US crude oil production from tight shale formations could climb quickly as prices recover, but the emphasis likely will be more on short-term onshore projects that are easy to start than on longer-run offshore areas with greater potential, the International Energy Agency’s chief economist said.
“The US tight-oil industry could restart in a dynamic fashion if and when global oil prices improve. [Companies] are ready to go,” Laszlo Varro said at the Center for Strategic and International Studies on Oct. 25. “At the same time, I think it would be very difficult for any major oil company to return to canceled offshore projects. The investment cost opportunities in North America primarily belong to short-term projects that are easy to start.”
Varro’s remarks centered on World Energy Investment 2016, the organization’s inaugural report on energy investments around the globe. It found that oil, the largest primary energy source, slightly increased its share of the global energy mix in 2015, but its share of global energy investment declined as the industry reacted to a sharp fall in prices since late 2014 with cuts in capital expenditures, most notably in North America.
“We are tracking the North American tight-oil industry in great detail. Luckily, most of the companies make a good quantity of data available,” Varro said. “US tight oil production has been declining for more than a year, and is close to 1 million b/d below its peak. But it has the capability to rapidly recover as prices increase.”
Investments in giant oil and gas projects also are relatively easy to track, he added. “In most cases, those technically haven’t been cancelled but delayed so the companies maintain the license and say they’ll revisit the project if and when market conditions justify it and, in any case, the oil isn’t going anywhere,” said Varro. Companies also are applying efficiencies to reduce massive projects’ costs, such as BP PLC, which now estimates that its Mad Dog project that it originally said would cost $22 billion now can come in around $8 billion, he indicated.
“What is extremely difficult to track is the impact of ongoing investment cuts on secondary field development, such as infill drilling,” said Varro. “That has been cut to the bone. That is very likely to have an impact on depletion of existing production, but it’s still extremely difficult to track.”
Where outlays stayed robust
Upstream oil investment remained robust in the Russia and the Middle East, helping to push up the share of the national oil companies that dominate production in those regions in oil and gas upstream investment to an all-time high of 44%, IEA’s report said.
“The relatively low cost of developing reserves in these regions and currency movements that mitigated the fall in the dollar oil price helped to support investment there,” it said. “While the Middle East produces more than one third of the world’s oil, it accounted for only 12% of global upstream investment due to exceptionally low drilling costs. In Russia, capital spending even increased in ruble terms, helping to stabilize production at a post-Soviet high.”
Varro said, “In terms of investment not only in Russia but also the Middle East, the share of national oil companies in global oil and gas upstream investment is at an all-time high. Given that very often this involves the control is of low-cost, it actually underestimates their potential future control.”
He said the overwhelming majority of Russia’s oil investments is by Rosneft and other major oil companies there. The country had a prudent financial policy when prices were high and accumulated a substantial financial reserve, but used half of it in the last two years, Varro said. “I should be cautious in my predictions. A year ago, many people were saying the Russians were at the end of their road. Since then, they have ramped up production by 300,000 b/d. But they really are pushing very, very hard against fundamental geology in Siberia,” he added.
The impact of low oil prices on cash flow tested the debt-financed investment model of the US shale oil industry, leading to a particularly sharp 52% drop in investment there in the past 2 years, the report said. “The shorter investment cycle of shale projects and the widespread use of futures hedging has enabled independent shale producers to rely on a highly leveraged business model, in contrast to major oil and gas companies that rely predominantly on internal cash flow for investment,” it said.
“Access to bond markets for US shale companies and the cost of capital are directly influenced by oil prices. While financial pressures in the shale industry remain widespread, despite a recent partial recovery in oil prices, the operators that have filed for bankruptcy represent only a minor proportion of total US unconventional production,” IEA’s report said.
Contact Nick Snow at [email protected].