Since the beginning of the long goodbye to the era of $100 a barrel oil last summer, the global oil and gas industry has undoubtedly gone through a paradigm shift.
The decision taken in November by OPEC to maintain the cartel’s output raised eyebrows, but just four months since, there is evidence that the move has had the desired effect, particularly in terms of disrupting the United States’ shale market. Saudi Arabia’s Oil Minister has gone on the record to say that the ruling on OPEC output wasn’t a politically motivated one.
However, few believe that the group would not have foreseen the effect it would have on projects in the US, although the rate of change may have taken some by surprise.
Indeed, the average U.S. rig count for February 2015 was 1,348, down 335 from the 1,683 counted in January 2015, and down 421 from the 1,769 counted in February 2014.
And according to Baker Hughes the total U.S. rig count stood at 1,069 rigs as of March 20, a steep drop from 1,803 rigs active during the same time last year.
The rig count slide is even more dramatic when rigs operating in the Gulf of Mexico and Canada are included. The total North American rig count has tumbled from a high of 2,192 rigs to just 1,209 last week, with shale wells being hit particularly hard.
This has coincided with the price of oil steadying at around $60, vindicating the stance driven by Saudi Arabia and delivered by OPEC in the eyes of many. At the beginning of March, Kuwait’s Oil Minister, said the drop shale oil production had triggered a rebound of global oil prices.
Meanwhile, OPEC’s Secretary-General said that the group’s exporters should not cut output to “subsidise” higher-cost shale, an energy source whose recent growth is blamed by OPEC for weakening oil markets.
Weighing in on the debate, Saudi Arabia’s veteran oil minister, Ali Al Naimi, said members of the OPEC cannot be held solely responsible for the drop in oil prices. He called on non-OPEC members to cooperate in helping to raise the crude oil price.
“GCC countries have made serious efforts to balance oil prices, but the prices are set by the market,” he said.
“We refuse to take responsibility alone because OPEC produces 30% of market output and 70% comes from outside.”
Asked whether OPEC would be willing to work with non-members, Al Naimi reportedly referred to the 1998 oil price crash, when the organisation worked with non-members to cut output and support oil prices.
“Today, the situation is difficult. We tried, met with them but did not succeed because they insisted that OPEC should take the responsibility alone,” he was quoted as saying.
“All must contribute if we want to improve prices because it is in the interest of all.”
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Opec’s Secretary General, Abdullah Al Badri added in remarks to a conference in Bahrain that tight oil, a term he has used for shale, was “not a challenge for us” but the market should now be left to decide which source of petroleum could survive at current prices.
Mahin Khalid Siddiqui, Associate, Gulf Intelligence, says: “The rebound of oil prices was inevitable – producing tight oil is simply more expensive and shale producers will be unable to keep up with it in the current oil glut.
“For conventional producers it is not so troublesome – their oil is produced cheaply, their contracts are firmly in place and generally, they are market experts. Unless there is a fracking technology that is economically feasible oil spoils will go to the low cost producer.
Propping up other producers and non-associated reserves is not in the Kingdom’s interest, she adds. “The oil industry is a business like any other industry – and Saudi Arabia is an oil company disguised as a country.
In a realist perspective, Saudi will not act like a safety net for other producers because it is not in their interest to do so, and neither is giving up their market share. Saudi Arabia will fiercely guard its market share – if during the process it drives away their competitors and provides geopolitical leverage, it is an added sweetener.”
Maher Chebbo, general manager of Energy and Natural Resources, EMEA, SAP, concurs, saying that, “the Saudis have been proven correct in their decision to maintain output. They has a bad experience in the 1980s when they cut output in an attempt to support prices, and they ended up losing market share. They’ve certainly taken a different decision this time”.
On the drop in shale activity, he continues: “When the price of oil falls below $80, many projects simply become uncompetitive and economical.
“It is difficult to know whether the decision to maintain output was taken purely with this outcome in mind, but what has happened would have been quite easy to predict, and it is continuing to make shale projects less viable.”
Siddiqui outlines the reasons for the dramatic fall-off in US shale projects and the economics behind the programme cancellations and postponements.
“For US shale producers, cheap oil does not cover their production costs even if oil services – drilling and exploration – have gone down,” she tells Oil & Gas Middle East.
“Tight oil wells decline by around 55% to 60% on an annual basis and drilling, operating and exploration activities for shale oil will certainly decline, while the oil price will certainly stabilise by 2016 if not by the end 2015. At the rate oil prices are plunging, the US shale players would rather pay for contract cancellations than keep drilling at current oil prices.”
There have been calls from non-OPEC countries for an emergency meeting to address the state of the global oil and gas market, but any summit before June 5th in Vienna is highly unlikely. Even if oil producing nations were able to get policy makes on the GCC to meet around a table, the odds of Saudi Arabia reversing its stance are slim, especially as the Kingdom is making up for shortfalls in other parts of the Middle East.
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“There is no question that the current trend will continue. In fact, crude oil output in February decreased as Iraq showed a decrease in exports from Basra due to bad weather (2.293mn bpd) while Libyan output disrupted due to political turmoil. Saudi Arabia was quick to fill in with Kuwait, fiercely guarding OPEC and its own market share.
“Saudi will resolutely defend its market share – let’s not forget Saudis are also oil kings.
“Had they cut back on oil production, not only would there have been a cut in oil prices – someone would have been happy to fill in the empty barrels – and they would also have faced low oil prices. At the moment Saudi Arabia is not facing loss – it is facing a loss in profits with their total cost production per barrel ranging from $8 to $10 barrel.”
For every action, there is a reaction, and OPEC’s stance – driven by Riyadh – may ultimately prove to be a turning point for the US’s shale ambitions, at least in the short-term.
The country’s ambition to become the world’s largest oil exporter has meant it has become one of the leaders in innovation, technology and skills to develop non-associated reserves – an area Saudi Arabia is currently investing billions of dollars in.
With companies having to stall projects and take hits to their balance sheets, there is the possibility they could become the target of acquisitions.
“We’ve seen some M&A activity in the United States and we think we are going to see more in 2015, particularly in upstream areas like geophysics and drilling. If a company can find out where the oil is, the less money it has to spend, and the more profitable you become, which can prove difficult in the upstream market,” says Chebbo.
“Companies can spend billions of dollars in the upstream market, but it is technology and geophysics that really help firms to become more profitable.
“We will see acquisitions in the upstream chain, whether that’s in production or exploration, and it will be the companies that are perceived to add value – those with technological capabilities – that will be targets.”
And having played a large role in slowing the shale industry stateside, reports are rife that Saudi Aramco is looking to headhunt a number of American shale experts for whom work has dried up.
“By introducing fracking plays Saudi Arabia is simply staying relevant while focusing on one thing: high production,” says Siddiqui.
“If shale adds to it then why wouldn’t they make this move?
“The reports are all true and shrewd – while the West focuses on exploiting basic research from Asia, and building on innovation and implementation in their own territory, the Saudis have one upped them by employing disgruntled and laid off expert and experienced employees who now find the hot desert climate a stable economic viability.
“With advertisements on LinkedIn that have drawn 160 applicants for the Saudi shale industry, it is true that Saudis are exploiting American layoffs,” she adds.
It is yet more proof that Saudi is one of the winners of the oil price drop, and politically motivated or not, rivals have been weakened.
Facts:
– 70%:30% The Ratio of Non-OPEC oil output compared with members of the organisation
– 160 applicants An Aramco shale job advert reportedly attracted a huge amount of interest.
