US shale has bounced back, but unlikely OPEC and Saudis are vanquished just yet
Where’s the bottom? That’s the question every US shale CEO asks after prices fall off a cliff like they did late last year. Dan K. Eberhart says he has the answer.
“With the price of oil bottoming out in January, the US shale production peaking in April, and the rig count stabilizing, the industry is on the way back,” Eberhart said.
“With Brent hovering around $63 a barrel and West Texas Intermediate at $60, the industry will reignite because of continuous investment in innovations that have allowed us to pump out light, tight oil for 20 per cent less than we did just a few years ago.”
Eberhart is the head of Canary, LLC, the largest privately held oilfield services company in the USA. The company was formed two years ago when Denver-based Frontier Energy Group LLC acquired Oklahoma City-based Canary Wellhead Equipment Inc. and decided to use the Canary name because of its better recognition in American shale plays.
He’s bullish on the future for the American oil and gas industry.
“Energy economic indicators are positive,” Eberhart said. “Not only have Brent prices increased about 40 per cent from last year’s lows, but recent rig counts have also shown a significant ‘flattening’ of the downward count. In horizontal oil rig activity, we’re seeing an uptick to positive activity after the six-month fall the industry took when oil prices crashed.”
For example, as American Energy News reported Monday, Pioneer Natural Resources is preparing to significantly ramp up its Permian Basin horizontal drilling, bringing its rig count to 36 rigs (28 rigs in the Spraberry/Wolfcamp and eight in the Eagle Ford Shale), which is essentially the same as it was prior to the recent oil price collapse.
I also reported on a study that showed high quality fields in the Bakken can be economic at $60 oil. Some fields have well costs as low as $27. That bodes well for future American oil production.
Eberhart says the US shale industry is moving rapidly into the role of worldwide “swing producer,” supplanting OPEC by delivering more crude to the market as prices increase, and also putting a cap on production to stabilize prices when Saudi Arabia, the putative leader of OPEC, refuses to do so.
“The OPEC house of cards is unstable,” Eberhart observed. “OPEC nations are bickering among themselves as Saudi Arabia faces growing domestic insecurity and questions about its role as the cartel leader. Saudi Arabia simply doesn’t trust the rest of OPEC’s production mix.”
Last November, when the Saudis refused to cut OPEC oil production despite growing inventories and plummeting world prices, the aim was to knock out the US shale industry while shoring up OPEC’s eroding market share.
“It didn’t work,” Eberhart said. “Between 2007 and 2015, OPEC’s global share actually declined from 37 percent to just 31 percent. Meanwhile, global demand for oil grew by 6.6 million barrels per day over the same time period.”
Eberhart predicts that at OPEC’s semiannual meeting in Vienna Friday, the Saudis are likely to continue ramping up oil exports.
OPEC is targeting China and other Asian nations as a replacement for eroding business in North America.
“The sheiks are vowing once again to reclaim OPEC’s world market share by keeping production quotas high while other members of the cartel – among them Iran, Iraq, beleaguered Venezuela and Nigeria – are clamoring for production cuts to raise prices,” Eberhart said.
“The Saudi strategy is backfiring, hurting the economies of other important members of the OPEC alliance,” Eberhart said. “On the other hand, the US shale industry is here to stay. Our willingness to adapt to changing markets and prices has allowed us to grab the swing producer’s throne. No Saudi games will change that fact.”
Eberhart isn’t the only industry insider to forecast OPEC’s defeat, but not everyone shares that view. Chriss Street argued the same line in an American Thinker piece I quoted in Tuesday’s Markham On Energy column. But Alberta Oil Magazine editor Max Fawcett made short work of Street: “How have they (OPEC) accepted defeat? They’re on the verge of victory…OPEC didn’t start this war with North American shale producers just so they could end it before its effects really started to bite. They’re in this for the long haul – and we are too, for better or worse.”
The takeaway from Eberhart is that the American shale industry has emerged as a major player in global markets, which has led to a clash of the titans over market share. But it’s still too early to declare a winner.
At this point, American E&P company executives will just be happy if Eberhart is right about oil prices having found their bottom. The rest can sort itself out later as energy nations duke it out for their slice of the pie.