Experts predict that in the long term, shale gas production will not be sustainable in the United States. The photo shows a shale gas well in Montrose, in the U.S. state of Pennsylvania. Credit: Emilio Godoy/IPS

By Emilio Godoy
WASHINGTON, Oct 7 2015 (IPS)

The emergence of fracking has modified the global market for fossil fuels. But the plunge in oil prices has diluted the effect, in a struggle that experts in the United States believe conventional producers could win in the next decade.

The U.S. oil industry had peaked – when the discovery of new deposits and output from existing wells begins to fall – which made the country more dependent on imports. But the equation was turned around thanks to the new technique.“The bubble won’t explode, but it will progressively deflate. At current prices, we would see a relatively quick shrinking of capital availability for the shale sector, because those companies are producing at a loss.” -- David Livingston

The innovative technology of hydraulic fracturing or fracking and the discovery of large deposits of shale gas and oil, along with massive investment flows, led to predictions that the United States would become autonomous in fossil fuels this decade. But these forecasts have been undermined by the drop in prices.

“The world is entering a new era of uncertainty in the geoeconomics of oil,” said David Livingston, an associate in the Energy and Climate Programme of the U.S. Carnegie Endowment for International Peace. “It is far from certain that the notoriously volatile oil market will become less cyclical.”

The analyst told IPS that as a result of domestic U.S. demand, “Companies will lose spare capacity, between what they can produce and what they produce, which is important, because the market is determined by that capacity.”

After 2003 international oil prices climbed, to 140 dollars a barrel in 2008, when the global financial crisis brought them down.

This decade they rallied, to around 100 dollars a barrel. But they have fallen again since late 2014, to about 40 dollars a barrel.

That means U.S. producers, in particular shale gas producers, are facing extremely low prices, overproduction, a lack of infrastructure for storing the surplus and a credit crunch for the industry’s projects, even though prices have gone down.

In addition, China’s economic slowdown and Europe’s stagnation are hindering the recovery in demand for energy.

The development of shale oil and gas has also put the U.S. industry on a collision course with the members of the Organisation of the Petroleum Exporting Countries (OPEC), especially since one of its widely touted objectives is to reduce imports from that bloc.

A warning about the danger of methane emissions in one of the shale gas Wells in Dimock, Pennsylvania. Credit: Emilio Godoy/IPS

Since November 2014, OPEC has kept its production quotas stable, as part of a strategy imposed by the bloc’s biggest producer, Saudi Arabia, aimed at keeping prices low and discouraging the development of shale deposits, which are much more costly to tap into than the organisation’s conventional reserves.

In late 2014, the Norwegian consultancy Rystad Energy put the cost of producing a barrel of shale oil in the United States at 65 dollars a barrel, which means the industry is operating at a loss. The average cost of extracting a barrel of conventional oil in that country is 13 dollars, compared to five dollars in the Gulf.

For Miriam Grunstein, a professor at the Centre for Economic Research and Teaching (CIDE) in Mexico, the outlook is very uncertain.

“There are doubts for several reasons. First of all, due to the low prices,” she told IPS from Mexico, which has begun to explore its significant reserves of shale gas.

“Although it has forced many companies to improve their operating capacity, reduce investments and achieve greater efficiency, they are in an environment where they have to look for markets, in Europe or Asia. But that requires liquefaction infrastructure, which implies major investments,” she added, referring to the current situation faced by shale gas producers.

In June, the United States produced 9.3 million barrels per day of crude oil, about half of which was shale oil, according to data from the Energy Information Administration (EIA).

The prospects for the industry are beginning to look less promising. In its Drilling Productivity Report published in late August, the EIA projected a fall in shale gas production in September, for the first time this year, to 44.9 billion cubic feet per day.

The agency stressed that output from new wells is not enough to offset the decline in existing wells.

For Livingston, “OPEC as an institution – and Saudi Arabia, its leader – is likely to emerge from this paradigm shift stronger than before in many ways. With its new strategy – one born out of necessity – the kingdom is emphasising market share, rather than price, while also moving to delegate the burden of balancing the world oil market to the U.S. shale industry.”

The United States would become the new “swing producer”, although without achieving the same power as the Gulf producers in influencing the market.

In the long run, total U.S. oil production will tend to drop, according to EIA projections. In 2020, crude oil production is expected to stand at 10.6 million barrels per day; in 2030, 10.04; and 10 years later, 9.43.

In the case of shale gas, projections are favourable, but at higher prices. In 2020, the country should be producing 15.44 trillion cubic feet per day; 10 years later 17.85; and in 2040, 19.58.

In total, the EIA forecasts that the country will produce 28.82 trillion cubic feet per day of natural gas in 2020; 33.01 in 2030; and 35.45 in 2040.

But the average price will go up. This year, the Henry Hub reference price for U.S. natural gas has stood at 2.93 dollars per million British thermal units (Btu), the heat required to raise the temperature of one pound of water.

The price should go up to 4.88 dollars per Btu in 2020; to 5.69 in 2030; and to 7.80 in 2040.

“The bubble won’t explode, but it will progressively deflate. At current prices, we would see a relatively quick shrinking of capital availability for the shale sector, because those companies are producing at a loss,” said Livingston.

Grunstein said: “Saudi Arabia’s aim is to keep the United States from becoming a major exporter. The strong markets exert the most pressure. If demand does not recover, the demand-price ratio is awkward. Consumption is needed, and I don’t see where it would come from.”

Livingston said one option is to review the 1970s-era ban on exporting U.S. crude oil, because “If production rises, refineries can’t process it and therefore new markets are needed.”

