The US is the new Saudi Arabia, the world’s swing producer of oil. I don’t know how many times I have read that over the past few months, but it seems to be the consensus view.
There is some truth in it. The big difference between shale oil and deep-water developments, for example, is that shale development timeframes are short. Now that the transport infrastructure is in place, it can take less than 12 months to drill a well and start pumping oil versus up to 10 years for a large offshore project. An estimated 3,000 wells have been drilled but not ‘fracked’ in the US. These could be added to supply in a matter of months (each well can initially produce 750-1,000 barrels of oil per day, meaning there are millions of barrels of potential supply simply sitting on the sideline).
As this short-term supply responds to changes in the oil price, the theory goes, it caps the amount by which the oil price can rise. The days of $100 oil won’t be seen again for many years to come.
Perhaps. Probably, in the short term. But ask David Einhorn and he’ll tell you many shale producers aren’t making any money even at prices north of $100. Not if you accurately measure the costs. Our analysis of a few ASX-listed players drew a similar conclusion. There has been lots of capital spent, lots of ‘independent’ experts’ reports showing hundreds of millions of dollars in asset value, but very little in the way of cash flow to shareholders.
And US shale doesn’t have a sheik who can turn the figurative tap on and off at will. There are thousands of independent players, each with their own calculations to make. They each own different assets and have varying costs of development and production.
Yes, some taps will be turned back on if the oil price hits $75, but I doubt there is going to be capital pouring back into marginal projects at that price. And, with decline rates of 30% or more, US shale needs a lot of investment just to stand still.
US shale might now be the marginal producer. How much it produces at $75 a barrel remains to be seen.
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