TPT July 2016

G LOBA L MARKE T P L AC E

the inadequate growth of upstream oil production capacity, in their view the dominant factor behind the sustained upward price push in the sector. The Price of Oil asserts that the international spread of two revolutions will assure much ampler oil supplies, delivering prices far below the highs that prevailed between the end of 2010 and mid-2014. Here, abridged and lightly edited, is the authors’ analysis of these twin developments: › The shale revolution – a result of technological breakthroughs in horizontal drilling and hydraulic fracturing, or fracking – has in less than a decade turned long-run declining oil production trends in the US into a rise of 88 per cent from 2008 to 2015. Despite current low prices and the damage done to profits, an exceedingly high rate of productivity improvements in this relatively new industry promises to boost shale output still further. The US does not stand out in terms of shale resources. Even an incomplete global mapping suggests a US shale oil share of no more than 17 per cent of a huge, widespread geological wealth. Given mainly non-proprietary shale technology and the many advantages to be expected by producing nations, it is inevitable that this revolution will spread beyond the United States. The world beyond the US will exploit its shale resources as successfully as the US has done in the past ten years. This would yield rest-of-world output of 20 million barrels per day in 2035, roughly comparable to the global rise of all oil production in the preceding 20 years – a stunning increase with far-reaching implications. › The second, related, revolution grows out of a dawning realisation that advancements in horizontal drilling and fracking – technologies associated with shale – can also be exploited for fuller extraction from conventional, but old and tired, oilfields. If the rest of the world applies these techniques more broadly, as the US has done in recent years, this would yield a further 20 million barrels per day of oil by 2035. The increases in oil output would be bound to put downward pressure on prices, either by preventing rises from recent levels, averaging some $53 per barrel in 2015; or by pushing prices back to these levels if an early upward reaction takes place. The authors of The Price of Oil foresee a price of $40 by 2035 – well below the levels posited in “authoritative forecasts” by public bodies and leading oil corporations. Of related interest . . . › The US Energy Information Administration (EIA) estimates that natural gas production from hydraulically fractured wells now makes up about two-thirds of total US marketed gas production. This is greater than the share of crude oil produced by fracking, which accounts for about half of current US crude oil production. Well completion and production data supplied to the EIA by IHS Global Insight and DrillingInfo Inc demonstrate the dramatic increase in US natural gas production associated with fracking. In 2000, approximately 26,000 hydraulically

newsletter noted that, after early May filings for creditor protection by Midstates Petroleum and Ultra Petroleum, 59 American oil and gas companies are now bankrupt. Input from Reuters, the law firm Haynes & Boone, and the credit industry resource BankruptcyData.com indicates that the number of US energy bankruptcies is closing in on the staggering 68 filings seen during the depths of the telecom bust of 2002 and 2003. And Charles Gibbs, a restructuring partner at the international law firm Akin Gump in Texas, told MarEx that the domestic oil industry is not even halfway through its wave of bankruptcies. “I think we’ll see more filings in the second quarter than in the first quarter,” Mr Gibbs said. Fifteen oil and gas companies filed for bankruptcy in the first quarter. (“US Oil and Gas Bankruptcies at Historic Levels,” 4 May) Perceiving “notable parallels” between the telecom and energy boom-and-bust cycles, MarEx noted that pioneering technology brought an influx of investment to each industry. A plethora of new, small companies issued high levels of debt, and a supply glut sapped pricing just as demand fell sharply. For the energy sector, the consequences are already being felt, and MarEx sees no early reversal of fortune. Among its observations: › Until recently, banks were willing to offer leeway to borrowers in the shale sector, but lately some lenders have tightened the purse strings. › A widely predicted wave of mergers in the shale space is yet to materialise as oil price volatility makes valuations difficult and buyers baulk at taking on debt loads until target companies exit bankruptcy. › Losses for energy investors in the stock and bond markets over the last two years are significant. It remains unclear how long it will take to get through the worst of the declines, and who will be left standing when it is over. The use of fracking in older but not quite played-out fields is seen as dealing the knockout punch to high prices The Price of Oil , published by Cambridge University Press late last year, was written by Marian Radetzki, a professor of economics at Luleå University of Technology, Sweden; and Roberto F Aguilera, an adjunct research fellow at Curtin University, Australia. Guest-blogging this spring on Scientific American , the co-authors expanded on the main proposition of their book: that the period of high oil prices has come to an end. (“The Age of Cheap Oil and Natural Gas Is Just Beginning,” 3 May) Noting that, in constant money, the price of oil rose by almost 900 per cent between 1970 and 2013, Messrs Radetzki and Aguilera compared this “truly spectacular” increase with the 68 per cent price rise over the same period for metals and minerals, a commodity group that, like oil, is exhaustible. They hold that political rather than economic forces have shaped

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J ULY 2016