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Texas Isn’t Scared of $30 Oil

News Article by Mi Swaco

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Texas has a message for $30 crude doomsayers: Bring it on.

A handful of shale patches in the state, which would be the world’s sixth-largest oil producer if it were a country, are profitable with crude below $30 a barrel, according to an analysis by Bloomberg Intelligence. In the Eagle Ford’s DeWitt County, which produced more than 100,000 barrels a day in November, the average well can be profitable with U.S. benchmark crude at $22.52 a barrel, $4 below the lowest level this year.

Drive 200 miles southwest to Dimmit County, and drillers need $58 oil. The wide range of break-evens, a term for the price at which a well goes from profitable to unprofitable, illustrates one reason why shale production from exploration and production companies has been more resilient than expected, filling storage tanks in the U.S. to levels not seen in 85 years.

 “It may be harder to kill many U.S. E&Ps than analysts originally thought,” Bloomberg Intelligence analyst William Foiles said in the presentation. “The wide range of break-evens undermines efforts to come up with a single threshold for U.S. shale producers.”

Since prices started falling in June 2014, U.S. shale drillers have dodged countless death warrants by cutting costs, experimenting with new techniques and technology and boosting output to keep their wells competitive. West Texas Intermediate crude fell 19 cents to $32.09 a barrel at 8:32 a.m. Thursday on the New York Mercantile Exchange.

Idling Rigs

It hasn’t been pretty. Two out of every three drilling rigs in the U.S. have been idled and scores of roughnecks who worked them laid off. Law firm Haynes and Boone says 42 companies already filed for bankruptcy as of Jan. 6. For the most part, though, it has worked. U.S. output last week was 9.2 million barrels, the highest January level since 1971 and just 5 percent down from last year’s peak.

QUICKTAKE Oil Prices

 It’s easier to survive low oil in some places than in others. Bloomberg Intelligence analyzed everything from the average well output to the amount of local school taxes to learn the average break-even cost for drilling in different rock formations in counties across Texas’s two big shale regions, the Eagle Ford in south Texas and the Permian Basin, which contains several shale layers such as the Spraberry and Wolfcamp.

Nine areas had break-even costs at $30 or below, including some of the biggest oil-producing counties in Texas, such as DeWitt, Midland, Martin and Reeves, with had combined output of 430,000 barrels a day in November, according to the Texas Railroad Commission.

Even Lower

Oil prices can be even lower to justify completing wells that have already been drilled but haven’t yet been hydraulically fractured, or fracked. Companies have built up a fracklog of more than 4,000 of those wells in the U.S. It’s economic to complete wells in 18 different areas in the Permian and Eagle Ford at sub-$30 oil. In Reeves County in the Permian, oil prices above $14 justify fracking an already-drilled well.

Even within one county, break-even costs can vary widely depending on which company is drilling and the richness of the rocks they’re tapping, said Kathryn Downey Miller, a principal at Lakewood, Colorado-based energy research firmBTU Analytics LLC. In DeWitt, for example, about 45 percent of wells drilled in 2014 would have been profitable with oil below $20, but another 5 percent needed $70 oil.

“You see a great amount of variability between operators, even in a small geographic area like a county,” she said by phone.

More Activity

That variability makes it difficult to tell when companies will give up drilling. For instance, while companies reduced the number of new wells coming online in Dimmitt County to 65 in the third quarter last year from 226 in the first quarter, they increased activity in DeWitt County by 77 percent.

While shale drillers have been battered during the price downturn, there may be a silver lining. Those who can maintain the cost reductions and productivity improvements when prices eventually rise may be stronger than before the crash.

“The good news is we’re primed and ready for when we need to see a return to activity in North America,” Miller said. “This lower price environment is making companies defer big oil projects, so there will be an opportunity for U.S. shale producers to contribute to production growth, and they’ll be better able to compete than they’ve ever been.”

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