Shale as world’s swing producer signals ‘jagged’ oil future



NEW YORK (Bloomberg) -- With OPEC ceding control for the first time since the 1980s, U.S. shale oil has been anointed the world’s new 'swing producer' by everyone from ConocoPhillips and Goldman Sachs Group to former Fed Chairman Alan Greenspan.

But can America’s oil really swing it?

Producers cut billions in spending, idled half the country’s rigs and kept more than 3,000 wells off the market, and it still took five months for U.S. production to start dropping. Analysts and banks say a recovery in production will also prove slower and more difficult than it would be for a single producer like Saudi Arabia.

“When you think of a swing producer, you think of OPEC and you think of spare capacity that can be turned on and off,” said Trisha Curtis, director of oil and gas research at Energy Policy Research Foundation Inc. “U.S. oil can respond, but the response is going to be messy, it’s going to be jagged and it’s not going to happen overnight.”

At the heart of all this is the fact that U.S. oil supply isn’t controlled by a single Saudi Aramco-like entity with a lever on all 9.4 MMbopd of output.

“The traditional market balancer isn’t there,” Daniel Yergin, vice-chairman of energy analyst IHS Inc., said April 14. “People have started to describe the United States as a swing producer. If it is the swing producer,” the recovery is going to be a lot more volatile, he said.

Saudi Arabia boosted production by 658,800 bopd to 10.294 million in March, according to data the country submitted to the Organization of Petroleum Exporting Countries.

Fracklog Challenge

Futures for West Texas Intermediate oil, the U.S. benchmark, rose 1.2% to $56.40/bbl in electronic trading on the New York Mercantile Exchange at 12:43 p.m. Singapore time. Prices are down 46% over the past 12 months. Brent, the global marker, traded at $64.09, down 42% from a year earlier.

Once U.S. drillers decide to tackle the fracklog, or backlog of uncompleted wells, they have to wait for hydraulic fracturing fluids and completion rigs to arrive. The largest challenge may be bringing back workers, tens of thousands of whom lost their jobs after prices collapsed.

“In reality, you can probably complete a well in between two and three months, but that’s assuming you have all the frac crews available,” Andrew Cosgrove, an analyst at Bloomberg Intelligence, said by phone April 15. “It’s going to be sticky in terms of getting everybody back to work.”

U.S. producers will find it easier to locate equipment and supplies than they did last year, when delays in sand deliveries and labor shortages kept wells waiting for months to be tied in, Cosgrove said. They may also find it cheaper as service costs have fallen along with demand for rigs, he said.

More Volatility

And while their response may be less consistent than that of Saudi Arabia, America’s drillers are solely driven by market conditions and may actually decrease volatility by serving as a check on the rest of the world, said John Auers, executive V.P. at Dallas-based energy consultant Turner Mason & Co.

Relying on flexible, low-cost opportunities that can stop and start on a dime will be critical as U.S. drillers become the world’s swing suppliers, ConocoPhillips Chairman and CEO Ryan Lance said April 8. “We’re going into a world that’s going to be characterized by lower, gradually rising prices and a lot of volatility.”

The retreat in U.S. oil drilling is a prime example of how the market will play out in the future, said Mike Wittner, head of oil research at Societe Generale SA in New York. Oil prices began collapsing in September, and yet U.S. producers didn’t really start pulling rigs out of fields until December. When prices rebound, their return to shale fields will again take months, he said.

“The big dogs, the Saudis, could snap their fingers and make that happen by tomorrow,” Wittner said. “Here, you have a whole sector of a couple hundred companies doing what they do and looking out for their own self-interests, and the whole thing takes a long time.”

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