Efficient production

Since 2012, US companies have reduced the cost of shale oil in the $ 30 to $ 34-67 per barrel (for WTI), wrote in a detailed analysis of the companies Morgan Stanley Bank. Citi calculation results showing that the current conditions in the production of US oil fields is unlikely to fall even with a decrease in the number of drilling rigs. In 2013, shale oil fields employed an average of 1,370 rigs in January 2014 - 1403 December - 1575 (average 2014 - 1530). If the reduction of investment to reduce the number to 20% units, 1250. However, they remain in this performance was increased by 34%; if this pace to continue in 2015 the volume of production during drilling will reduce the number of such as work units in 1675 with a performance at the 2014 level of performance if the increase is only 17% of production volume in 1460 will correspond to the settings. "This is hardly a recipe for a tangible slowdown in production", - concluded at Citi.

What is the cost of shale oil

Cost of oil from shale mdeposits is largely determined by the complexity of its production, which depends on the site location and the geological formations, fields under development (where there is a whole infrastructure and bought the rights to the land, the cost is often less than $ 40 per barrel), the distance to the refineries, which are located in mainly on the coast, and the availability of means of transportation. Miners in Texas pay a few dollars per barrel, to pour oil into the pipeline, which will send it for 150 km at the refinery, and in North Dakota, Colorado and Wyoming, where pipeline capacity is not enough, often have to pay $ 10-15 per barrel for loading oil in railway tank cars and transport to 1500 km or more. According to the operator of pipelines and storage tanks Enterprise Products Partners, average shale well in many areas is not profitable at $ 60 per barrel, but some high-quality wells in Texas and can work at a price of $ 30 per barrel.

A paradigm shift

Since June 2014 oil fell by more than 40%, and signs of stabilization has not yet seen. While rawupertsikla that began over 10 years ago, the proposal does not keep pace with demand, which was stimulated by the rapid rise of emerging economies. Now, thanks in part to new technologies emerged oversupply, says David Fuller, publisher Investment Bulletin Fuller Treacy Money. And demand is low because of the slow growth of the world economy and more efficient use of energy resources. Fuller back in 2003 predicted the formation of a long-term "bullish" trend in commodity markets. In recent years, in his opinion, in the oil market, a period of slow decline in prices, which will last until the end of the decade.

Long-term structural changes means that the "mark of $ 90 per barrel [for oil Brent], who served in recent years, the level of support will become a resistance level," he wrote at the beginning of the year Edward Morse, head of Citigroup analysis of world commodity markets. The revival of the world economy in 2012-2013. "Drew off a doomsday attack caused by the shale revolution in the United States," he says now in a report titled "Goodbye, trehznachnaya the price of oil. "

The situation is changing under the influence of two factors, says Daniel Yergin, vice president of research firm IHS and Founder of Cambridge Energy Research Associates. Demand for oil from China and other emerging economies has ceased to be the main factor in pricing, he wrote in an article published by The Wall Street Journal. They become oil production growth in the US, which Yergin calls astounding, real and dynamic.

According to Ed Yardeni, president of Yardeni Research, the main reason for what is happening right now in the oil market, which started "Battle of the Titans" - "shock on the supply side." "Saudi Arabia has abandoned its role of the Federal Reserve System in the oil market - says Yardeni. - The Saudis do not want to spend more "open market operations" in order to stabilize the price on behalf of OPEC. They decided to allow the market to determine the price and hope that it will fall low enough to stop a large part of oil production in the US, and then rise again. " But the success of this plan do not believe he Yardeni: "As usedudet "good luck" in Arabic? "

Years of great change

The United States reduced their consumption of oil and oil products, but the main thing - it dramatically increased their production due to the shale revolution. If in 1983-2005 gg. consumption increased by 36.5% to 20.90 million barrels a day, and then began to decline - by 9% to 18.96 million in 2013. Production also in 2005-2013. increased from 5.18 million to 7.44 million barrels a day (in the crisis of 2008, it temporarily fell below 4 million). This year production growth accelerated to more than 1.5 million barrels of: according to the Energy Information Administration (EIA - Office of the US Department of Energy), for the week to December 5, oil production was 9.118 million barrels per day - a record for the weekly statistics, which is being 1983

