A note from Dax Driver, CEO of the Energy Chamber:
5th January 2014
The current low international oil price has led to many commentaries on future prices in the international and local media. One of the key issues that has been discussed has been the impact of the spectacular growth of US shale oil and gas production, with one widely shared analysis in the Economist in early December 2014 characterizing the drop in oil prices as “Sheiks vs shale”.
In Trinidad & Tobago there has been a lot of interest in the US shale revolution over the past five years, though the tendency has been to concentrate on gas rather than oil. There have been frequent presentations on shale gas at the annual Energy Conference, with respected columnist David Renwick going so far as to say the Energy Chamber was “mesmerised by the subject of shale gas and its potential effect on Trinidad and Tobago’s gas-exporting industry” (7 February 2012). Given the fact that at one time one hundred percent of our number one export, namely LNG, was going to the US market and that this was also the major export market for our methanol and ammonia production, this concentration on US shale gas production has not been surprising.
Despite the concerns earlier in the decade, the companies marketing LNG from Trinidad & Tobago have been very successful at finding alternative higher price markets, especially in Latin America. This success led Bob Dudley, the global CEO of bp, to conclude in his presentation to the Energy Chamber’s 2013 Annual General Meeting that despite some previous predictions, Trinidad & Tobago had not been blown away by the “shale gale”.
While Trinidad & Tobago was keeping its eye on the US shale gas market, we have perhaps not been as focused on what has been happening with US shale oil. And it is now US shale oil production that according to most commentators has shifted the global oil markets.
One of the major questions that analysts have had about the oil markets is if shale oil will continue to attract the high-levels of investment it has received over recent years. Because shale oil wells have very high depletion rates, the shale industry needs constant drilling activity to maintain production. This means that service companies have been able to generate significant business in this sector, including at least one service company with Trinidad roots.
One of the reasons that shale oil took off in the US is that the onshore drilling industry in the US is the most dynamic drilling industry in the world. Drilling rigs are quickly brought into operation when market conditions are right and quickly taken out of operation when conditions are not right.
For this reason the North American Rig count, published by oilfield giant Baker Hughes every week, is one of the key indicators to watch in order to understand the trajectory of oil prices. The North American rig count data over the past decade paints an interesting picture. The rig count shows the rapid increase in rigs drilling for gas up until the crash in US gas prices in late 2008 and early 2009, followed by a rapid drop and a subsequent build back to similar levels, but now with the emphasis being mainly on oil.
Over the past few weeks the North American rig count has begun to drop in response to the falling oil prices, down seven percent since October. The expectations are that this drop in the rig rate will continue while prices remain low. There are some forward looking indicators that suggest that this will be the case, for example new applications for drilling which are apparently decreasing.
Source: Baker Hughes website
The trajectory of US drilling is, however, just one factor in determining oil prices. Predicting exactly how oil prices will respond is a notoriously difficult occupation as there are just so many moving parts, including geo-politics, the state of the global economy, economic and political decisions from key producers (especially Saudi Arabia), the sentiments of major oil traders and even the weather. Some people are predicting that oil prices will go lower and remain low in the medium-term while others are predicting that they will bounce back within a few months.
For Trinidad & Tobago the low price environment should be used to help focus our attention on the fundamental issues affecting our economy. We can do nothing about oil prices, but we can make sure that we have an economic and social policy framework that drives competitiveness. Many of the structural changes that are now being discussed, such as ensuring that subsidies are focused on those in need, are things that should be implemented whether or not oil and gas prices are below budget.
The topic of low oil prices and the implications of this for Trinidad & Tobago will obviously be the major topic of conversation at the Trinidad & Tobago Energy Conference on 26 – 28 January 2015. Our interest in the shale revolution in previous conferences seems to have been justified.