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When Global Oil Prices Tanked, Shale Oil Production Didn’t. Here’s Why.

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Written by: Thomas Covert

Click HERE to Read the Article by the Publisher.


As global oil prices fell from more than $100 a barrel in July of 2014 to less than $30 a barrel in January of 2016, industry observers expected to see a precipitous drop in U.S. shale oil production. At the time, these forecasts seemed sensible. Shale wells were definitely not the cheapest source of new crude oil production.  In fact, the break-even costs for North American shale producers were thought to be about three times higher than for similar costs for Middle Eastern producers.  Shale wells also deplete faster than conventional wells, with production rates falling about 70% after the first year.  On top of this, many shale producers used inflexible debt financing to fund their operations, making a drop in operating cash flow potentially catastrophic for ongoing development efforts.

To the surprise of many, shale production actually increased during that drop in prices.  Total production peaked in March of 2015, and has only fallen by 17% since then. Meanwhile, production in some basins, like the Permian in Texas and New Mexico, is within spitting distance of peak levels. While offshore rig workers around the world are packing up and heading home, oil companies are still drilling new wells in every major U.S. shale play. With this shift in oil resources, it’s no wonder major energy companies like BP are seriously examining how to best tap shale resources.

Why has U.S. shale production proven to be so resilient to low oil prices? I can think of (at least) three reasons. All three come down to costs.

First, as oil prices fell, so did the costs of drilling and completion services—more than 30% from the last quarter of 2014 to the first quarter of 2016. Because of this steep drop in costs, wells that would have been only marginally profitable in late 2014 could still be profitable in early 2016. Much of this decline in the price of drilling and completion services can be rationalized simply by supply and demand.  When oil prices fell, shale producers had the ability to drive a harder bargain with their suppliers.  After all, there was less of a “pie” to share in those negotiations, and there were fewer customers for oilfield service contractors to negotiate with.  Thus, even without changing operating procedures or drilling locations, shale producers were partially insured against lower oil prices by a fall in the costs they faced.

Second, the engineering properties of shale wells mean that “breakeven” price calculations can be misleading about the profitability of new wells in a different oil price environment. While the development costs of conventional oil wells are mostly fixed in the form of drilling an expensive hole in the right place, more than half of the cost of developing a shale well lies in the complicated hydraulic fracturing treatment that producers must employ to make these wells productive.  There is now long-standing evidence that more aggressive treatments generate more oil production.  But since more aggressive treatments are more expensive, shale producers must solve a cost-benefit tradeoff: how much “fracking” maximizes the profits of a given well?


Tags: oil, oilfield, crude, energy


Written by: Thomas Covert

Click HERE to Read the Article by the Publisher.

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