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March 2012 • BAKKEN BREAKOUT
Associated Press
Iranian submarines and warships participate in navy drill in the Sea of Oman Dec. 28, 2011. Iran’s navy chief warned Dec. 28 that his country can easily close the strategic Strait of Hormuz at the mouth of the Persian Gulf, the passageway through which a sixth of the world’s oil flows.
barrels per day.
Saudi Arabia and other OPEC nations have expressed a willingness to make up any deficiency, perceived or real, in the event of a supply disruption. Still, even those reassurances aren’t doing much in the way of calming markets at this point.
To put things into perspective, worldwide consumption of oil is close to 90 million barrels per day and that figure is projected to rise in the years ahead as developing countries like China continue to grow and consume more. The United States, currently the single largest user of oil, requires approximately 20 percent of the daily supply followed by China at more than 10 percent. While Iranian oil production makes up less than 4 percent of total world output, its intensified efforts to move forward with a nuclear program continue to destabilize the region and rile oil markets.
Despite trade sanctions, officials in Iran have no choice but to aggressively seek alternative buyers of their oil. Revenues derived from oil sales make up a significant portion of their government’s income, at least half of those, and the vast majority of their export revenues. That’s money needed by the government to operate effectively and
pursue its agendas, including those currently causing considerable tension around the globe.
The reality is that there will be a limited number of willing buyers of Iranian crude while the sanctions are in place and, because of that loss of leverage, could mean discounted prices for their oil. At the same time, it tends to put the remaining OPEC producers in the driver’s seat as they’re looked upon to make up for any production shortfall if Iran fails to find suitable markets for its oil.
The Chinese, who import more Iranian crude than any other country, see the sanctions as extremely problematic and worry about supply disrupts. The concern is so great that they’re assessing ways to assist shipping companies with insurance on oil shipments from Iran once the sanctions take effect on July 1.
Originally the 27 counties making up the European Union agreed that the embargo would negatively impact insurance coverage for vessels carrying Iranian cargo. Lately though, exceptions are being considered by the EU clearing the way for at least some level of coverage to shippers and subsequently lowering their risk.
While the end result might be more in the way of shifting supply rather than an overall reduction, it still sets the stage for crude oil prices to rise. For the majority of the world’s end users of the flammable fossil fuel, it means higher prices at the pump for the refined product powering their vehicles.
The cloud of uncertainty surrounding nuclear proliferation in Iran has serious implications not only for neighboring countries in the Middle East but around the globe. At the same time, it creates an extremely favorable environment for domestic drillers targeting shale plays from a cost-price standpoint.
The Bakken and the global market Exploiting unconventional oil plays like the Bakken shale comes with a hefty price tag; individual well costs can approach and exceed $10 million. With breakeven points greater than those of conventional wells, higher per barrel prices are needed in order to make horizontal drilling a profitable proposition. In essence, high foreign oil prices make drilling Bakken shale more feasible than when prices are low.
The Bakken is unique not only because of the extraction techniques used but also because rapid expansion has outstripped existing infrastructure creating numerous logistical challenges.
Moving oil from wellhead to market presently is costly and as a result Bakken crude is trading at a discount.
With production projected to stay significantly ahead of existing and proposed infrastructure, pipeline projects like the Keystone XL Pipeline aimed at alleviating the bottleneck are understandably viewed as critical to the future development of the field. Politics leading up the presidential election this fall have delayed the project at this stage as the current administration attempts to appease environmentalists and campaign donors who oppose the pipeline.
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