The dynamics of shale

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Lower global crude oil and gas prices have ensured that oil and gas companies across the world are having a rather rough ride. But for an oil importing country like India, lower prices have been a boon. Earlier this month, India received its first shipment of US crude oil of 1.6 million barrels.

According to a statement by Indian Oil Corp. Ltd (IOC), the total volume of crude oil presently contracted by Indian public sector refineries from the US is 7.85 million barrels. This allows India to de-risk its crude oil sourcing profile. This was made possible owing to a sharp increase in US oil production in recent years, helped by higher output of shale oil (technically called tight oil).

In a declining oil price environment, shale oil has proved to be resilient. Andrew Harwood, research director (Asia upstream) at global consultancy group Wood Mackenzie, says that cost reductions and productivity improvements since 2014 mean that today only 20% of US tight oil potential production needs prices higher than $60/barrel to break even. “The majority of current shale oil production breaks even at prices below $60/bbl— this is why we have seen so much growth in US production since the start of 2017,” says Harwood.

To be sure, shale producers also suffer due to lower crude oil prices, says Ritesh Gupta, research analyst at Ambit Capital Pvt. Ltd. “But it is a disruptive force so it cannot complain that it is suffering. Shale gets very competitive at $55-60 a barrel and uncompetitive below $50 a barrel,” says Gupta.

But US exports are the new kid on the block in the world oil market. Restrictions were imposed on US oil exports, a result of the Arab embargo on the US during the 1973-74 Arab-Israeli War. However, rising US oil production forced the industry to lobby heavily to reverse the embargo. The ban was lifted two years ago.

What is ironical is that Canada remains one of the key exporting markets for the US and it is a net oil exporter while US is a large net oil importer. The US has now commenced its exports to India as well, partly owing to commercial reasons and partly due to India-US bilateral relations. The sourcing of crude oil from the US is a step towards strengthening India-US ties in the hydrocarbon sector, according to IOC.

Incidentally, this comes at a time when Reliance Industries Ltd (RIL) exited from one its shale gas assets in the US last week. Lower gas prices and lower volumes showed on RIL’s numbers. For calendar year 2016, its US shale business posted a loss at the earnings before interest and tax level compared to a profit the year before. “Managing below scale assets in the USA can prove to be a management and administration burden,” says Deepak Mahurkar, leader (oil and gas practice) at PwC India. “Further, in the USA, over time, shale oil is proving more rewarding than shale gas.”

But despite the US being able to export now and rising shale oil production, the global oil market may not move much, in the larger context. After all, what is 7.85 million barrels in a world oil market of as much as 92 million barrels per day? Moreover, the US is and will continue to remain a large net importer of oil in the coming years. That means it is unlikely to become a major oil supplier to other countries.

Moreover, the speed at which US output growth will continue depends on whether companies can continue to keep costs low, or whether inflation or lower productivity will start to impact on break-evens, says Wood Mackenzie’s Harwood. “Increasing activity, particularly in key plays such as the Permian, meant that costs in US tight oil are showing signs of inflation,” he adds.