What happened after the oil price crash?

House of Fools

Prior to the oil price collapse of late 2014, the sustained high price of oil, largely predicated on expectations of sustained high Chinese economic growth, as well as heroic predictions of world economic growth post-2008 credit crash, had given rise to a speculative boom in "unconventional" oil and gas exploration and production ventures. This meant that hitherto high cost and "marginal" production techniques in smaller and relatively low-yield fields, in combination with record low interest rates, suddenly and overnight looked like safe bets.

Another key factor at work was the shared political and strategic consensus in the U.S., that after the Gulf (of Arabia) military cleanup of a "new American century," the U.S. would seek to become energy self-sufficient by the mid-2030s, by which time it would have also largely completed its imperialist "pivot on Asia" strategy for the economic and military containment of China.[1]

Apart from the marginalization of OPEC[2] and the securing of wider MENA[3] regional oilfields dedicated to the supply of the U.S.'s strategic allies in Europe and East Asia, the decisive factor would be in the development of "tight" oil (and gas) from hydrocarbon-bearing shale "plays" that make up much of the North American East, Midwest and Southern states geological formations. Additionally, high production cost ventures in the Gulf of Mexico and Outer Continental Shelf deep waters as well as within the Arctic Circle augmented further by the Canadian tar sands would complete the future hydrocarbon supply mix.

Between 2008 and 2013, OPEC producers--particularly Saudi Arabia--found themselves displaced from the north American markets as U.S. shale derived hydrocarbons rapidly came on stream. Also with oil at over $100 per barrel, Arctic and deepwater activities expanded unhindered despite BP's Deepwater Horizon setbacks and swinging compensation suits. And that myopia drives the speculative instincts of petro-capital was amply demonstrated by the fact that in the wake of the 2003 Iraq invasion OPEC overproduction had resulted in a $20 per barrel price, the prevailing view until November 2014 was that high oil prices were here to stay.

The rapid oil price recovery from 2004 onwards combined with the maturing of a number of "unconventional" production methods--strata fracturing (fracking), slant and horizontal drilling and "enhanced" production methods such as water or gas injection--saw U.S. domestic oil and gas production increase by over 20 percent, much of it based on short-term debt financed operations within a liberal licensing regime with scant regard for environmental responsibility.

The OPEC oil price retaliation from 2013 onwards took the form of a 10 percent increase in production that was intended to expose the largely high-cost Western and in particular U.S. operations to the full pressure of aggressive market forces. But as OPEC itself contained some high-cost producers, most notably Algeria, Angola, Iran, Nigeria and Venezuela, the risks were very high. But what the gamble did reveal in the first instance was the hopelessly high production costs of both unconventional and the "extreme" established fields of the North American Arctic Circle, Siberian and the UK and Norwegian North Sea operations.

And fast-forwarding to early 2016, the U.S. petro-hegemony dream had soured with a halving of the U.S. onshore rig count, the effective abandonment of further Arctic and deep water exploration and a resurgence of OPEC, which in collusion with Russia is now commanding over 50 percent of global oil production.[4]

The cost in just written-off capital since 2014 has been enormous. In the U.S. alone some $800 billion of capital investment has been lost with even big domestic producers running to Chapter 11 for bankruptcy protection. For nearly two years the world oil business has had to live with a reality of a $60 oil price being the boundary between life and death.[5] For countries like Nigeria and Venezuela it has meant the end of subsidized domestic energy, internal energy insecurity, and rationing and political crisis.

Even for Saudi Arabia, the richest and biggest reserves economy within OPEC, the economy is now in massive deficit to the extent that all consumer energy subsidies have been scrapped and the cost of electricity has trebled.[6] An exception to the austerity price that most OPEC members have had to pay in the attempt to destroy the U.S. shale industry has been Iran, which since the lifting of UN sanctions a year ago following the nuclear power peace deal, has doubled production by 1 million barrels per day, most of it into the U.S. dollar-earning export market. And much to the chagrin of Saudi Arabia, Iran has also been able to strike a massive $100 billion "oil revenues for capital investment" deal with five Western oil majors.

