Iraqi Economists Network

شبكة الاقتصاديين العراقيين

Arab World - MENA RegionEnergy, Oil & Gas Policy

Hoping for better sense to prevail in oil plays. By Saadallah Al Fathi *

Dip in prices throws up as many imponderables for shale oil producers as well.

When oil prices collapsed in 1986 from $28 (Dh103) a barrel (for the Opec reference crude Arab Light) to less than $10 a barrel in just a few months, we were told the battle for market share with non-Opec producers was joined. I was just starting my new job at the Opec Secretariat and one of the apostles of that approach told us, “We will bring non-Opec producers to their knees” and force them to reduce their high cost oil.

A few months later, most Opec members were in a dire situation and the market share philosophy was abandoned and prices remained low for almost two decades thereafter.

The reason why I am telling this story is because some analysts are explaining the current precipitous fall in oil prices by saying that Opec, or at least some of its members, are trying to protect market share against increased production from non-Opec. I am not yet convinced this is actually the case and I certainly hope that Opec, or any of its members, will not repeat the painful experience of 1986.

For almost 25 years now, analysts were predicting the fall of non-Opec production to no avail. May be it is rising slower now, but still rising and with moderate growth in demand, the margin for Opec to increase its production is now limited.


The growth in non-Opec production in recent years has been dominated by the increase in the US crude oil production, which is almost entirely coming from tight oil plays. US crude oil production increased from 9 million barrels a day (mbd) in 2011 to 10 mbd in 2012, 11.2 mbd in 2013 and is anticipated to clock 12.6 mbd in 2014 and more to come next year. All this is in spite of reductions in Alaska and the Gulf of Mexico production.

The shale or tight oil revolution has been driven by technology, the availability of funds at low interest rates and most importantly by high prices of oil. Now that oil prices have fallen by more than 20 per cent in the last four months, the question is how much of this reduction will affect tight oil production? And is there a reprieve for oil prices and should oil producers count on this?

The short answer is “No” as current tight oil production will, in the short run, continue unabated even at breakeven prices or at a loss as producers want to abide by contracts and to generate as much cashflow as possible. Analysts’ opinion is divided as usual, but on balance the fall in prices to the $80 a barrel is not expected to affect shale oil production much.


Shale oil producers are also aware that prices may have bottomed out and even rose a little in the last few days, thereby confirming their unpredictability and that the world economic and geo-strategic situation could turn prices upward if demand improves or supply suffers a cut somewhere else. As recently as this month, the US Energy Information Administration (EIA) forecast oil prices next year to average about $95 a barrel for the US benchmark WTI and about $102 for Brent oil.

While it is generally accepted that the breakeven for shale oil is about $80 a barrel, the greater majority of shale oil production is much cheaper than that.

Maria van der Hoeven, executive director of the International Energy Agency (IEA), recently told Reuters that “Some 98 per cent of crude oil and condensates from the US have a breakeven price of below $80 and 82 per cent had a breakeven price of $60 or lower.”

But shale oil producers are in the business of making profits and in the long run they will not be satisfied with breakeven prices. If oil prices do not rise, there may be a reduction in drilling and a consequent decline in production. After all shale oil production is dependent on continuous drilling due to the fact that well productivity declines very fast.

If on the other hand oil prices resume their decline and $60 a barrel is tested, then according to Ed Morse, Citygroup’s head of Global Commodities Research in New York, “There is probably something to the notion that if prices fell suddenly to $60 a barrel, the [shale oil] production growth would turn negative”.

Even then, oil prices would have to stay low persistently over a year time before we can see this happening. Let us hope that the small oil price recovery will continue and that we do not need to test these predictions. And that the wisdom of Opec would see to it in its next meeting late in November.

(*) The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.

Source: Gulf News, October 26, 2014



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