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Why shale may spoil OPEC’s party again

Analysts feel that major oil producers are shifting to a view that keeping black gold in the ground makes less and less economic sense. A lot of their oil may never find a buyer, ever

opinion Updated: Feb 09, 2018 14:33 IST
Pramit Pal Chaudhuri
A tanker carrying the first shipment of US shale gas docking at Grangemouth, Scotland, Britain, September 27, 2016
A tanker carrying the first shipment of US shale gas docking at Grangemouth, Scotland, Britain, September 27, 2016(REUTERS)

Global oil prices have moved to a higher equilibrium of $62 a barrel, thanks to production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and global economic recovery. That is mildly bad news for, say, Narendra Modi, the leader of a major oil importer heading into an election year with a tight budget. But there is an alternative viewpoint beginning to gain ground in Wall Street and the global energy industry. In this scenario, a storm of shale oil is building on the horizon and will flood oil markets by year-end.

The foundation of all this is the Permian basin, a Texan rock formation that has been producing hydrocarbons for nearly a century. Already the second-largest geological oil source in the world, new surveying is leading to a belief that the Permian has shale riches on a mind-boggling scale. Last year the US Geological Survey concluded that the single Wolfcamp stratum of the Permian had 20 billion barrels of recoverable oil. Today, firms like Pioneer Natural Resources say two strata, Wolfcamp and Spraberry, could have as much as 75 billion barrels.

Said a senior partner in a US-based energy consultancy, “This could be the size of Saudi Arabia’s Ghazar.” Ghazar, the largest oilfield in the world, is the heart of Saudi Arabia’s petro-power and produces 5 million barrels of oil per day.

A ‘new Permian age’ seems to be breaking even as technological advances in shale production continue apace. The time between discovery of a well and actual pumping by a rig is now down to 10 days; the cost of the entire process is down to $10 million. Even deep 4-kilometre drills have a turnaround time of less than a month. The International Energy Agency (IEA) in its Oil Market Report last month was among the first mainstream organisations to warn of an “explosive” increase in US shale production.

The head of analysis for one of the largest Wall Street investment funds said in New Delhi, “By year-end, definitely by early next year, the US will overtake Saudi Arabia oil production. Next year, it will overtake Russia to become the world’s largest oil producer.” One of the largest US investment bankers is considering a scenario where oil prices fall to $45 a barrel and US oil production reaches 10 million barrels a day — and beyond.

Others predict a more gradual fall, if only because US shale producers may prefer to leave the spigots half-open, keep prices in the sixties and pocket fatter profits.

The other headache for the oil industry is the degree to which other energy sources — renewables and gas — is holding back oil demand. Despite economic growth predicted in every part of the world, the IEA has predicted oil demand this year will barely budge from its 2017 levels.

World oil prices are on a knife’s edge. “Oil is on a price threshold. A small swing in demand or supply could drive prices dramatically in one direction or another,” said the investment fund analyst. The Permian is pushing the probabilities towards slump rather than spike. It would be an echo of the earlier but smaller shale wave that broke the back of oil prices in 2014.

What could make all this permanent is a changing mindset. BP chief economist Spencer Dale argues that major oil producers are shifting to a view that keeping black gold in the ground makes less and less economic sense. A lot of their oil may never find a buyer, ever. If a shale wave or a renewable revolution pushes this fear into belief, the five cheapest oil producers — the Ten Dollar Barrel Production Club led by Saudi Arabia, Iraq and Iran — may decide to pump for glory. They would accept oil at $ 30-40 a barrel but compensate by seizing the market share of expensive oil producers.

Even this would be a doomsday option. “Iran and Saudi Arabia would incur severe budget deficits if oil prices were to collapse,” says West Asian expert Bernard Haykel of Princeton University. But while the Saudi Arabians have financial reserves so they can “weather the storm if the price fall is short term,” Haykel says, Iran would suffer massive domestic unrest if prices fell by $20. Costly oil producers like Russia and Nigeria would simply be flattened.

Permian is the place name that is keeping both businessmen and politicians awake at night. Whatever happens, says almost everyone, $100 a barrel will never happen again. The question is whether $50 a barrel will also find itself in the dustbin of history in the next few years.

pchaudhuri@hindustantimes.com