Oil carousel

There is no need to talk about "shale counter-revolution" yet

The oil market develops cyclically. Simplified, it goes like this: at the bottom of the cycle, oil prices are low, there is an excess supply of oil, investment is slowing down. The decline in prices stimulates demand, which gradually begins to exceed supply and pushes oil prices up. Oil companies begin to increase profits and get the opportunity to invest in the development of new projects. The industry is booming, new discoveries are becoming more economical, new companies are entering the market, the market is glutted, demand is declining, oil prices are falling, the industry is shrinking, and slowly bottoming out again.

According to well-known British economist Anatoly Kaletsky, since the 1970s, two types of cycles have alternated in the oil industry: in the first, prices fluctuated in the range of $50-120, in the second - $20-50. Accordingly, the price of $50 per barrel, which was the bottom for the first cycle, was the ceiling for the second. Given the current trends in the market, it becomes clear that the oil industry is now in the second cycle, in which it is unrealistic to expect prices above $50 in the near future.

The new market reality poses a serious challenge to US shale oil producers. What will happen to their projects if oil prices fluctuate in the range of $20-50? The recently published EIA (Energy Information Administration) report on drilling performance on shale projects recorded a net decline in production for all key fields in 2015: Bakken, Eagle Ford, Marcellus, Haynesville, Niobrara. A slight increase in oil production is observed in the Utica and Permian regions. Moreover, the decline is due to the development of old deposits, while oil and gas production at all new drilling rigs increased last year.

But even if oil prices continue to fall, declaring the end of the shale revolution would be wrong. There are a number of reasons for this. First, the advent of a competitive regime in the oil market will force the exit of less competitive companies that joined the general boom at a time of high prices and counted on quick profits rather than long-term development. The rest of the new reality will force to increase the efficiency of production - and they are already doing it. While the number of rigs at shale projects remained broadly unchanged between 2011 and 2014, their production of shale oil and gas tripled from 4 million to 12 million barrels of oil equivalent per day. In addition, if in 2006 oil prices had to be at the level of $80–100 per barrel for the break-even operation of shale projects, by 2014 the cost of production at some fields had dropped to $40 per barrel.

It is obvious that producers will now focus on developing only the highest quality, promising deposits, which will reduce production costs and protect shale projects from price fluctuations.

Lower prices will help cool the overheated market and, according to the Boston Consulting Group, "reset costs" for development, lowering them to a more sustainable level.

The shale revolution has let the genie out of the bottle, changing the balance of power in the energy market. It will be impossible to bring him back.