While oil prices continue to command attention, the shale industry has slipped beneath the radar. Production continues to rise, having skyrocketed in recent years. New drilling techniques have allowed production to remain profitable even as the price falls. But now, a reckoning is due.
Production has finally started to drop, with October seeing a loss of around 200m cubic feet per day in output – one of the longest losing streaks in a number of years.
Shale companies, like the mining sector, have been caught in a downward spiral, spending more in order to produce more, and ultimately running faster just to stay in the same place.
Consolidation is one possibility for those firms involved – similar to the moves in the oil and mining sectors in the 1990s and early 2000s – and this will stave off the day of reckoning.
But not all firms will find a rescuer, and the weakest will be knocked out. Reality is finally catching up with the sector, and it will not be pleasant.
Ole Hansen, head of commodity strategy at Saxo Bank, says No
US shale producers are struggling with the extended period of sub-$60 a barrel crude oil. The return to the market of Iranian oil during the first months of 2016 will add some pressure, not only on US producers, but also other Opec members desperate to maintain market share. But what characterises shale oil production is its ability to remove and add capacity as the price changes, in a cost-effective manner.
A clear sign of the attractiveness of this has been recent reports of major US oil producers moving away from expensive, high-risk megaprojects towards safer revenue, lower-cost shale operations.
So while we see the sector consolidate, it will by no means remove US producers permanently. During coming years, the continued growth in demand, combined with dramatic cuts in capex during past months, will leave the oil market short of megaprojects, and to help Opec fill this gap we will see a resurgence among US shale producers, prices permitting. Shale is down, but by no means out.