“We are climbing that learning curve. It is still early in the tight oil reservoirs. Our expertise today is about where we were several decades ago with conventional reservoirs,” says ConocoPhillips chief executive Ryan Lance, referring to unconventional, US tight oil extracted from shale formations – or shale oil.
“We are climbing that learning curve. It is still early in the tight oil reservoirs. Our expertise today is about where we were several decades ago with conventional reservoirs,” says ConocoPhillips chief executive Ryan Lance, referring to unconventional, US tight oil extracted from shale formations – or shale oil.
Shale crude producers – ConocoPhillips included – are not alone in having to move up a learning curve. What Lance is talking about has more to do with the technological side of crude extraction. But the oil industry as a whole has spent the past two years trying to move up a few learning curves to figure out how shale will affect oil prices and the supply-demand balance going forward.
Opec secretary-general Mohammed Barkindo conceded at the Oil and Money conference in London on 18 October that when oil prices started to drop in 2014 and Opec, in response, adopted a strategy of pursuing market share rather than prices, its members did not expect the market imbalance to last so long. A quick correction and rebalancing had been expected – and a likely reason it did not happen was because Opec underestimated the resilience of the US shale industry.
The shale oil boom is so recent a phenomenon that the global oil industry – Opec members, conventional non-Opec producers and US shale oil firms alike – had no data on how the shale oil firms and production would perform in the lower oil price environment that the boom spurred.
It turned out that the US shale industry proved much more resilient than many had anticipated. “Ten months it took for our production to decline,” says Lance about the sector. The reasons behind this resilience have been improved operating efficiency and productivity, and the industry now does not need as many rigs or employees to produce the same amount of shale crude as before.
“Low oil prices are strengthening the need for ongoing innovation. So, there is a strong case for resilience in US tight oil.” He is convinced the industry is moving up the learning curve.
But even two years into the lower oil price environment, a lot of unknowns remain about the future correlation between shale crude output and global oil prices. Shale firms cannot even agree between themselves on whether shale oil is a “swing producer”, with the ability to quickly meet market requirements and, as a result, directly impact or even set the oil price range.
“It is not a swing producer,” argues US independent Hess chief executive John Hess. “It is a short-cycle producer. Saudi Arabia to the best of my knowledge is the only swing producer out there that can go up or down a couple of hundred thousand barrels a day on short order. Shale, on the other hand, from first investment decision to first oil is somewhere between six and 12 months before that oil can hit the market”, even if it is much faster than longer-cycle projects such as those in deep water where the cycle is 3-5 years, he says.
“Going forward, shale’s growth is really going to be a function of price,” Hess says. Thanks to operating efficiency and productivity improvements, the industry can now sustain shale crude production at current levels with oil prices at $50/bl, he says. At $60/bl, shale output might grow by 300,000 b/d every year, but that would leave 700,000 b/d of forecast annual demand growth of around 1mn b/d to be met from other sources, Hess says, backing up his assertion that shale crude output is not swing production.
But Lance is convinced that it is possible for shale to be a swing supply source. “When you think about the marginal barrel required to satisfy demand today, I think it lies right in the cost of supply that onshore shale and tight oil is in,” he says.
“I think it is going to be a swing producer. It can react much faster than the typical cycles in our business over the last 10, 20, 30 years. And that is what is unique about what is going on. We have to think about this business differently today than we did just a decade ago.”
Opec has had to revise its strategy in the face of shale’s resilience. But it is still forecasting a 2017 decline in US tight oil production. Opec’s Monthly Oil Market Report sees output shrinking by 289,000 b/d next year, after falling by 607,000 b/d this year, despite higher prices and despite revising its forecast for overall non-Opec production next year slightly upwards. Non-Opec production growth is centred in developing countries and the FSU.