First Published: 2014-11-23

US shale boom could soon face its own day of reckoning
Analysts say impact from drop in US oil prices has so far been limited, but bigger decline would be bad for industry.
Middle East Online

By Prune Perromat, Juliette Michel - NEW YORK

Is it wise to keep shale boom booming?

The US shale boom, which has challenged the rules of the global petroleum market, could soon face its own day of reckoning due to the supply glut it helped unleash.

The impact from the drop in US oil prices from more than $100 a barrel in June to about $75 a barrel has so far been limited. But a bigger decline would be bad for the industry, analysts say.

"If prices were to fall to $65 and remain there for a period of time, it would have an impact on US investments in establishing new oil production," said Chris Lafakis, a senior economist at Moody's Analytics.

That is in the balance as the OPEC cartel meets in Vienna this week to discuss what to do about the sagging prices that their barrels of crude earn. If they don't cut back production, prices could fall further.

The shale boom has lifted daily US oil production more than 40 percent since 2006, altering the US and global energy balance and helping press down crude prices.

But keeping the shale boom booming is an investment-intensive proposition. Shale production wells decline more quickly than conventional oil wells and have to be replaced more often.

Barclays projected that a sustained drop in prices of about 30 percent could reduce all US oilfield investment by about $40 billion from the current $200 billion annually.

ConocoPhillips in October was the first large US oil company to announce lower investment for 2015.

"We know this is a cyclical business and we've been here before," said chief executive Ryan Lance. "We intend to make prudent adjustments at this time, while continuing to monitor the environment."

Continental Resources, a leading shale producer, plans to trim its 2015 budget for drilling and developing sites by 12 percent.

"We are choosing not to accelerate development next year and will instead maintain our current pace," said Continental chief financial officer John Hart.

But even with these cutbacks, analysts expect US oil production to post strong gains next year based on projects already in the pipeline.

Continental said its 2015 output could rise as much as 29 percent even under a shrunken capital program, while ConocoPhillips expects output growth of three to five percent per year.

A meaningful decline in the growth rate of US production "would probably not show up until 2016," said Lysle Brinker, an analyst at IHS.

On the other hand, US shale producers are finding ways to lower their production costs as they become more experienced with shale exploration technology.

Production costs in the most profitable regions, like Bakken Shale in North Dakota and Eagle Ford shale in Texas, run about $50-$65 a barrel, said Lafakis of Moody's.

That's a big advantage over regions like the Permian Basin, where shale oil still costs about $80-$90 a barrel to produce and so are now uneconomical, Lafakis said.

Even at their lowest, though, production from shale still costs three to four times as much as oil from the Middle East, leaving US shale producers deeply vulnerable if OPEC does not cut back its own output.

 

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