The big question for US shale: Is it permanent or just ‘permania?’

A pump jack used to help lift crude oil from a well in the South Texas Eagle Ford Shale formation. US shale oil producers have upended old assumptions in the global energy market. (Reuters)
Updated 08 March 2018
0

The big question for US shale: Is it permanent or just ‘permania?’

LONDON: The Americans have a name for it — “Permania” — which they use to describe the frantic, even crazy, activity around the shale oil fields of West Texas.
In the past four years, the global energy market has been stood on its head by the boom in US crude production, to the point where the Americans are now producing more oil than Saudi Arabia and will soon overtake the world’s biggest producer, Russia.
The US’s 10 million barrels of oil per day account for roughly 10 percent of global output, and, as domestic demand for energy is saturated, they are being exported increasingly to the rest of the world.
That boom has unhinged the global oil market. The price collapse of 2014, the “Vienna Alliance” between OPEC countries and Russia, and the fiscal challenges of countries in the Gulf, are all down to the shale boom.
Sara Ortwein, president of Exxon Mobil’s shale business XTO Energy, told the CERAWeek by IHS Markit conference in Houston, Texas this week: “A decade ago, the idea of exporting US crude would have been seen as preposterous. Now, we have enough to satisfy US energy needs and sell it to the rest of the world.”
The Permian basin, west of Houston, Texas, and straddling New Mexico, is at the heart of the revolution. It produces 25 percent of American oil output, and has virtually changed the global oil equation on its own.
For traditional exporters like Saudi Arabia, it presents a big question: To join the party in Texas and other US shale fields, or to stick to pumping crude from the sands and seas of the Middle East?
“We have the golden goose, right before us,” said Tim Dove of Pioneer Natural Resources, one of the leading shale companies and among the first to exploit the Permian around the turn of the millennium. “We don’t drill dry holes, because we know the oil is there. Technology will only make it better. The sky is the limit,” he told the CERAWeek.
In a throwaway line, he seemed rather pleased about how he and other shale producers have caused confusion in the ranks of the traditional producers.
“I think that OPEC is impressed by what we’ve done, even if they are trying to get their arms about what it all means.”
He was speaking after a meeting with OPEC officials and traditional oil company executives in one of the many power-broking dinners around the CERAWeek venue.
It was the second year that OPEC had invited the shale barons to break bread in an attempt to end the undeclared hostilities between traditional oil producers and the Texans in place since the fall in prices in summer 2014.
Mohammed Barkindo, Opec general secretary, explains how the “peace” talks had come about. “We agreed last year to continue the dialogue with the Sahel industry. The last stage of the oil cycle has been the most injurious for all our members, and to everybody in the world. We all suffered. We had been operating in silos and we agreed to talk to the shale industry.”
Barkindo insisted that the meeting did not discuss oil prices or deals on limiting output, and Dove pointed out that US anti-cartel laws would make such agreements illegal.
“You cannot have these kind of talks in the US. We were invited and we went along. As far as I’m concerned, the dinner was congenial, and it may well become an annual event,” Dove said.
There has been speculation that some OPEC members might seek to do deals with shale producers as a way of balancing their portfolios and getting exposure to the upside in shale.
Amin Nasser, chief executive of Saudi Aramco, said that the company was always looking to get involved in growth areas, but he did not specify which ones.
But some in Houston questioned whether the shale industry had cured the “boom or bust” cycle of the past, when falling oil prices led to withdrawal of financial support from investors.
Others pointed out that shale still faced big problems in overcoming pipeline and shipping challenges, as well as opposition from the environmental lobby.
Mark Pappa, one of the pioneers of shale finance via his company EOG Resources, said that shale forecasts were too optimistic, and that the industry was exploiting cheap and easy assets that would quickly be exhausted.
“If shale does disappoint over the next four to five years, there are not a lot of safety valves in the system,” he said.
Dove dismissed these fears, pointing out that the shale industry’s cost breakeven price was only $19 per barrel. “There is no downturn price that would affect our profitability until it gets to below $40 a barrel,” he said.
Nonetheless, Papp’s skepticism was a wake-up call in Houston for an industry that was basking in its own considerable achievements.
But the convinced “Permaniacs” remained optimistic. Ortwein, who suggests the Permian could eventually be producing five million barrels of oil per day, half the total output of Saudi Arabia, said: “Permania is not a fad, it is permanent.”


Dubai property developers put bond plans on hold

Updated 45 min 33 sec ago
0

Dubai property developers put bond plans on hold

  • Dubai property prices have fallen since a mid-2014 peak, hurt by a period of weak oil prices and muted sales
  • Residential prices fell 6 to 10 percent in 2018 and are expected to drop 5 to 10 percent more this year

DUBAI: Dubai’s Emaar Properties and state-owned developer Nakheel have put on hold plans to issue US dollar-denominated bonds, Emaar and sources familiar with the bond issues said, amid a real estate downturn and volatility in emerging markets.
Emaar told Reuters that it had put on hold a planned bond issue, blaming rising interest rates but did not elaborate. Nakheel declined to comment.
Three financial sources said the firms had planned dollar-denominated sukuk, or Islamic bonds, and would have had to pay a yield premium to attract enough investors due to concerns about Dubai’s property price slide and emerging market volatility.
Dubai property prices have fallen since a mid-2014 peak, hurt by a period of weak oil prices and muted sales, although the slide has not come close to the more than 50 percent plunge seen in 2009-2010, which pushed Dubai close to a debt default.
Residential prices fell 6 to 10 percent in 2018 and are expected to drop 5 to 10 percent more this year, according to Savills. The drop has hurt developer earnings.
Emaar, developer of Burj Khalifa, the world’s tallest building, reported a 29 percent fall in the third quarter last year, while Dubai’s second-largest listed developer DAMAC reported a 68 percent drop.
The financial sources said Emaar and Nakheel hired banks a few months ago to issue Islamic bonds but shelved the plans.
An Emaar spokesperson said its decision to put its plan on hold was not linked to the property market performance.
“The bond was considered more than a year ago and was put on hold due to increasing interest rates. The decision was not based on market conditions,” the spokesperson said.
Dubai government owns a minority stake in Emaar.
Nakheel, developer of palm shaped islands off Dubai, was one of the worst hit by Dubai’s 2009-2010 real estate crash, forcing it into a massive debt restructuring. It has not issued public debt since it nearly defaulted in 2009.
The market downturn has put pressure on property companies’ existing bonds, which investors use as a parameter to establish the price of new debt sales from borrowers in the same sector.
In secondary debt markets, yields of bonds issued by Dubai developers have risen significantly over the past few months, underperforming corporate debt from other sectors.
DAMAC’s $500 million sukuk due in 2022 and $400 million Islamic paper due in 2023 saw their yields spike by over 200 bps and 150 bps, respectively, since early November.
BofA Merrill Lynch last week forecasted weaker booked sales and gross margin for DAMAC, saying it was likely to be pressured by the property market and upcoming debt and land payments.
DAMAC did not immediately respond to a request for comment.
Yields on a $600 million sukuk issued by private developer Meraas, due in 2022, have jumped by around 120 basis points in the same period. Meraas declined to comment on the move.