The shale boom can shrug off slumping oil prices because extraction costs have fallen far enough to give producers room to profit, experts say.
Big efficiency gains at wells are helping even as West Texas Intermediate, a benchmark for U.S. crude oil, fell below $80 a barrel Monday for the first time in two years, before recovering to $81. Brent crude, an international index, that was above $115 a barrel in June closed at $85.44.
Oil and gas firms are susceptible to low commodity prices, which can make drilling uneconomical. But U.S. shale drillers are cutting costs by sinking more wells from single “pads,” drilling longer lateral shafts to cut across tight rocks and improving geological sensing abilities to tap lucrative oil deposits.
More drilling rigs have recently been deployed in North Dakota despite dampened prices. Two weeks ago, the state that’s at the heart of the shale boom had 190 operating rigs. It’s now 196.
“You can see that hasn’t deterred drilling by any means,” Alison Ritter, a spokeswoman with the state’s Department of Mineral Resources, told the Washington Examiner.
About 85 percent of shale wells could handle a $75 to $80 per barrel price long term, said Frederick Lawrence, vice president of economics and international affairs with the Independent Petroleum Association of America.
Well-heeled firms in regions that have come to define the energy boom — the Bakken in North Dakota and Montana, and the Eagle Ford and Permian in Texas — can now probably stomach prices as low as $60-$65 a barrel for a while. If such prices were sustained, however, firms would probably reduce spending on rigs, wells and other capital, Lawrence said.
“The $60-65 floor is one that has been around for some time and the companies have been getting more efficient over time,” Lawrence said in an email.
Lower oil prices may last for a while yet. Goldman Sachs slashed its first quarter 2015 forecast for Brent to $85 a barrel, down from $100, and prices for U.S. crude from $90 to $75 a barrel. Others, such as Schlumberger, an international firm that provides services to oil drillers, expect prices to rebound soon.
“We … expect Brent to recover and stabilize when and at the level that is deemed appropriate by the main oil producers,” Schlumberger CEO Paal Kibsgaard said this month during the firm’s third quarter earnings call.
Prices have dropped recently because of high American production, lower global demand and unexpectedly high production in Iraq and Libya.
Saudi Arabia, the world’s biggest producer, has in the past cut production to keep prices high. It depends on oil for the majority of its revenues. But it’s now keen to keep production high to avoid losing market share to the U.S. American production has surged to 8.8 million barrels a day, which is more than 3 million barrels a day higher than in 2010.
Analysts said Saudi’s decision is designed to test the “break even” point of U.S. shale wells. The tactic has caused discomfort for some older shale operations but they’re not idling drilling.
“We’re hurt, but we’re not to the point we’re shutting down,” Harold Hamm, chief executive of Continental Resources, a major player in the Bakken, told Platts Energy Week TV. “And we’re not getting close to that, yet, within a pretty good measurable amount, you know, $15 or $20. And certainly that’s the case in the Bakken.”
A recent Citi report said crude prices would need to fall to $50 per barrel for shale drillers to call it quits. And drillers in some of the more established shale operations have likely viewed the break even point as below $80 per barrel for some time because transporting crude to refineries adds costs.
“Even at those prices [for] producers in the Bakken and Eagle Ford shales … returns to investment have been quite healthy,” said Ken Medlock, an energy fellow at Rice University’s James A. Baker III Institute for Public Policy.
Still, firms at new wells are feeling the pinch, Ritter said. Several are in “fringe” counties around the Bakken and are now uneconomic for drilling. These represent just under 8 percent of the state’s oil production, according to Department of Mineral Resources statistics.
But many of those rig contracts are still active, so production will continue. If prices rebound before those contracts expire, production may remain steady, Ritter said.
“We could see about 10 rigs lay down, give or take,” Ritter said. “It’s not a huge impact.”
