Shale Oil’s Comeback – 7/30/16

Shale oil drilling was largely to blame for the recent glut that sent oil prices below $30 a barrel from over $100 a barrel only a few years ago. Yet, that glut hurt shale drillers as much, if not more, than conventional oil companies and about 70 shale-related firms have gone bust in America since the start of 2015.

The questions now are how quickly can shale drillers recover and what will happen when they start ramping up output again. Shale drilling is known for quick turnaround times measured in months compared to the years conventional oil can take to start operations in earnest. Drillers still have the technology that allowed created the oil glut; however, they have many psychological and technical barriers to a quick resurgence.

On the physical side, idled rigs may require months of maintenance before they can be brought back into service and workers need to be convinced that the time is right to return to the shale fields. The rate limiting step in shale drilling won’t be setting up rigs though. There are plenty of pre-drilled but untapped wells leftover from the awkward period between prices too low to pump oil and not so low to stop preparations for a recovery.

A lot of what will hold back a revitalization of the shale drilling industry will come from the mental side of markets.

Many drillers were burned when they increased spending during a false rally in prices and are reluctant to jump back into the fray. It could take months of prices above $50 a barrel before investment starts flowing back into shale oil projects in any meaningful amount.

Many are also aware that Saudi Arabia has the capacity to raise production substantially. Ahead of the planned initial public offering of Saudi Aramco, the kingdom might see fit to pump more oil just to inflate the company’s value. The Saudis seem increasingly committed to reducing their oil dependency by selling stakes in the state oil company to mitigate the risk that technological changes or policies aimed at fighting climate change will make their oil assets worthless.

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