There has been much debate on the environmental risks of fracking for shale oil and gas.
The fact remains, however, that it’s big business in the US – and as the oil price climbs back up towards $60 a barrel, it’s becoming increasingly profitable.
It’s that delicate balance of shale’s profitability – anything over $50 a barrel and it pays to start drilling again – that is keeping oil prices steady, even as OPEC nations such as Saudi Arabia restrict supplies in a bid to drive up the price.
OPEC reached an agreement with Russia in January 2017 to cut production – a deal they recently agreed to extend for a further nine months beyond March 2018, when it was due to expire.
The move followed a failed bid by OPEC in 2014 to shut down shale-oil drillers by opening the taps and flooding the market with cheap oil.
It worked in the short term, pushing the oil price as low as $35 a barrel by the start of 2016. Many US rig contractors went out of business, and the industry consolidated. And waited.
Towards the end of 2016, OPEC nations decided they had had enough of selling oil on the cheap, and tried a different tactic – turning off the taps.
Saudi Arabia persuaded a group of 24 countries, including the 13 other OPEC members and Russia, to curb global output by 2% to 1.8 million barrels a day.
Shale drilling restarts
The supply cuts pushed the price of West Texas crude (WTI) up to a recent high of just under $58, while the more valuable North Sea Brent crude hit $62.
However, what OPEC hadn’t been expecting was that the US shale-oil drillers would be able to start up again so quickly as such a low price point.
Oil companies hired the contractors who had managed to stay in business and quickly restarted operations – in fact, contractors were in short supply due to the earlier bankruptcies, and were able to charge upwards of $17,000 a day to operate a drilling rig.
As the US oil came on stream, so oil prices fell again. But this time, OPEC accepted the situation more gracefully.
Tommy Nusz, chief executive of North Dakota shale producer Oasis Petroleum, told Reuters OPEC members “have demonstrated that they have a difficult time understanding the US shale plays, but I suspect that is improving”.
Meanwhile United Arab Emirates energy minister Suhail al-Mazroui told reporters at the recent OPEC meeting, “Shale is an important parameter, and complementing the production of the world.”
OPEC now realises it’s not going to shut down the US drillers any time soon, and that as long as the price remains competitive, they will keep the rigs running.
So an uneasy truce has arisen in which both sides see an advantage in prices staying in a sweet spot that keeps everyone happy.
Boon for producers
Many in Texas and North Dakota – the two largest US shale-producing states – have come to see the OPEC curb as something of a boon.
“Now that it seems prices are looking to stabilise with this OPEC deal around $60, I think that’s going to be a very nice price environment for folks around the state,” Ryan Sitton, one of three commissioners on the Texas Railroad Commission, told Reuters in a phone interview from Austin.
But there are those warning against a new shale boom in the US. Scott Sheffield, executive chairman of Pioneer Natural Resources Co, one of the largest producers in the Permian Basin of Texas and New Mexico, the largest US oilfield, said extra cash from higher prices should go to shareholders, not fresh drilling.
Price collapse warning
“If producers in the US increase their rig count over the next few months due to higher prices then I expect another price collapse by the end of 2018,” he said.
“I hope that all US shale companies will maintain their current rig counts and use all excess cash flow to increase dividends back to their shareholders.”
Oil peaked at $115 a barrel in June 2014, and it will almost certainly never reach that level again, thanks in part to the rapid technological advances – and falling prices – of alternative energy sources such as wind and solar.
But oil still has a big role to play, and it may just sit at around the $60 level for some time to come. That’s a price point that keeps everyone happy, whether they be Saudi princes or tough US rig contractors.