Saudi Arabia and Russia took the initial step to stem the slide in oil prices. There’s just one problem: If they are successful – and that is a large if – the wildcatters of Texas, Oklahoma and North Dakota are waiting to pounce.
With 4,000 wells drilled and just waiting for better prices to be triggered stream, the so-called fracklog could act as a cap to any oil rally, industry executives, traders and OPEC officials said.
Worse, a price recovery could effectively bail out dozens of shale companies now struggling with $30-a-barrel oil, letting them return to the main city market.
“If you think about creating a production cut as OPEC, prices rise and these producers can get oil online in 80 days,” Jeff Currie, Goldman Sachs Head of Commodities Research, said on Bloomberg TV.
“It makes any kind of price rally self-defeating.”
The look for a grand bargain among oil producers now use the Iranian capital Wednesday as Venezuela and Qatar energy ministers started talks with Iran and Iraq to try to expand an agreement to freeze crude production to shore up prices.
The chance of meaningful output cuts for Saudi Arabia, Russia yet others is they backfire. Slowly but surely, low prices happen to be bringing the U.S. shale industry to the knees. Bankruptcies have mounted while company after company slashed spending, laid off roughnecks and idled drilling rigs.
As many as 74 North American producers face significant difficulties in sustaining debt, according to credit score firm Moody’s Investors Service.
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The drop in U.S. oil rigs towards the minimum since 2010 is starting to translate to the wellhead.
In North Dakota, production from the prolific Bakken formation suffered its first year-on-year stop by a decade in September. In Texas, home from the Eagle Ford and Permian basins, output in November fell on an annual basis the first time since 2010.
“Saudi Arabia must be assured that U.S. shale wouldn’t recover quickly,” said Bob McNally, president of consultant Rapidan Group in Washington and a former senior oil official in the White House.
With shale groups struggling, U.S. production is set to say no this year by 740,000 barrels a day to 8.69 million, based on the latest government forecast. A rebound in oil prices could alter that math.
Shale output is if oil prices rise to US$50 a barrel, Ian Taylor, ceo of Vitol Group BV, the world’s largest oil trader, said within an interview before the Saudi-Russia deal was announced. “It looks clear that a lot of the oil that’s likely to be turn off within the next year or so because it is simply too low a cost, some of it could come back,” he explained.
Once oil rises, shale companies can secure prices, insulating themselves against any market weakness and attracting lenders. “If the price of oil goes back as much as US$50, banks will respond quickly,” said Ed Hirs, an energy economics lecturer at the University of Houston and managing director of non-public drilling company Hillhouse Resources LLC. “Shale companies tends to buy a brand new round of hedges, and banks won’t be calling their” loans, he said.
So far, the possibilities of a cost rebound seems limited. U.S. oil futures fell back below US$30 a barrel on Tuesday after the deal was announced on speculation that it wouldn’t lessen the current glut. Futures were up US$1.73, or 6 %, to US$30.77 a barrel at 11:02 a.m. Wednesday.
Some shale companies may not be inclined to dive in. Bill Thomas, ceo at EOG Resources Inc., the largest landholder in Texas’s Eagle Ford shale formation, told attendees at an industry conference in Houston last week that his company won’t start boosting output the first time oil hits US$60 a barrel.
“We’re going to ensure the market is who is fit, it’s balanced, and we’ve got a future,” Thomas said. “We don’t wish to ramp it up and drive the cost of oil down again.”
The cheapest and quickest method for shale companies to increase output is always to tap the fracklog.
Almost 4,000 wells happen to be drilled but they are still waiting to become hydraulically fractured to allow them to produce, based on Bloomberg Intelligence analysts William Foiles and Andrew Cosgrove. If the fracklog were reduced just by 170 wells a month, it could add 400,000 to 600,000 barrels a day, Cosgrove said.
It wouldn’t be as quick as stepping on an accelerator, because companies have laid off a lot of roughnecks that it would take time to rebuild the work force to be able to take on the projects, he said. “It’s no immediate snap-back, but it’s waiting in the wings,” Cosgrove said.
Bloomberg News
