US shale producers innovating, driving down costs vs. Saudi marginal cost of $10 per barrel

Who’s winning the heavyweight bout for international oil markets? One American analysts is arguing for a US shale victory, but don’t count out OPEC just yet.

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Chriss Street.

An American Thinker piece by Chriss Street entitled, “OPEC accepts defeat in anti-fracking war with US” is getting a lot of play on my social media feeds, both in Canada and Texas. The author argues that “OPEC’s attempt to overproduce crude oil for export to crush prices and bankrupt the American shale-fracking oil boom has failed, according to a draft OPEC long-term strategy draft report seen by Reuters ahead of the cartel’s policy meeting in Vienna on June 1st.”

The draft apparently forecasts that non-OPEC production “will grow until at least 2017.”

Street quotes from the report, noting that not even severe price cuts will cause production from existing shale fields to drop and “recent structural changes in the growth patterns of non-OPEC supply as a result of the substantial contributions from North American shale plays” could be a turning point for global markets.

Ergo, America has won, OPEC has lost.

Max Fawcett, editor of Alberta Oil Magazine and a keen observer of oil politics, is having none of it. He says Street is “totally misinterpreting the Reuters piece.”

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Max Fawcett, editor, Alberta Oil Magazine.

“How have they (OPEC) accepted defeat? They’re on the verge of victory,” suggests Fawcett, who also thinks the much ballyhooed policy meeting this Friday in Vienna won’t yield much change either way.

“I’m betting it’ll be much ado about nothing,” he said in an interview. “OPEC didn’t start this war with North American shale producers just so they could end it before its effects really started to bite. They’re in this for the long haul – and we are too, for better or worse.”

Other experts agree. “Preserving market share still remains a top priority for Gulf states,” Saudi economist Abdulwahab Abu-Dahesh was quoted as saying by French press agency AFP.

“I don’t think that any change will happen at OPEC’s meeting,” a former member of Kuwait’s Supreme Petroleum Council, Musa Maarafi, told AFP. “Gulf states will continue to defend their market share. They will not accept to cut output at their own expense unless an agreement is reached with non-OPEC producers.”

Fawcett et. al. are predicting an OPEC victory, but that doesn’t mean the Americans aren’t mounting a furious counter-offensive. The American response to OPEC’s decision last year to abandon its historical role as swing producer for world markets and not cut production was to find ways to compete with the Saudis and other low cost Gulf producers.

For instance, much has been made of the high cost of shale drilling – as much as $80 per barrel – and the rapid depletion of wells. But as AEN reported last week, not all shale wells are created equal. A study of Bakken operations noted that well quality falls into three tiers and well costs in high-grade, Tier 1 fields can be as low as $27.13. Producers are now being much more selective, “creaming” the best fields and ignoring lower quality, high cost opportunities.

Squeezing profit margins has also unleashed a wave of innovation and new technologies designed to improve efficiency. In some cases, drillers are finding they can back into wells drilled only a few years ago to re-frack them or inject specially tailored fluids to get oil flowing again. That can return a well in some cases to peak output, without the expense of drilling a new well.

The companies are also getting much faster. Exxon says it has cut the time it takes to drill a well in North Dakota’s Bakken formation by one-third over the past four years. It has also cut by half the cost of fracturing the rock and preparing the well for production, according to a recent wire story.

Producers have also leaned on their vendors to reduce costs, which were inflated due to high demand during the height of the shale boom. Service company costs have dropped as much as 40 per cent.

Bottom line, American shale producers appear to be viable at $60 oil, which is where West Texas Intermediate has been hovering in recent weeks. Activity is already picking up in some parts of Texas. AEN reported yesterday that Pioneer Natural Resources will use the proceeds from the sale of its midstream business and ramp up drilling in the Spraberry/Wolfcamp assets in West Texas to levels consistent with the boom period.

Saudi Arabia can pump a barrel of oil for $10, a price American producers will never equal. But there is a lot of pressure from some OPEC members to cut output and raise prices before their countries are bankrupted.

Will the Saudis be resolute in the face of demands from Nigeria or Venezuela? Probably. Will American companies continue to innovate and drive down costs? Absolutely.

This fight isn’t over by any stretch, folks, so grab the popcorn and pull up a chair. This is going to be a fight for the ages.