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AB 2000 studies

Alain Boublil Blog


The "cowboyistan" and the US oil renaissance

Fossil fuels hold their head high in the United States. Europe just became aware of it. The discovery and the commissioning of shale gas deposits attracted much interest, because they represented a technological challenge, but they had no major impact outside of the US. The construction of LNG terminals has recently been authorized and will allow the United States to become exporters. But evolution is slow. Meanwhile, several consequences will result from the emergence of unconventional oil.

Three large deposits were discovered and put into operation in 2006: Eagleford in Texas, Permian between Texas and Arizona, and Bakken in North Dakota. With great humour, Americans called this area the "Cowboyistan". In 2014, production reached 4.5 million barrels per day, more than Iran or Iraq. The reserves are considerable, and even higher than in most countries of OPEC. The threat that "unconventional" oil would place on those exporting countries inspired, according to some commentators, the decision of Saudi Arabia in November not to adjust downwards its production to keep prices to their past level at around $ 120 per barrel. The reality is more complex and this strategy may be lasting.

The geopolitical motivations were not foreign to the decision makers. The goal was to weaken Iran at a time when the religious rivalry between Shiites and Sunnis reached its climax. And Western countries - America in the lead - were not unhappy to sanction Russia at the same time. Oil prices were therefore divided by 2 in less than three months to the benefit of importing countries. All those considerations remain valid. Saudi Arabia, although it only partially offset the drop in resources from oil by increasing its production, is expected to maintain this line at the next OPEC summit in June. But does that weaken the new American producers? Nothing is less certain. The decline in current prices is primarily the result of an excess of supply over demand, contrary to what has been said about the "scarcity of natural resources", not to mention the theory of "peak oil". Thanks to advances in exploration and extraction techniques, we entered a lasting era of abundance of fossil fuels. This revival has taken off in the US and could be extended to many other areas.

Actually: geology was more decisive to the fall in prices than geopolitics. The drop should be sustainable despite the rebound in a month. And it does not deter new US producers to continue their conquest of the market. They have flexibility in operating the wells that you do not find in traditional deposits. This difference appears in the decisions taken by producers in recent months. Lower prices led initially to postpone projects in traditional sectors. Canada, Australia and Norway have announced investment cuts reaching tens of billions of dollars. The production of these fields has been delayed. But reserves exist and they will be exploited later.

The situation in the "Cowboyistan" is different. Since the beginning of the year, almost one third of the drills was stopped and the year production forecasts lie down slightly from the record of 2014. Hence, many commentators praised the success of the OPEC strategy. This is not justified for two reasons. First, the number of wells is not a relevant indicator because the production can vary greatly from one well to another and operators have logically started to close those that were less productive. Especially, if the ultimate objective is to raise prices, the current result is illusory because as soon as they will reach a certain threshold, unconventional deposits will be restarted.  Thanks to rapid advances in new extraction techniques one considers that an operation is profitable when the price range is between 60 and 70 $ per barrel. This shows that prices are not likely to reach their past level.

The challenges that the new American producers are facing are different. The United States prohibits the export of crude oil extracted on their soil while refining capacity becomes saturated. The park was restructured in the past to treat heavy oil in Venezuela or particular product from oil deposits in Canada. 30% of refineries also belong to foreign groups that supply them with their own production. But, the oil produced in "Cowboyistan" is the contrary of "light" oil, suitable for processing into gasoline. This is an advantage, provided you have adequate refining tools. The real reason for the halt in the growth of unconventional oil, is that we can not produce more of it because exporting it is forbidden and refining capacity is saturated. Part of this surplus was added to the US strategic stocks, but this strategy is limited.

Producers are calling for the lifting of the ban that they consider as a sanction. Indeed it causes a difference of approximately 10% between the "brent" (the world rate) and the WTI (the US rate). Lifting the "ban" is therefore on the agenda. A bill has been introduced in the Senate, but it should be discussed after the presidential election. It is not certain that this will align up US prices with world prices, but it will give producers an opening to the world market. Meanwhile, the US refining system will be adapted to new market conditions, even if this process will be gradual and will take longer.

The evolution of world oil prices will therefore depend in the future, not from the choice of OPEC, but from the decisions to be taken by the United States. In any case, the feeling that currently prevails in the US is that a new era of abundance has just opened and that it is not limited to natural gas. The renewal of oil and gas will not be without effect on the performance of the US industry. Europe must prepare for it. By reducing the share of coal, it could also significantly contribute to the reduction of greenhouse gas emissions.



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