It is perhaps for the first time since June 2014, when oil prices started their descent, that the impact on the production of tight oil and shale gas is being widely acknowledged and reported.

Oil prices have declined by almost 60 per cent since June 2014, and average prices during this August were the lowest in six years. Those of 2015 so far are the lowest since 2005. The latest Brent price is $48.23 (Dh177) a barrel and the corresponding Opec basket price is $43.54.

The little recovery of early September is fizzling out, thereby keeping the direction of prices downward.

The International Energy Agency (IEA) in its September Oil Market Report says: “The lower price environment is forcing the market to behave as it should by shutting in output and coaxing demand.” IEA estimates demand growth this year would be a healthy 1.7 million barrels a day (mbd) but their eyes are surly on the supply.

Here, the IEA is saying “Oil’s latest tumble is expected to cut non-Opec supply in 2016 by nearly 0.5 mbd — the biggest decline in more than two decades.” More importantly, “US light tight oil, the driver of US growth, is forecast to shrink by 0.4 mbd next year” or 80 per cent of the non-Opec expected decline.

Therefore, after a record increase in US production of 1.7 mbd in 2014, low oil prices are starting to bite with a sharp decline in tight oil production already setting in “as oil’s rout extends a slump in drilling and completion rates”.

Conservative forecast

The Opec Secretariat’s forecasts in the September report may differ from those of IEA, but on the direction they are actually in agreement. Opec still sees a comparatively small increase in non-Opec supply — of 0.16 mbd in 2016, a conservative forecast that may be revised later.

But Opec is estimating the growth in tight oil production in the US in 2015 to be only 0.45 mbd as the active drilling rigs are now only 864 units, less than half of what they used to be a year ago. And “there are signs US production has started to respond to reduced investment and activity. Indeed all eyes are on how quickly US production falls”.

In 2016, Opec is forecasting an increase in US tight oil production of 0.22 mbd as compared with 1 mbd on average in each of the last few years.

Because shale well production declines rapidly — 72 per cent within the first year — continuous drilling is needed “to grow or even to sustain production levels” and that investment is no longer easily obtained as “low oil prices reduce frackers’ access to the capital they need”. A $30 billion cash outflow has been reported by shale producers and bankruptcies and restructurings are inevitable.

Edward Morse of Citigroup recently said “There would have to be a shake-up in the US shale oil industry to separate the good companies from the bad” and “Just as it drove the industry to spectacular growth, the financial sector is going to drive the industry to consolidate and contract”.

Further warning

Bloomberg reported that ExxonMobil is looking at acquisitions in the Permian Basin in West Texas, the largest shale oil producing region in the US, and it may award drillers with 30 per cent of the profits after meeting their cost. Whether this is a sign of belief in the future of the industry or an attempt to control it remains to be seen.

While Goldman Sachs is anticipating a $20 a barrel if no supply adjustments are made, it is indeed a further warning to investors in shale oil production as well as to others — including Opec — who have to make decisions on billions of dollars on production.

But let us not be taken in. The shale oil industry may have few more cards to play aimed at improving efficiency of their operations by using multi-pad drilling where many wells can be drilled from almost the same place thereby saving time and money. This technique is said to reduce well drilling time from 35 days to 21.

Substantial cost saving

Another emerging technique is the re-fracking of old wells where new technology enables the producer to reach new production zones at substantial cost saving.

The Western media is no longer reporting the demise of Opec and no one is saying “Goodbye Saudi Arabia”. The IEA report states “On the face of it, the Saudi-led Opec strategy to defend market share regardless of price appears to be having the intended effect of driving out costly ‘inefficient’ production”.

However, let us take care of reforming the economy in the producing countries of our region through diversification and adopting wise taxation and price reforms to reduce the pain of chasing market share.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.