A surge in the US oil shale industry has been one of the major contributors to the fall in oil prices this year.
In July alone, 2.4m barrels per day is expected to come from the US Permian basin which is spread between west Texas and eastern New Mexico.
So why is US shale oil gushing now?
The first reason is that the 20 per cent price rally caused by Opec and non-Opec pledges to curb oil output late last year lifted the price to a level that encouraged increased investment into the US. The International Energy Agency has predicted a 53 per cent upswing in investment into US shale oil this year alone.
“The boost to the oil price following the Opec/non-Opec production cut, which saw prices stabilise around $55 a barrel over the first quarter, encouraged investment in late 2016, the result of which we are now seeing as production rolls through,” says Christopher Haines, head of oil and gas at BMI Research.
Two other factors behind the shale gusher are closely tied together: the oil price crash of 2014 forced producers to become more efficient and a lot of this was gained through advances in technology.
Unlike traditional, vertically drilled oil wells, shale oil refers to deposits that are trapped within rock formations that are not very porous. As a result, shale oil is accessed via hydraulic fracturing (fracking), through which horizontal wells have a mixture of water, chemicals and sand pumped into them to split the rock and let the oil flow out.
Recent technological advances have been made via what Herman Wang, an Opec specialist at S&P Global Platts, sums up as “massive drilling efficiency gains”. These come down to factors such as better chemical compositions, technology that has allowed horizontal wells to lengthen and are aided by other developments such as software innovations.
With a lower breakeven point after the oil price crash, producers were spurred into streamlining and experimenting with operations further to achieve maximum efficiency.
Nicole Decker, energy sector strategist at UBS’s chief investment office explains: “Unit operating costs for US shale operators have been declining. The oil price needed for most US shale oil producers to produce profitability has fallen. Many operators can now produce profitably with West Texas Intermediate [the US benchmark oil price] near the $50 a barrel level.”
Drilling efficiencies will likely always improve, but other types of technology push the sector forward too.
Take the example of London-listed Highlands Natural Resources which is concentrated on the US market. Highlands has a farm-in agreement with a shale project in Colorado where it will begin drilling their first two-mile horizontal well this summer and is also developing a natural gas project in an area with significant helium reserves.
However, it also has patented “disruptive” technology that Highlands’ founder Robert Price describes as a “simple, elegant solution” that allows the fracking industry to address a major efficiency problem.
At present, it is difficult for producers to “refrack” already-drilled wells, a problem that if addressed would increase production without the expense of drilling new wells. It is also difficult to protect some pre-existing wells, known as “parent” wells, from a phenomenon such as bashing.
“The problem that they’re having now they call it bashing, well-bashing, it’s when you frack a new well next to an old well the fluids invade the regime of the old well, called the parent and it just destroys production from the parent well, so this asset that you have that generates income if you drill a new well and frack it, it could actually destroy the value you’ve already created. It’s a problem,” says Paul Mendell, Highlands’ director of exploration and development, and the creator of the patented tech.
Highlands has filed for worldwide patents for the technology, which works by injecting gas into a well to keep it from becoming damaged and filling up with sand and water.
The Trump effect?
Beyond tech and investment though, another market force has promised to spur oil and gas development: US President Donald Trump.
“I was speaking to a group of investors and it was right after the election in the United States and I said I’ve got good news and bad news,” Highlands’ Price says.
“I said the bad news, Donald Trump has been elected to become president of the United States. The good news, is Donald Trump has been elected president of the United States and we’re in the oil and gas business. I’ll tell you this, no one laughed at that presentation either.”
Trump has said he will push for the US to become energy independent, so far working to repeal the Clean Power Plan, which would create more demand for natural gas and has championed additional liquefied natural gas exports, among other pushes for the sector. Trump has been defeated in several of his major campaign pushes since becoming President, but will his march for “energy dominance” really pedal the sector further?
“We have not seen any regulatory changes that will have any material impact,” BMI Research’s Haines says. “Some environmental regulations have been softened, though for most companies safety and environmental issues remain a priority and they have not changed their practices. Price will be the primary driver of the US oil sector, not Trump.”
The President is, then, likely to be an aid to the sector, but not exactly a springboard.
The near horizon
So what is next in the short-term? Although there are a few bearish analysts, total US oil production, driven in large part by the rise of shale, is projected to grow to 9.9m bpd next year.
The Permian basin is forecast by the US EIA to represent 30 per cent of America’s oil production in 2018.
“Certainly the resilience of US shale will probably continue to put a ceiling on prices and largely neutralise any attempts by the Opec/non-Opec coalition to boost prices,” S&P’s Wang says. “There are signs, however, that the growth in US shale production may be plateauing. The US oil rig count fell [earlier this month] for the first time since January. We will have to see if this becomes a trend.”
It should be noted, too, that the erosion of the Opec cut gains is not solely down to US shale output increasing - important Opec members Nigeria and Libya have both ramped up supply as they were exempt from the quotas, and global demand for oil has slightly undershot expectations. Oil watchers will be monitoring these steps closely too.