In 2015, the fall in oil prices certainly had a significant impact on shale oil exploration and production in the USA – many shale oil and shale gas companies reported heavy losses, notably the smaller companies.
However, despite low crude prices, and against all expectations, US oil production from shale continued to increase in 2015 and early 2016. These unexpected results were mainly due to technological innovation and efficiency gains. We have also seen a substantial increase in storage facilities, allowing producers more flexibility in a volatile market. The present price level of around $50 per barrel has led to renewed optimism for many shale producers.
Unconventional US oil and gas production helped the economy in a number of ways: reduction in dependence on imported energy and a reduction in the trade deficit, contingency between WTI and Brent prices spread, and others.
Many shale operators have been quick to adapt their operations to the current low-price scenario by implementing technological innovations and cost-saving measures. Improvement in drilling techniques and specialised equipment, perfecting the blend of water, sand and chemicals used in the fracking process, and the use of data diagnostics, are all factors contributing to efficiency gains.
This experience refers primarily to larger-scale producers rather than to smaller enterprises – financial difficulties at times when the crude price was much lower led to bankruptcy and closures for some smaller players.
Where does shale fit in the current global market landscape?
According to the recent announcements from certain OPEC member countries, the current crude oil price level ($50 per barrel) is expected to hinder further increase of supply by shale oil producers and other similar high-cost producers, especially in the Arctic and other remote regions.
Traditional crude oil producers recognise that shale oil production has an important influence on the markets and price levels. Middle East producers need to see a price level such that the impact on their domestic economies is sustainable.
The present level of $50 per barrel seems to be a level that could be acceptable to many parties. Any substantial deviations from this price could lead to increased volatility and uncertainty in the market.
Despite the competitive markets, Middle East producing countries are continuing to invest in new production units and facilities. A slowdown of the global economy and an increase of oil supply from non-OPEC countries have meant that it is now more difficult for any party to effectively control this complex situation.
Furthermore, the Iran factor has to be also taken into account, and any increased production coming from Iran will have an added impact on the global markets and price levels.
If we now focus on the impact of shale gas in North America, Europe and Asia, it is clear that it has become a promising fuel and petrochemical feedstock option for the future.
For American companies, the overall situation is a chance to become more energy independent and reconcile the refining and petrochemical sectors. Low ethane prices have revitalised the US petrochemical industry, but the shift to shale gas based ethane feedstock has resulted in reduced propylene yields from steam crackers. This problem needs to be addressed and we are seeing more projects for on-purpose propylene production in the US, and also in Europe. One recent example is the Propane Dehydrogenation Project (PDH) based upon UOP Oleflex technology in Police, Poland.
We have also seen the activities of Ineos, which is planning to import petrochemicals feedstock from the US for its plants in Europe, and also looking to participate in any future shale developments in the UK.
Many of the new, large projects that have been announced are attempts to derive benefits from lower-cost natural gas resources. Not all these projects will proceed, taking into account that these capital-intensive projects create
additional risks – project costs have been rising significantly in the past few years. Complex projects involve a variety of parties, including owners, clients, investors and EPC contractors.
With the $50 per barrel price expected to remain for the near future, and geopolitics impacting markets and economics, managing costs and risks effectively should be the priority for companies in both the upstream and downstream sectors.
Many petrochemical projects are now being re-evaluated in this environment of lower crude – and hence lower naphtha – prices. It’s a volatile time in our industry, so companies must be ready to adapt to the changing markets.
About the author: Colin Chapman is the president of Euro Petroleum Consultants.