Five years ago, leaders of the market of such a turn did not expect. In 2007, the National Petroleum Council (representing the views of the US oil and gas industry workers) at the request of the Ministry of Energy has prepared a report entitled "The hard truth about energy", which said: "The hard truth is that the supply of oil and gas <...> is unlikely to be keep up with the increasing demand, which after 25 years50-60% higher than the current level. <...> The rate of growth may outpace the commissioning of new sources of supply [oil and gas], stimulating the growth of prices. " The report, of course, did not foresee the global economic crisis undermined demand. But they did not pay attention to the fact that just at that time, their colleagues - especially small independent company - laid the foundations of the shale boom. Using techniques such as hydraulic fracturing and horizontal drilling, they have since 2008 helped to increase production by almost 4 million barrels a day. And shale oil in the last three years, provides virtually all of the growth in US oil production and most of the growth in the world (see. Infographic), note analysts IHS.

Own oil replaced imported from the US market, for which it was necessary to look for buyers in other regions, increasing the offer there. In 2005, the import of oil to the United States amounted to 10.13 million barrels per day, in 2014 -. 7.4 million, for example, supplies from Nigeria declined in 2010-2013. by 76.4%, from Iraq - by 17.3%, Venezuela - by 33.5%, from Mexico - by 26.10% (while imports from other countries, egEmer Saudi Arabia and Kuwait, grew up).

According to the EIA, in 2015, imports will account for only 21% of liquid fuels consumption in the US, compared with 60% in 2005. This reality makes authority to adjust forecasts, for example, in early 2012, it is expected that imports will be reduced to only 37% by 2035

US Now although lagging behind Russia and Saudi Arabia for the extraction itself of crude oil, but, according to EIA, ahead of them in liquid hydrocarbons (crude oil, natural gas liquids), making them more than 12 million barrels a day (cm. Infographic ). Estimates of Citi, by 2020 this figure will exceed 14 million barrels, which gives the US in case of cancellation of the existing ban on shipments abroad the ability to export nearly 5 million barrels a day. This will change the world energy market, according to Citi. Even if prices fall significantly, indicating Morse, the trend does not change, and by 2019, if not by 2018, the US will become a net exporter of oil and oil products.

"Free enterprise economy in the United States allows companies to build business plans in the most healthy atmosphere of competition and stimulates the development of technology- Explains the success Fuller. - Other producing countries, including Russia, have become too dependent on oil at the expense of diversification, and business development. " We can say that now the market is punishing Russia for it, says Fuller.

For the first time in more than 30 years of OPEC's dominant position in the oil market is being challenged, and it will be very difficult to adapt to the situation, because among its members there is no unity in what to do, said Yergin. cartel decision on Nov. 27 did not change production quotas reflects concern the Gulf of losing market share in the case of production cuts.

Saudi Arabia would consider the possibility of reducing production only if it will join other countries, said after the OPEC meeting, Prince Turki al-Faisal al-Saud (formerly it was headed by the country's intelligence service and was ambassador to the United States). Kingdom did not repeat the mistakes of the past and "is not going to give in this time another share of the market and allow them to, whether it be Russia, Nigeria or Iran, or other countries to sell oil to customers in Saudi Arabia," he said. In recent years, Saudi Arabia will formla substantial cash reserves - about $ 800 billion, according to the assessment of Citi, - that will enable it to meet their needs, while "major oil producers such as Russia and Iran, requires a certain level of prices to maintain a balance" in the economy, the prince said.

Russian Finance Minister Anton Siluanov has recently praised the country's losses in 2014 by falling oil prices in the $ 90-100 billion; Russian foreign exchange reserves - $ 416.2 billion.

In Saudi Arabia believe that the market will stabilize prices at a level of about $ 60 per barrel and it will undermine the economy of the oil shale production, wrote the WSJ in early December. Back in mid-October, according to the publication, an official of one of the Gulf countries - allies of the kingdom called the $ 70 per barrel of American oil WTI «magic number" - when it is supposedly reaching production in large parts of shale becomes uneconomical. OPEC's Abdullah al-Badri, Secretary General at the end of October, said that half of the oil shale in the United States production is unprofitable even at a price of $ 90 per barrel.

Where the balance point?

basedon forecasts of the International Energy Agency (IEA) and OPEC, analysts say: to balance the market, the supply in the I quarter of 2015 should be reduced by 1-2 million barrels per day. "We believe that [oil] industry is fast enough to react to geopolitical situation with the price of oil, - says in the report Ian Stewart, the chief of department of the analysis of energy markets Credit Suisse. - But she can not act as quickly as OPEC. Oil reserves will grow, pressing on futures for the coming months in the quarter I, for which we forecast an average price of $ 62 per barrel for WTI ».

