The second coming of American oil shale is preparing to challenge OPEC again

LOST HILLS, CA - MARCH 23: Pump jacks are seen next to a canal in an oil field over the Monterey Shale formation where gas and oil extraction using hydraulic fracturing, or fracking, is on the verge of a boom on March 23, 2014 near Lost Hills, California. Critics of fracking in California cite concerns over water usage and possible chemical pollution of ground water sources as California farmers are forced to leave unprecedented expanses of fields fallow in one of the worst droughts in California history. Concerns also include the possibility of earthquakes triggered by the fracking process which injects water, sand and various chemicals under high pressure into the ground to break the rock to release oil and gas for extraction though a well. The 800-mile-long San Andreas Fault runs north and south on the western side of the Monterey Formation in the Central Valley and is thought to be the most dangerous fault in the nation. Proponents of the fracking boom saying that the expansion of petroleum extraction is good for the economy and security by developing more domestic energy sources and increasing gas and oil exports. (Photo by David McNew/Getty Images)
Pump jacks are seen next to a canal in an oil field over the Monterey Shale formation where gas and oil extraction using hydraulic fracturing, or fracking, is on the verge of a boom in this 2014 file photo.

After a two-year downturn spurred by oil’s plunge to $26 from $100, U.S. production is on the rise once again

When the who’s who of the oil industry met a year ago in Houston, Saudi Arabia’s energy minister had harsh words for U.S. shale drillers struggling with the worst price crash in a generation.

“Lower costs, borrow cash or liquidate,” said Ali Naimi, who managed the world’s largest oil-exporting business for more than two decades.

In the year since, the drillers have largely taken Naimi’s advice. While more than 100 have gone bankrupt since the start of 2015, the companies that survived have reshaped themselves into fitter, leaner and faster versions that can thrive with oil at $50 a barrel. Now, it’s OPEC that’s seeking solutions, desperate to drive prices up even further in a push to repair the economies of the countries it serves.

“The shale business is rejuvenated because of the difficulties it has been through,” Ben van Beurden, the chief executive officer of Royal Dutch Shell, said in comments last month.

After a two-year downturn spurred by oil’s plunge to $26 from $100, U.S. production is on the rise once again, opening the door for another showdown with the Organization of Petroleum Exporting Countries. The number of U.S. drilling rigs has grown 91 percent to 602 in just over nine months. Meanwhile, production has gained more than 550,000 barrels a day since the summer, rising above 9 million barrels a day for the first time since April.

And as shale returns with a vengeance, it’s not just the pioneer cowboys that dominated the first phase of the revolution in the Bakken of North Dakota. This time, ExxonMobil and other major oil groups are joining the rush. It’s a new reality that OPEC and Russia — the main forces behind the production cuts approved last year as a solution to re-balance the global market — are starting to acknowledge.

“With $55 a barrel, we see everyone very happy in the U.S.,” said Didier Casimiro, a senior executive at Moscow-based Rosneft.

Long a world leader in multi-billion dollar oil developments that take years to build and even longer to profit, Exxon is diverting about one-third of its drilling budget this year to shale fields that will deliver cash flow in as little as three years, Chief Executive Officer Darren Woods said this week. In January, Exxon agreed to pay as much as $6.6 billion in an acquisition designed to more than double the company’s footprint in the Permian basin of west Texas and New Mexico, the most fertile U.S. shale field.

Add to the mix the election of President Donald Trump, carrying the promise of fewer regulations, added pipelines and energy independence, and you see why the mood at CERAWeek, the conference that every year gathers oil executives, bankers and investors in Houston, will be far brighter next week than in 2016.

“North American oil companies are going to increase their spending by 25 percent in 2017 compared to last year,” said Daniel Yergin, the oil historian-cum-consultant who hosts the CERAWeek. “The increase reflects the magnetism of U.S. shale.”

U.S. benchmark West Texas Intermediate traded at $52.79 a barrel on Friday. Futures bounced between $51.22 and $54.94 in February.

So far this year, U.S. energy companies have raised $10.5 billion in fresh equity, with shale and oil service groups drawing the most investment, the best start of the year since at least 1999 and equal to a third of what the sector raised in the whole of 2015.

In Midland, the Texas city at the center of the Permian basin, the activity rush is palpable, as is the threat of higher costs for shale companies. The county’s active-rig total ranks second in the U.S., behind only Reeves County further to the west.

“You could see the town’s energy is back,” said Alan Means, founder of Cambrian Management Ltd., a Midland-based firm that operates more than 200 oil wells in the Permian across Texas and New Mexico. “The rigs are up again, the fracking crews are busier and the highway traffic is increasing.”

As activity rises, the man-camps in the town outskirts are flush again, with workers arriving from the Bakken in Montana and North Dakota, and from as far way as Canada. The 1,000-bed Permian Lodging camp is now 100 percent full, up from 65 percent in July, according to camp owner Ralph McIngvale.

It’s not just more activity. The growth is also the result of far more efficient ways to drill than existed only two years earlier. With oil companies benefiting from lower service costs, Shell reckons it can drill a well today for about $5.5 million, down a whopping 56 percent from 2013. And the new wells, thanks to more powerful fracking techniques, are yielding more barrels than ever.

The average Permian well now gushes 668 barrels per day, compared to just 98 barrels four years ago, according to government data.

Shale companies such as EOG Resources Inc. and RSP Permian Inc. are telling investors they will expand oil output by as much as 30 percent in the next two or three years, more than they did in the heydays of the shale boom between 2010 and 2014.

“The bottom line is we think they can produce as much oil out of the Permian as they want to,” Greg Armstrong, the boss of Plains All American Pipeline LP, told investors in February. “It’s a matter of rigs, just a manufacturing operation.”

And the revival isn’t confined to the Permian, which stretches from Texas into New Mexico. Drilling is also increasing in other shale basins, such as the Scoop and Stack in Oklahoma, and in the Gulf of Mexico’s deep-water oilfields.

At the same time, some of the industry’s most influential voices say they are keeping a tight hold on production budgets, vowing not to repeat the mistakes of the first phase of the shale revolution from 2010 to 2015, when companies spent well above the cash they generated.

Marathon Oil Corp., for example, told investors last month it expects to boost output by about 20 percent a year from 2017 to 2021 even if oil prices stay at around $55. “We plan to achieve these impressive growth rates within cash flow, inclusive of the dividend,” Marathon CEO Lee Tillman said in February.

For a U.S. industry that once seemed ever-dependent on $100 oil, the return to profit with lower prices was a big surprise. And producers returned to profit using the very playbook offered by one-time market rival Naimi, who was replaced as Saudi Arabia’s energy minister in May.

“Today, almost every single shale basin is economic in the $35-$50 a barrel price range,” said Regina Mayor, head of energy at KPMG in Houston.




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Cherry May Timbol – Independent Reporter
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