Is US shale oil back in black?

US shale oil is attracting billions of investment dollars despite recently emerging from the largest boom-bust in the commodity’s history. For traditional oil projects, the economics remain challenging, and risks loom large. However, US shale producers can quickly add resources with a fraction of the risk, but one US unconventional basin stands above the rest.

Why is Permian (an oil and natural gas geologic basin in southwestern US ) shale outperforming oil and outproducing other shale basins? Permian shale producers benefit from the region’s unique geology and well-established infrastructure. The Permian Basin has several stacked layers of oil due to multiple periods of thriving carbon-based life forms and rising and falling sea levels, geological prerequisites for oil creation. Additionally, these pay zones have risen to the surface and become outcroppings, dramatically increasing our knowledge of their production potential.

For many years, the Permian Basin functioned as a conventional oil field. Now, shale provides additional, meaningful life for this basin. Since shale uses similar services as conventional drilling, the necessary infrastructure is already in place for drilling and extracting, allowing companies to quickly and efficiently increase production.

The combination of geography and infrastructure makes the Permian Basin a unique shale play and strategically important to the portfolios of energy producers. Permian oil rigs are on the rise, while rig counts in Eagle Ford and Bakken Basins are plateauing. We expect other plays to recover soon, but investment dollars will pile up higher in West Texas. Despite a modest premium to peers, we believe the Permian Basin represents enormous value with multiple pay zones driving many years of growth and infrastructure in place to develop it.

Robin Wehbé – The Boston Company, a BNY Mellon Company

US shale oil is attracting billions of investment dollars despite recently emerging from the largest boom-bust in the commodity’s history. For traditional oil projects, the economics remain challenging, and risks loom large. However, US shale producers can quickly add resources with a fraction of the risk, but one US unconventional basin stands above the rest. Why is Permian (an oil … read more

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Which industry is unlikely to see a pay rise in 2016?

Technological innovation (horizontal drilling and hydraulic fracturing), the Organisation of Petroleum Exporting Countries (OPEC) inaction and cost deflation have effectively ended the 12 year up-cycle in oil, resulting in the biggest oil price collapse since the 1980’s. Indeed, nobody saw the US shale oil revolution coming. Between 2009 and 2015 US oil production doubled, approaching all-time highs not seen since the early 1970s and contributing to a supply-demand imbalance in global oil markets. In response OPEC, steered by Saudi Arabia, refused to cut production and actually increased it throughout 2015, effectively removing any floor in the price of oil.

After a significant increase in industry project complexity during the 2000’s, the new oil price reality is forcing companies to make significant cuts to costs. We see significant scope for cost deflation across the supply chain, such as industry wages and rig rates. In 2002 workers at two global oil majors were paid similarly to their counterparts in other engineering industries, but in the decade that followed the salary employees commanded diverged from the rest of the engineering industry. During 2015 this has started to correct, with room for further wage deflation. Another example of cost deflation has been falling day rates for oil rigs. In 2014, the day rate for an ultra-deepwater rig reached US$650,000. Just 12 months later this had fallen over 50% to approximately US$300,000 per day. We believe sector valuations reflect a much higher oil price environment.

Chris Smith – Newton, a BNY Mellon company

Technological innovation (horizontal drilling and hydraulic fracturing), the Organisation of Petroleum Exporting Countries (OPEC) inaction and cost deflation have effectively ended the 12 year up-cycle in oil, resulting in the biggest oil price collapse since the 1980’s. Indeed, nobody saw the US shale oil revolution coming. Between 2009 and 2015 US oil production doubled, approaching all-time highs not seen since … read more

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“Why oil won’t breach US$70 for the next five years”

Before 2015, the cost of exploration, developing and extracting oil added up to some US$30 per barrel but there are other extras that also need to be factored into the price, such as required margins and transportation costs. All in, the breakeven point for oil production companies pre-2015 was around US$47. This means at US$70 a barrel companies were able to earn a 15% return and still have a cash margin of US$2.15.

