GEOPOLITICS OF TODAY’S ENERGY LANDSCAPE
March 6, 2016 § 5 Comments
Meghan O’Sullivan delivered a fireside chat at the Sanford School at Duke on roughly this topic on March 3, 2016. She is on the faculty at the Kennedy School of Government at Harvard and is a former adviser to President George W Bush. Here I will report on some of her remarks but also put my personal spin and make a solid effort to distinguish between those. I have selected a few of her topics only, so this is not a comprehensive report by any means.
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Dr. O’Sullivan believes that a significant US interest/presence in the Middle East is warranted despite the increasing self-sufficiency in oil. As we have discussed in these pages for a couple of years, this country will have all its oil sourced from North America (US, Canada, Mexico) by 2025, or even by 2020. We had been on a trajectory of adding a million barrels per day (bpd) each year since 2011. At that pace 2020 was realistic. Well, we are no longer on that pace, not for the last year. Mid last year we were at a record high and have since reportedly dropped by about 0.5 MM bpd, possibly a bit more recently. Two takeaways. One is that the upward trajectory is gone for now. The other is that it could resume in weeks after prices are acceptable. The first to go on stream will be the 5000 plus “fracklog” wells. Acceptability will depend on the operator’s breakeven cost per barrel. In pretty short order the weak will perish and the strong will buy their assets (independents and private equity only; I still don’t think this a play for the majors).
Sustained prices below $30 per barrel could deal a mortal blow to shale oil; unlikely but not impossible. Absent that the North America self-sufficiency scenario will play out. In that situation why would the US need the same armed forces footprint in the Middle East? Certainly we would no longer need the current naval presence designed to protect traffic in the Strait of Hormuz. O’Sullivan agreed with that premise and expected we would share the load with others, possibly even China. She noted the cooperation of others in dealing with piracy. Speaking of China, she opined that our shale related energy strength has engendered a new found respect for the US. She felt this improved our chances for cooperation, especially in the Middle East, where China cedes to us a better understanding of the locale.
One other point. Shale gas will not be wounded, much less mortally. Gas is a regional commodity. LNG globalizes it some but adds $4-6 per MM BTU, making the landed price anywhere in the world more than double the price in the US. This sustained low cost position of the US has caused over $160 billion of investments in US chemicals, more than half of that from foreign sources. These investments commenced in 2011. Expect demand to rise within three years when the plants are fully functional. This will firm up prices sufficiently to reinvigorate a currently moribund shale gas production scenario.
Dr. O’Sullivan was asked about the curious bi-lateral Doha agreement between Saudi Arabia and Russia on holding production to January levels. She noted that January was a high water point for both and suggested this was an effort by the Saudis to isolate Iran. Iran’s production from the sanction month of January was low. So this agreement could be a tactic by the Saudis to make Iran the problem for continued low prices. Saudi intransigence on production (instead of cutting to prop up price, increasing production to drive out higher cost competition) is widely viewed as the cause of the price crash. Fingering mortal foe Iran would help. However, any attempt to prop up price is bound to embolden US shale interests. That part of the industry is in an “innovate or perish” mode. Cost per barrel is dropping steadily, at first by service company cost reductions and efficiency improvements. The real gains will be in improving net recoveries, currently at an anemic 5% of the oil in place. This will happen, the question is timing with respect to survival.
There was some discussion of the effect of consistently low oil prices on the health of the economy and on citizens. Dr. O’Sullivan’s view that the positive effect on the US has been less than expected, is shared by other experts. The principal cause is believed to be that the public is saving rather than spending the bounty. One net importer appears to have managed the situation very well and that is India. Modi’s government has cut subsidies and raised taxes on fuels in step with the oil price drop. What the treasury does with the windfall will determine the true impact of the low oil prices.