Analyst: Impossible for Saudis to destroy U.S. shale industry

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Despite its best efforts, it is impossible for Saudi Arabia to destroy the “resilient” U.S. shale industry, an analyst said.

Because of its mid-cost nature, compared to the high cost of conventional drilling, shale will rebound quickly, according to Daniel Yergin, founder of IHS Cambridge Energy Research Associates, who said groups are already in place to grab the assets of bankrupt U.S. shale drillers.

Shale oil rig.
Shale oil rig.

“The management may change and the companies may change but the resources will still be there,” Yergin told the Daily Telegraph.

“It takes $10 billion and five to ten years to launch a deep-water project. It takes $10 million and just 20 days to drill for shale,” Yergin said at the World Economic Forum in Davos, Switzerland.

The Saudis underestimated the fight in U.S. shale companies when they launched a strategy to take out competitors by flooding the market with cheap oil, Yergin said.

“Shale has proven much more resilient than people thought. They imagined that if prices fell below $70 a barrel, these drillers would go out of business. They didn’t realize that shale is mid-cost, and not high cost.”

Zhu Min, the deputy director of the International Monetary Fund, said U.S. shale has changed the balance of power in the global oil market and there is little the Saudis and OPEC can do about it.

“Shale has become the swing producer. OPEC has clearly lost its monopoly power and can only set a bottom for prices. As soon as the price rises, shale will come back on and push it down again.”

Meanwhile, exporting countries are facing severe economic crises as the slump in oil prices continues. “Venezuela is beyond the precipice. It is completely broke,” said Yergin.

Iraq now sells crude oil for $22 a barrel with half of that amount covering production costs, Prime Minister Haider al-Abadi said in Davos. “It’s impossible to run the country, to be honest, to sustain the military, to sustain jobs, to sustain the economy,” he said.

Yergin, author of “The Prize: The Epic Quest for Oil, Money and Power”, said the U.S. shale industry is destined to go on.

“$60 is the new $90,” he said. “If the price of oil returns to a range between $50 and $60, this will bring back a lot of production. The Permian Basin in West Texas may be the second biggest field in the world after Ghawar in Saudi Arabia.”

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