In the U.S., where OPEC intended the maximum damage to occur there has been a crash in the total U.S. rig count from 1,910 in Jan 2015 to just 400 in May 2016, although a slight rebound of up to 620 by November has occurred.[7] Also the maximum output target of 10 million barrels per day (mbpd) that had been set in 2004 was never quite reached--9.6 mbpd in April 2015 had fallen to 8.6 mbpd by September 2016.[8]

What the figures for the U.S. tell us is that despite a massive fall in rig numbers, the U.S. shale sector is robust with only a slight fall of 10 percent in oil production. This is largely due to improved drilling efficiencies--often into the more productive Permian plays of west Texas--where production "pads" now typically contain up to 10 wellheads.

Yet the loss in U.S. onshore and coastal waters oil and gas jobs has been high with as many as 350,000 skilled rig and pipeline workers reported to have gone, leaving the industry with a significant know-how deficit.[9] But the fall in U.S. domestic production has not reflected falls in U.S. petroleum consumption, which continues to show a small but steady increase of around 1.2 percent per annum.[10] And what the overall picture reveals is that despite the cost of two major Gulf wars combined with considerable domestic subsidies, tax breaks and liberalized land purchase and environmental control "easings," the U.S. still finds the goal of total energy self-sufficiency elusive; the production shortfall is now being made good by the return of imports, largely from the Middle East and other OPEC producers.

Without attaching much strategic sense to the pre-election boasts of Donald Trump, in the president-elect's rants on the stump, he reiterated his objective to make the U.S. petroleum (and natural gas) self-sufficient. Central to this objective is his aim "to unleash $50 trillions worth of U.S. shale and deep water offshore oil and gas reserves" with the requisite Congressional consents within the term of his presidency.[11]

Yet this objective has been cast into doubt by a recent industry report: "Energy independence is technically possible but makes absolutely no commercial sense...There is no point in U.S. consumers paying for higher price fuels developments in the U.S. when they can get crude supplies at much lower cost from sources such as Canada, Mexico and the Middle East."[12]

In anticipation of a Trump administration dumping the U.S. with a high-cost and unsustainable domestic petroleum dependency, Barack Obama on December 21 used his presidential executive powers to invoke a 1953 law that permits the Interior Department to ban all sales of mining rights in U.S. territorial waters which include the Atlantic from New England to the Chesapeake Bay as well as waters off Alaska that include the Chukchi and Beaufort Seas. And although these waters currently account for only 0.1 percent of U.S. oil production, the Department of the Interior has commented, "That at current oil prices, significant production in the Arctic (in particular) will just not occur," adding Obama's own comment, "These actions, and Canada's parallel actions, protect sensitive and unique ecosystems that are unlike any other region on Earth."[13]

These measures come on top of the eventual Congressional ban in June 2016 on future developments of the massive XL Keystone pipeline project which would have provided transit for bitumens released from the Canadian Alberta tar sands as well as "tight" oil extracted from the Bakken shales of Wyoming and North Dakota--in addition to which, of course, is the tremendous victory of direct action to stop additional pipeline developments at Standing Rock in North Dakota in December.

The oil price crash of November 2014 had an immediate and negative impact on what is probably the highest cost offshore operation in the world--the UK North Sea and West of Shetland sectors. By March 2015 more than 40,000 jobs in offshore and supply chain activities had been lost--70 percent of which were in Scotland. The continual oil price fall--even though followed by a modest and slow recovery--spelt doom for the industry. In May 2016 the CEO of UK Oil and Gas said, "We are an industry at the edge of a chasm...30 years ago, the province (UK N Sea sectors) was producing more than double the current rate from around a quarter of the fields and, on average, discoveries were five times their current size...If current prices prevail ($40 per barrel), nearly half of UK CS (Continental Shelf) fields will not cover their operating costs in 2016."[14]

UK Offshore and Related Employment Pre-2014 Price Crash[15]:

Offshore
36,000

Direct supply chain
200,000

Indirect services
112,000

Processing/export
100,000

Total
448,000

In May 2016, Unite (the union) estimated that the total North Sea-related job loss by January 2017 would be at least 120,000 with over 70 percent of those jobs in Scotland[16]. This situation was used as a long-expected pretext for the North Sea operators to go onto the offensive regarding terms and conditions in the industry, which they did in the autumn of 2015 with the imposition of zero-hour contracts for many workers and the 'introduction' of the "3n3" (three weeks onshore/three weeks offshore) take it or leave it shift regime[17]. The "reform" package amounted to a 30 percent cut in offshore earnings.

