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Page added on June 25, 2017

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Can U.S. Shale Survive Below $40?

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Many U.S. shale drillers have said that they have full-proofed their operations for $40 oil, having lowered breakeven prices substantially over the last few years. They may soon have to prove it. Oil prices dropped to fresh seven-month lows on Tuesday, officially entering bear market territory, down more than 20 percent year-to-date. The declines have raised questions about the possibility of WTI hitting $40 soon.

A rising U.S. rig count, multi-year record production levels from Libya, and a general mood of pessimism more than outweighed the positive news that OPEC and non-OPEC producers increased their compliance rate in May. There is now a growing consensus that the OPEC deal won’t be sufficient to bring down inventories at a fast enough pace to balance the market this year.

There are very different answers out there depending on who you ask. Most of the oil majors and some top shale companies such as EOG Resources, are said to have breakeven prices below $40 per barrel. That would suggest that their drilling campaigns would not stop even after taking into account the latest slide in prices.

But those are just the top companies, not everyone across the industry. Some smaller companies in more marginal parts of U.S. shale basins will face much more pressure in today’s market.

A long list of shale drillers have dramatically reduced their breakeven thresholds, lowering costs so that they could make money, by and large, with oil prices in the $50s. That is why the rig count surged over the past year.

But $40 oil is much different than $50-$55 oil. “We had $52 on average in Q1 and everyone said we are going to start growing again. Everyone said our balance sheets are fine,” Paul Sankey, a senior analyst at Wolfe Research, said on CNBC. “The market is now testing who can really stand up and run. At $52 the answer was too many people. Now at $43 we are going to really find out as we go into Q2 earnings who can really get this done at $43. And I can tell you, there’s not many companies that we like…Most of the sector has got an awful problem down here for sure.”

UBS says that oil at $45 per barrel “slows most U.S. shale plays.” The Bakken, the Eagle Ford and the Niobrara struggle below $45. But if prices drop to $40, companies will be forced to “hit the brakes,” even in the highly-sought after Permian Basin.

So even as shale executives talk up their cost reductions, they will be put to the test in the near future. “We are nearing the point where it’s going to be a challenge for them as well, if you break $40 per barrel,” John Kilduff of Again Capital told CNBC.

“With oil at $45, there will be very little movement in capital globally, and fewer projects will get sanctioned,” David Pursell, an analyst at the investment bank Tudor, Pickering, Holt & Co., told the Houston Chronicle.

Because there is a lag between oil price movements and rig counts, the effect of the recent slide in prices might take some time to become apparent. Moreover, with rigs already out in the field drilling, production might continue to rise even if prices fall.

But if prices fail to rebound, the gains in the rig count could start to slow. Companies would have to start thinking about paring back their drilling campaigns the longer that oil prices stay in the low or mid-$40s. “[T]he rate of growth in drilling we’ve seen over the past year might not be sustainable through the year and certainly not into 2018,” said Jesse Thompson, a business economist at the Houston branch of the Federal Reserve Bank of Dallas, according to the Houston Chronicle. “At a certain price point, you’ve eventually saturated the drilling you can afford to do.”

The equation, however, would really change if oil prices continue to fall even more. “I think we most definitely go to $40. We’re probably looking at the upper-$30s at this point now,” John Kilduff told CNBC.

By Nick Cunningham of Oilprice.com

oilprice.com



9 Comments on "Can U.S. Shale Survive Below $40?"

  1. deadlykillerbeaz on Sun, 25th Jun 2017 8:58 am 

    In 2006, there were about thirteen hundred Bakken wells. The number of wells is closing in on twelve thousand. Ten thousand new wells producing somewhere around 980,000 barrels per day, plus the thirteen hundred already there.

    At a cost of 5 or 6 million dollars per well, times ten thousand, 50 to 60 billion dollars has been frittered out the window.

    980,000 times 50 gets you 49 million dollars each day if the price is fifty dollars. Times 40 you have 39,200,000 dollars from those eleven thousand wells.

    Times 3650 days, the total amount of value of the Bakken oil is 143,080,000,000, or 80 to 90 billion dollars more than the cost of those wells. Has to be a payday somewhere down the line, even if they are all insolvent now.

    At 250,000 barrels per well, times twelve thousand, you’ll end up with 3,000,000,000 barrels of oil. Times 50, 150 billion dollars. The numbers are in line with or close to reality.

    Add up all of the costs, you should breakeven over time. It was or is being done all for practice, you’ll learn a thing or two about a thing or two, but you aren’t going to get rich, you might lose too. Oh well.

    The US gov has a 20 trillion dollar debt, another 60 billion is peanuts, they can buy the debt and control those eleven thousand wells. Deficits don’t matter. The US military can make good use of the oil somehow.

    You won’t get any.

    The crazed millenials want cell phones, not cars. They can fly to any destination they want to choose. Don’t need an expensive ice car that needs repair and is a money pit. Cars don’t cross oceans. A cellphone can order a car when you get there.

    People have turned into robots, smartphones outsmart them, they have to follow what the cellphone display displays, otherwise, they’re lost, mired in the muck.

