2017 should see more stable prices, beginning of US shale revival
As a year draws to its close, journalists like to look back and talk about what they got right, skip over what they got wrong, and blather about what they think will happen in the coming 12 months.
I’m no different. Especially since my 2016 prognostication record isn’t too bad, with the exception of several spectacular misses – taking a curve too fast, hurtling over the mountainside, and crashing in a ball of fire, kind of misses.
#1 on the hit parade: Let’s start with my biggest miss, the election of Donald Trump as president.
I’m not alone on this one. I remember late in the campaign when Fox News’ Megyn Kelly interviewed Newt Gingrich, who was arrogantly predicting a Trump win based on internal polling. What I want to know is, who the hell is the GOP pollster? Everyone else was predicting a Hillary Clinton win with a 90-plus percentage certainty, including me.
Here’s why Trump is my pick as the most important energy story of 2016.
The New York billionaire promised to give the American energy industry everything in its letter to Santa Claus: rollback of the Obama Administration’s many regulations, speedier LNG approvals, opening up of federal lands for increased drilling, a revival of the coal industry, and the biggest one of all, the banning of OPEC crude oil from American markets.
Not an economist I have interviewed or a pundit I have read gives Trump a snowball’s chance in Hades of making that ban fly. Either the new President will discover he doesn’t have the power to do it, the geopolitical problems it would create are just too enormous, or the skittish Republican-dominated Congress won’t let him.
But if he does follow through with his pledge – first announced in his May 26 energy speech in Bismarck, North Dakota and repeated on the campaign trail – the ban will effectively create a North American oil market and profoundly change the American industry, which will enjoy stable domestic prices and still be able to take advantage of export opportunities.
Likelihood of Trump banning OPEC (and oil from “other nations hostile to our interest”)? Less than 50%, in my estimation. Not great odds, but better than he was given to win the Nov. 8 election. Stay tuned.
#2 – American shale producers’ reduction in costs, boost in productivity.
I called this one. Back in early 2015, when it became clear the Saudis were going to use OPEC to drive US shale companies out of market, I argued that American ingenuity, innovation, and management expertise would triumph in the end.
And that’s exactly what happened. Skeptics will argue that producers leaned on service companies for the entire cost reduction, and while that certainly is partly the case (and service producers will be looking to recoup some of their losses in 2017) that is hardly all of it.
Senior IHS Markit analyst Pete Stark told me in an interview that in the Permian Basin, for instance, the amount of oil that could be produced with $1 million of capital had doubled in the past two years. He attributed that spectacular productivity increase to drilling efficiencies, greater automation, and a range of capital and management efficiencies no one worried about when oil was over $100.
Outgoing Pioneer Natural Resources CEO Scott Sheffield told reporters during a quarterly conference call that his company’s costs were so low they were in line with the Saudis’, in some cases under $10.
In 2017, look for American ingenuity to continue. Manhattan Institute fellow Mark Mills says there are more cost reductions to come in what he calls Shale 2.0 – the application of Big Data and analytics to the optimization of shale wells.
#3 – Oil prices and the OPEC production cuts deal
Everyone remembers when WTI prices hit $23 last Jan. Now they’re hovering around $53. A more than 100 per cent increase in one year is a big story, but we’ll be watching prices with keen interest in 2017 to see if OPEC members and Russia follow through with their promises.
Sarp Ozkan, economist with DrillingInfo and author of the crude oil price forecast Supply for Every Demand, said in an interview that 2017 oil prices will be decided by the success of the OPEC-led agreement. If it fails, Ozkan predicts prices will hover in the $52 WTI range. But if it succeeds, prices could rise as high as $67 and American oil output could rise by as much as 750,000 b/d, a significant increase from the current level of 8.5 million b/d.
Energy economist Craig Pirrong at the C.T. Bauer School of Business, University of Houston, isn’t quite as bullish. When I interviewed him for an Energy News Webinar, he was skeptical OPEC members wouldn’t cheat, and forecast a high of $57 for the coming year.
The consensus among economists I’ve interviewed seems to be a range in the mid-$50s. At that price, many American shale producers will still be ramping up production.
At least they will be in the Permian Basin, where 2016 saw a land rush that drove acreage prices as high as $60,000 and saw companies flooding into West Texas to take advantage of the multiple formations and well developed infrastructure, much of it based in the Midland area.
The best news as we get set to ring in the New Year is that the worst seems to be over for the American oil patch. Prices are settling at a sustainable level, capital expenditures are stabilizing and may begin to rise, service companies are hiring and ramping up after two very difficult years.
From our news team at the North American Energy News, we wish you and yours a Very Happy New Year and all the best in your business and employment endeavors.