In most OPEC not everyone is convinced that the cartel will be able to win a price war with miners shale oil. "The prices that we see - not a good reason to affirm with certainty that in the next four or five months of shale oil production will be reduced by 1 million or 2 million [barrels a day]", - Iran's oil minister said Midzhan Namdar Zanganeh told Bloomberg at the end of November, when Brent was worth about $ 70, while WTI - about $ 66 per barrel.

Oil production in the United States proved to be more viable than the prdpolagalos indicates Yergin. But the company can not respond to the fall in prices. A week ago, ConocoPhillips announced a reduction of investments in 2015 by 20%. It will delay the development of a number of new areas of shale deposits, including the Permian Basin in west Texas, Niobrara in Colorado, Montney and Duvernay in western Canada. Major investments will be concentrated on already actively exploited oil fields in North Dakota Bakken and Eagle Ford in Texas. But ConocoPhillips expects, as before, to increase production in 2015 by 3%.

EOG Resources, a pioneer of shale boom and the largest independent oil company, said it will stop working on many areas of oil and gas in Canada and will focus on projects in the United States last week. According Drillinginfo, the number of permits for drilling in the US fell in November by 36% compared with October. However, it is still 13% higher than in November 2013 - and the company can continue to prey on the already issued permits.

In the Eagle Ford oil field rig count fell from a peak of 210 in July to 190 "Reduction is now inevitable," - said Carr Inghuh, an economist at the Texas Alliance of energy producers. But they do not mean that oil production will decrease, objects Greg Haas, director of research firm Stratas Advisors: companies are becoming more efficient, and "if before the oil production fell after reducing the number of operating drilling, but now it is not so." Analysts point to the ever-increasing efficiency of shale miners as a factor that can ensure the continuation of production growth - at least in the coming months and quarters (see incision.). Increased shale extraction efficiency can offset the decline in investment in other fields and in other countries, contribute to the growth of total production in 2015 and even lower to lower oil prices, analysts said Citi.

One of the basic questions - under what oil shale production prices will remain profitable. The IEA estimated that only 4% of this production is unprofitable in the US at a price below $ 80, but most of the production from the Bakken shale in North Dakota, the largest in the United States, cost-effective at $ 42 and below. "Costin McKenzie County, the most productive district of the state - as little as $ 28 per barrel ", - said the agency report.

Hard-to about 80% oil (mostly shale oil), which may be produced in 2015, at a cost of $ 50-69 per barrel WTI, evaluates IHS; This price covers the capital and operational costs and gives a profit rate of 10%. (Margin of 10% is included in the cost estimate in all calculations.) IHS waiting for the price of WTI, which in recent years usually cheaper Brent for a few dollars, at $ 77 per barrel in 2015 .; In this case, the US hard-to increase oil production will amount to about 0.7 million barrels a day. The growth of the total production of oil and natural gas liquids is expected to reach 1 million barrels, and in 2016 - 0.65 million barrels per day. However, psychology can significantly influence the actions of market participants, according to the IHS: «If price expectations, not to mention the real prices to fall even lower, the consequences for the production will be more significant."

Morse estimates the cost of the complete cycle consisting of the purchase of rights to the land or lease and construction of infrastructuress, at $ 70-80 per barrel. However, after that for the commissioning of a new well requires much less investment, which can be as little as $ 35-40, he said. Trying to squeeze out of Saudi Arabia from the market shale miners can give only a temporary effect, Fuller believes they will concentrate on the job in the most profitable areas, besides constantly improving technology, reducing production costs.

Many companies can survive the significant drop in prices in the next year or two. Pioneer Natural Resources have hedged 85% and two-thirds of the potential production of shale oil and gas before the end of next year - until 2016, Noble Energy and Devon Energy hedged two-thirds of production in 2015. True, Continental Resources, the largest oil producer in the field Bakken, in the beginning of November, when oil cost about $ 80, closed all contracts for hedging of $ 100 up to 2016, considering that the price will soon be restored. Continental sold on this deal $ 433 million, but remained vulnerable to further decline in prices.

