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News Extra: Plunging costs for US shale oil producers threaten viability of other oil basins around the world

13 August 2016

US shale oil producers have confounded industry observers by increasing production despite the current low oil price. Six months ago, many analysts were saying that shale producers had hit a wall after cutting costs and lifting well output by as much as 50% since the price crash in mid-2014. Now, it seems producers are seeing output gains from improved well designs and fracking techniques.

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Noble Energy, for example, said in a second-quarter results presentation on August 3 that productivity gains were 4% over the quarter and that after initial production forecasts of 390,000 barrels of oil equivalent per day (boe/d) this year on expenditure of $1.5 billion, it was now expecting to spend less and produce 415,000 boe/d.

Companies have reduced costs due to technical changes, such as injecting far greater quantities of sand and water than in the past, and have worked hard to make efficiency gains at the wellhead and in support operations. They have also renegotiated contracts with oilfield service providers such as Halliburton and Schlumberger.

Consultants Wood Mackenzie estimated in a recent report that full-cycle break-even costs have fallen to $48 in Eagle Ford and $37 at some wells in the Permian in Texas, and to $35 in the South Central Oklahoma Oil Province. The price of benchmark Brent crude has seen highs of $53 and lows of $41 over the last three months.

The majority of US shale fields are now viable at $60, the report says. Average costs per barrel have dropped by 30% to 40% for US shale wells, but just 10% to 12% for other oil projects, according to the report.

The Baker Hughes count of North America oil rigs has risen for most of the last two months after a long period of decline, and this understates the effect. Multi-pad drilling means that three wells are now routinely drilled from the same rig, and sometimes six or more. Average well productivity has risen fivefold in the Permian since early 2012.

Wood Mackenzie said companies with US shale assets are likely to be at a competitive advantage over the next few years. Producers that rely on oilfields in higher-cost regions will have to cut costs further or face shrinking output.

An opinion piece in The Daily Telegraph by Business Editor Ambrose Evans Pritchard on July 31 looked at those countries likely to face pressure from the resurgence of US shale. He thinks that older basins such as the North Sea and high-cost projects elsewhere such as off the coast of Nigeria and Angola, in the Arctic, or the oil sands of Canada and Venezuela's Orinoco basin would all face difficult times.

“Venezuela is already in the grip of hyperinflation and food riots. Nigeria's currency peg was smashed last month, and the naira has fallen 60%. Angola has turned to the International Monetary Fund, Azerbaijan to the World Bank,” Pritchard said.

But he also highlighted the uneasy situation OPEC now finds itself in, particularly Saudi Arabia, which almost two years’ ago took the decision to flood world markets with oil and use its own substantial financial reserves to weather the period of low oil prices that would ensue.

This did indeed succeed in killing off a string of planned high-expense mega-projects in deep waters, reducing future output by around 5m barrels a day,  but the cost to Saudi Arabia has been extreme, with net foreign reserves falling 25% even though it is borrowing money abroad to slow the loss.

The Saudi move was designed to sink a number of competitors, particularly US shale drillers whose supply was disrupting OPEC’s traditional markets. But the ability of these companies to reduce costs has meant that although overall US shale production is down on 2015, surviving drillers are leaner and meaner than ever.  And the near-4,000 drilled but uncompleted wells in US shale basins are profitable at $50 and will come on stream when, as forecast, prices rise in the medium future.

“North America's hydraulic frackers are cutting costs so fast that most can now produce at prices far below levels needed to fund the Saudi welfare state and its military machine, or to cover OPEC budget deficits, Pritchard concluded.

If he is right, this could have major geopolitical and economic consequences around the world, and particularly in the Gulf.


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