The oil alliance of Opec and Russia has abandoned efforts to drive US shale out of the global energy market, accepting the hard reality of America’s irrepressible frackers for years to come.
“To really fight shale we’d need oil below $40 a barrel,” said Kirill Dmitriev, head of Russia’s wealth fund.
“That is not good for the Russian economy and it is not good for the Saudi economy. It is not practical, and we are not going to try to fight it,” he told the World Economic Forum in Davos.
A string of Opec members would risk incipient insolvency if there were another oil price war along the lines of 2014-2016. Saudi Arabia’s ruling dynasty would struggle to maintain its cradle-to-grave welfare model needed to head off political dissent.
Mr Dmitriev, a key architect of Russia’s oil strategy, said his country was working tightly with the Opec cartel and was now pursuing prices of $60 to $70, deemed the optimal range needed to ensure long-term stability.
Brent crude has crept up into the bottom of this range after a dramatic sell-off in October and November on global recession fears and a soft US line on Iranian sanctions. The Opec-Russia deal last month to trim output by 800,000 barrels a day (b/d) has restored balance to the market.
Surging shale output in the Permian Basin lifted US output by 2m b/d last year, an increase alone equal to the entire production of Mexico.
The US has pulled ahead of Russia and Saudi Arabia to become the world’s biggest producer of crude at 11.7m b/d, a feat made possible by America’s deep capital markets and $50bn of equity financing for wildcat projects.
Vicki Hollub, chief executive of Occidental, said the Permian was an astonishingly prolific basin with multiple layers of rich resources. Seismic imaging, multi-pad drills, and longer lateral bores have radically changed the economics of the industry.
“We’ve driven down the breakeven price of much of the Permian to less than $40, and in some cases even to $30, so there is still going to be a lot of opportunity to grow,” she said.
This time investors will be more disciplined. “They have been burned and are much more cautious now. Investors are going to hold companies to account,” she said.
Fatih Birol, head of the International Energy Agency, said new pipelines in Texas would unblock a major bottleneck by the end of this year, opening the way for a fresh flood of US shale into world markets. “We’ve not seen the full impact of shale yet. The second wave is on its way,” he said.
Dr Birol said it was perfectly plausible that the US would raise output by a further 10m b/d over the next decade. This would entirely change the geopolitical prospects of Russia and the Middle East.
John Hess, founder of Hess Petroleum, said the US would keep growing to 15m b/d but then start to hit all kinds of constraints. “Shale is about 6pc of world oil supply now, and it probably will go up to 10pc by mid-decade. Then it flattens out,” he said.