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Low oil prices will test US oil industry revival

Cheaper energy prices will slow but not stop the American oil and gas revolution

Sometime in December if all goes to plan a vessel carrying liquefied gas will leave Louisiana, destination as yet unknown. The test cargo, from a converted plant at Sabine Pass, will mark the start-up of LNG exports from the lower 48 – and confirm the most remarkable turnaround the oil and gas industry has seen in decades.

By now, everyone is familiar with the upheaval seen in US energy in the past decade, but the bare facts are worth stating. Ten years ago, a natural gas supply crunch was imminent, prompting legislation to speed construction of dozens of new LNG import terminals. Domestic oil supply was dwindling and demand had reached a record high. In 2005, Americans were buying almost almost 14m barrels a day (b/d) of foreign oil.

US LNG export plants

The shale bonanza dragged the US out of this position of weakness and now leaves it at the top of world’s energy league tables: not just the world’s biggest consumer of oil and gas but its biggest producer of both too. As LNG exports rise – plans afoot could see volumes reach 64m tonnes a year by 2018 – the US will become a truly global force in seaborne gas markets, rivalling Qatar and Australia. If Congress agrees, producers will also start selling crude oil beyond the continent as early as next year. Shale drilling has hardly made a dent yet outside North America, but North America’s shale-derived energy is about to go global.

In some ways, it already has. Qatar and others spent years – and billions of dollars – building LNG capacity with US customers in mind. But that market has disappeared, loosening supplies for everyone else. The global oil glut has many origins, including slower economic growth in China, but the light tight oil gushing out of American shales has been the dominant supply-side factor, even if not a barrel of it has left North America. US production growth since 2011 has more than compensated for production outages in the Middle East. West Africa’s light oil has been squeezed out of Canada and the US northeast. American oil imports were just 9.5m b/d in May. The fall in Opec’s sales to the US has been spectacular – and a key reason why Saudi Arabia has set off on a strategy to reclaim market share.

The plunge in oil prices is now testing the strength of this American energy renaissance. Rig counts in the US have plummeted. Debt-straitened drillers have reined in spending programmes. Economic growth in 2014 in Texas (5.2%) and North Dakota (6.3%) was well above the national average, but is starting to cool. In Texas, output per mining worker is 4.6 times the state average, meaning drilling job losses will disproportionately affect GDP.

Down and down US imports

But the energy revival is not about to end. In the face of the falling market, industry costs have dropped sharply, bringing down break-even prices. Drillers are getting more oil from each well, honing techniques and lifting productivity. Oilfield services are getting more competitive. The highly price-reactive nature of shale drilling means supply will respond quickly if oil prices rise or stabilise around $65/b.

The rapid growth of oil and gas supply seen in recent years could not continue indefinitely and the sector will be healthier for a pause. But unlike 10 years ago, no longer need anyone worry about scarcity. The slowdown now will leave a wealth of unexploited reserves ready to be tapped, from Texas to North Dakota, the Gulf of Mexico to Alaska. If rival producers think the US energy revival can be stopped, they’re betting against the wrong country.

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