Don’t panic! Oil price outlook improves as US shale faces headwinds in 2018

Workers hired by US oil and gas company Apache Corp. drill a horizontal well in the Wolfcamp Shale in west Texas Permian Basin near the town of Mertzon. The US shale sector may not proveas much of a threat to Gulf oil producers as previously feared according to energy analysts. (Reuters)
Updated 26 December 2017

Don’t panic! Oil price outlook improves as US shale faces headwinds in 2018

LONDON: Arab News has been told that 2018 is unlikely to see a massive ramp-up in US shale production that could potentially wreck attempts by Russia, Saudi Arabia and other producers to stabilize oil prices and shrink surplus inventories.
Speaking from Denver, Colorado, senior Wood Mackenzie energy analyst Ryan Duman said there were “headwinds” for the US shale industry which would hold back production next year, reducing the danger that the oil price would head south again.
Duman said: “US shale operators who don’t have rigs or crews under contract are going to have to pay dearly because the oil services industry is overstretched right now.”
That’s because it pared back considerably during the slump — building it up again is going to take time, he said.
There were plenty of wells, but the big question was how quickly can they come on line.
“One of the things we are looking for in 2018 is the rate of completions, whether they start to catch up to the rate of drilling. And then, how fast can the oil get to market.”
He added: “What we need to see is a massive rehiring to make up for the labor that was let go during the bad times, and operators need more equipment, such as pressure pumping and other assets, in order to push forward with hydraulic fracturing — in other words, the completion stage — which comes after the rigs have dug the wells.”
There were also infrastructure challenges in terms of transporting shale oil to refiners, some of which don’t process that type of crude.
Asked if he thought the US could overtake Saudi Arabia to become the world’s second-largest producer after Russia, Duman thought this was years away, “although I am not saying it won’t happen.”
The way he saw it, the obstacles for US shale currently were the following: Not having ample takeaway capacity — that is, pipelines and other equipment, essential to get crude to market; and a dearth of workers, both skilled and unskilled who were laid off three years ago.
Duman said: “We have seen rigs added back quickly this year, but operators can’t get the crude to customers fast enough — which has implications for costs.”
The outlook for 2019 was a different matter, as long as the oil price stayed between $60 and $65 — because at those prices the shale operators were in the money, he said.
“I think 2018 could be about hiring and rebuilding the sector that has been neglected in recent years. After that, a very strong production year in 2019.
One important factor was that technological improvements and efficiencies would gradually make the shale industry more profitable.
Operators today are able to drill and complete wells much faster than before thanks to developments in predictive analytics or big data — all of which propel optimization.
In the Permian Basin (the region of Texas and New Mexico at the center of the shale revolution), Goldman Sachs estimates that wells have become 50 percent more productive over the past two years.
And shale companies have locked in higher oil prices when they occur by turning to hedging contracts. More and more oil companies are using hedges to give them certainty.
“But the other part of it is the sheer learning curve … shale is still in its infancy if you think about how young the industry is compared with Big Oil,” said Duman.
But will huge quantities of US shale be cascading into the market next year?
Duman doesn’t think so — “We have growth rates almost equivalent for 2017 and 2018 at about 850,000-900,000 bpd.”
His overall analysis was echoed by BP CEO Bob Dudley who told the Financial Times that traditional producers such as Saudi Arabia would continue to exert more influence over crude prices.
Dudley said he was less worried these days about the extent to which US shale resources could hold down prices as more was learned about their geology. 
He told the FT: “There are cracks appearing in the model of the Permian being one single, perfect oilfield.”
He warned of emerging technical challenges, and called into question the ability of shale companies to rival conventional producers over the long term. 
Dudley was outspoken on another matter. While acknowledging that oil faced long-term competition from electric vehicles, he claimed the technology had been “hyped” and that environmental problems surrounding the mining and disposal of materials used in lithium-ion batteries that power electric vehicles had been underestimated.
On the issue of shale, however, the International Energy Agency (IEA) sees things differently to Wood Mackenzie, and — as we’ll see — OPEC as well.
In a report this month, IEA said the recovery in oil prices this year to about $63 per barrel had spurred growth in US tight oil output (which includes crude, condensates and natural gas liquids, which the IEA said would cause global supplies to exceed demand in the first half of 2018.
It added US oil output until 2025 will be the strongest seen by any country in the history of crude markets, making it the “undisputed” leader among global producers. “Technological advances that have enabled production from US shale oilfields to thrive will lead to growth of 8 million barrels a day between 2010 and 2025, surpassing expansion rates enjoyed by any other nation,” said IEA executive director, Fatih Birol.
In an interview with Bloomberg, Birol said the US would become the undisputed global oil and gas leader for decades to come and is expected to account for 80 percent of the increase in global supply over the same period.
US tight oil production will rise to 13 million bpd by 2025, out of total US output of 16.9 million bpd.
“The growth in production is unprecedented, exceeding all historical records, even Saudi Arabia after production from the mega Ghawar field or Soviet gas production from the super Siberian fields,” Birol said.
Moreover, if oil did settle at $60, we should expect a ramp up in US production which would stop inventories coming down, according to Birol. OPEC’s views are different still. At a recent forum in London, secretary general Mohammed Barkindo said the global oil market was tightening at an “accelerating pace,” and he cited a sharp reduction in worldwide inventories as evidence that last year’s agreement by producers to cut supply was having an effect.
He added: “OPEC stocks in September were about 160 million barrels above the five-year average, down from 340 million in January. There has been a massive drainage of oil tanks across all regions, a balanced oil market was fully in sight,” said Barkindo.
OPEC and other producers want to get stocks down to the five year average in order to remove the glut built up when the price was above $100.
Perhaps, the only thing one can say with any degree of certainty about the oil industry is that there is widespread disagreement about almost everything.
It was always thus.


