Oil Markets 2014: The Shale Genie, Risk And Soft Power

| About: Pioneer Natural (PXD)

In oil markets, the year 2014 already looks like a continuation of the second half of 2013. But unpredictability in commodities' extraction and delivery, political risk and policy risk may play a bigger role in 2014. If the industry can remove the export ban on crude oil, more variables will factor into 2014.

The second rail disaster from transporting oil from North Dakota's Bakken Shale, the Lac-Mégantic, Quebec incident with loss of life and the December 30th Casselton derailment renewed the debate between pipelines versus rail transportation. The director of the North Dakota Department of Mineral Resources "predicted that as much as 90 percent of crude produced in the Bakken this year will move by rail," noted a recent article on the issues. In Parker County, Texas, the Texas Railroad Commission listened to residents' complaints about earthquakes, which they attribute to disposal wells. The US Geological Survey sees a link between the earthquakes and wastewater disposal, a similar renewal in earthquake activity is happening in Oklahoma as well.

Recent violence in Iraq, with Al Qaeda pushing into the cities of Ramadi and Fallujah of Anbar province, create concern about Iraq's oil production potential in 2014. Iraq is the second largest OPEC producer behind Saudi Arabia. Bloomberg writes: "The violence hasn't affected Iraq's major oil fields, the country's main source of revenue. Iraqi output increased by 100,000 barrels a day to 3.2 million barrels last month, the most since August, according to a Bloomberg survey of oil companies, producers and analysts." Venezuelan production dropped 235,000 barrels a day to 2.45 million this month. OPEC production just under its 30 million b/d target to 29.995 million at year-end. Libyan oil production is expected to rise as some shut-in oil production comes back online.

The U.S. has pledged support of various kinds to Iraq to help reverse the tide of Al-Qaeda advances and violence. These events remind us that global oil supply is still under the management of OPEC & Co. Brent crude prices were $107.61 for the February 14 contract. Brent spot prices ended the week of Jan 2nd at 107.94, and WTI was $95 (which is also the Energy Information Administration's 2014 forecast price).

The Shale Genie

However, as mentioned in earlier articles, the shale genie is out of the bottle. U.S. production in shale oil and shale gas offers lessons learned for countries desiring to exploit their own resources.

According to the EIA, several nations have begun to evaluate and test the production potential of shale formations located in their countries. Poland had drilled 50 test wells as of November 2013. Exxon, Marathon and Talisman gave up on Poland, with its stringent regulations. Recently however, Chevron (NYSE:CVX) became one of the first majors to form an agreement with Polish state-controlled gas firm PGNiG. Poland imports most of its gas from Russia. Professor Rychlicki of Krakow's mining university estimates that "Poland will need to drill about 300 test wells - each costing $10m-$15m - before the country will have a proper grasp of how much shale gas it has, and whether it can be extracted in commercial quantities," notes a Financial Times article. The top levels of the Polish government are now focused on expediting Poland's shale gas potential, estimated at 346 billion (bn) to 768 bn cubic meters (i.e., 12.219 trillion cubic feet (tcf) to 27.122 tcf).

Argentina, Australia, China, England, Mexico, Russia, Saudi Arabia and Turkey have begun exploration or expressed interest in their shale formations, notes the EIA.

The state of global assessment is varied:

The state of shale gas is that of abundance:

Importantly, what is technically and economically recoverable is key to unlocking other countries' resources. The testing and de-risking activities in the Permian Basin offer a glimpse of the task ahead for the repeat performance of the recovery of shale resources. Even Pioneer Natural Resources (NYSE:PXD), with its mad shale skills, took two to three years to analyze thousands of existing wells to assess the potential shale oil reserves in the Permian Basin. Estimates of the reserve potential in parts of the Permian, consisting of the three basins, is still under review, so to speak.

Independent producer Noble Energy (NYSE:NBL) has a strong foothold in the Eastern Mediterranean region with its recent gas finds. Noble also has developed the skill sets involved in shale production and extraction, as has Apache (NYSE:APA), a global player too. In the U.S., independent E&P firms, both small and large, will continue to improve their processes and find efficiencies, which can potentially add return for investors.

Beyond the Financials

Importantly, when considering investing in energy firms, beyond the financials and due diligence, a number of "soft power" factors may indicate sustainability and long-term vision. These lessons or takeaways come from a recent article about Pioneer's leadership in D CEO magazine. They extend to other firms. Evidence from academic research shows that communications from the C-suite and certain decisions taken from the top are value enhancing.

1) Leadership and management: Is the top leadership in touch with the operations and culture of the firm? Are there indicators that their employees are in sync with and support of the firm's mission? Are management and employees proud of their firm?

2) Vision: Is the strategy of the firm aligned with the changing environment in which they operate? Are they sensitive to the trends impacting the industry or are they out of touch with the forces impacting their industry positively or negatively?

3) Communications: Does the leadership display a proactive approach to informing the public and stakeholders about developments that could impact short-term profitability? Does the firm communicate about developments or challenges that impact the industry at large?

There are a number of E&P firms that operate with a high degree of social conscience. To study a firm's quotient for excellence takes time and can only be observed over a period of time, sometimes years.

Over the last many months, a focus of the Permian Basin's re-development has been of foremost interest, and a new short book I have written, "Chronicles of an Oil Boom: Unlocking the Permian Basin," conveys an analysis of U.S. shale oil and the Permian. In observing the trends, which seem to be set in motion, their context and implications are only beginning to emerge. In 2013, the trends of continued U.S. oil production and a reduction of imports are confirmed. How shale resources exploration evolves around the globe is yet to be determined. New regulation in shale production may emerge given water resource and wastewater disposal issues. Relative to the U.S.'s success story, the national interest of other countries with adequate domestic resources may be well served to identify and explore their options.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.