America to drill on as shale boom dims Opec's market power

Houston

NO matter what Opec countries decide on Thursday about cutting oil output, US producers already know what they're going to do: drill on.

As Saudi Arabia and its 11 fellow members of the Organisation of Petroleum Exporting Countries meet for what's viewed as the cartel's most important conclave since 2008's worldwide financial crisis, the US has the most to gain and the least to lose.

For the oil industry, a significant production cut by Opec would lift prices and profits across the board and help finance further US energy innovation. And while a weaker response - or no move - would put more pressure on energy companies, the industry is increasingly insulated by burgeoning North American output.

"The US oil industry is going to continue on its growth track whether Opec comes out with a cutback or not," said Daniel Yergin, vice-chairman of Englewood, Colorado-based consultant IHS Inc and Pulitzer Prize-winning author of The Quest. "As oil prices go down, the US industry is going up the learning curve and is better capable of coping with lower prices than it would have been two or three years ago."

The swagger of US producers in the face of plunging oil prices shows the confidence they've gained from upending Opec's six decades of market dominance with technology that wrings oil from dense rock for prices as low as US$40 a barrel. The shale boom has placed the US oil industry in its strongest position since Opec began flexing its pricing power in the early 1970s.

Investors are taking note, pouring money back into shale producers in the past 10 days after shares fell an average 20 per cent since July.

Beyond the ability of producers to remain profitable at lower prices, the broader US economy is even less susceptible to whatever course Opec might take. A shift away from industries like steelmaking and into services such as healthcare has helped make the economy less reliant than ever on oil and natural gas, according to US government data compiled since 1950.

Since the 1973 Arab oil embargo, the first major shock brought about by Opec coordination, the amount of oil and gas consumed in the US to generate US$1 of gross domestic product has fallen 64 per cent.

The US in August imported an average of about 4.8 million barrels a day of crude and petroleum products, a 24 per cent decline from 1986, the year Saudi Arabia's market machinations sent prices below US$10 a barrel in a crushing blow to US producers.

As the services economy grew, oil demand has fallen, with the US burning 13 per cent less oil in 2013 than in 2005.

Improvements in fuel consumption mean cars and trucks can travel further on each gallon of petrol. The nation is 26 percentage points more efficient in terms of the energy required to generate economic growth than the global average, according to the US Energy Information Administration.

Since the dawn of the shale oil era in 2010, booming domestic production has insulated US prices from global shocks as growth helped assuage fears of supply disruptions in the Middle East and North Africa. When Libya's civil war intensified in early 2011, Brent crude, the global benchmark, surged 25 per cent while the West Texas Intermediate price rose just 18 per cent, according to data compiled by Bloomberg.

US producers already are responding to lower oil prices by adjusting their spending to focus on cheaper wells with higher production.

As a result, the billions of dollars in projected spending cuts next year won't significantly curtail US output, which is expected to hold at current levels even if prices drop to US$70 a barrel, according to data compiled by Bloomberg. US oil fell to US$74.09 a barrel on Tuesday ahead of the Opec meeting.

"The industry is very resilient, as strong as ever in recent history," Tony Sanchez, chief executive of Texas producer Sanchez Energy Corp, said. "The technological advances we've made underpin virtually everything right now."

It's a different story for the 12 Opec nations, which are at loggerheads over whether to cut production to halt the worst crude-market slump of this decade when they meet in Vienna. A modest cut that reins in current production by about 500,000 barrels a day is the most likely outcome, although no action is also possible, according to analysis in the past week by Goldman Sachs Group Inc, Morgan Stanley and Wolfe Research LLC.

"Opec's problem this time is it's dealing with something which is outside of its control - this growth in US and Canadian oil production," Mr Yergin said.

No action from Opec would probably pressure oil prices to as low as US$60 a barrel, Paul Sankey, an analyst at Wolfe, said in a Nov 24 note to clients.

That would prove disastrous for countries such as Equatorial Guinea, Chad, Venezuela, Angola and Iran that are dependent on oil revenues to survive, said Mark Schaltuper, head of the Americas research team at Fitch Inc's Business Monitor International.

To offset the impact of the US shale boom, Opec's leading producer, Saudi Arabia, "would have to take a very substantial cut in supply, which it appears they are not willing to do", Charles Doran, a professor at Johns Hopkins University's School of Advanced International Studies, said. BLOOMBERG