US shale operators have fought OPEC to a stand still

Ambrose Evans-Pritchard:

Opec's worst fears are coming true. Twenty months after Saudi Arabia took the fateful decision to flood world markets with oil, it has still failed to break the back of the US shale industry.

The Saudi-led Gulf states have certainly succeeded in killing off a string of global mega-projects in deep waters. Investment in upstream exploration from 2014 to 2020 will be $1.8 trillion less than previously assumed, according to consultants IHS. But this is a bitter victory at best.

North America's hydraulic frackers are cutting costs so fast that most can now produce at prices far below levels needed to fund the Saudi welfare state and its military machine, or to cover Opec budget deficits.

Scott Sheffield, the outgoing chief of Pioneer Natural Resources, threw down the gauntlet last week - with some poetic licence - claiming that his pre-tax production costs in the Permian Basin of West Texas have fallen to $2.25 a barrel.

"Definitely we can compete with anything that Saudi Arabia has. We have the best rock," he said. Revolutionary improvements in drilling technology and data analytics that have changed the cost calculus faster than almost anybody thought possible.

The 'decline rate' of production over the first four months of each well was 90pc a decade ago for US frackers. This dropped to 31pc in 2012. It is now 18pc. Drillers have learned how to extract more.

Mr Sheffield said the Permian is as bountiful as the giant Ghawar field in Saudi Arabia and can expand from 2m to 5m barrels a day even if the price of oil never rises above $55.

His company has cut production costs by 26pc over the last year alone. Pioneer is now so efficient that it is already adding five new rigs despite today's depressed prices in the low $40s. It is not alone.
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There is much more.

This report pretty well confirms what I have been blogging about in recent months.   Opec's market share strategy has become a virtual suicide pact.  While the Saudis are stronger than Venezuela, they are burning through reserves and they will not last indefinitely.

US oil producers can concentrate on the inexpensive shale plays and avoid the high-cost high-risk offshore wells at the current price.  There is also a substantial investment by the big players in the petrochemical business, which takes advantage of the cheap US shale gas.  That business is also less likely to be impacted by governments' pander to Big Green since the alternative energy mavens have no alternative to the petrochemical business and modern life and transportation depend on it.