Oil recoil - J Curve, page-26

I personally think the Saudis are fighting a losing battle if their main goal is to protect market share. Yes they may drive current shale oil producers out of the market BUT IMO the likes of COP et al will just come along and pick up these abandoned fields and start producing themselves. I know this is counter to COPs guidance re reduced Capex Budget, but when assets are up for sale at distressed prices the temptation is too great to ignore.

The question then is...at what price does shale oil break even? Well that depends on economies of scale from company to company. In COPs case their BE price across their shale oil portfolio would be less than say a one field producer.

Then one might presume that if there is consolidation within the shale oil arena, there will continue to be over supply in the oil market, unless OPEC realizes its folly and cuts production to protect revenues instead of market share. And I think one would be correct in that assumption.

Will this mean an increase in US oil production if there is consolidation in the shale oil arena? Not IMO. IMO its all swings and round-a-bouts. If the likes of COP were to consolidate the fragmented shale oil arena, then IMO they will divert CAPEX from say DW exploration and improving oil recovery on declining fields. So I think it will balance out.

There is another argument that everyone seems to be ignoring with respect to shale oil. and that is the environmental effect! I can see in the not too distant future a swath of class actions being filed against operators in shale oil. The environmental effects are incredible and cannot be ignored for much longer IMO.

Back to the question...I think in the short term we will have to live with shale oil supply and even continued over supply from OPEC. In the medium to longer term I would have a FARken clue