Shale producers could hold key to future of oil industry

So Royal Dutch Shell is to pull out of oil and gas in several countries, at the cost of at least 5,000 jobs (“Shell to exit oil and gas in up to 10 countries, cut at least 5,000 jobs”, June 8).

Nonetheless, oil prices have risen to about US$50 (S$67.60) a barrel, an equilibrium of sorts, it seems. This, despite inaction at the recent meeting of the Organization of the Petroleum Exporting Countries (Opec). It appears that the industry producers’ selfishness remains.

This means that nothing has been learnt from the crisis of the past two years or more; for instance, the need to be responsible, so prices can stabilise, and to give due consideration to the environment at the same time.

That means adopting greener solutions, while being more responsible in monitoring emissions from operations around the world.

It would be commendable if this could possibly and realistically be undertaken, given the challenging time the industry finds itself in now. Nonetheless, low or high oil prices seem to have little impact on climate change; there are other factors to consider.

Meanwhile, at US$50 a barrel, the United States’ shale oil industry benefits. It could ramp up production to repair ailing balance sheets quickly, but this would probably reverse the good fortune and add to the supply glut.

It is a double-edged sword. Drilling in shale areas in the US is possible even if crude prices drop to US$25. The break-even cost is said to be as low as US$20 in some places.

Though shale oil producers have refrained from drilling new wells, a backlog stands ready for fracking. The higher oil price will encourage this. And companies that have stopped fracking would consider completing some of these wells now.

Also, they would probably increase capital spending to boost production next year. Producers would be persuaded to hedge, which would lock in decent prices for their oil.

Although Opec and Russia continue to grapple with lower crude prices — with some difficulty — it is a matter of survival for shale oil producers.

With the higher price, banks will probably throw them a lifeline, and most producers would jump at the chance to increase production and clear their outstanding debts.

So with oil prices reaching US$50, shale oil producers will be in business for a while, it would seem. What they do next is the question. It could have a bearing on where the industry heads.