How OPEC Lost The War Against Shale, In One Chart

Tyler Durden's picture

At the start of March we showed a fascinating chart from Rystad Energy, demonstrating how dramatic the impact of technological efficiency on collapsing US shale production costs has been: in just the past 3 years, the wellhead breakeven price for key shale plays has collapsed from an average of $80 to the mid-$30s...

... resulting in drastically lower all-in breakevens for most US shale regions.

Today, in a note released by Goldman titled "OPEC: To cut or not to cut, that is the question", the firm presents a chart which shows just as graphically how exactly OPEC lost the war against US shale: in one word: the cost curve has massively flattened and extended as a result of "shale productivity" driving oil breakeven in the US from $80 to $50-$55, in the process sweeping Saudi Arabia away from the post of global oil price setter to merely inventory manager.

This is how Goldman explains it:

Shale’s short time to market and ongoing productivity improvements have provided an efficient answer to the industry’s decade-long search for incremental hydrocarbon resources in technically challenging, high cost areas and has kicked off a competition amongst oil producing countries to offer attractive enough contracts and tax terms to attract incremental capital. This is instigating a structural deflationary change in the oil cost curve, as shown in Exhibit 2. This shift has driven low cost OPEC producers to respond by focusing on market share, ramping up production where possible, using their own domestic resources or incentivizing higher activity from the international oil companies through more attractive contract structures and tax regimes. In the rest of the world, projects and countries have to compete for capital, trying to drive costs down to become competitive through deflation, FX and potentially lower tax rates.

The implications of this curve shift are major, all of which are very adverse to the Saudis, who have been relegated from the post of long-term price setter to inventory manager, and thus the loss of leverage. Here are some further thoughts from Goldman:

  • OPEC role: from price setter to inventory manager In the New Oil Order, we believe OPEC’s role has structurally changed from long-term price setter to inventory manager. In the past, large-scale developments required seven years+ from FID to peak production, giving OPEC long-term control over oil prices. US shale oil currently offers large-scale development opportunities with 6-9 months to peak production. This short-cycle opportunity has structurally changed the cost dynamics, eliminating the need for high cost frontier developments and instigating a competition for capital amongst oil producing countries that is lowering and flattening the cost curve through improved contract terms and taxes.
  • OPEC’s November decision had unintended consequences: OPEC’s decision to cut production was rational and fit into the inventory management role. Inventory builds led to an extreme contango in the Brent forward curve, with 2-year fwd Brent trading at a US$5.5/bl (11%) premium to spot. As OPEC countries sell spot, but US E&Ps sell 30%+ of their production forward, this was giving the E&Ps a competitive advantage. Within one month of the OPEC announcement, the contango declined to US$1.1/bl (2%), achieving the cartel’s purpose. However, the unintended consequence was to underwrite shale activity through the credit market.
  • Stability and credit fuel overconfidence and strong activity: A period of stability (1% Brent Coefficient of Variation ytd vs. 6% 3-year average) has allowed E&Ps to hedge (35% of 2017 oil production vs. 21% in November) and access the credit market, with high yield reopen after a 10- month closure (largest issuance in 4Q16 since 3Q14). Successful cost repositioning and abundant funding are boosting a short-cycle revival, with c.85% of oil companies under our coverage increasing capex in 2017.

That said, the new equilibrium only works as long as credit is cheap and plentiful. If and when the Fed's inevitable rate hikes tighten credit access for shale firms, prompting the need for higher margins and profits, the old status quo will revert. As a reminder, this is how over a year ago Citi explained the dynamic of cheap credit leading to deflation and lower prices:

Easy access to capital was the essential “fuel” of the shale revolution. But too much capital led to too much oil production, and prices crashed.  The shale sector is now being financially stress-tested, exposing shale’s dirty secret: many shale producers depend on capital market injections to fund ongoing activity because they have thus far greatly outspent cash flow.

