US says shale strengthens ties with oil exporters

OREANDA-NEWS. August 17, 2016. The re-emergence of the US as a major oil producer has strengthened its relations with Saudi Arabia and other exporters, even though US shale output has limited Opec's effectiveness, the top US energy diplomat said.

"The US is now the world energy superpower because of growth in our oil production, natural gas production capability" and the ability to export both oil and natural gas, US State Department special energy envoy Amos Hochstein told Argus in an interview. The US is also a leader in developing energy efficiency and renewable resources, he said. "It puts us into a partnership in the energy world. It allows us to have far better, more detailed conversations that move the whole market forward."

US crude output last year reached 9.43mn b/d while Opec's combined output was 32.09mn b/d — about a third of the world's total. US production almost doubled since 2008 while US imports from Opec, at 2.9mn b/d last year, were down by 51pc from 2008.

US shale production has been declining for the past year and US crude output this year should drop by 7.4pc to 8.73mn b/d, according to the US Energy Information Administration. But the ability of US shale producers to increase production in offset declines elsewhere provides a "certain flexible ceiling" against price movements, Hochstein said. "That essentially makes the unconventional US production a swing producer, the new swing producer."

Opec remains important because of the share of the global output, but it no longer has the ability to increase or decrease production by common decision, he said. "The only thing that Opec can do effectively, outside of Saudi Arabia, is to reduce production, but I have not seen evidence of that happening," he said.

An effort by major oil exporters, including countries that are not members of Opec, to negotiate a freeze in output failed earlier this year. Opec's poorer members, such as Venezuela, are pushing for another attempt to negotiate such a freeze, ahead of a meeting of the International Energy Forum in Algeria next month. But Opec's leading producer Saudi Arabia has signaled it is unlikely to agree to cut output to support oil prices and that it expects prices to rise eventually as non-Opec output declines.

"I do not understand a freeze in general, because when you have an oversupplied market, freezing production at an all-time high is not necessarily supportive of the market coming back into balance," Hochstein said. All the Opec members except for Saudi Arabia are at their maximum production, he pointed out. Many non-Opec members, such as Oman or Russia, also are at historically high output levels.

But even if an agreement to freeze or reduce production results in raising the price of oil, "that will trigger a new production increase, a significant one, in the US," he added. "That reduced oil production from one group of states will be replaced by the private sector, by the market."

Oil is not the only aspect of the US energy diplomacy. Growth in US natural gas production and the launch of LNG exports from the US Gulf coast earlier this year are affecting global markets as well. "We are putting more gas on the market, and that in turn reduces the price of gas," helping energy importing countries to transition away from coal in power generation and to back up intermittent renewables, Hochstein said.

The notion of the US proudly touting its oil and natural gas resources may come as a surprise to many energy industry insiders who complain about regulations imposed by President Barack Obama's administration and view with suspicion his intention to accelerate the transition away from fossil fuels.

But the US administration has embraced the results of the shale exploration both in the US and internationally. Then secretary of state Hillary Clinton established a bureau of energy resources in 2011 with a mission to manage the geopolitics of energy, as well as to assist in transformation to renewable energy sources. Hochstein oversees that bureau and serves as the State Department coordinator for international energy affairs.