Saudi Arabia May Go Bust Trying To Beat America's Frackers

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Recently Michael Filloon, Lead Energy Analyst for Splitrock Private Trading and, wrote a column for SAB explaining why American oil production has remained resilient in the face of falling oil prices. He provided far more detail than anyone outside of the oil or investment industries is probably comfortable with, but if we can boil his argument down to a simple phrase it is this: Lower prices are making American oil producers better at getting shale oil.

Or, put another way, competition breed competence.

Saudi Arabia bet against that when they decided to keep oil production high as a way to create as supply glut, and lower prices, to hurt their competitors here in America. So far, it’s not working out so well for them:

If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years. “It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run,” said the Saudi central bank in its latest stability report.

“The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience,” it said.

One Saudi expert was blunter. “The policy hasn’t worked and it will never work,” he said.

The reason? As I said, competition breeds competence:

The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year – and not only by switching tactically to high-yielding wells.

Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. “We’ve driven down drilling costs by 50pc, and we can see another 30pc ahead,” said John Hess, head of the Hess Corporation.

Here in North Dakota, even as rig counts have fallen, oil production has remained remarkably stable. Nationally rig counts have fallen too, but oil production has actually risen:

The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. “The freight train of North American tight oil has kept on coming,” said Rex Tillerson, head of Exxon Mobil.

The problem is that these American oil producers, who have done so much to innovate in an adverse oil market, are still trapped in the domestic oil market entirely in the thrall of domestic refiners. These companies cannot export their oil, thanks to the Nixon-era oil export ban.

Were that ban to be lifted, and if we could cut through some of the political red tape surrounding the build-out of needed infrastructure like pipelines, Saudi Arabia’s efforts to manipulate the markets would be even more fruitless than they already are.

But you almost get the idea that some here in America would rather Saudi Arabia and OPEC remain king of oil on the international markets.