This is the key ingredient of what Goldman calls the shift to a new "structural deflationary change in the oil cost curve" as shown in chart above. As such, there is the danger that tighter conditions will finally remove the structural pressure for lower prices. However, judging by recent rhetoric by FOMC members, this is hardly an imminent issue, which means Saudi Arabia has only bad options: either cut production, prompting higher prices and even greater shale incursion and market share loss for the Kingdom, or restore the old status quo, sending prices far lower, and in the process collapsing Saudi government revenues potentially unleashing another budget crisis.

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Last of the Middle Class's picture

Couldn't happen to a better group of market manipulating camel jockeys!

 

GunnerySgtHartman's picture

Memo to OPEC: "CHANGE OR DIE." (hopefully it will be the latter)

CrazyCooter's picture

Any oil patch ZHers out there have an informed or educated opinion about that first chart - I find it very hard to believe.

A 50% reduction in well head break even - due purely to "technology" smacks of utter BS. Unless that technology is "creative accounting".

Regards,

Cooter

Son of Captain Nemo's picture

Well said Coot

This read is pure BS from the shale oil miracle that "IS NOT" and more importantly "NEVER WILL BE" because of the energy required for it's extraction!

tmosley's picture

"demonstrating how dramatic the impact of technological efficiency on collapsing US shale production costs has been"

I was told by several reputable peak oil theorists that there was no such thing as technological advance, and that we are all going to die next Thursday.

No, surely it is reality that is wrong.

Son of Captain Nemo's picture

"I was told by several reputable peak oil theorists that there was no such thing as technological advance, and that we are all going to die next Thursday."

Probably not Thursday... But more than likely the week after next Thursday!

I just bought a brand new Mustang GT 450hp and my second car is a Camaro!... What do you drive?!!!

HowdyDoody's picture

Goldman says it is so, so it must be true. They would never say one thing to the public and do the opposite themselves, would they? That would be unethical and make them loads on money as well. And we all know that is exactly what Goldman does not do.

NoDebt's picture

If you're old, like me, the idea of US oil production starting to shove those Saudi assholes around just puts a smile on your face.  Fuck those Arab camel jockeys.  Maybe we can have fewer wars there now, too (don't hold your breath on that one).

I'm guessing most here are way too young to remember the 70s when the A-rabs turned off the tap (twice!).  Soaring gas prices, long lines at the gas pump, rationing (alterante days depending on whether your license plate ended in an odd or even digit), people buying locking gas caps for their cars because gas theft became a real problem in some areas, etc.  Muscle cars (my personal favorite things every built by the hand of man) were basically made illegal by a combination of insurance regs, fuel economy standards and high gas prices.  It sucked.  And it sucked even worse when Jimmy Carter told everyone to turn their heat down to 62* and wear a sweater while the Iranians held US hostages until after he left office.  Except for the drugs (which were AWESOME!) the 70s were one giant suck-fest.  And OPEC was one of the big reasons why.

 

So Close's picture

As someone who has worked on the drilling side of O&G E&P, I can tell you the drop in wellhead prices is correct.  If you will go back and look at my posts over the last several years here on ZH you will see this is one of the few areas I have taken contrast with the opinions of Tyler/The ZH crew.  For a long time it seemed ZH was railing against the shale-ponzi scheme thing.  While I allowed that there has been massive over investment, I held that the spicket could be turned off quickly (which it was) and that innovation was moving things forward.  (It has).    It has to do with shorter more efficent drill times, multistage fracking, and nearly an order of magnitude more propant being pushed into these drilled wells/formations.  More propant, more pathways for hydrocrabons to come back up the wellbore.  Hope that helps satisfy the request from the above post re: more info on the subject.

Son of Captain Nemo's picture

Okay S C

Now tell us about the refining of it and how long it will last given the sheer cost of our military attempting to loot it everyplace else the last 16 years which contradicts the 100 year prediction we keep hearing?...

