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As I’ve said for years now, “Peak Oil” is a ludicrous myth. But I’ve also said, from the very beginning of the Saudi gambit to bankrupt America’s frackers, that fracking was (and is) perhaps the greatest tech story of the decade, that American technology and innovation would prevail, and that OPEC (and Russia) would not only lose but would be left in ugly desperate straits. I wasn’t the only one who said this, but I was one of the few.
I was right. Again. — RDM
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by Ambrose Evans-Pritchard
August 4, 2016
OPEC’s worst fears are coming true. Twenty months after Saudi Arabia took the fateful decision to flood world markets with oil, it has still failed to break the back of the US shale industry.
The Saudi-led Gulf states have certainly succeeded in killing off a string of global mega-projects in deep waters. Investment in upstream exploration from 2014 to 2020 will be $1.8 trillion less than previously assumed, according to consultants IHS. But this is a bitter victory at best.
America’s hydraulic frackers are cutting costs so fast that most can now produce at prices far below levels needed to fund the Saudi welfare state and its military machine, or to cover OPEC budget deficits.
US shale oil output has risen exponentially, and the latest dip is
just a temporary setback.
Scott Sheffield, the outgoing chief of Pioneer Natural Resources, threw down the gauntlet last Thursday (7/28) — claiming that his pre-tax production costs in the Permian Basin of West Texas have fallen to $2 a barrel.
“Definitely, we can compete with anything that Saudi Arabia has. We have the best rock,” he said. Revolutionary improvements in drilling technology and data analytics that have changed the cost calculus faster than almost anybody thought possible.
The ‘decline rate’ of production over the first four months of each well was 90% a decade ago for US frackers. This dropped to 31% in 2012. It is now 18%. Drillers have learned how to extract more.
Mr. Sheffield said the Permian is as bountiful as the giant Ghawar field in Saudi Arabia and can expand from 2m to 5m barrels a day even if the price of oil never rises above $55.
His company has cut production costs by 26% over the last year alone. Pioneer is now so efficient that it is already adding five new rigs despite today’s depressed prices in the low $40s. It is not alone.
The Baker Hughes count of North America oil rigs has risen for seven out of the last eight weeks to 374, and this understates the effect.
Multi-pad drilling means that three wells are now routinely drilled from the same rig, and sometimes six or more. Average well productivity has risen fivefold in the Permian since early 2012.
Workers at a Statoil USA site in the Eagle Ford formation prepare to tie in a
pipeline extension.
Consultants Wood Mackenzie estimated in a recent report that full-cycle break-even costs have fallen to $37 at Wolfcamp and Bone Spring in the Permian, and to $35 in the South Central Oklahoma Oil Province. The majority of US shale fields are now viable at below $50.
This is a cold douche for OPEC. It has been an article of faith among Gulf exporters that hedging contracts had kept US shale companies on life-support and that there would be a brutal cull as these expired in the first half of this year.
No such Götterdamerung has occurred. A few over-leveraged players have gone bankrupt, but Blackstone, Carlyle and other private equity groups are waiting on the sidelines to buy distressed assets and take over the infrastructure.
The crucial mid-tier drillers have weathered the downturn. Many are still able to raise funds at low cost. Total output in the US has fallen by 1.2m barrels a day to 8.5m since the peak in April 2015 but production has been bottoming out. Today’s frackers can just about cope with oil prices in the $40 to $50 range.
OPEC may now have to brace for a longer war of attrition than they ever imagined. Global inventories of crude oil remain near all-time highs, record volumes are being stored on tankers off-shore.
Forest fires in Canada, rebel attacks in Nigeria, and other global upsets took 4m barrels a day off the global market at one stage over the May-June period, masking the continued world glut. These disruptions are subsiding. Lost output has dropped to nearer 2m barrels a day. That is a key reason why US crude prices have fallen 20% to $41 over the last six weeks.
Morgan Stanley says the long-awaited rebalancing of the global markets has been delayed for yet another year until mid-2017.
Worse yet for OPEC, consultants Rystad Energy say that 90% of the 3,900 drilled but uncompleted US horizontal wells – so-called ‘DUCs’ – are profitable at $50. This implies an overhang of easy supply waiting to hit the market. Citigroup expects an extra 1m barrels a day in late 2016.
Once that is cleared, shale drillers will have to build new rigs. Mr. Sheffield said Pioneer can do this in 135 days flat, a dramatic contrast to deep-water mega-projects that can take seven to 10 years.
