Shale Rebound Runs Out Of Steam At $40 Oil
The IEA recently predicted that U.S. shale would grow by at least 430,000 bpd this year, plus another 780,000 bpd in 2018. But those heady growth projections are in doubt with oil prices plunging to their lowest levels in ten months.
In fact, lower oil prices come at a time when the industry is struggling to achieve deeper cost reductions. Over the past three years, shale drillers have improved well economics by drilling longer laterals, using more sand, finding the sweetest spots, and generally doing more with less. But the lowest hanging fruit has already been plucked, and further cost reductions are harder to come by.
Moreover, much of the efficiency gains came from demanding lower fees from oilfield services companies, an issue explored in previous articles. Oilfield services companies are fed up with taking it on the chin, and are starting to charge more for fracking services, rigs, and equipment. That ultimately means higher costs for producers.
But with oil prices now sharply lower, the issue of rising production costs is a more urgent issue. According to Wood Mackenzie, the average oil well even in the most attractive shale basin in the world – the Permian Basin – breaks even at roughly $43 per barrel. Importantly, that breakeven price is actually higher than it was earlier this year at $39 per barrel. Service costs will continue to climb this year, and the breakeven price in the Permian could rise to $45 per barrel in the months ahead.
“They definitely can’t maintain the trajectory they’re on,” said Ben Shattuck, an analyst at Wood Mackenzie, according to the Houston Chronicle. “For a lot of these pad wells to work, you need those ultralow service prices, and that doesn’t happen when you have more than 300 rigs in the Permian.”
If oil prices stay where they are, or fall even lower, some of the more marginal areas of the Permian will be pushed out of the money. Of course, because the breakeven price is an average for the whole area, plenty of locations are profitable with much lower prices. But the drilling boom will likely slow down quite a bit if oil prices do not rebound.
A deeper selloff for oil prices would also have a second order effect on oil drillers. Shale companies could see stingier lenders if Wall Street balks at rescuing the industry from another downturn after doing so multiple times over the past three years.
Early signs of a growing wariness among banks and investors are starting to emerge. The Houston Chronicle reports that oil companies have only raised $3 million in new equity issuance so far in June, a massive drop off from the $1 billion raised in May. That is also down from the roughly $8 billion that flowed into the shale industry in the three months after the OPEC deal was announced late last year. Some investors have “little-to-no interest in providing a second lifeline to the industry,” according to Tudor, Pickering, Holt & Co.
Read full article at Oilprice.com