By the way?... Can you tell me if we will be paying for this North American bounty in "USD" given the little debt issues we've been facing with that looting operation for oil everywhere else -which by the way keeps destroying that oil infrastructure with our American ordnance at the "same time" which makes the energy extraction problems in those Countries that much worse???!!!

post turtle saver's picture

look man...

quit bombing us with strawmen just because the peak oil religion has been proven to be false... again... and again... and again...

refining it is no big deal, US refiners have the most capacity and highest tech in the world and have had so for decades... those cracking and catalyst paths are there for a reason, and it's not because the only thing they can handle is light sweet crude...

once more, "science, it works bitchez"... how many times do we have to say it, I guess once more...

Son of Captain Nemo's picture

You're right Khazarian turtle. There is both alchemy and science to oil just like Au and Ag.

No worries... I believe you!

fx's picture

So OPEC lost to shale? The entire fvckin' war? And shale is the marginal price setter?
These are pretty dumb conclusions drawn by G. Sucks.

I am not even sure, if OPEC even lost the current battle. But the entire war already? Let's see how long these shale wells will actually last. and what money (if any) shale producers will ultimately make from them. My guess is 'less than nothing'.
And marginal price setters? Oh, really? How can that be if shale produces at higher break-evens than virtually everybody at OPEC and higher than Russia? They do not set prices, they lower prices for everybody else. Me thinks an investment bank should at least know the basic concepts about a subject they publicly discuss.

philipat's picture

Yes, yes, the Saudis and all, but I think I must be missing something. If shale, as a result of "technological breakthroughs" now has a breakeven PRODUCTION cost of $50-55 (I had read that the breakeven production cost was ALWAYS $50-55?) that still doesn't leave any PROFIT. Excuse me but I had assumed that the prupose of being in business was to make a profit? And that breakeven production cost still does not include transportation, insurance etc.

So what gives? Is "someone" subsidizing shale in a deliberate attempt to break OPEC and the Saudis? Yes, I know "fuck the Saudis" and all but in the interests of truth, there is something here that is not computing.

thatthingcanfly's picture

I agree with So Close. I work for a silica sand mining company that is supplying huge amounts of frac sand to the Permian right now. Our resin coated sand market has picked back up too. The amounts of proppant per well are projected to increase through 2018 across nearly all operators in the field. Doing this reduces the well degradation rate, and contributes to driving down ultimate costs through the life of the well.

Good time to be in the sand mining business.

 

Son of Captain Nemo's picture

Terrific!!!

Now tell me the cost of your "resin coated sand market", vs the bullets bombs, tanks aircraft, soldiers ,sailors and marines it's costing that offsets that TERRIFIC DEVELOPMENT???!!!

If you are so certain of it's "perfection" in making your Country sustainable without NEED ANYWHERE ELSE than "WHY" aren't you using the spare money in your wallet to protest what our military is doing on behalf of Israel, Saudi Arabia and the U.K. banks which may END YOU AND EVERYONE ELSE if we don't CEASE AND DESIST fucking with everyone elses energy that DOESN'T BELONG TO U.S.!!!

thatthingcanfly's picture

Yet another non sequitur.

You really don't have any critical thinking skills at all, do you?

Son of Captain Nemo's picture

"You really don't have any critical thinking skills at all, do you?"

You're probably right on this aspect. I'm not a disciple of "Anton LaVey", or a committed socio/psychopath like yourself.

But I am unfortunately a "taxpayer" that wishes to alter the course of a government that is bankrupt going on 30 years and beyond out of control and on "suicide watch"!

Put your money where your mouth is before it's too late!

Son of Captain Nemo's picture

What a milestone for the U.S. and it's shale oil miracle (https://www.rt.com/business/381629-soviet-debt-payment-russia/)?...

Oops! Don't we wish!!!

Son of Captain Nemo's picture

I know tt

"Deficits Don't Matter"!!!!!

Just keep telling yourself that.

