Precise takes a look at whether the US could soon achieve a long term goal of theirs and become entirely self sufficient in the oil and gas sector.
With just four days to go before OPEC come together for one of the organisation’s most difficult meetings in its entire history, it’s as though the US is plotting to give the group even less chance of a restful sleep. Just last week Deloitte LLP published a recent survey of the US industry’s movers and shakers who said the country had the potential to become oil independent in the next five to ten years.
This has been THE dream for every US president since Truman and last year Obama said in his State of the Union address that, “After years of talking about it, we are finally poised to control our own energy future.”
In 2012 BP’s chief executive Bob Dudley was one of the first to forecast what impact the growth in shale oil and gas supplies could have. He believed it would “make the western hemisphere virtually self-sufficient in energy by 2030.” According to Deloitte LLP, belief in that statement, just two years later, is up 150%.
Last year US production went up by 15% and the number of oil rigs in North America is at its highest ever – with just over 1600 rigs. Recently Rex Tilleson of Exxon Mobil, the US’s biggest oil producer, said the country had now entered “an era of energy abundance.”
It’s a development that was unforeseen just a few years ago when the US relied on importing its energy demands. But innovations in technology changed the landscape forever. Within the last ten years US companies began using fracking to unlock new supplies of oil and gas from shale rock in places like Texas and North Dakota. It’s now widely accepted that by 2020 the US will produce more oil than Saudi Arabia and Russia. Also a change in the current export ban introduced in 1973 would also have an impact on forecasts.
But that is dependent on many factors – progress on drilling technologies to availability in financing and the price of oil and there are signs that things are changing. The number of shale oil rigs dropped to their lowest level since August last week, with drilling companies in the Texan Eagle Ford shutting down the fastest.
This is wholly down to the continued price plummet and brings us neatly back to the importance of this week’s OPEC meeting. The problem for US drillers is that shale oil is so expensive to extract. Just because there’s lots of it underground doesn’t mean it’s going to make you a profit as Cheaspapeake Energy found out last year. In 2011 it bought land in Ohio’s Utica shale oil field and touted it as a $500 billion opportunity. But in 2013 it was bringing out just 80 barrels a day.
Who remembers subprime? Well, this time instead of US homeowners, it’s the US’s oil producers who are in huge amounts of debt as a result of excited borrowing at the beginning of the shale oil revolution.
Most of these companies are small and were forced to borrow money at high rates in order to fund the costly fracking process. JP Morgan says if prices fall to below $80 a barrel the vast majority of shale oil basins are barely profitable. Recently Deutsche Bank carried out stress tests of subprime borrowers in the US energy sector and predicted that if prices fall to $60 per barrel, it could result in a 30% default rate among B and CCC rated high yield borrowers. If oil prices stay low – something OPEC have the power to realise – these companies could be forced to shut up shop and the banks will lose their money. Deja vu anyone? Seen through this prism, playing hardball with the big boys in OPEC might not be such a good idea after all.