United States’ production of light tight oil (LTO, commonly known as “shale oil”) has gone through a rapid expansion between 2010 and 2014, thus becoming the largest source of growth in global oil production. At the start of 2015, however, the sustainability of its business model, largely based on debt, got into limelight. Oil prices have collapsed and uncertainty about US production was high. The sharp fall in the number of drill holes as of January 2015 combined with the debt-based business model cast a shadow over the US petroleum production.
In 2017 though, it seems that the shale oil revolution has gotten over the challenges. While the production of shale has clearly gone down, productivity improvements and cost cuts have enabled a halving of the LTO equilibrium price. Independent producers have refocused their activities on the most productive facilities. The key role played by the Permian basis should also be emphasized. Despite a decreasing number of drill holes, output has continued to rise and now amounts to about a quarter of American oil production. Moreover, independents have drawn extra value from abundant inventories, which include drilled and uncompleted wells.
The success of the LTOs is changing: after US majors did not manage to enter the US in the early 2010, American energy companies are investing billions in LTOs, which is expected to generate solid growth in future production. Export of unrefined crude oil has been authorized since January 2015 while the new regulations have not changed the situation over the past two years since it took place while prices were low and the Brent crude very cheap. They have, however, boosted US exports and opened new opportunities. The transport, storage and port infrastructure needed for further development are being worked on, and could mean a major shift for international crude trade, with an increased role for the United States and WTI (West Texas Intermediate, or WTI, is the underlying commodity of the New York Mercantile Exchange’s oil futures contracts).
The new US administration has also promised to achieve the country’s energy independence by tapping into the energy wealth of the American subsoil. The increased output will be facilitated through the implementation of less stringent regulation and investment in transport infrastructure facilities. Although optimism persists today, with production going up by 1 Mb/d between December 2016 and December 2017, uncertainty around medium and long-term production is still there, as LTO production and resources costs are not yet well understood as is the responsiveness of the self-employed to adapt to a changing situation. Therefore, the OPEC’s efforts at the rebalancing of the market are ultimately full of unknowns.
‘The Resurgence of Shale Oil’ – Study by Sylvie Cornot-Gandolphe – Institut français des relations internationales (Ifri).
(The Study can be downloaded here)
