U.S. shale oil investment surges more than 50% in 2017, IEA says
Costs for U.S. shale also seen as rising this year
After two years of significant declines in upstream oil investments, the sector is finally facing a rebound in 2017 and it all comes down to one thing: a sharp jump in money flowing into U.S. shale oil projects.
The International Energy Agency, in a report out on Tuesday, predicts a 53% upswing in shale investments this year, even as oil prices are struggling to make a sustainable push above $50 a barrel.
“The largest planned increase in upstream spending in 2017 in percentage terms is in the United States, in particular in shale assets that have benefited from a reduction in breakeven prices as a result of a combination of improvement in costs and efficiency gains,” the IEA said.
The big rise in U.S. activities is expected to give global upstream — or exploration and production — investments a 6% bump in 2017, following a 44% plunge between 2014 and 2016. Russia and the Middle East are also seen ramping up spending on upstream projects, albeit at a slower pace, as the chart below shows.
Investment in the oil industry started to significantly decline two years ago, when oil prices plunged from above $100 a barrel as a global supply glut destabilized the market. That immediately slowed U.S. shale production, as their oil at the time was more expensive to extract than in many OPEC countries, for example.
But as prices stayed persistently lower, the shale industry adapted and has been able to increase production. U.S. producers have also benefited from the OPEC-led production cuts that have left room and incentivized other producers to take market share. The U.S. Energy Information Administration in May lifted its 2017 U.S. output forecast to an average of 9.31 million barrels per day and again in June raised its 2018 production forecast.
The latest Baker Hughes rig count also showed that the number of active U.S. rigs drilling for oil rose by seven to 763 last week.
“U.S. shale industry operates in a highly dynamic and competitive environment with a very flexible and well-developed service sector, which tends to adapt to market conditions very quickly,” the IEA said in its report.
“There are already signs that the sector is experiencing some renewed cost inflation — a trend that might accelerate in the second half of 2017 — should oil prices remain at current levels (around $50 per barrel) or rise. We estimate that average costs for U.S. shale activities will increase on average by 16% in 2017,” they added.
More broadly, and not just looking at upstream spending, total energy investments worldwide fell 12% in 2016 to around $1.7 trillion, the IEA said. While that has not yet raised near-term concerns over energy security, the Paris-based agency said the low activity in oil and gas exploration could lead to potential risks in coming years.
“The recent slowdown in the sanctioning of conventional oil fields to its lowest level in more than 70 years may lead to tighter supply in the near future,” the IEA said in the report.
“Given depletion of existing fields, the pace of investment in conventional fields will need to rise to avoid a supply squeeze, even on optimistic assumptions about technology and the impact of climate policies on oil demand.”