The shale/price balancing act
DOMESTIC PRODUCTION REPRESENTS THE MARGINAL BARREL
OF PRODUCTION FOR THE FORESEEABLE FUTURE
DEBORAH BYERS AND VANCE SCOTT, EY, HOUSTON
WILL US SHALE production serve as a natural cap on crude
prices for the foreseeable future? We believe it will — and the
resulting compressed price cycles will require oil and gas
companies to make significant changes in strategy in order
to compete effectively.
There is no question shale plays — through the ongoing
application of technology innovations and cost improvements
— have disrupted the traditional supply curve. The industry
has always been cyclical in nature, but those cycles have
typically been long ones, usually featuring multiple years of
higher-than-normal prices followed by sharp drops and long
recoveries. For example, after the price of oil crashed in 1985,
it stayed relatively low for more than 15 years before beginning
its upward trajectory.
Shale changes the game. Because of its abundance, the
number of economically rational operators involved, its short
development cycle and its ability to deliver returns quickly,
US shale will likely represent the marginal barrel of production,
at least in the medium term.
To be certain, there will still be other resource plays with
the ability to impact both global supply and pricing. Like
OPEC, for example, deciding to pull back production in an
effort to push prices upward. And geopolitical disruptions
are always a possibility in an industry that operates in many
challenging locations.
Today, many shale operators are completely capable of
drilling profitably when the price of oil is relatively low. And
— for now — there is enough capacity in the marketplace, in
terms of labor, equipment and associated supplies, to ramp
up production quickly if prices warrant it. This capacity is
also greatly enhanced by the significant efficiency gains in
the drilling and completion process that is much more akin
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