Raging Debate's picture

A vendor (Saudi) that repeatedly shits on its number one customer for decades is not going to retain its customer. I agree with No Debt, hope finishing our energy independence allows our exit from the ME. 

cheka's picture

so sad that the nyc.opec cartel has lost control of producition suppression.  saddam would have lived if he would have waiting until now to bust his nyc production quota

cougar_w's picture

These wells don't last very long.

The other side of this story is the "new discoveries" chart. Monterey dissolved in a mist. I can't think of anything since to fill in the gap. The current plays have what -- 10 years to live, tops? And then they become expensive stripper wells ... actually I don't think so.

Maybe it really will last forever. Maybe it will last, but the USG nationalizes the whole thing as a question of national security ahead of SA imploding under a regional unwind.

Son of Captain Nemo's picture

How does "finite resource" = last forever?

So Close's picture

As someone who has worked on the drilling side of O&G E&P, I can tell you the drop in wellhead prices is correct.  If you will go back and look at my posts over the last several years here on ZH you will see this is one of the few areas I have taken contrast with the opinions of Tyler/The ZH crew.  For a long time it seemed ZH was railing against the shale-ponzi scheme thing.  While I allowed that there has been massive over investment, I held that the spicket could be turned off quickly (which it was) and that innovation was moving things forward.  (It has).    It has to do with shorter more efficent drill times, multistage fracking, and nearly an order of magnitude more propant being pushed into these drilled wells/formations.  More propant, more pathways for hydrocrabons to come back up the wellbore.  Hope that helps satisfy the request from the above post re: more info on the subject.

Hulk's picture

You can say that again !!!

Jubal Early's picture

"and nearly an order of magnitude more propant being pushed into these drilled wells/formations.  More propant, more pathways for hydrocrabons to come back up the wellbore."

Now I get it.  An order of magnitude more propant means pharma, refining, smelting and other industries can inject an order of magnitude of toxic waste into the ground than before thereby alowing them to split the savings with the frackers.  Throw in ever cheaper capital costs and diminishing middle class wages and presto:  lower costs at the wellhead.  Of course the stupid goyim will never be allowed to know at what cost this comes to their ground water, earthquakes, and various other envonmental issues.

Asking an oilman for the truth about fracking is like asking a jew for the truth about the "holocaust". 


Life of Illusion's picture

 

Same fracking tech used for years starting with Mitchell..

The reason fracks back is machinery and equipment went to liquidation and the boyz went back to work producing at a lower cost.

Maybe we should liquidate other industies and get GOV the fuck out of the way.

 

 

NoDebt's picture

Hey, it worked in the Nat Gas industry when Aubrey McClendon turned the entire US into a NatGas pincushion with so many wells he damned near bankrupted his own company (Chesapeake Energy).  Somebody bought a lot of that shit for pennies on the dollar and fired those wells back up at a lower cost.  All of which I am totally cool with.  You can drown me in cheap energy, I won't complain.

 

 

phaedrus1952's picture

The dozens of massive new power plants being built in the Ohio/Pennsylvania region using Combined Cycle GasTurbine hardware, fueled with cheap natgas, will provide that area with some of the cheapest electricity on the planet.

MEFOBILLS's picture

70s when the A-rabs turned off the tap (twice!).  Soaring gas prices, long lines at the gas pump, 

 

Those A-rabs, were given a deal by Kissinger, which they accepted.  Since Kissinger was and is a CFR agent working for the banksters - maybe your eyes should refocus. 

The 72,73 Saudi-Kissinger deal ALLOWED the A-rabs to Cartelize, which means monopoly pricing.  The same deal also gave the Saudi's 5'th fleet protection, advanced American military gear, promises to come to their defence.  It sanctioned the Saudi coup, which in turn was a MI6 operation.

All this for what?  So, that Saudi oil would be priced in dollars.  Also, Saudi's are to recycle their petrodollars into western financial markets.  This means the buying of TBills.  Said TBills are in reserve loops of wester banks, specifically Rothschild banks that hold dollars as reserves.  OK?'