Today, post company cutbacks and lower transportation costs (a result of more pipelines), different assumptions must be made to work out the breakeven cost per barrel for oil companies. A more realistic figure today is closer to US$35 per barrel. So even with oil as low as US$52 a barrel, companies are able to generate the same returns and thus grow supply. Given these estimates the industry is likely to continue to be able to absorb lower oil prices, supported by deflationary cost pressures, and as a result they could remain under a US$70 ceiling for some time to come, if not indefinitely.

Robin Wehbé – The Boston Company Asset Management, a BNY Mellon company

Before 2015, the cost of exploration, developing and extracting oil added up to some US$30 per barrel but there are other extras that also need to be factored into the price, such as required margins and transportation costs. All in, the breakeven point for oil production companies pre-2015 was around US$47. This means at US$70 a barrel companies were able … read more

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China and Japan no longer hostage to energy suppliers

In Asia, security of energy supply is nowhere near as pressing as it was even a couple of years ago. Until recently, China and Japan were concerned either that some energy-producing nation would create a supply shock or that they would struggle to procure enough oil and gas to meet the needs of their domestic economies. These concerns seem to have faded now that oil is US$50/bbl and given an expected ramp up in Liquefied Natural Gas (LNG) supply over the next decade.

On the demand side too there are positive signs, particularly since China’s economy is set to be less energy intensive per unit of GDP as the country increasingly shifts to consumption and services. China’s oil demand has grown by 6% per annum over the last 5 years and the country has accounted for 40% of the world’s total incremental demand over the period. However, currently crude oil demand is growing at only half the rate of the last 5 year average (June 2015 was +3.4% yoy).

As a result, neither Chinese oil companies nor Japanese trading houses feel the need to go out and buy resources, companies or stakes in oil or gas fields at vastly over-inflated prices as they have tended to in the past.

Richard Bullock – The Boston Company Asset Management, a BNY Mellon company

In Asia, security of energy supply is nowhere near as pressing as it was even a couple of years ago. Until recently, China and Japan were concerned either that some energy-producing nation would create a supply shock or that they would struggle to procure enough oil and gas to meet the needs of their domestic economies. These concerns seem to … read more

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Energy companies on hot coals?

The Carbon Tracker Initiative May report1 (in follow-up to its initial 2013 report 2)  has given a new head of steam to the lively debate ignited in the oil and gas industry by drilling down into the balance sheet reserves of major international oil companies and putting together a ‘carbon supply cost curve’.

Investors too are now becoming very engaged in the debate. The oil and gas sector has struggled in recent years to generate a reasonable rate of return, even with oil prices of over $100. This, and the threat of related assets becoming stranded, has prompted investors to ask oil company executives tough questions. Some investors have even gone so far as to wonder whether explicit exclusion of the oil and gas sector from their portfolios is now a realistic option.

Sandra Carlisle, Newton.

1Unburnable carbon 2013: Wasted capital and stranded assets.

2Carbon Supply Cost Curves. Evaluating financial risk to oil capital expenditures.

The Carbon Tracker Initiative May report1 (in follow-up to its initial 2013 report 2)  has given a new head of steam to the lively debate ignited in the oil and gas industry by drilling down into the balance sheet reserves of major international oil companies and putting together a ‘carbon supply cost curve’. Investors too are now becoming very engaged … read more

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Surprise victors of a falling oil price

There is a general misperception the fall in oil price is negative for all emerging markets. In fact many of these countries are net importers which helps improve their balance of payments. For net oil importers a high oil price is a potential headwind regarding the credit worthiness of the country. So when the cost of importing oil drops it is ultimately supportive of growth and acts as a positive in terms of trade shock.

Colm McDonagh, Insight Investment

There is a general misperception the fall in oil price is negative for all emerging markets. In fact many of these countries are net importers which helps improve their balance of payments. For net oil importers a high oil price is a potential headwind regarding the credit worthiness of the country. So when the cost of importing oil drops it … read more

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