This agility has changed the nature of the oil cycle. It means that OPEC faces an unprecedented headwind from mid-cost producers.
Stalwarts Anadarko and Hess say they will wait for $60 before investing heavily, but they are already preparing the ground. The losers are high-cost projects elsewhere: off the coast of Nigeria and Angola, in the Arctic, or the oil sands of Canada and Venezuela’s Orinoco basin.
Roughly 4m to 5m barrels a day of future supply has been shelved around the world.
This sets the stage for an oil shortage and a price spike later this decade. Whether OPEC can survive that long is an open question. Most of the cartel need prices of $100 to fund their regimes.
Venezuela is already in the grip of hyperinflation and food riots. Nigeria’s currency peg was smashed last month, and the naira has fallen 60%. Angola has turned to the International Monetary Fund, Azerbaijan to the World Bank.
Saudi Arabia has deeper pockets but its net foreign reserves have fallen from $737bn to $562bn, even though it is borrowing money abroad to slow the loss. It burned through another $11bn last month.
Riyadh is trying to curb the country’s culture of subsidy and entitlement but was forced to sack a minister and backtrack after a 500% rise in water prices set off an outcry. It is the famous social contract from cradle-to-grave that keeps the House of Saud in power.
But for how much longer? The world is no longer hostage to Saudi oil – thanks to the ingenuity and creative destruction of America’s frackers.
— Ambrose Evans-Pritchard is the International Business Editor of the London Telegraph. This article originally appeared at To The Point News.
Rod is one of our nation’s leading minds. He’s smart, original, and very committed—a combination that one rarely finds.
Rod Martin and [former Howard Dean campaign manager] Joe Trippi are America’s two foremost experts on online politics.
Rod Martin is a Reaganite-Thatcherite conservative…[and] a man who has spent much of his life ministering to and working for the benefit of others. I know Rod as an advocate for freedom, a leader who understands the real changes we need in Washington, and who has the drive and ability to make those changes happen.
Rod Martin is the kind of dynamic leader who has the knowledge, ability and experience to lead us successfully into the 21st Century. His vision for America is compelling.
Rod Martin literally wrote the book on excellence. Humble yet brilliant, a man of love and compassion, with penetrating clarity he illuminates the world around us, and we are both stirred and enlightened.
Rod Martin is a born leader and an outstanding political mind. Anyone who takes him on is going to have a serious fight on their hands.
Rod Martin is a man of uncommon vision and character. Ever since I first worked alongside Rod in the early days of PayPal, I’ve been struck by his powerful vision for the future. Rod understands the intersection of technology, politics and culture in a way that few others do.
Rod Martin wears with uncommon grace an uncanny ability to link his vigorous faith to the practical challenges of both the business world and the political arena. Yet the respect he shows for others carries a warmth and modesty that are both too rare among those who are strong advocates of feisty positions.
America badly needs more leaders who really get the future. We need more Rod Martins.
Rod Martin is a modern day philosopher-statesman. He is a capitalist intellectual, a conservative iconoclast, a gentle adversary and a kind prophet. He inspires us towards a fresh national vision built upon the original founding principles.
Rod Martin is not only effective and efficient, but he is also perceptive, wise and gracious. He gets things done. He is a great friend and a great ally.
Rod is one of the sharpest, most gracious men I know, and one of the most gifted political thinkers today. His ability to analyze issues and communicate thoughtful insights on them have earned him the respect of people across the political spectrum.
I am proud to have been Rod Martin’s friend for a quarter century, and I can tell you that he is one of the finest men and most outstanding leaders in our church and in our country today. He has a knack for turning everything he touches to success.
Rod Martin is a cornucopian entrepreneur and eutropic thinker whose influence radiates through an array of companies, institutions, movements and churches. A renaissance American, he is also a prolific friend of freedom and faith around the globe.
If Rod Martin represents the next generation of leaders, America has nothing to worry about.
A leader and a servant, in public life and in private, Rod Martin strides at the top of his profession, and has nowhere to go but up. He is in the truest sense of the word ‘outstanding’.
Rod Martin is undoubtedly one of the most accomplished thought leaders today. He is a wonderful mentor, a humble role model, and a deep inspiration for the next generation of scientific innovators and entrepreneurs.
Rod’s achievements pale beside his character and his brilliance. He sees what others can’t. He leads when others won’t.
Rod Martin is one of America’s finest young minds.
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