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Saudi Arabia and Russia have taken the initial step to stem the slide in oil prices. There’s only one problem: If they’re successful – and that’s a large if – the wildcatters of Texas, Oklahoma and North Dakota are waiting to pounce.
With 4,000 wells drilled and merely waiting for better prices to become triggered stream, the so-called fracklog could behave as a cap to any oil rally, industry executives, traders and OPEC officials said.
Worse, a price recovery could effectively bail out dozens of shale companies now struggling with $30-a-barrel oil, allowing them to return to the main city market.
“If you consider making a production cut as OPEC, prices rise and these producers can get oil online in 80 days,” Jeff Currie, Goldman Sachs Head of Commodities Research, said on Bloomberg TV.
“It makes any kind of price rally self-defeating.”
The search for a grand bargain among oil producers now use the Iranian capital Wednesday as Venezuela and Qatar energy ministers started talks with Iran and Iraq to try to expand a contract to freeze crude production to shore up prices.
The chance of meaningful output cuts for Saudi Arabia, Russia and others is that they backfire. Gradually, affordable prices have been bringing the U.S. shale industry to its knees. Bankruptcies have mounted while company after company slashed spending, let go roughnecks and idled drilling rigs.
As many as 74 North American producers face significant difficulties in sustaining debt, based on credit rating firm Moody’s Investors Service.
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The stop by U.S. oil rigs to the minimum since 2010 is beginning to mean the wellhead.
In North Dakota, production from the prolific Bakken formation suffered its first year-on-year stop by a decade in September. In Texas, home of the Eagle Ford and Permian basins, output in November fell every year the very first time since 2010.
“Saudi Arabia must be assured that U.S. shale wouldn’t recover quickly,” said Bob McNally, president of consultant Rapidan Group in Washington along with a former senior oil official at the White House.
With shale groups struggling, U.S. production is placed to say no this season by 740,000 barrels a day to eight.69 million, based on the latest government forecast. A rebound in oil prices could alter that math.
Shale output is if oil prices rise to US$50 a barrel, Ian Taylor, chief executive officer of Vitol Group BV, the world’s largest oil trader, said within an interview before the Saudi-Russia deal was announced. “It looks clear that a lot of the oil that’s probably going to be turn off in the next year or so since it is way too low a price, some of it could return,” he explained.
Once oil rises, shale companies can secure prices, insulating themselves against any market weakness and attracting lenders. “If the cost of oil dates back up to US$50, the banks will respond quickly,” said Ed Hirs, a power economics lecturer in the University of Houston and managing director of private drilling company Hillhouse Resources LLC. “Shale companies tends to buy a brand new round of hedges, and banks won’t be calling their” loans, he said.
So far, the prospect of a price rebound seems limited. U.S. oil futures fell back below US$30 a barrel on Tuesday following the deal was announced on speculation that it wouldn’t lessen the current glut. Futures were up US$1.73, or 6 %, to US$30.77 a barrel at 11:02 a.m. Wednesday.
Some shale companies might not be inclined to dive back in. Bill Thomas, ceo at EOG Resources Inc., the largest landholder in Texas’s Eagle Ford shale formation, told attendees in an industry conference in Houston last week that his company won’t start boosting output the very first time oil hits US$60 a barrel.
“We will make sure the market is in good shape, it’s balanced, and we’ve got a future,” Thomas said. “We don’t want to ramp it up and drive the cost of oil down again.”
The cheapest and quickest way for shale companies to increase output is always to tap the fracklog.
Almost 4,000 wells happen to be drilled but they are still waiting to be hydraulically fractured so they can produce, according to Bloomberg Intelligence analysts William Foiles and Andrew Cosgrove. If the fracklog were reduced by just 170 wells per month, it could add 400,000 to 600,000 barrels a day, Cosgrove said.
It would not be as quick as stepping on an accelerator, because companies have let go so many roughnecks it would take time to rebuild the job force to be able to undertake the projects, he explained. “It’s no immediate snap-back, but it is browsing the wings,” Cosgrove said.
Bloomberg News
