Hail shale: the sweet saviour of US energy ambitions
The second wave of the USfracking revolution is about to gush onto the market, with huge geopolitical implications
More than 1,000 shale rigs dot the plains of the US fracking heartlands in a patchwork of economic promise. The oil price crash all but snuffed out the US pioneers of the shale rush. Yet, it is from this pyre of bankrupt frackers and hastily dismantled rigs that a new industry centred on the Permian Basin in Texas has galvanised to reassert the US as an energy superpower.
It is this “remarkable strength” that is “triggering a rapid transformation of global markets”, according to Fatih Birol, the chief executive of the International Energy Agency (IEA). “The second wave of the US shale revolution is coming. It will see the US account for 70% of the rise in global oil production,” he said last week.
The IEA’s latest report predicts US shale will gush into the global market at nine million barrels a day, surpassing Russia and rivalling Saudi Arabia by 2021. “This will shake up international oil and gas trade flows, with profound implications for the geopolitics of energy,” Birol said.
Suddenly, one of the world’s most energy-hungry countries is a major exporter of oil and gas; geopolitical imbalances are shifting, and the era of the boom-bust oil market super cycle may already be at an end.
There are fewer of the high-flying cowboy explorers that became a function of the boom-bust cycle. In their place are tech-savvy investors with a prudent view of the market and some of the deepest pockets in the energy industry. Among the new breed of shale players are global oil giants ExxonMobil and Chevron, which have signalled their intention to lay claim to the Permian Basin’s boom.
The region is well understood and easier than ever to tap using cutting-edge fracking technologies. This is the energy equivalent of shooting fish in a barrel.
“If there’s one thing that we can take from the US shale boom from the past couple of years it is that producers can do things faster and cheaper than ever before,” Michael Tran, a global energy strategist at RBC Capital Markets, said. “For E&P companies the ‘e’ in exploration and production is being replaced with ‘exploitation’. It’s not a case of exploring for oil, it’s about how to get it out faster, and cheaper.”
Last month, US crude exports reached record highs of 3.6 million barrels a day. The IEA predicts that this will climb to 5.6 million by the end of this year. “That’s a stark difference. Typically, when you think about tectonic shifts in the global oil market, they take place over decades. The US shale industry is completely rewriting that idea,” Tran said.
This doesn’t come without challenges. Under the reign of US shale the oil market is likely to face more price volatility. When there are higher prices nimble rigs will ramp up significantly to take advantage of a more lucrative market. In a rapidly oversupplied market, prices will plunge more quickly, too. Super cycles that wax and wane over years could explode and rebuild within months.
“US shale will be at the epicentre of swinging that production back and forth through these short-dated cycles,” said Tran. “In a sense it will be a return to the ‘drill, baby, drill’ mentality of the early shale years.”
The US’s role as the global oil market’s swing-producer comes at a price to the Organisation of Petroleum Exporting Countries (Opec). The Saudi-led cartel has controlled the oil market for decades with a careful grip on market share to steady prices. “This is a complete transformation from how we used to think about the market, where a lot of projects needed long investment lead times of three, four, five years to grow production,” Tran said.
It threatens to upend the rules of global geopolitics, too. “The shale boom has rewritten all the rules in terms of how we’re thinking about the US’s role in the global energy dynamic,” he said. “It has empowered the Trump administration, because if we were still reliant on imports perhaps the government would have taken a different stance, from a foreign policy perspective, on Iran or Venezuela.”
There are limits to the US might, which are missing from the bombast of political rhetoric that surrounds the shale resurgence. The US will never be entirely energy independent, according to Tran, because crude quality matters. It is heavy, sour crude that most of the world’s refiners crave rather than the sweet, light crude that rises from the US shale heartlands. This means the established oil market players are still in play. “Who can supply a heavier sour barrel? That’s Venezuela, that’s Iran, that’s Saudi Arabia. So there is still a major role for Opec to play,” said Tran.
“It’s popular to count Opec out. But they have shown time and time again that they still hold a central pillar of influence in the oil markets.”
– © The Sunday Telegraph