The dollar as reserve system morphed and became TBill economy after 73 agreement.  The world money system became the TBill economy, to today.  These Wahabi A-rags are today friends of Zion, are they not?  The CIA, MI6, private banking Zion are all butt buddies.  Wall Street included.  Today, the western world is still TBill economy, Petrodollar, AND THAT INCLUDES SHALE.  ok?  

Shale fields peter out quickly - no discussion about that here.  DEBT requires the future to be productive, to then pay the banksters their usury.  

By the way, all of the petrodollars flooding into western capital markets in 74 directly leads to Mexico being reclassified from third world country, to becoming "emerging market."  This then allowed dollar loans to flood toward Mexico leadership, then forming an Oligarchy.  Banks were flush with petrodollars, hence the desire to make loans.  The Amerindian peasants were forced off their land during several subsequent peso collapses.  Their lands were harvested and now most land is owned by a few.

That then leads toward Mexinvasion.  You don't think elites in Mehico want their low IQ Amerindian population do you?  Again, cast your eyes toward Wall Street and the Financial Oligarchial elite.

But, you know, as long as people mis-atribute reality, the shit show can go on forever.

www.sovereignmoney.eu


NoDebt's picture

I wouldn't even begin to debate you on that.  I just want cheap gas and I enjoy the hell out of watching this carefully constructed OPEC cartel become IRRELEVANT.

 

MEFOBILLS's picture

OPEC is just a symptom.  Remember Libya?  Gold Dinars and not pricing oil in dollars = being overthrown.  Today, Libya no longer stands as a bulwark against African migration into Europe.  The banksters don't care about sovereignty.  The don't care about long term stability of nation-states and people groups.

How about Iraq?  Saddam was making oil deals outside of the petrdollar system, using swaps.  Syria?  More of the same.

It is all tied together via the private banking money system.  ZH denizens need to be monetarily literate.  If not here, then where?

BennyBoy's picture

 

Don't forget about Iran accepting gold for oil....Gee, is that why Iran keeps getting demonized by the west?!

1972-73 get off the gold standard and on the oil standard, which means the dollar standard.

BennyBoy's picture

 

MEFOBILLS ...

What about Venz?

Their socialist crap from the oil boom years really hurt them in the last few years. But it seems the awful way the economy has been destroyed and people leaving the country had to have been "helped" by the bankers looking to get the oil.

Huh Reeeally's picture

Good posts, it certainly is all about the petro dollar. Every time some country thinks about selling oil for gold, or gold backed currency they are invaded and destroyed under the guise of spreading democracy. Iran sold a lot of oil for gold - Turkey was instrumental in these transactions, a fine example of NATO solidarity - while Iran was under sanctions.

And which country is in the neocon sights now? Iran. Just as General Wesley Clark outlined years ago.

The Saudis, Russians and Chinese, to name a few, are busy dumping Tbills for various reasons. Belgium, Ireland and the  Exchange Stabilisation Fund are the likely buyers, vacuuming up all the debt that no one wants. It's a combination shell game and ponzi scheme enabled by military misadventures and, like Rome, the empire is fully extended economically and militarily and busy debasing their currency. What could go wrong?!?

 

junction's picture

Not good posts, great posts with insider facts.  Thanks.  

Raging Debate's picture

MEFOBILLS - NO argument from me either. The US needs to end the Fed, a private bank and regain control over its own currency. Currency should be a public utility, not owned an managed by a foreign (BiS) corporation. 

froze25's picture

Excellent post, nailed it!

MEFOBILLS's picture

I had to look up FOFOA.  

I am ok with gold used for international trade.  That is ... the gold system post Bretton Woods up until 71.  Gold anchored goods trade between nations, including oil.

Internal to a country, history shows us gold always has credit riding on top.  Then in that case, gold acts as a lever and makes credit expand or contract too fast.  Our ((friends)) say in the protocols, that "gold has been very good for us." 

