Removal of US crude export ban to secure new investments for shale

Dubai: United States shale oil is likely to find new appetite from investors now that the government is set to lift a four-decade ban on oil exports.

Shale producers have increasingly come under pressure this year as low oil prices turned their once highly profitable but capital intensive operations into loss-making ventures. The number of operational rigs in the US have fallen and interest in investment in the shale oil industry, which has a higher operational cost than traditional oil drilling operations, dropped.

But on December 16, congressional leaders in the US agreed to lift the ban, which dates back to the 1970s, in a step that will to give the industry opportunities for new, long-term investment.

“Lifting the ban removes a significant threat to shale oil company investment down the road, by allowing production companies to sell their crude at competitive prices,” Bob McNally, a former energy adviser to the George W. Bush administration, told Gulf News.

Shwan Zulal, an associate fellow at Kings College in London and director of Carduchi Consulting, told Gulf News it is “great news” for shale producers.

“This will give them ... [the] selling point to raise capital.”

Viability

US shale boomed over the past seven and half years, largely in the Midwest state of North Dakota, until oil prices fell to below $60 (Dh220) a barrel in January this year from a high of $115 a barrel in June 2014.

The oil price crash raised questions over the viability of US shale, which helped the US to become the world’s third largest producer after Russia and Saudi Arabia.

In January 2015, North Dakota Congressman Kevin Cramer, who favours lifting the ban, told Gulf News the longer oil stayed low, the more likely the ban will be lifted.

“We are not going to be the price taker anymore, we’re going to be the price maker,” he said at the time.

Lifting the prohibition on exports “will stop a big differential opening up between US and international prices,” Robin Mills, head of research at Manaar Energy in Dubai, told Gulf News.

“Longer term it will help support US shale production if global prices recover somewhat.”

US crude West Texas Intermediate and global benchmark Brent crude are trading at near parity and on Friday US crude traded at $34.55 a barrel on Friday, while Brent traded at $36.88 a barrel.

Saudi strategy

On December 15, the International Monetary Fund Middle East Director Massood Ahmad said the fund sees oil slowly climbing over the next five years to $60 a barrel in 2020.

Lifting the ban is not going to have a “big impact” on prices, Mills said, and so will mean little for Saudi Arabia’s strategy of pursuing market share over high prices. Asian markets, buyers of Middle East oil, are also unlikely to start buying US crude given the near parity with Brent and high transport costs to ship from the US.

For the shale producers, buyers are most likely to be “European, Caribbean and South American; simple refiners optimised to run light crude,” McNally said.

Exports to Mexico and Canada, which were permitted under the ban, are also likely to increase by some degree.