Speaking at the IHS CERAWeek conference, Abdalla El-Badri, secretary-general of OPEC dashed hopes of a deal to address the world oil glut. Taking claims about the increased efficiency of US fracking at face value, El-Badri claimed that any OPEC cut in production would immediately be taken up by US Shale. This suggests that last week’s tentative attempt to freeze output may be the end of the line rather than the start of a move to cut output and increase prices.
Much of this may be smoke and mirrors. With neither Iran nor Iraq prepared to freeze production, the Saudis will not want to risk losing market share. So it suits them to claim that they have effectively lost their position as the global swing producer. But the efficiency claims of US fracking are overstated too. As has happened in the North Sea, a large part of the “efficiencies” is actually a statistical outcome of the least productive operations being shut down, leading to a lowering of the “cost-per-barrel” for the region.
John Hess, chief executive of Hess, one of the leading US Shale producers has questioned El-Badri’s claims, pointing out that restarting US shale drilling would be a time consuming and capital intensive operation. This poses difficulties at a time when major banks are setting aside billions of dollars to cover the anticipated round of bankruptcies in the industry. Investors are unlikely to rush straight in unless high oil prices can be sustained.
Although an oil price of $60 per barrel would reopen some of the US shale plays, Hess doesn’t believe this would be sufficient to take up the slack from an OPEC production cut. Although, of course, he has a vested interest in stating this case, since without an OPEC cut in production most of the US fracking industry is toast.