Kemp: Will The Saudis Drive US Shale Out Of Business



Reuters

John Kemp is a Reuters market analyst. The views expressed are his own

LONDON, Nov 12 (Reuters) - There has always been a close link between U.S. oil production, international prices and OPEC, so it should come as no surprise that North America's shale drillers find themselves locked in a battle with Saudi Arabia over prices and market share.

Until the 1950s, the United States accounted for more than half of all global oil production. Big finds such as Oklahoma's Glenn Pool (1905) and the East Texas field (1930) drove oil price changes around the rest of the world.

Since the 1970s, the United States has been a net importer, and international prices have tended to drive changes in U.S. exploration and production.

Drilling and output in major oil-producing states have been closely correlated with the rise and fall in real oil prices. And nowhere has the relationship been closer than North Dakota, where the fortunes of its oil industry have mirrored the rise and fall in prices, resulting in a brutal cycle of boom and bust.

Light The Flare

After unsuccessful exploration for almost 40 years, the first oil was found in North Dakota in 1951, and the first well was drilled in the now-famous Bakken formation in 1953.

The extraordinary story of the state's dogged oil pioneers was chronicled by North Dakota State Geologist John Bluemle in a monograph to mark the 50th anniversary of the first successful find in 2001.

Photographer Bill Shemorry, who was there on the night of April 4, 1951, later wrote: "When I reached the hill just west of Wheelock I could see the glow of a fire in the sky directly to the east" four miles further on ("Mud, sweat and oil" 1991).

Parking near the well, Shemorry recalled: "The drilling rig and surrounding area were lighted by a huge gas flare. It was almost as if it were daylight. The noise of the escaping gas that fed the flare was so loud spectators had to shout to make themselves heard."

Clarence Iverson No. 1 well, named after the landowner, went on to produce more than half a million barrels of oil and 800 million cubic feet of natural gas over the next 28 years.

Booms And Busts

After the initial burst of excitement, however, North Dakota settled into a role as a niche producer, drilling around 200 wells a year and producing perhaps 50,000 barrels per day throughout the rest of the 1950s and 1960s.

The state's first oil boom came in the late 1970s and early 1980s as a direct consequence of the Arab oil embargo (1973), the Iranian revolution (1979) and the price increases demanded by OPEC.

The number of new wells drilled increased from just 90 in 1972 to peak at 834 in 1981 as the real price of oil surged from $14 to around $100 per barrel at today's prices.

But the state's oil industry fell into a deep and prolonged depression in the 15 years of low prices that followed the crash of 1986.

In 1989, just 188 new wells were drilled. By 1994, the number had fallen to 111. And in 1999, it fell to just 58. (http://link.reuters.com/taq43w)

Bakken Dreams

Even as prices and drilling fell in the 1980s and 1990s, some of the most enterprising companies had begun to experiment with drilling horizontal wells in the Bakken formation.

Meridian Oil drilled the first horizontal well in the Bakken in 1987. For a few years, Bakken was the most active oil exploration play in the state, with dozens of wells drilled each year. "But by the end of 1995, drilling for the Bakken had ceased and the play was over," according to Bluemle, the state geologist.

Writing in 2001, before horizontal drilling had been successfully coupled with hydraulic fracturing, Bluemle speculated about the possibility of renewed production from the Bakken. "However, for that to happen, we'd need to see the development of a significant new technology," he wrote.

"Economic volumes of oil or gas cannot be produced using today's technology. It was the application of an improved technology, horizontal drilling, that spurred the short-lived Bakken play during the late 1980s and early 1990s. But horizontal drilling wasn't enough."

Bluemle wondered: "Perhaps some other new technology will be developed that will allow the hydrocarbons trapped in the shale to become mobilized and produced at economic rates. If this happens, many wells will be drilled for the oil and gas in the Bakken formation."

From 2005, just four years later, horizontal drilling and hydraulic fracturing were successfully employed together to release oil and gas trapped in the shale.

The quadrupling of oil prices between 2002 and 2012 provided the financial incentive for another drilling boom.

And by 2013, the number of new wells drilled topped 2,000, and daily production hit 860,000 barrels.

In August 2014, state oil production stood at more than 1.1 million barrels per day, more than 90 percent of it from the Bakken, according to North Dakota's Department of Mineral Resources (http://link.reuters.com/waq43w).

Fortunes Together

North Dakota's oil industry and other similar shale oil plays across the United States are the product of events and price changes far beyond the state's own borders - and indeed beyond North America. It is vital to remember that linkage when thinking about the next phase of the oil price cycle.

Craig Pirrong at the University of Houston doubts that Saudi Arabia is using a predatory pricing strategy to drive shale producers out of business ("The Saudis: crazy like a desert fox?" Nov 2014).

There is no evidence that Saudi Arabia is deliberately engineering a volume or price war to stop the shale revolution (or indeed to intensify the pressure on other oil-exporting rivals such as Iran and Russia) rather than simply responding rationally to protect its market share.

Yet a prolonged period of low prices and a squeeze on the shale business may be inevitable, unless Saudi Arabia and OPEC are willing to accept a big drop in their market share.

Past experience suggests the fortunes of the U.S. oil industry, Saudi Arabia and OPEC are bound tightly together. Part of the adjustment process now underway in the oil market is likely to be a prolonged period of lower prices and a slowdown in the growth of the U.S. shale industry.

North Dakota's Bakken has become a relatively mature play, so this time around it might be spared the worst of the slowdown. Drilling has slowed in some outlying counties, but in counties at the core of play continue to report strong activity.

North Dakota's Bakken is far more cost-competitive than it was in the 1990s thanks to technical advances and improvements in drilling efficiency.

The shale revolution will not be reversed, and the United States will continue to have a much bigger role in global supply.

But some slowdown in shale growth is inevitable and will probably come on the fringes of the Bakken and in less developed shale oil plays, which have taken its place at the vulnerable high-cost frontier for U.S. onshore oil exploration.

(editing by Jane Baird)



WHAT DO YOU THINK?


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

Lester Jessop  |  November 14, 2014
It is going to be very interesting to see what happens in the next year. I went to the oil and gas expo this year in Bismarck, ND and from what I heard it was near impossible for this play to go bust like it did in the 80s. If it goes bust this time I will head straight to school for engineer degree so I can catch it on the upswing again....after all we wont stop using oil and we have only harnessed around 7% of the oil in the Bakken, the other 93% represents Billions of barrels.
David M.  |  November 14, 2014
Because of a glut of oil production within North America, prices have been falling. With this there is a labour shortage (at least here in Canada). Does it not seem plausible that there could be a better balance between lessening production to generate a dependable market price, which then would co-inside with the amount of labour available. Do meet the demand, situations could exist to match North America production with imports to keep OPEC at bay. Obviously this is a very broad solution, but maybe a possibility. Just ask T. Boone Pickens, who recently stated that US production is to great and has to be brought back to scale.
Leo Sinnott  |  November 13, 2014
The cost of oil field services drives activity more than product pricing. Over the years, working shale and other non-conventional areas in the northern mid-continent, the cost of typical HZ/plug & perf drill & complete soared from $3.5 MM to $6.8 MM in 7 years making it impossible to profit. Having one foot on the gas pedal and one on the brake is not the way to run the oil business.