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Don't Bet Against American Shale

Don't Bet Against American Shale

Despite consuming more oil and gas than any other country in the world, the United States is on pace to become a net energy exporter before 2025.

Finally, structural improvements to the shale industry are translating to stronger balance sheets—especially as oil prices hover between $60/bbl and $70/bbl—but questions remain about financial discipline. As oil prices rise, corporations face a tough choice: continue to invest in production or redirect cash to investors. The heavy upfront costs of shale projects and the quick drop in output mentioned before makes this decision even more difficult. In other words, the race to build more wells to maintain production and income is still one today. Routing free cash flow to compensate shareholders, pay down debt, increase dividends, or initiate share buybacks rather than continuing to drill requires a level of financial restraint not yet seen in the industry.

But in the near term, shale’s outlook remains strong. While energy consulting firm Wood Mackenzie does not foresee the shale sector becoming cash-flow positive before 2020, industry experts believe that $60/bbl oil is sufficient to sustain tight oil growth indefinitely. This is generally believed to be true, even accounting for increasing service costs. This means that despite facing declining production from resource exhaustion and aging wells, the industry’s technological upside should be sufficient to keep production growing. Furthermore, the EIA estimates that even at prices of $30/barrel, about fifty percent of the technically recoverable resources found in major deposits remain economically viable. The shale sector is a smarter, more agile, and more resilient version of its former self. Barring a catastrophic price crash, it will remain a critical pillar of U.S. energy for years to come and an unhappy omen of OPEC’s future.

James Clad is the Senior Fellow for Asia at the American Foreign Policy Council and former U.S. Deputy Assistant Secretary of Defense for Asia-Pacific Security Affairs.

James Grant is a Junior Fellow with the American Foreign Policy Council where he specializes in Geopolitics, Energy Security, and Economics.

Image: Reuters