted their chances of survival.

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"US producers made inroads in terms of lowering costs and boosting drilling efficiencies so they were able to focus production on core shale 'sweet spots' to prevent a dramatic decline in production during the downturn," Divya Reddy, an energy analyst at the world's largest political risk consultancy, the Eurasia Group, told DW.

Reddy said many producers have been able to hedge at $55+ a barrel levels which support shale's continued growth.

The recent oil price rebound was fueled by OPEC agreeing in late 2016 with several non-member states — including Russia — to limit oil supply, to help drain excess inventories and boost prices. That agreement, which remains in place until the end of the year, inadvertently gave American shale a vital shot in the arm.

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Author and energy analyst Robert Rapier credits the first wave of shale oil for moderating prices at the gas pumps over the past decade.

"If the US shale boom hadn't occurred, the world would have been living with $100+ oil since 2007," he told DW, referring to how oil prices skyrocketed as a result of the financial crisis.

He believes the sector's resurgence "slows down OPEC's plan to return inventories to normal levels," and will likely help keep prices in check for now.

Less price volatility

Rapier's view is backed up by a new report from the Oxford Institute for Energy Studies (OIES), which suggests US shale production will keep oil prices within a tight trading range of $60 to $75 per barrel for the next few years. Any price rise would boost shale's fortunes, which would add enough supply to force prices back down, according to OIES' forecasts.

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The Eurasia Group's Reddy expects that shale will be boosted by "efficiency gains and some consolidation in the sector in the hands of financially stronger companies [that] will put a floor under any possible fallout."

But she warned that geopolitical shocks could still "cause temporary crude price spikes that can filter down to gasoline prices," specifically the ongoing political crisis in Venezuela and the potential for US President Donald Trump to reimpose sanctions on Iran.

Rapier, who authored the book "Power Plays: Energy Options in the Age of Peak Oil," told DW that while it was in the US producers' interests to keep oil prices fairly constant, "there are thousands of oil companies all making decisions based on a thousand different outlooks."

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He said US oil producers were unlikely to work together to restrain production in the same way as OPEC, and predicted that if oil prices rose to $70 per barrel or above, "you will see a frenzy again in the US, with many producers throwing discipline to the wind."

How sustainable?

Rising oil demand from a growing global economy will also be a boon to US shale producers. But doubts remain over whether OPEC's production discipline deal will hold, amid compliance issues from some countries.

"Eventually — probably next year — OPEC will need to consider a phased unwinding of the cuts, which will prove difficult to manage neatly — and without a consequent price dip," warned Reddy. Once again, any major price fall would weaken the viability of US shale.

Questions remain over whether US shale output levels can be sustained over the medium term, which will allow the US to become truly energy independent. About 50-60 percent of extraction typically takes place in the first year of shale production. Finding abundant areas of shale deposits is tricky and costly, and even within 'sweet spots,' much of the oil is uneconomical to extract, meaning production forecasts could be well wide of the mark.

"That's the big question. If it's over — the US shale boom — in 3-4 years, then OPEC and Russia will be back in the driver's seat. But if US production can increase for the next 10 years, it's going to be tough for OPEC and Russia to control the market," said Rapier, who is also director of Alternative Fuels Technology at Arizona-based Advanced Green Innovations.

Reddy believes a strengthened shale sector can dominate despite the industry's recent growing pains and OPEC dominance.

"The big benefit for US shale production is its quick ramp up time, so in a volatile oil market, investment will favor US shale rather than long-cycle investments that could take years rather than months to come on stream," she told DW.

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