OPEC is hoping Shale Oil loses steam and goes on the wane.
What is Shale?
The introduction of massive shale oil created a cataclysmic effect in the global oil economy as supply outweighed demand tremendously. Ironically, in the not-too-distant past, several observers expected an international shortage of crude. This shortage failed to fall out partly attributable to the imperious rise and growing production of oil within the USA.
How is Shale oil produced? Shale is uniquely produced as it exploits technological advances in drilling. The process involves horizontal drilling and the hydraulic fracturing of underground rock formations containing crude oil that are trapped within rocks. The popular term this is called is fracking. It is so expensive and requires lots of CAPEX (capital expenditure). The production of shale relies on the drilling rigs (which is reported every Friday by Baker Hughes data) and technical labor, which is one of the reasons why America has the capabilities to carry on this production.
U.S. shale oil production has grown from about 0.4 million barrels a day in 2007 to more than 12 million barrels a day as of 2019. Notably, these figures were at 4 million barrels per day in 2014. The growth has been exponential, and this called for dramatic policy changes within the OPEC network. The U.S. has usurped Saudi Arabia as the country with the most oil produced daily. This oversupply in the market led to the crash in oil prices from 2014-2016. Ever since then, OPEC has gone through several cuts to pursue equilibrium between supply and demand. These cuts have been largely inconvenient for members of OPEC+. Caroline Bain, the chief commodities economist at Capital Economics, said in a note that “Russia has made no secret of the fact that it is concerned about the growth of the U.S. shale industry and of its view that repeated output cuts by OPEC were effectively handing market share to U.S. producers,”
For the last couple of years, Nigeria and other OPEC members have been making cuts to balance the oil economy which has had adverse effects on Nigeria’s oil production. A couple of years ago, Nigeria had a crisis in Niger Delta where pipelines were being vandalized and resulted in low production of oil from our facilities. After the country recovered from that period of militancy, it has not been able to achieve its capacity as the West African nation has been subject to several cuts as a duty to help it’s OPEC partners balance the market. This situation has led to serious loss as Nigeria’s revenue depends significantly on oil. Nigeria has been painted as a “laggard” when it comes to cuts.
The reason behind their poor compliance could be attributed to technical difficulties in shutting off wells or deliberate attempts to cheat quotas and make more revenue. A quick look at the numbers. Nigeria’s 2020 budget is benchmarked to an oil price of $57 per barrel, but the decline in the price of oil has forced the government to revise to $25 per barrel with compulsory cuts to the OPEC Pact.
Hopefully, OPEC is hoping Shale Oil loses steam and goes on the wane. The only factors that can end Shale are lack of funding from banks and investors and climate change activism. Nigeria sincerely needs Shale to end as diversification of the economy still seems far off.