The Unite and RMT unions balloted for and held a series of strikes aboard eight Shell production platforms operated by the Aberdeen-based Wood Group throughout August before settling for what turned out to be a wholly unsatisfactory offer, recommended by the unions as being in the interests of "an industry going through a difficult period." This decision at the time of writing is being challenged by the "Furies" rank-and-file offshore workers' organization.

In the (nearly) 50 years since North Sea production began, the few big "elephant" and "super giant" oil and gas fields have been all but exhausted, and today production is based on around 305 small and geologically discontinuous fields increasingly far from land and in much deeper and stormier waters. In the experience of a sustained low oil price and high operating costs, UK Gas and Oil now project that by 2020 North Sea production will be down to just 150 fields, with exploration to the west of Shetland (where much larger reserves are "known" to exist) highly unlikely at oil prices below $80 per barrel[18].

But in the meantime and with offshore decommissioning costs escalating towards $42.8 billion[19] by 2030 and with revenues from oil and gas to the Scottish treasury down from $15.3 billion in 2008 to just $82,000 for 2015-16, there is every danger of the industry being politically written off as a liability. That is, unless, as some have argued[20], the industry is placed under public ownership and its hydrocarbon resources dedicated to new green and diversified carbon-based industrial products.[21]

In early 2014, Chancellor George Osborne declared an open season for companies applying for shale fracturing (fracking) licenses by offering the incentives of relaxed planning procedures and generous tax breaks. This was met with howls of outrage and the launch of militant local campaigns in west Sussex and mid-Lancashire. And in many areas where it was known that prospective fracking companies had expressed an interest, local planning authorities were often keen to uphold local objections.

Since then the government has revised local planning powers to allow final determination to rest with the Secretary of State and thus overrule local objections as upheld by the local planning and minerals planning guidance authorities. And then on December 20, 2016, the high court ruled on the behalf of the government that fracking consents should be awarded for Third Energy to proceed at a site at Kirby Misperton, Ryedale, North Yorkshire, and that the objectors as represented by Friends of the Earth, be made to pay $12,200 in costs.

Yet this episode in eco-bullying will remain a pyrrhic victory--at least in commercial terms--as long as the world-traded price of natural gas remains so low. Although all traded fossil fuels are at least nominally linked to the price of oil (in terms of thermal energy equivalent content), the price of oil as long as traded at less than $60 per barrel will dictate a gas unit (Million British Thermal Units) price of less than $3.4.

In the U.S. where a vast land mass often offers thick and continuous shale strata with a fairly high gas or oil content (in the U.S., Eagle Ford and Bakken shales hold up to 5 percent total organic content (TOC); the shales in the UK--mainly in the Bowland-Hodder measures--have much lower TOCs, averaging between 1 and 2.5 percent.[22]) This means that for most UK shales to be economically competitive, the world traded price of natural gas would have to be around $9.5 per unit. And given the small, faulted and discontinuous nature of UK shales, it is by no means how much of the estimated TOC can be extracted.

In Scotland, where the Scottish government has imposed a moratorium on all shale oil and gas exploration, Ineos, the owner and operator of the Grangemouth refinery and petrochemical plant, is working hard at lobbying for a lifting of the present ban. This of course is not unconnected to Ineos obtaining over 1,400 square kilometers of land across the Central Belt of Scotland plus further licensed blocks in Galloway and Dumfries. In addition to which the company has a $428.4 million UK government credit loan for a new liquid gas import facility on the Forth estuary at which it lands 27,500 cubic meters gas per load which has come from the broadleaf forests of the U.S. West Pennsylvania Appalachian mountains.

