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December 13, 2016
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The attached article is only surprising to those who do not understand the impact of technology and the pressure to be profitable. Many predicted the “End of the Shale Oil Industry” when prices dropped below $50/b. People who understand the impact of technology and the nature of the oil and gas E&P industry correctly criticized these “prophets of doom”.
Leonard Maugeri predicted the drop in oil price two years before it took place because he correctly noted that advancements in drilling and fracturing would lead to a surplus in oil, because this would lead to a concomitant increase in oil production in the USA (and to a far smaller degree – in Canada). This happened in late 2014, though Dr Maugeri had predicted it would take place 6 months earlier.
When the price dropped in 2014-2015, those who understood the USA shale oil industry correctly predicted the following (among other things):
All of these have happened. The cost to drill and frack wells continues to drop. The real drops as of Nov 2016 are substantially larger than the numbers quoted below:
http://www.roseassoc.com/the-current-costs-for-drilling-a-shale-well/ March 2016
The USA also responded by shutting down uneconomic wells, massively reducing drilling, and focusing on good assets. The chart below shows the effect, although there is a definite uptick in the last few months suggesting that the drop has plateaued.
So, the overall effect of the Saudi Arabia decision two years ago to “open the taps” has been a significant decrease in all development costs, a more responsive and flexible industry in the USA (and Canada), but not really elsewhere, and this all means that the Saudi action was largely for naught.
Now, the USA medium sized companies who led this cost cutting onslaught are extremely well positioned to profit from any increase in oil price, they can produce oil more cheaply, and far from being the “death of the shale oil industry”, this price drop has had healthy long-term results on the state of the drilling and production industry. Whether you view this outcome as socially good or bad (or neither) is a personal matter, but it is an outcome that was obvious to many some time ago as the technology shift began. It is surprising to me that it was not obvious to the Saudis. I wonder just who is advising them…?
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