EU seeks battery autonomy, but first it needs graphite

Updated 5 min 15 sec ago

EU seeks battery autonomy, but first it needs graphite

  • The key component in electric vehicles is currently mostly produced in Asia

VÉNISSIEUX: As Europe looks to declare its tech independence by becoming a leader in next-generation batteries, it will have to start by making its own graphite. The problem is, nearly all of it now comes from Asia, mainly China.

So France’s Carbone Savoie and Germany’s SGL Carbon, the only European firms deemed capable of taking up the challenge, have been corralled into an ambitious battery alliance launched by Brussels.

“Thank you for bringing us on board this ‘Airbus for batteries,’ though to be honest, we weren’t even on the passenger list,” Carbone Savoie’s chairman Bruno Gastinne told France’s deputy finance minister Agnes Pannier-Runacher on Thursday.

They were attending the ribbon-cutting for a new, more efficient carbon baking oven, a “brick cathedral” some five meters underground at its site in Venissieux, just south of Lyon in southeast France.

The €11 million ($11.9 million) investment will allow the company to double its carbon production, the first step for making the synthetic graphite prized for batteries.

The carbon is then shipped to its factory at Notre-Dame de Briancon in the Alps, where hydroelectric dams provide the intense electrical currents needed to turn it into graphite.

Carbone Savoie says it has developed a new production technology that uses just half the energy required currently, and cuts waste levels in half. “It will be less expensive and more efficient than Chinese graphite, while consuming less energy. The hard part is that we have to move quickly,” said Regis Paulus, the firm’s head of research and development. “To catch up with the Chinese, we have to invest massively,” he said.

EU authorities in November unlocked a whopping €3.2 billion for the European Battery Alliance, hoping to attract an additional €5 billion in private money to build the factories needed to meet homegrown demand.

Automakers are racing to shift to electric fleets, under growing pressure to cut carbon emissions and the reliance on fossil fuels. Batteries make up about 40 percent of the value of an electric car, but are currently made by companies in South Korea, China and Japan.

A single electric model from Tesla, for example, requires around 70 kilogrammes (150 pounds) of graphite, Carbone Savoie’s CEO Sebastian Gauthier said. While the material can be mined, battery producers usually prefer the more expensive synthetic versions that offer improved technical performance. It is the only key component of lithium-ion batteries that can be produced in a factory — nickel, lithium, manganese and cobalt must be mined.

But without government help, few of Europe’s industrial giants were willing to embark on the costly crusade to build their own batteries.

The push has been a boon for Carbone Savoie. Even so, the company still does not produce anywhere near enough graphite required to fulfil Europe’s electric car dreams, or its own goal of becoming “the European leader in battery graphite” by 2025.

That would require a good chunk of the funds promised by Brussels, which have been pledged by Germany, France, Italy, Poland, Belgium, Sweden and Finland.