United States: OPEC’s Price War Is Entrenching North American Shale Producers’ Global Competitive Advantage

Oil price uncertainty strengthens the global competitive advantages of U.S.—and Canadian—unconventional oil projects. Both countries offer excellent geology, robust supporting infrastructure, deep local capital markets, stable politics, and favorable legal and regulatory regimes. They will be the markets that see the leading edge of efficiency improvements and cost decreases. In a nutshell, the OPEC low-cost producers' decision to launch and sustain a crude oil price war will only entrench and increase the North American shale drillers' first-mover advantage over the next several years.1

The U.S. already has a massive lead on other countries that are developing (Argentina) or that seek to develop (China, Mexico, Russia) unconventional oil and liquids projects, as reflected by the fact that liquids output growth in the U.S. between 2009 and 2014 was roughly three times larger than that of Canada, China, and Russia combined (Exhibit 1).

Exhibit 1:  U.S. Liquids Production Growth Compared to That of Other Current and Potential Unconventional Oil Producer Countries

Source: EIA, El Universal, National Energy Board, NBS China, Reuters

First-mover status favors the core U.S. and Canadian developments because most overseas shale oil projects (in China, for instance) are in the test phase and remain too small to capture economies of scale and thus need much higher oil prices to produce economically. Even for the main non-North American play that is actually in commercial development—Argentina's Vaca Muerta—analysts estimate that it needs prices close to $85  per barrel to break even.2 This is on par with the highest-cost U.S. plays such as the Tuscaloosa Marine Shale—and far above the costs of the Bakken, Eagle Ford, and Permian, which have many areas that are profitable at prices as low as $50/bbl (and in some cases lower).3 And these breakeven points in the U.S. are likely to fall as costs decline—indeed, one of the largest U.S. unconventional oil producers expects its drilling and completion costs to decline by at least 20 percent in 2015.4

E&Ps are likely to slow or defer development plans for unconventional oil and liquids projects in Argentina, Mexico, Russia, and China—particularly if prices remain weak another three to six months, which looks likely. Slowing or deferring these projects will significantly retard the pace of their development, as many of the specific completion procedures needed to "crack the code" and efficiently and successfully develop unconventional liquids projects are typically locally generated and play-specific.

Optimizing well and completion designs requires experimentation, involves trial and error, and can take years in a new play—even in the freewheeling, innovative U.S. oil patch. It also requires lots of drilling—the simple shale arithmetic is that more wells drilled equals more data to study and more opportunities to learn and improve. A prolonged period of low prices risks stalling this process, particularly outside North America.

Just because U.S. producers are mastering the shale game does not mean their experiences will be neatly transferrable to foreign projects. Indeed, China's shale gas and oil development to date has thus far significantly underperformed relative to expectations despite China's multibillion-dollar investments in U.S. projects, hiring service companies with deep experience in U.S. shale gas, and researching the U.S. shale revolution.5

Herein lies the irony of OPEC's actions: most North American shale producers are no longer the marginal, high-cost global barrels. Low prices are simply making the strong stronger—EOG Resources reports it now makes better returns on oil at $65 per barrel than it did at $95 per barrel in 2012.6 Plus, in the unconventional plays in the United States that primarily produce natural gas (such as the Marcellus), infrastructure improvements, pending LNG exports, and healthy industrial demand will continue to support robust natural gas drilling and production activity.

Whatever challenges U.S. unconventional producers face in the current environment, aspiring shale developers in other locations face much larger challenges. The realities explained above beg the question of what the Saudis and other low-cost OPEC producers' true objective is—do they really seek simply to punish North American shale drillers, or are they instead playing a longer game and seeking to sidetrack the potential emergence of a global shale boom that could trigger a long-lived oil price collapse?


1 By "low-cost producers," the author refers to Saudi Arabia, Iraq, Kuwait, Qatar, and the UAE, which have the lowest production costs in OPEC and are best positioned to weather low prices for several more quarters if necessary as they compete for market share.

2 Martin Bidegaray, "La caída del petróleo complica los planes en Vaca Muerta," ("Oil's Fall Complicates the Plans for Vaca Muerta"), El Clarin, Nov. 15, 2014, http://www.ieco.clarin.com/economia/precio-crudo-Vaca_Muerta_0_1249675063.html.

3 Cimarex Energy, "Corporate Update—February 2015," showing that Wolfcamp wells in the Delaware Basin can now make internal rates of return between 33 percent and 52 percent with oil at $40/bbl; http://cimarex.investorroom.com/presentations (accessed on Feb.19, 2015).

4 For instance, see Pioneer Natural Resources, Feb. 18, 2015, investor presentation, http://investors.pxd.com/phoenix.zhtml?c=90959&p=irol-presentations (accessed Feb. 19, 2015).

5"我国页岩气2020年产量目标减半," ("China 2020 Shale Gas Output Goal Cut in Half"), CNPC, Aug. 8, 2014,  http://news.cnpc.com.cn/system/2014/08/08/001501540.shtml  (accessed  Feb. 19, 2015).

6 EOG Resources investor presentation, Feb. 18, 2015. http://www.eogresources.com/investors/slides/InvPres_0215.pdf  (accessed Feb. 19, 2015).

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