The past year has seen a large (estimated between 50-60%) reduction in the drilling of new shale rigs largely because of the low price of oil. This has meant a steep reduction in new projects as well as heavy losses of jobs in the oil drilling industry. As banks make lending more stringent to shale companies because of fear of default from continued low oil prices (currently around $50/barrel), Tier 3 exploration and production (E&P) companies may become bankrupted by this lack of credit. The upside is that Tier 1 & 2 E&P companies can procure those companies at liquidation prices and able to put their drilling assets to immediate use.
End of Iran Sanctions = More Global Oil
Now that the sanctions against Iran have ended, the price of oil is low and might stay that way for a prolonged period. With more Iranian oil flooding into the global market, much of it in route to China, this will put even more downward pressure on the price of oil.
This might induce US shale producers to look at more expensive enhanced / tertiary extraction methods or lower cost extraction techniques like working down the existing backlog of wells (aka the “fracklog”). It’s also important to note that although we at ShaleStuff.com focus mostly on oil, the output of oil wells are quite variable: some are rich in Natural Gas liquids such as butane, ethane, propane, butane and therefore can be quite valuable above just their oil reserves.
This new glut of Iranian oil is also a bitter reminder that the United States government has a crude oil export ban that’s been in place since the 1970s. Estimates are that Iran will initially add 500,000 more barrels of oil a day to the world crude oil market, with that number increasing to more than 1 million barrels a day. In absolute terms, Iran exported approximately 2.85 million barrels of oil per day in June, 2015, and that number is eventually expected to reach around 4 million barrels once production ramps up over time after the sanctions are lifted. Saudi Arabia, the world’s largest producer of oil at around 10 million barrels/day, has said it would reduce production to coordinate with the new increased Iranian output, but whether or not that happens remains to be seen. Saudi Arabia’s Ghawar oil reserves are the largest in the world and is also cheaper to extract oil from compared to U.S. shale deposits:
The Nabucco Project
There’s been lots of chatter about how the U.S. nuclear talks with Iran are more of a smoke screen and that its primary interest is in oil pipelines in Iran’s backyard. Whatever the real reason behind lifting the Iran sanctions, one result is that the US-backed Nabucco pipeline is going to be built while Russia’s South Stream pipeline plan has been shelved. From “Iran to provide Europe with alternative to Russian gas” (World Bulletin):
Iran’s deputy oil minister Ali Mejidi has indicated that the Nabucco Project, which was presented as an alternative to Russian gas with the potential of fulfilling a large proportion of Europe’s need before being put on hold last year, is now back on track.
The Nabucco project, which was first presented in 2002, plans to pump gas to Europe via Turkey, Bulgaria, Romania, Hungary and Austria. The project will also pump 31 billion cubic meters of Azerbaijani and Iraqi natural gas to Europe.
As such it’s an excellent way for the U.S. to take some of the emerging EU natural gas market away from the Russians, who will have to rely upon the existing Nord Stream and Yamal pipelines as well as shift more sales towards Asia.