The American weak shale industry, an opportunity for the big oil

The foxtrot and the Dust Bowl may be part of the story, but there may be a comeback in America in the 1930s: the overproduction of oil. This brings us back to 1933, to the battle against "hot oil" and to the inspiration of Opec.

Like today, Texas oil production was booming in the early 1930s, following the discovery of the giant East Texas deposit, and had exceeded one million barrels per day, more than a third of the total. total US. In contrast to the current situation, oil demand has been weak due to the Great Depression and prices have fallen to $ 10 (Dh 36.72) a barrel today. After bitter legislative battles, the Texas Railroad Commission (RRC) was given the power to regulate state production and coordinate with other states to prevent the illegal transportation of surplus oil.

The CRR sets the maximum production rates for each well or area. Texas, like Saudi Arabia today, has therefore provided "variable" capacity, increasing or decreasing production to fill market gaps and maintain stable prices. From the 1950s until the early 1970s, he was joined internationally by the "Seven Sisters" of major oil companies, who collaborated to limit the production of their joint ventures in Iran, in Iraq and the countries of the Persian Gulf.

This system lasted until March 1972, when the growing maturity of the Texas fields allowed the RRC to allow companies to produce at their maximum rate. The state's oil production was 3.45 million barrels a day, a historic record it could never reach.

Until 2017. Under the impetus of the shale boom in the Permian Basin, in western Texas, production barely exceeds 1 million barrels a day as recently as 39 years ago. in 2010, climbed to just under 5 million barrels a day, more than any other country with the exception of Russia. and in Saudi Arabia.

Still, the financial returns of shale oil companies and services remain poor. This prompted a respondent to a survey conducted by the Dallas Fed in a survey of the sector: "We need to engage in a dialogue between the sector and the government on the restoration of rationing (daily production quotas and monthly market factors). Nobody generates free cash flow. "

Texas is not the first to remember this idea. The largest Canadian oil producing province, Alberta, introduced mandatory quotas beginning in January, although the problem lies in the lack of pipeline export capacity, which has led to a sharp fall in producer prices. receive at the wellhead.

One cap per well would not work for shale, given the short life of fractured wells and low production rates after the first year or so. As in Alberta, a limit could be applied to total production per firm, based on historical levels, or perhaps the amount of drilling. But this would be a radical step, likely to be fought by most industries and not supported by other oil-producing states.

The mere fact that such radical and non-market approaches are being proposed shows the frustration of shale companies. Since the last recent oil price in January 2016, US light crude has almost doubled from $ 29.42 to $ 56.2 a barrel, and production in the Permian Basin has also doubled from 2 to 4 times. millions of barrels a day.

But despite this quadrupling of gross revenues, shale producers have been disliked by investors. Shares of Occidental Petroleum, one of Permian's largest producers following the acquisition of rival Anadarko, are down 17%; ExxonMobil, which has bought a large set of Permian badets in 2017, is down 3% despite the great success in Guyana. Halliburton, a service company that does a lot of the hydraulic fracturing in the United States, has lost 23%.

At the same time, Chevron, which has a strong position in the Permian but lost in the bidding war for Anadarko, has risen 51%.

As the price of oil has dropped since October, the activity of the platforms has also declined. Helmerich & Payne, the largest platform owner in the US, rose from 220 last quarter to 214, while the smallest competitor Patterson-UTI is down 10% to 142.

A lively debate is underway among badysts, some fearing a slowdown in production and the famous famine of capital, while the debt and equity markets are approaching a sector that has recorded remarkable growth but continuous to consume money.

As a marginal producer, shale companies are in the uncomfortable position of pricing – guaranteeing them minimal profits. Only the best companies with the best geology can benefit from sustainable yields.

Wells drilled too close to each other showed lower production. Excess gas produced in the Permian has sometimes resulted in negative prices and initially promising areas such as Apache's "Alpine High" produced more gas and less oil than expected.

But other observers, such as Kayrros, a Paris-based company, are using satellite imagery to argue that the productivity of drilling and fracturing crews has improved. After the first land-grabbing and frantic drilling, companies are developing more systematically. Occidental and a large group of EOG companies are currently experimenting with the injection of natural gas and carbon dioxide in order to boost recovery beyond the 5 to 10% of oil contained in the rock.

With the purchase of shale badets from its Australian rival BHP in shale, and Shell also seeking to strengthen itself, small shale companies may have to consolidate or be swallowed up. Large oil companies can be patient and fund expansion from internal cash flow.

A more measured growth phase, a Shale 3.0, seems to be coming. This will somewhat ease the major oil exporters, with the International Energy Agency predicting that US crude would leave 2 million bpd surplus in the first quarter of next year. However, Opec should not expect the Railway Commission to come to its rescue or the collapse of the shale.

Robin M Mills is CEO of Qamar Energy and author of The myth of the oil crisis