The US shale industry has ‘only begun to scratch the surface’ of vast and cheap reserves, driving growth for years to come.
The US shale industry has failed to crack as expected. North Sea oil drillers and high-cost producers off the coast of Africa are in dire straits, but America’s “flexi-frackers” remain largely unruffled.
One starts to glimpse the extraordinary possibility that the US oil industry could be the last one standing in a long and bitter price war for global market share, or may at least emerge as an energy superpower with greater political staying-power than Opec.
It is 10 months since the global crude market buckled, turning into a full-blown rout in November when Saudi Arabia abandoned its role as the oil world’s “Federal Reserve” and opted instead to drive out competitors.
If the purpose was to choke the US “tight oil” industry before it becomes an existential threat – and to choke solar power in the process – it risks going badly awry, though perhaps they had no choice. “There was a strong expectation that the US system would crash. It hasn’t,” said Atul Arya, from IHS.
“The freight train of North American tight oil has just kept on coming. This is a classic price discovery exercise,” said Rex Tillerson, head of Exxon Mobil, the big brother of the Western oil industry.
Mr Tillerson said shale producers are more agile than critics expected, which means that the price war will go on. “This is going to last for a while,” he said, warning that any rallies are likely to prove false dawns.
The US “rig count” – suddenly the most-watched indicator in global energy – has fallen from 1,608 in October to 747 last week. Yet output has to continued to rise, stabilizing only over the past five weeks.
Mr Tillerson said this is more or less what happened in the sister market for US shale gas. In 2009, some 1,200 rigs produced 5.5bn cubic feet (bcf) of gas per day at a market price near $8.
Today the price is just $2.50. Nobody would have believed back then that the industry would continue boosting supply to 7.3 bcf, and be able to do so with just 280 rigs.
“Will we see the same phenomenon in five years in tight oil? I don’t know, but this is a very resilient industry. I think people will be surprised,” Mr Tillerson said, speaking at the IHS CERAWeek forum in Houston.
“We’ve really only begun to scratch the surface. Shale can keep growing by 500,000 to 700,000 b/d easily,” said Harold Hamm, founder of Continental Resources. His company has cut costs by 20pc to 25pc over the past four months.
US shale will “roll over” to some degree as producers exhaust their one-year hedges and face the full shock of lower prices. But it is hazardous to bet too heavily on this assumption.
IHS said an astonishing thing is happening as frackers keep discovering cleverer ways to extract oil, and switch tactically to better wells. Costs may plummet by 45pc this year, and by 60pc to 70pc before the end of 2016. “Break-even prices are going down across the board,” said the group’s Raoul LeBlanc.
Shale bosses have been lining up at this year’s “Energy Davos” to proclaim the fracking Gospel. “We have just drilled an 18,000 ft well in 16 days in the Permian Basis. Last year it took 30 days,” said Scott Sheffield, head of Pioneer Natural Resources.
“We’ve cut spud-to-spud time to 19 days,” said Hess Corporation’s John Hess, referring to the turnaround time between drilling. This is half the level in 2012. “We’ve driven down drilling costs by 50pc, and we can see another 30pc ahead,” he said.
IHS said shale is so competitive that it may “take off” again early next year after troughing in the fourth quarter, adding 500,000 b/d in 2016. “It could crowd out other parts of the world. In the long run the US could get a bigger share of the pie,” said Mr LeBlanc.