INDICATIONS have emerged that the much-touted threat to the conventional oil and gas by the discovery of Shale oil in the United States(U.S.) and China may prove unsustainable for now.
The reason is because at about $90 per barrel production cost of Shale oil as against between $10 and $25 production cost of conventional oil, the threat may take long in coming at least until the production costs of Shale oil progressively reduces to the competitive rate.
This was disclosed in findings carried out by the Paris-based International Energy Agency and published recently by Bloomberg.
The U.S. shale boom is producing record amounts of new oil as demand weakens, pushing prices down toward levels that threaten to reduce future drilling.
Domestic fields will add an unprecedented 1.1 million barrels a day of output this year and another 963,000 in 2015, raising production to the most since 1970, according to the U.S. Energy Information Administration. The Energy Department’s statistical arm forecasts consumption will shrink 0.2 percent to 18.9 million barrels a day this year, the lowest since 2012.
More supply from hydraulic fracturing and horizontal drilling, and less demand, are contributing to the tumble in West Texas Intermediate crude. The U.S. benchmark is down 24 percent since June 20 and fell below $90 a barrel on October 2 for the first time in 17 months.
The Vice Chairman and global Head of Energy Investment Banking at Jefferies LLC, Ralph Eads, which advised 38 percent of U.S. energy mergers and acquisitions this year, said in an interview recently: “If prices go to $80 or lower, which I think is possible, then we are going to see a reduction in drilling activity. It will be uncharted territory.”
Ed Morse, Citigroup Inc.’s Head of global commodities research in New York, said: “Shale oil is expensive to extract by historical standards and only viable at high-enough prices. Oil from shale formations costs $50 to $100 a barrel to produce, compared with $10 to $25 a barrel for conventional supplies from the Middle East and North Africa. There is probably something to the notion that if prices fell suddenly to $60 a barrel, the production growth would turn negative.”
Brent crude could drop to $80 a barrel before triggering a slowdown in investment from U.S. shale-oil drillers, Fitch Ratings said in a report last week.
As U.S. supply rises and imports decline, the Organization of Petroleum Exporting Countries (OPEC) may be heading for a price war, according to Frankfurt-based Commerzbank AG. OPEC’s September output rose to a one-year high of 30.935 million barrels a day.
Saudi Arabia, the world’s largest exporter, reduced selling prices on October 1, signaling it is prepared to let prices fall rather than cede market share, according to Commerzbank. OPEC accounts for about 42 percent of world supply, according to London-based BP Plc, Europe’s third-largest oil company.
With these developments, indications emerged that there are fewer deals.