OPEC seen losing role as global oil market stabiliser

Oil cartel, OPEC, could lose its role in balancing supply and demand in the global oil market as shale producers cut costs and improve efficiencies to ramp up production, a move which is challenging the current order, a new report by leading global investment firm, Goldman Sachs has found.

According to the firm’s top projects report, which is an annual review of the world’s top energy assets, obtained by BusinessDay, short-cycle projects now make up 50% of top projects, up from only 16% in 2010, as the industry’s capital spend becomes more cyclical and OPEC loses its role in balancing supply and demand.

“On our estimates, shale has added 190 billion barrels of oil resources since the start of the boom in the late 2000s (more than Iran or Iraq, and only behind Saudi Arabia or Venezuela) that can be developed through a technically simple supply chain which can be expanded with a 12-24 month lead time.

“This effectively ends the industry’s great resource hunt in increasingly complex areas and re-focuses the industry’s resources on development efficiency, rather than resource maximization.”

“The E&P industry effectively shifts from ‘E’ to ‘P’ and in doing so, rediscovers tremendous ability to standardize, simplify, and reduce costs.”

Current breakeven cost between key development areas after accounting for inflation is about $54 unlike about $90/barrel five years ago, and shale producers currently has 73 years’ worth of production, said the firm.

“Shale break-evens fell the most through the down cycle, thanks to the short-term nature of its capital commitments and productivity improvements. However, costs are now normalizing, with 30% cyclical cost inflation from the trough, and shale break-evens now stabilizing,” said the report.

There have been concerns about the influence of shale producers on global oil markets, but this report presented it in its stark, scary reality. Analysts say shale oil development is now beginning to displace higher-cost alternatives including deep water exploration and the Canadian Oil Sands. Technological improvements in drilling and completing wells are driving these shifts, and new innovations continue to be developed.

While, Goldman Sachs admitted that the rest of the industry is still lowering costs through simplification, deflation, strong delivery and taxes, it expects shale to substitute about 50 complex giant oil fields under development.

“We see deepwater and traditional developments becoming competitive again, with over half of their developments sitting below shale on the cost curve,” the document said.

 

ISAAC ANYAOGU