Another potential problem - the high level of indebtedness on the part of companies that finance developmentie with the help of borrowed funds is not generating sufficient cash flow. If EOG Resources and Anadarko Petroleum when the price of oil in 2015, about $ 70 debt will be approximately equal to EBITDA, which, according to Tudor Pickering Holt, quite a bit, then a number of other companies, including Laredo Petroleum, Goodrich Petroleum and others. He EBITDA exceeds four times or more. But the problem of bankruptcy or weak companies will create opportunities for financially strong players. Consolidation, the emergence of spare capacity, the purchase of the productive areas of successful companies will reduce costs and improve efficiency, according to some analysts. "The growth rate of production decline. At $ 50 it might stop, but production will not be reduced ", - says Philip Verleger, president PKVerleger, engaged in consulting in the energy sector.

Even at a price of $ 60 in 2015 production growth does not stop, but slow down to 0.5 million barrels per day, the reduction of the cash flow and investments will start to have an impact on production has only in 2016, according to Citi.

"Bears" are here to stay

By 2020, the price of Brent crude oil will fluctuate between $ 70-90per barrel, according to Morse and colleagues. They explain this shale revolution, and that the slowdown in China's economy, which has been the main driving force behind the rise in prices for raw materials - a long-term process.

In the near future the same time to improve the situation with the prices can be expected only in the second half of 2015 is considered by many analysts. Cheaper energy by the time can accelerate the growth of the world economy and the oil price will go up again, according to Citi, and sets before Brent can cost $ 60-70 per barrel. If implemented geopolitical risks (major supply disruptions from the Middle East and North Africa, a marked drop in production in Libya, etc.), Brent could grow in 2015 to $ 93-95, but it will provide incentives for increasing production of oil shale in the United States and pricing and industrial struggle will be transferred in 2016. Proposal shale mining sector sufficiently elastic, agrees to Morgan Stanley: well maintained not as long as in traditional fields because the company quickly respond to the rise in prices, having increased investments again.

Bank analysts believe that the inaction of the OPEC market mozhet unbalanced even stronger in the first half of 2015, prices will continue to fall. The pessimistic forecast is that the excess of supply over demand will peak in the II quarter, the average price of Brent - $ 57, and in the worst case - $ 43. In the second half of the year the situation will stabilize. Morgan Stanley predicts the entire 2015 price of $ 81 for Brent, for the next years of his analysts give more optimistic forecasts than other banks: the price again exceed $ 100 per barrel.

To significantly reduce cash flow and access to capital shale miners in the United States, prices should be "on painfully low for an extended period of time," Stewart points out of Credit Suisse. The first signs of decreased activity plus seasonal factors could begin to deploy the situation in the II quarter, the price could rise to $ 70 from $ 62 per barrel in the quarter I. By year-end Brent price could rise to $ 75 (WTI - up to $ 70), and in 2016 - up to $ 80 (WTI - up to $ 75). The last value at Credit Suisse believe the equilibrium in the long run, maintaining a forecast until the end of the decade.

The fall in prices will affect and slow demand, and nedlozhenie IEA experts point out in its monthly report published on Friday. The agency lowered the forecast growth in demand in 2015 at 230,000 barrels per day to 900,000 barrels, it will amount to 93.3 million barrels a day.

In the long term, OPEC is largely lose control of the oil market, said Fuller: development of technology contributes to a production capacity (shale development in the future may develop, and others), as well as its cheaper, as well as the introduction of competitive sources of renewable energy and energy efficiency. Fuller also believes that the development of nuclear power resumes. So, in 2015 again earn a nuclear power plant in Japan. The era of high energy costs on the ends in the oil market - a long-term "bearish" trend, he said.

Oil locomotive to down and the prices of other raw materials. Since energy accounts for up to 50% of the cost of production of a number of agricultural commodities and metals prices, many of them continue to decline, analysts said Societe Generale: which means that manufacturers will be able to increase their production, having increased OFFERset.

Bloomberg Commodity Commodity Index, which has grown from 2000 to April 2011 by 91% by the end of last week fell by 37%, including 12% - since the beginning of this year. If the index has completed 2014 in the red, the fall will last four years: this is the longest decline in the index, which was formerly known as DJ-UBS, from the beginning of his calculation in 1991

"We are entering a new era in the global oil market, where prices for some time will be low. Oil was the last of the goods commodity super cycle that still held "at the highest level, Yergin said recently in an interview with The Sunday Telegraph.