However, the Scottish shales--which are the same as the England Bowland-Hodder measures--have only low to modest TOC levels and are unlikely to be of economic significance in the immediate future. But given the dominance of market fetishism and the lack of strategy or intellectual rigor that informs UK energy policy, it cannot be ruled out that like nuclear power shale gas is allowed to escape public scrutiny or environmental responsibilities whilst remaining the recipient of government subsidy and market fixes.

In the midst of the oil price crisis, the governments of the world paid lip service to the issue of climate change with a neoliberal charade at the Paris COP21 environment summit in December 2015. Using the same combination of "see no evil" with the discredited jargon of pre-crash financekapital, carbon "credits" and "swaps" were transferred into "futures" as like in some grim pre-1914 Edwardian garden party, the croquet ball was knocked into the long grass of 2025--after which, hard decisions would be made. This was while the oil price was falling, actual petroleum consumption continuing to rise and the IEA[23] forecasting a rise in oil production of 14 million barrels per day each year until 2040.

Although racked with uncertainties, the world business of hydrocarbons and the flounderings of international agencies in attempting to address the prospects of catastrophic climate change, the one certainty at present is a world of environmental chaos and petroleum fuelled imperialist conflict (that is pending, a decisive and historical revolutionary intervention).

Yet, within just the past year we have seen the world of hydrocarbon capital shaken by the mass resistance at Standing Rock, the cancellation under popular pressure of the XL Keystone pipeline as well as strikes by North Sea offshore workers and migrant solidarity strikes at the giant Exxon/Mobil Fawley refinery in Hampshire, UK. Only small blows in the war against hydrocarbon big business but within the seemingly impregnable shell of state-sponsored legal immunity and corporate hubris it must hurt like hell.

1. The historical context of this period has been set out in Petrocide: Hydrocarbons, Conflict and climate Crisis. Unpublished manuscript for international Socialist Review by Jonny Jones and Brian Parkin, November 2016.
2. OPEC; Organization of Petroleum Exporting Countries. A 13 state cartel comprising Algeria, Angola, Ecuador, Indonesia, Iraq, Iran, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates and Venezuela.
3. MENA; Middle East and North Africa region.
4. OPEC 1st quarterly report 2016, Vienna.
5. Bloomberg, NY, Dec 2015.
6. IMF May 2016. Saudi Arabia had run up a fiscal deficit of 15.9 percent of GDP for the 2015-16 financial year.
7. U.S. Energy Intelligence Authority (EIA), December 2016.
8. Ibid, November 2016. .
9. Irina Slav, OilPrice.com, December 8, 2016.
10. International Energy Agency (IEA) Paris, May 2016.
11. Peter Tabener, OilPrice report, December 8, 2016.
12. Vince Scott, Ernst and Young, July 2016. Scott is the U.S. Oil and Gas Transaction Advisory Service leader for the energy consultancy.
13. Guardian, Thursday, December 22, 2016.
14. Dierdre Michie, CEO UK Oil and gas Activity report, May 2016.
15. UK Oil and Gas and UK Government, December 2015.
16. Unite, Scotland region North Sea bulletin/press release, July 2016.
17. Brian Parkin, North Sea oil and gas strikes against background of offshore industry crisis, August 7, 2016, rs21 website.
18. UK Oil and Gas, Activity Survey; interim statement, April 2016.
19. Brian Parkin, North Sea offshore crisis: capacity closures, resources abandoned and decommissioning defaults. August 2016.
20. Brian Parkin, North Sea Offshore Crisis threatens as low oil prices wipe out revenues. Briefing paper, August 25, 2016.
21. Also see R. Morell and B. Parkin, Unite against Trident. rs21 pamphlet, July 2016. See the chapter on a diversified Scottish industrial economy.
22. British Geological Survey. BGS Shale Gas report, 2014.
23. International Energy Agency. World Energy Outlook report, 2015.

First published at rs21.