The shale industry is impacted by the levels of oil production in other areas. When oil demand is satisfied easily then the prices go down. This is a truth about the oil industry full stop – whether it is shale or traditional oil exploration and production.
However, this is not the first question that needs to be asked about shale. The first question that anyone looking on at the shale industry would ask is: why are the prices per barrel so much lower for shale? Global oil reached a robust price of $70 to $80 a barrel recently – but shale continued to hit prices close to $50. Why? The answer is simple – it is the maturity of the infrastructure that supports the exploration and delivery of the oil from shale.
Understanding the current state of shale requires an analysis of pipelines and storage facilities – both for the sellers and the buyers. The impact of the storage fees that need to be paid by producers drives down prices for those exploring. Plus, these production costs are on the rise due to steel and aluminium tariffs – which in turn increases the pressure on price.
This gives us a mixed picture to report, as there is actually a lot of enthusiasm and positivity about the shale industry. There is rightly some excitement at the possibility of much wealth from shale exploration and production. However, there is a warning amongst industry insiders to suggest that explosive growth rates can no longer be taken for granted.
Is this dampening of the enthusiasm for shale warranted? Is the four-year low in prices part of a normal upward and downward trend. It is less the voice of naysayers than it is a warning for the need for major investment in the infrastructure if the price is going to be maintained.
Let’s look at one problem that needs to be resolved to secure shale oil production. The associated natural gas does not have a commercial market and only a small portion can be burned off at the wellhead. This creates a problem for those involved in shale, as production has been forced to halt to avoid violation of gas-capture targets.
So, there are problems at the well-head as well as downstream with the pipelines and storage. There are environmental issues that need a solution, as well as the need for investment.
Despite this there are some major companies seizing bigger positions in shale fields. BP, Exxon Mobil, Chevron and Royal Dutch Shell are all moving aggressively into shale. This area may have been pioneered by the independent explorers and producers. However, for this industry to go from financial strength to strength – it will need the integrated solutions that only the major producers can offer. In other words, the structures and systems companies like BP have in place give them a natural advantage in shale exploration and production.
The current state of shale? At present there seems to be a bad news/ good news story. The explorers and producers of the past are now limited by their size. They do not have the size to make shale more efficient to explore and produce. Therefore, prices are depressed in comparison to global oil prices. This is the bad news for the independents. The good news is the opportunity that they have created for the major companies to step in and take advantage of the potential booms that shale can bring.
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