Shale oil resilience poses another nightmare for Nigeria, OPEC

Rebounding oil prices, increasing exploration activities and a more strategic approach from shale oil producers in the United States (US) are reopening 2014 scars for Nigeria and some of the biggest oil producers in the world, as they seek to support prices and reduce oversupply.

The resurging shale oil production will be scary for Nigeria and most OPEC countries who went into recession after Shale caused a supply glut that sent oil price crashing to a historic low in mid-2014, while also making the US the largest producer of the commodity.

Unlike 2014, US shale is growing again. But the growth is not for the sake of production alone, it is also for consistent shareholder returns, positive free cash flow, and a smaller environmental footprint.

JP Morgan, one of the most authoritative voices in the global oil market, believes US shale output will start growing in the second half of 2021, thanks to higher prices.

“Unlike small independents that have debts to pay and can only pay it by boosting production, larger independents are drilling again, but more than that, they are completing already drilled but uncompleted wells,” Bob McNally, president of consultant Rapidan Energy Group said in a note.

The US’s Energy Information Administration’s latest drilling productivity report also pointed towards a recovery in production although a selective one.

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Its report showed shale’s oil production averaged 11 million bpd last week, although that’s still 2 million bpd lower than the record pre-pandemic levels of 13 million bpd, but above the average for a week earlier and the four-week average for the period ending on March 19.

“US oil drillers are no longer sitting in the trenches, waiting for the pandemic storm to pass. They are once again in growth mode,” a statement from a first-quarter energy survey by the US’s Dallas Federal Reserve said.

Beyond just increasing oil production, Shale investors also want disciplined spending and a smaller environmental footprint, which they claimed will help them avoid past mistakes.

Several big shale firms have recently unveiled net-zero or reduced greenhouse gas emissions targets. In February, Occidental Petroleum became the first major US oil company to announce a net-zero target that included emissions from its own products while Pioneer Natural Resources recently set a 2030 target to reduce its greenhouse gas intensity.

“The investor community that stuck with the shale industry is the steady ones, that want discipline, that want predictability,” said Regina Mayor, global head of energy at accounting firm, KPMG, in an interview with Forbes. “That’s the investor base they are all pandering to now. The growth investors are gone.”

Between 2010 and 2020 the industry had negative net free cash flows of $300 billion, more than the annual revenue of Exxon Mobil, according to a study last year by accounting firm Deloitte.

Deloitte noted that disillusioned venture capital firms and other high-growth-seeking funds were already exiting the sector before the pandemic, but the virus-caused oil rout accelerated their retreat.

“The 2021 supply outlook is now slightly more optimistic for U.S. shale with oil prices increasing, and output is expected to recover more in the second half of 2021,” OPEC said last month.

Implication for Nigeria

The shale boom has upended the global market, turning the United States from a keen buyer of Nigerian oil to an aggressive competitor.

If the shale boom or revolution ground to a halt, it will increase supply in the global oil market, a development that will automatically lead to lower oil price which would have an adverse effect on Nigeria’s economy.

Nigeria’s economy is struggling with its low production quota. The quota is about 1.45 million barrels a day.

Africa’s biggest oil-producing country needs the oil price to rise and in the worst case, remain steady at any price above its revised budget benchmark of $40 a barrel to feasibly implement its N13.6 trillion budget.

Implication for OPEC

Most analysts say the once-brash U.S. shale industry, which spent profusely in recent years to grab market share, is now focused on preserving cash, which may put it at a disadvantage to low-cost OPEC producers as the global economy begins to gear up again.

Growth in the non-conventional oil supply from Shale has caused problems for OPEC in the recent past.

Prior to the pandemic-induced downturn, OPEC countries led by Saudi Arabia restrained their production, eager to bolster prices to fund national budgets dependent on oil revenue. Shale drillers took advantage, boosting U.S. output to a record 13 million barrels a day.

This glut eventually prompted the creation of OPEC+, which began to restrain output in 2017.

OPEC pumps about a third of the world’s crude and the biggest of its 15 members is Saudi Arabia, one of America’s closest friends in the Middle East. While the group doesn’t target a specific oil price, it adds or removes supplies in the market and therefore can affect the cost of crude.

OPEC+ is meeting this week to discuss whether to increase the current cuts, 9.7 million bpd or ease this to 7.7 million bpd as initially agreed. A major kingpin Saudi Arabia has since taken on voluntary cuts of 1 million from the beginning of February through March.