We've defeated shale revolution, says Opec

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Marcus Leroux

Jan. 19: Opec was on the verge of claiming victory over its North American rivals last night after its strategy of squeezing out the shale industry by flooding the markets with oil appeared to be vindicated.

The oil producers' cartel said that falling prices would force lower production from its rivals by the end of this year, with American and Canadian producers particularly affected.

Opec, led by Saudi Arabia, has maintained production levels even as crude prices have collapsed 70 per cent from their level in 2014.

In its first monthly report of the year, Opec said that its policy was starting to have an effect and it highlighted the North Sea as a "particularly vulnerable" basin.

Analysts said that Saudi Arabia and its allies in the Opec bloc were taking aim at American frackers, who in a few years had transformed the US into the world's biggest oil and gas producer.

The lifting of sanctions against Iran also has strengthened Saudi Arabia's resolve as it is unwilling to leave a gap in the market for Tehran to fill.

"The analysis indicates that 2016 will be a supply-driven market. It will also be the year when the rebalancing process starts," Opec said in its report.

"After seven straight years of phenomenal non-Opec supply growth... 2016 is set to see output decline as the effects of deep [capital expenditure] cuts start to feed through."

The decline will be cushioned by new projects commissioned when oil was selling for more than $100 a barrel, but the level of investment that was abandoned or deferred when oil prices began sliding in 2014 will translate to a decline in production of 660,000 barrels of oil a day - the equivalent of two thirds of Britain's production.

That figure is 69 per cent greater than Opec's previous production estimate.

Most of the new production cuts have come from the US. A study by Wood Mackenzie calculated that 68 "megaprojects", representing an investment of $380 billion, had been deferred or abandoned. By 2025 that will equate to 2.9 million barrels of oil a day - 3 per cent of present energy demand. Producers of US shale oil proved far more resilient than Opec expected.

The number of oil-rigs operating onshore in the US has fallen by about two thirds from its peak in 2014, but production remained relatively stable because they were becoming more efficient.

However, production from wells in shale formations typically drop off by up to two thirds in their second year. With new investment in the US shale oil industry having fallen sharply, there are unlikely to be enough new wells being drilled to compensate for the drop-off of existing reservoirs.

Set against that is the looming increase in production from within Opec.

The Times, London