The Energy Information Administration (EIA) reports that shale oil production is rising strongly in the U.S. and many analysts are forecasting a year of revival for shale.
Project approvals are to more than double this year and exploration spending is set to increase for the first time in three years, according to Wood Mackenzie Ltd. 20 oil and gas fields are planned for development in 2017 compared with 9 in 2016, the industry consultant said in a report, while spending on exploration and developing existing projects will increase by 3% following two years of cuts.
Beyond 2017, there are still many projects that have break-even costs higher than $60 a barrel, especially offshore. Of the 40 larger deepwater projects up for approval, about half have a rate of return less than 15% at a $60 oil price, according to Wood Mackenzie. This relatively low return for costly, difficult projects could be problematic if prices remain below $60 as expected.
Spending is picking up fastest in onshore U.S. operations, unsurprisingly, where companies can respond quickly to higher oil prices thanks to speed of fracking operations and abundance of drilled but untapped wells. Spending on U.S. onshore projects is likely to grow 23% to $61 billion, based on the Wood Mackenzie report. In much of the world outside the U.S. exploration spending is expected to continue to decrease.
While the outlook is improving, global upstream spending in 2017 will remain 40% below 2014, Wood Mackenzie said. Project approvals will also be below the 2007-2014 average of 40 a year.
So what does that mean for the OPEC push for higher oil prices?
How effective the OPEC supply cuts can be if U.S. output rises was always a major concern for OPEC officials. So far, Saudi Arabia’s oil minister, Khalid al-Falih, has voiced skepticism of shale’s potential impact. Speaking at Davos, he observed that oil-field-service providers are renegotiating terms with drillers and are likely to raise the break even price for shale production.
Still, slightly higher costs have already been priced in as far as many traders are concerned. And the EIA forecasts that prices for West Texas Intermediate will average $52.50 a barrel in 2017 with output increasing throughout the year. In just the last three months, U.S. petroleum-liquids production bounced by about 350,000 barrels a day (b/d) — more than the output cut promised by Russia as part of its deal with OPEC. At $52.50, the EIA sees U.S. output rising by another 775,000 b/d by the end of 2017.
Realistically, a revival for shale drilling in the U.S. is inevitable, but just how badly it tears apart the OPEC deal will be an interesting show.