Investors Flock to Oil Shale

on April 27, 2017 at 2:04 PM

Fracking In California Under Spotlight As Some Local Municipalities Issue BansLast year some investors in the energy market took a beating when numerous U.S. oil shale producers filed for bankruptcy. However, those losses have not deterred investors from making massive new investments betting on the future of the oil shale industry. In the first three months of 2017 investors placed nearly $20 billion with private equity funds for energy ventures nearly triple the amount invested in the same period of 2016.

The accelerated rate of investment from private equity funds comes along with increased investments from hedge funds and investment banks. This recovery comes even as oil prices have stalled around $50 a barrel in part due to a persistently high global supply. The increase attention from investors is due not to the high price of oil but rather the impressive cost reductions which shale producers have seen in recent years. Over the past two years the cost of producing a barrel of oil from shale has been slashed nearly in half. This coupled with the projected rise in demand which many anticipate is enough to whet the appetites of potential investors.

Yet even without price gains, the cost reductions and the continued advances in technology which are expected to cut costs are enough to give financiers confidence that there are returns to be made in this sector. New companies are being created with veteran oil shale producers at the helm. These companies  are expected to be able to move into production quickly to take advantage of current market conditions.

The latest oil price crash began in 2014 and drove many companies in the oil shale sector to the point of bankruptcy. However, the rapid advances in technology has made many projects viable as long as the price of oil stays in its current range of $40-$55 per barrel. This does not mean that the market is not still vulnerable to a pullback. The drilling rush this year has brought a flood of new entrants into the market with the U.S. drilling rig count rising at its fastest pace in six years and the U.S. stockpile of crude stands close to 533 million barrels, which is near an all time high.

The dynamics of U.S. oil production has changed fundamentally in the last decade for the first time in nearly half a century. Between 1970 and 2008 U.S. crude oil production fell by nearly 50% to just over 5 million barrels per day. This sharp decline was attributable to the depletion of conventional wells. Since 2008 production has made a dramatic recovery with production approaching 10 millions barrels per day, levels not seen since the early 1970s.

This dramatic recovery is attributable to new extraction technologies which have been created in recent years and led to Congress lifting the 40 year old ban on crude oil exports last year. This reversal in policy is just one of a number of factors which are changing oil market. While the oil industry has been seen numerous boom and bust cycles throughout its 160 year history this cycle is widely seen as indicative of a sea change.

The changing market and the U.S. oil boom is a source of great concern for the cartel known as Organization of the Petroleum Exporting Countries (OPEC). OPEC member nations are meeting next month and will consider extending the production cuts that first took effect in January of this year. Investors see the United States a being a new swing producer with the ability to increase supply quickly in response to heightened demand. Investors believe that this fresh infusion of capital should be sufficient to push U.S. production levels above 11 million barrels per day by 2020.