Shale oil without a veil

Shale oil without a veil

Baku, Azerbaijan, Jan. 14

By Vagif Sharifov - Trend:

The oil forecasts from the US, which strived for the shale gas revolution, turned out to be very disappointing. The desire to extract oil "ahead of everyone" turned out to be nothing but desire.

The Energy Information Administration (EIA) released a report, which said Brent crude oil average price is expected to reach $ 58/barrel this year. What it means is that we will have to live the entire year with the oil price that is almost similar to the minimum price of 2014.

The mentioned minimum price in 2014 was $55 per barrel, while the average through the year was almost $99 per barrel. It seems however, that we might not see that $99 per barrel any time soon, since EIA believes average Brent price for 2016 will be only $75 per barrel.

Historically, within the last almost 30 years, Brent crude oil spot price was observed to be at $75 per barrel during the period from 2006 to 2010. For example in 2014, the price passed the $80-70 corridor within 16 days.

Economic anomaly

It is clear that the oil market is historically undulating. This is not the first time the prices fall, but such a 'surprising result' of the "invisible hand of the market" is something even Adam Smith hasn't dreamed about. Take a look at the three facts below:

- EIA report says that the oil prices of 2014 shouldn't be expected for the next two years, but the oil demand will actively grow - nearly 92.5 million barrels per day in 2015 and a million more the next year;

- Ali Al-Naimi, the oil minister of Saudi Arabia, which is a major oil producer, said that the world may never see a $100 per barrel price again. He said that the oil production decrease is not in the interests of the OPEC members, regardless the price. He said that it is inappropriate to cut production despite whether the prices will drop up to $40 or even $20 a barrel.

- The US, most interested in expensive exploration of own shale fields, does not actively intervene in maintaining the prices at a high level at the moment when the shale sector needs it the most.

While Iran calls the oil price drop a "conspiracy" for the political and economic "pressure on certain countries" and Venezuela continues to claim the market needs to be saved, the number of active drilling rigs decreased by 60 in the US and as we know, the first shale oil production company went bankrupt.

It is known that the prime cost of the shale oil production is very high. For instance, the spot price for Brent dated oil totaled almost $47 per barrel on Jan.12, that's to say, if this price drops by $7 more, over 65 percent of all shale oil production will be suspended in the US.

It is clear that the work will not be suspended instantly, and people will try to get back at least some part of the invested money. But companies will unlikely get new investments to continue the development as easily as for example in H1 of 2014 when the oil prices exceeded $100 per barrel.

The IHS research company estimated the breakeven point for shale oil production in the US at $57 per barrel in the autumn of 2014. Currently, the price is $10 per barrel lower than this level.

The technically recoverable shale oil reserve in the world, beautifully dubbed by many as "the second breath of the global economy", is estimated at 345 billion barrels, according to EIA (Energy Information Administration).

Let's forget for a second about the economic returns and the cost of development. Let's suppose that all these volumes are proven recoverable volumes. Considering the oil demand in 2015, this shale oil reserve will only be sufficient for 10 years.

This is hardly "the second breath of the global economy", but rather an end for the entire world industry based on oil.

If we consider these volumes only as auxiliary ones, then the shale oil, as a sector is worthwhile only with the price of $90-$100 per barrel or more. That's to say, on one hand, the global balance is increased by 345 billion barrels and on the other hand, the reserve exists only with high prices.

What's worse is that the shale oil sector will not be a stable foothold for the global oil market at least because, it exhausts unpleasantly quickly.

Indeed, given the great financial opportunities of the US, this sector in the US is partially subsidized. However, no matter how much money is invested, it seems to be too much even for the investors that can make dimensionless volumes of investments.

The whole point is in the speed of production decline. In reality, over 90 percent of shale oil production in the US falls only on three regions where the average speed of the decline in production is almost 50 percent.

The decline is especially fast in some wells - over 70 percent in the first year of work. It means that if the production is equal to 100 barrels per day on Jan.1, 2015, then on Jan. 1, 2016 the production will not go above 30 barrels per day.

However, the main goal of such subsidies is to ensure the population's employment. The shale oil and gas production in the US in 2012 ensured the creation of over two million jobs, according to API (American Petroleum Institute).


Vagif Sharifov, is an oil markets expert, development director at Trend Agency. Follow him on Twitter: @VagifSharifov

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