The latest energy gathering in Doha is proving once again why the Bakken is a world class shale play. Only this time the “world class” description is showing its global impact from overseas. And according to energy expert Dr. Loren C. Scott, president of Loren C. Scott & Associates, Inc., believes this past weekend will have a negative impact on the shale plays in America.
“It’s not going to be good for the shale plays for sure,” Scott said. “They are very sensitive to changes in the price of oil and their breakeven point. Depending on where they are is a lot lower than where the price is right now.”
Scott, an economic and energy consultant whose clients include such large national firms as BP, Capital One Financial, Entergy, ExxonMobil, J.P. Morgan Chase, Nucor, Sasol, Chesapeake Energy, and a diversity of others, saw positive signs and momentum heading into the energy meeting.
“I think in anticipation of this meeting, we saw the price of oil drifting up in a nice way if you are in the oil and gas industry,” Scott said. “The fact that they did not come to an agreement has had a downward impact on the price of oil.”
Scott continued to explain how and why the finger pointing started during Doha.
“It looks as if this political difference and this agitation between the Saudis and the Iranians that keeps throwing a monkey wrench in any sort of an agreement right now,” Scott said. “The Iranians want to increase their output to at least the presanctioned level, which is not an easy thing to do. And the Saudis want to freeze things to where they are now. ”
Scott reiterated that without some resolution to that disagreement, there is going to be a problems in the Bakken and other American shale plays. A resolution where getting on the same page may take some time, education and cooperation.
“A lot of people who didn’t know much about Iran thought that once the sanctions were lifted – boom – they could start increasing their output,” Scott said. “There are a lot of things that are a problem for the Saudis in terms of increasing their output.”
One is aging and inferior infrastructure, according to Scott. Another issue is their lack of education, experience and general shale play skills creating a sticky situation of uncertainty.
“There skills are not at the level it needs to be,” Scott said. “They have to get international oil companies to come in and explore and get things going again. A lot of companies are very reluctant under the terms of some of these Iranian contracts.”
Scott maintains the Iranians want to increase and the Saudis want to freeze things where they are. This style of finger pointing creates fear in some and doubt in others, all in the name of market preservation.
“They are afraid if they freeze their output, where it is and the Iranians simply continue to increase theirs, it will be at the expense of the Saudi market share,” Scott said. “Everyone’s just kinda protecting market share right now.”
The international chess game may be protecting some, but back in the Bakken it is already taking its toil.
“What happened over the weekend is also going to have a negative impact on the shale plays in another way,” Scott said. “People that work in the shale plays typically borrow money in order to to their drilling. They are not operating off their own income.”
Scott, who also is a Professor Emeritus of Economics at Louisiana State University, explains why unsatisfactory meetings across the ocean impact our U.S. shale plays.
“The more uncertain the price of oil remains, and the more they have meetings that turn out to be unproductive, the more reluctant the lenders are going to be to give money to the shale people to go back out,” Scott said. “I think many of them have to be concerned at this point.”
Concerned over a period of time that has proved oil can drop below $30 a barrel as fast as it rises to $100. This rate of volatility causes major concern in lending according to Scott.
“There are so many unpredictable things that impact the price of oil that when it comes to lending, you want something more consistent than that,” Scott said. “The fact the Saudis were unable to pull it off this weekend adds another layer of uncertainty and makes it harder to borrow money. That’s especially tough on the shale play operators.”
When asked whether a new round of $100 oil will fix all the shale play oil woes, Scott sees continued hesitation and reluctance, at least for a while.
“Hundred-dollar-oil would fix a lot, but the problem with lenders is they would have to see $100 oil for a while,” Scott said. “One movement to $100 oil is not going to satisfy them. They are going to have to see it at $100 oil and stay there for a while before they are going to start emptying their pockets again.”
Scott added the uncertainty of oil prices are such an important element in the energy equation, it truly becomes a constant dicey part of the industry.
“I taught forecasting for 30 year to MBAs and executive MBAs, and I told them oil prices where the second toughest thing in the economy to forecast,” Scott said. “That’s because two-thirds of the oil reserves in the world are under the lands of countries where the government is running the oil operations. And you never know what those countries are going to do.”
Scott argue the whole price drop from $100 down to $26 was due to the Saudis deciding they wanted to turn the oil taps on. This added a surplus of oil in the market, bringing the price down and halting operations in American shale plays.
“They are trying to stop what is going on in the shale plays in the United States. If you think about this for a minute, between 2008 and 2015, U.S. oil production increase 85%. There isn’t another country in the world who came close to that,” Scott said. “What happened as a result, there was a big increase in our own production and our imports of oil dropped from 56% to 34%. So we were not importing nearly as much oil as we used to.”
For the Unites States to get back to those production numbers it would have increased their rig total. Scott points out the shale plays biggest Achilles heel – a quick decline curve.
“The only way you can produce more and more oil in the United States, from the shale side, is to continue to be drilling,” Scott said. “The decline curves are so darn steep you have to keep drilling to replace the decline curves because it turns out the rig count is down about 80%. It is not going up, it is going down. As a result you are seeing a decline in oil production and I believe that is what the Saudis wanted to achieve.”
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