Edited by Estrella Gutiérrez/Translated by Stephanie Wildes

Collective lawsuits against oil contracts with foreign companies have heated up the debate on Mexico’s energy reform. Credit: Courtesy of Pemex

By Emilio Godoy
MEXICO CITY, Nov 21 2013 (IPS)

As Mexico moves towards a controversial reform that would be the largest opening of the oil industry to foreign investors in decades, local communities and non-governmental organisations are fighting in court against earlier contracts with foreign companies, which have been possible since 2008.

The collective lawsuits brought against three of the 11 agreements between the state oil company Pemex and private foreign corporations, to operate oilfields in the southeast of the country, are serving as a kind of testing ground for those who wish to fight the energy reform.

The reform, which the international markets are expectantly waiting for and the Mexican Congress may approve in the next few months, would throw this country’s oil industry wide open to foreign companies.

Mexico’s oil industry was nationalised in the 1930s and the state has remained in control of Pemex since then.

But by means of the 11 contracts, Pemex granted contracts to private foreign companies for oil production in the southeastern states of Tabasco and Veracruz in mature or marginal oilfields – fields that have been producing for more than 20 years and whose production is in decline, but which could be reactivated with new technologies.

But opponents argue that the contracts include an illegal formula for payment for the contractors, because it takes into account a direct percentage of the price of sales, based on international oil prices.

“The concessions are unconstitutional, because they mean the loss of oil revenue,” activist René Sánchez, coordinator of the organisation Colectivas, one of the plaintiffs, told IPS. “They damage the country’s wealth, and the companies earn excessive profits.”

A group of organisations and individuals presented two collective lawsuits in 2011 and 2012 against the first three contracts signed. A federal judge is expected to rule on the first lawsuit before the end of the year, and the decision will set a precedent for all of the accords.

The companies directly involved are Britain’s Petrofac and the French-U.S. Dowell Schlumberger. Petrofac won two contracts in 2011 and the Mexican subsidiary of Dowell Schlumberger was granted one contract. All three concessions are for drilling in the state of Tabasco.

A 2010 constitutional reform allowed for class action lawsuits. Under the law, individuals, communities and organisations that feel they have been affected by a government decision can bring a collective lawsuit, even if they weren’t directly harmed.

A year later, the Supreme Court rejected a parliamentary attempt to challenge the oil contracts with private firms as unconstitutional, on the grounds that the legislature was not one of the affected parties.

In its ruling, the Supreme Court did not address the underlying issue: whether the contracts run counter to the Mexican constitution. It did rule that they cannot include payments to the contractor that represent a percentage of the value of sales.

It was in the last decade that Pemex began to sign agreements with private companies for exploration and drilling for gas and oil, in exchange for payments based on output.

First multiple service contracts were signed for exploration and production of gas in the Cuenca de Burgos, a natural gas-rich zone that stretches through the northern states of Nuevo León, Coahuila and Tamaulipas.

In 2008, Congress passed a reform of the Pemex legal framework, which expanded the legislature’s role on the company’s board, among other things. As a result, the board overhauled the firm’s internal rules and regulations and introduced a new system for contracts, which has drawn criticism from the start.

“Few companies are interested in those contracts, and Mexico’s production and reserves are declining,” Miriam Grunstein, with the Centre for Economic Research and Teaching (CIDE), told IPS. “That points to how ineffective they are, from both the commercial and technical standpoints.”

“The recovery of costs can make the contrasts very burdensome for the country,” she said.

Pemex argues that the contracts generate value and bolster productive capacity, with profitable, competitive schemes in mature oilfields and land and deepwater deposits.

It also says they make it possible to increase Mexico’s oil reserves, reactivate marginal fields, and improve the commercial value of offshore deposits.

According to the state oil company, the three fields in question contain total reserves of 182 million barrels and 124 billion cubic feet of gas, in a 312-sq-km area.

Their joint production exceeds 13,000 barrels a day and more than 17 million cubic feet of gas. The contracting companies receive just over six dollars per barrel.

Pemex’s argument for putting the oilfields out to tender was that it lacked the technical expertise and financial capacity to exploit them itself and preferred to concentrate its resources on more profitable undertakings.

Mexican President Enrique Peña Nieto of the Institutional Revolutionary Party (PRI) sent Congress the bill in August that would reform the oil and electricity sectors, and would involve Pemex and the Comisión Federal de Electricidad, the state power company.

The bill includes modifications of articles 27 and 28 of the constitution, to allow profit-sharing contracts to be offered to private firms, and changes in Pemex tax structure, and to strengthen transparency and accountability in the state oil monopoly.

During the debate, Congress could introduce the possibility of granting concessions for blocs of oil and gas, which are more attractive for corporations and similar to the way state oil companies do things in other countries of Latin America, such as
Venezuela, Ecuador, Peru and Argentina.

The collective lawsuits could have a major influence on the energy reform, because if they are successful they would hinder the opening up of the oil industry to foreign capital and could make transnational corporations hesitant to invest in Mexico.

Pemex, which currently produces 2.6 million barrels of crude a day, has outdated technology and is plagued by debt, steadily declining reserves, administrative problems, and accusations of corruption.

“We want the contracts to be declared invalid, to curb the process of privatisation of Pemex. The next step is granting concessions for oil blocs,” Sánchez said.

Any decision that affects the course taken by Pemex, a powerful symbol of Mexico’s sovereignty and identity since the oil industry was nationalised in 1938, has an enormous effect on the country.

One camp is calling for the opening up of the oil industry, while another advocates strengthening Pemex with legal and fiscal reforms, to boost its financial and investment capacity.

But both groups agree that it needs to be overhauled, modernised and made more transparent.

Grunstein recommends removing the option for contracts in the reform and moving instead toward concessions for blocs.

“They should achieve a balance between risk and reward,” she said. “And to be more attractive and capture a larger spectrum of companies, there should be a system where the company would be paid with a share of the output.”