‘OPEC cannot kill shale oil’

© Fahad Shadeed
The minute oil prices go up shale oil production will go up again to its previous levels, says independent oil expert Dr. Mamdouh Salameh. OPEC can only slowdown its production, but shale oil’s real shortcoming is its wells depletion rate, he adds.

Gulf Cooperation Council (GCC) members including Saudi Arabia are no longer able to afford their abundant welfare and near-zero taxes because of the collapse in oil prices and expensive military campaigns. The six Gulf States have agreed to introduce VAT, to plug the gap. It's not yet clear how high the tax is going to be, but it will be introduced over the next three years.
Saudi Arabia recently decided not to cut oil production, which would've helped drive up prices. RT asked Dr. Mamdouh Salameh whether it is now reaping what it has sowed.

In his words, Riyadh’s policy on the matter is “fluid”.

“They are insisting on not cutting production and also putting pressure on OPEC not to cut production.... They claim they want to defend their market share,” he said. According to Salameh, “that policy was tested and found wanting by Sheikh Ahmed Yamani, the former Saudi Oil Minister, who tried it in the early 80’s when he flooded the oil market with 10 million barrels a day leading to a collapse in the oil price to $10 a barrel.”

“He was forced to withdraw it, and he lost his job afterwards,” he added.  

The expert argues that this policy will not work and “Saudi Arabia and the other Arab Gulf producers within OPEC will have to cut production.”

“Their talk about gaining or defending market share is nonsense, because even if Saudi Arabia gets five percent more market share, the value of that five per cent amounts between $6-8 billions,” he told RT. He suggests that Saudi Arabia alone is losing $140 billion.  

Salameh cited the International Energy Agency in Paris that said that “the global demand for oil this year, 2015 has been increasing by 1.4 per cent translating into 1.3 million barrels a day or 1.4 million barrels a day. That is a good and positive development.”

“But what is preventing the price from increasing – is that every time the price shows signs of moving up, OPEC and particularly Saudi Arabia introduces more oil thus exacerbating an already existing glut,” he continued.

Salameh argues the Saudis claim that they “will stick to 30 million barrels a day.” However, they are producing 32.2 million. “If you take that 2.2 out of the market, you stop the glut and a price could rise immediately or within a week to 70 or 80 dollars,” he added.

He does not think that Saudi Arabia is driving down oil prices to squeeze out the American shale producers, “because the minute the oil price starts to go up, shale oil will be back.“

He said that it is “true that some shale oil producers have gone out of the market, and the production of US shale oil has declined this year by 600,000 barrels a day.” He went on to say that “it is projected to decline by almost 900,000 barrels next year” if the prices continue to be that low.

“Efficient producers of shale oil will remain in the market, and they are using technology to reduce the breakeven prices from $70 to $85 - now it is $60,” Salameh told RT. “Maybe in few months it could go to $50.”

According to Salameh, we have to accept that shale oil is “a fact of life and we have to deal with it.” But, he added,” the shortcoming of shale oil is their depletion rate.”

“In the first year of production a well of shale oil loses 70 – 90 per cent of its reserves. That means that shale oil producers will have to produce and drill so many thousand, estimated, I think by Bloomberg, to be 9,000 wells every year at a cost of $45 billion that are just to remain where they are to prevent production from declining further. So OPEC cannot kill or slowdown – it can slowdown shale oil, but ... the geology will eventually kill shale oil,” the expert said.

OPEC, he noted, cannot kill shale oil production, but can slow it down. However, it is “geology that “will eventually kill shale oil.”

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.