All international trade is only barter.  Any trading between nations should have an accounting unit related to barter.  In the post bretton woods system, up until 71 any imbalance in good exchange, would lead to deficit country losing its gold. 

This then forced exchange rates down in a bid to recapture the lost gold.  This system worked pretty well, but was undone by Nixon.  

A bancor system is superior as it is a pure accounting unit (not money) and marks goods trade only.  It channels only relative to goods exchange.  It also prevents mercantilism.

Silver could be used internal to an economy, as it is plentiful.  Historically, it was a good unit of exchange, and didn't wear away easily.  It is still deflationary.  Humanity has not matured to the realization that money's true nature is law.  So, even a metal solution is preferable to bank "Credit" fiat, to my worldview.

No, I'm not FOFOA.

cougar_w's picture

It was FOA and FOFOA who opened my (and a lot of ZHers) eyes to the petro-dollar link to gold.

Huh Reeeally's picture

I remember Cadillac giving away a free Chevette with every Caddy purchase, I think the Chevette was around $6K back then....

post turtle saver's picture

yeah, I gave up on trying to be reasonable about this a long time ago... we're going to see a huge thread of "no way impossibru" with this article, even though "science, it works bitchez"

been chatting with the petro engineer faculty at UT off and on about this for the past few years, their assessment then was "we're going to flood the world with cheap hydrocarbons and when it happens the price impact will be breathtaking, especially when the financial impact of the Brent peak gets flushed out of the system"

well... they're the experts for a reason, they sure called this one...

Stuck on Zero's picture

Tight oil and gas formations are not confined to the U.S. See here: https://www.eia.gov/analysis/studies/worldshalegas/

Fossil fuels are doomed to be at low prices for a long time.

Son of Captain Nemo's picture

'Fossil fuels are doomed to be at low prices for a long time."

Especially as more and more people go without viable work and bombs from nation(s) that have air force(s) keep dropping them on those who have "energy" they want!

Arnold's picture

We'll never see $44 oil in my lifetime.

--Gartman

Son of Captain Nemo's picture

When your government starts a conventional exchange that leads to "non-conventional" in Korea, off some islands in the South China Sea, Syria or Eastern Ukraine you won't need to worry about the notion of "peak oil" ever AGAIN lad!

Gator05's picture

This argument cracks me up.  Back of the envelope math, average Wolfcamp Permian well EUR BOE is 500,000 bbls oil over life time of the well.  Average cost of diesel to frac 1 mile well 250,000$, for the sake of argument multiply this by 5 to cover, drilling, production and to handle movement of material to well site.  That’s 1,250,000 $ spent on diesel and gas.  Let’s assume a diesel/gas cost of 3.0 a gallon.  (It’s more like 4 .0 – 5.0 when delivered to a field location.) So 1.25 MM $ gets you 416,666 gallons of diesel / gas, incidentally way more than we use to drill, frac and move equipment to a well. 

Our 500,000 bbls of oil well, when refined, makes 20 gallons of gas, and 10 gallons of diesel per bbl of oil.  We can also do this with a 3-2-1 crack spread but this is easier.  So 500,000 barrels of oil refined to gas and diesel equals – 10,000,000 gallons of gas, 5,000,000 gallons of diesel and a whole bunch of jet fuel and other useful distillates gained versus half a million gallons of fuel expended. 

You are oversimplifying the externalities of the arguments Gator!  I am! Go ahead and express the actual externalities of every piece of equipment used, built, depreciated, manpower, boxes of donuts sold by service vendors to my consultants, cost of the over educated philosophy major operating my frac blender etc.  Convert the whole thing to BTU’s, we still come out way ahead.

Gator

Son of Captain Nemo's picture

That is simply G-R-E-A-T NEWS Gator!!!

So why again do we have to be looting and fucking up everyone elses energy resources if we have so much of it to frack HERE AT HOME???