  2. shortonoil on Sun, 25th Jun 2017 9:04 am 

    [b]Can US Shale survive below $40[/b]

    Yes they can; as long as their EBITDA stays positive, and they can find a loan office who wants to make the commission on the loan. Of course, to do that the FED has to keep its presses oiled up, and running full steam ahead. If the FED actually told the truth for a change, and actually do reduce their balance sheet (rather than selling their assets through some scheme to themselves) it doesn’t look good for the frac and pump crowd. By 2018 we should have some first hand information on how well its going.

  3. MASTERMIND on Sun, 25th Jun 2017 9:38 am 

    Don’t worry I am sure the shale producers will invent some sort of Alien technology to extract oil for pennies!

  4. Northwest Resident on Sun, 25th Jun 2017 10:50 am 

    [b]Can US Shale survive below $40[/b]

    Sure, if you call existing on nothing but pure life support “surviving”. US Shale “survival” depends on:

    1) Ultra-low interest rates to make carrying massive debt bearable, taking on new debt achievable, and rolling over existing debt doable

    2) Massive FED and CB liquidity creation, without which not just U.S. Shale but the entire global economy will go supernova and collapse into a black hole from which there is not return (gonna happen anyway, eventually)

    3) Expertly crafted propaganda generated 24/7/365, aided and abetted by Saudi/OPEC and occasional Russian jawboning to keep notching the price of oil back up as it continues to drop based on fundamentals (too much oil, not enough demand)

    4) Plenty of risk-on and greed sentiment on the part of “investors”, sentiment which is totally dependent on 1, 2 and 3 above

  5. rockman on Sun, 25th Jun 2017 12:59 pm 

    Would any US shale play be viable at $30/bbl? Some will…some won’t. During the late 80’s and early 90’s the Austin Chalk carbonate shale was the hottest drilling play in the US. And oil prices were $30/bbl…or less.

    “The Austin Chalk Trend is a self-sourcing carbonate reservoir, where both oil and gas were formed from organic matter in the chalk itself. Approximately 30-miles wide and about 650-miles long, it is a very fine grain limestone, with very small pores and little or no matrix permeability, but it has excellent porosity and is naturally fractured, often extensively, with considerable faulting and formation dip changes, and it is in the areas of dense fractures that the Trend is most permeable and productive.

    In prior decades, these sweet spots were drilled to drain the shallow oil, but frequently, because boreholes were vertical, they would miss the paralleling vertical fractures and result in dry holes. During the 1980s, however, horizontal drilling was introduced, and with it, measurement-while-drilling (MWD) and logging-while-drilling (LWD), systems that provided realtime data on the direction of the bit and the strata through which it was drilling. As a consequence, the success rate in encountering the productive, northeast-trending vertical fractures increased exponentially, and the Austin Chalk play became the world’s primary location for horizontal drilling, with more than half the horizontal wells in the world.
    The 1990s saw the focus of the Trend shift from emphasis on oil to development and production of the associated gas reservoirs.”

    And with lower oil prices hurting other shale plays interest in the AC has resurfaced:

    “Some shale players are chasing an old tight oil play under the Eagle Ford trend in Texas and Louisiana. US tight oil specialist EOG Resources is rapidly expanding its holdings in the Austin Chalk trend through a pair of leasing programmes after hitting a series of big wells while targeting the play underneath its Eagle Ford shale acreage. EOG has land companies working on its behalf in Texas and Louisiana to lock up what it believes are the most prospective places for a new tight oil play.”

    And some early results:

    “Summary: EOG’s Austin Chalk wells outperform the “premium well” definition by a wide margin, pay back initial investme7nt in under 5 months and offer an over 200% ROI. The average recent Permian well is not a premium well, though at 56% ROI and return of capital in 20 months it is still worth drilling. Not every well can be expected to be a premium well at this time, as their fraction was estimated at only 60% in 2016.”

    And one more time: trying to tagged all shale plays as viable/uneconomic at any particular price is asinine and a good sign you’re reading the thoughts of an ignorant amateur…at best.

  6. bobinget on Sun, 25th Jun 2017 2:06 pm 

    If oil w/$40 handle persists. EVERYthing goes
    on auto pilot. Almost all employees in actual production needs to replaced by robotics.

    When companies like Suncor in Canada or SRC Energy ushered in self driving trucks, rigs, w/o a hitch, that should have been enough of a signal.

    No free spending rough-necks, $80,000 a year
    coal workers, will be the economic condom facing America for the remainder of the century across
    all labor sectors.

    The so called “War on Coal” was sponsored by
    #1 natural gas
    #2 automation

  7. Anonymous on Sun, 25th Jun 2017 4:01 pm 

    40 really starts to cut into things. Only a few choice areas are still competitive (the high grade of the high grade). Only a few operators overall in the Permian can still grow. Overall LTO will contract at 40. Even 43 is probably too low. Think we need something like 47 for flatline production (US LTO overall). But also obviously 53 was enough to grow. Was too high for flatline.

  8. Anonymous on Sun, 25th Jun 2017 4:14 pm 

    See here for a great survey of real operators.

    https://www.dallasfed.org/research/surveys/des/2017/1701.aspx#tab-questions (read down to second question, not the opex at the top).

    Even for the best play (Permian Midland), the breakeven (average) is $46. Of course the answers range from 25 to 65. Presumably based on differences in how good of a land the operators have. but still. 40 is no go overall for the average operator.

  9. Mr. Pockets on Mon, 26th Jun 2017 10:51 am 

    but how much does cheap credit and subsidy provide an illusion of “growth” at $53?

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