The US Shale Oil Industry Will Simply Vanish says Energy Information Administration (EIA)
by Phil T Looker, Financial Editor
A few months ago, before the June oil prices crash, the US oil industry was ebullient. "It is too late for OPEC to stop the shale revolution", industry pundits squawked, "OPEC can’t stop the shale industry" – screamed banner headlines in the usually restrained financial press.
In July, the projected the expansion of US shale oil and gas supply in 2016 had to be adjusted to take into account new conditions. Compared to the first-half of 2014, US crude oil prices had declined by 47%. Fracking, the process of getting oil and gas to the surface from oil shale deposits is expensive. And messy. And making the oil and gas useable asfter it has been got out of the ground is another expensive process. With EIA forecasts predicting the Brent crude oil (the highest quality crude oil) average price will rise in 2016 scarcely to 59$ from average 54$ in 2015, it simply is not worth the expense of getting oil and gas out of the ground.
This is not only because of poor product quality; shale oil wells only have a very short life in which to pay back investment. Production start to collapse exponentially the moment a new well is in operation. Within 3 to 5 years these wells produce less than 20% of their initial production capacity.
My research indicates the running costs for one well is about $20 dollars per barrel, at current prices hardly enough to keep the well running. To create commercial products from shale oil, costs average around $35 to $40 dollars a barrel including transport, storage etc.. US shale companies need 57 dollar a barrel to break even. Most shale producers get paid less than spot market prices because of quality related problems.
The financial mainstream-media try to reassure investors that the rig production is going up, but forget to mention that the production per well is going down. This is because producers are now drilling more than one hole per rig. Producing oil has become a little cheaper but that is not enough to compensate for the low oil prices. With West Texas Intermediate selling at $46.50 producers are still losing dollars on every barrel produced.
The main oil price factor in the markets used to be the state of the US economy. Now it is the economic condition of China and expectations of demand growth in emerging markets. The oil price seems to be linked to China’s Purchasing Managers’ Index (PMI), which declined in August to 47,3, the lowest level in last six years. Also increased uncertainty of developing Asian countries affected the price, the latest stage in a slowdown that looks set to continue as demand from western economies for manufactured goods continues to slump.
At the same time, due to US fracking mania, supply is still going up. Then there is Iran; with a looming global crude oil supply glut the agreement to ease sanctions that will let the Islamic State back into the global market next year while te outlook for car owners is good, for business it is bleak. Added supply could be almost twice as big as the production cuts by US shale frackers who are shutting up shop.
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