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The US Shale Breakeven Price Debate

The US Shale Breakeven Price Debate

My favorite quote by H.L. Mencken is ‘a cynic is a man who, when he smells flowers, looks around for a coffin‘. A bit morose, I know, but this appeals to the contrarian in me. My second favorite is überly-applicable to US shale oil break-evens: ‘For every complex problem there is an answer that is clear, simple, and wrong‘. For there is no lack of estimates flying around as to the price level at which US shale oil production could be curtailed. The problem is, they all appear to be different.

The debate was ignited by OPEC, after comments from Secretary General El-Badri. The Libyan said late last month that tight oil (aka US shale) would be the first to be impacted by the drop in oil prices, stating: “If prices stay at $85, we will see a lot of investment, a lot of projects, a lot of oil going out of the market.” He said half of shale oil would be out of the market at a price of $85.

This view is at the high end of the range when it comes to estimates, with the IEA seemingly taking the other side of this bet. Executive Director, Maria van der Hoeven, said last month that 98% of U.S. shale plays have a break-even price of below $80.

Related: 5 Reasons The Halliburton-Baker Hughes Deal Is Poisoned

The IEA’s Chief Economist, Fatih Birol, tempered this optimistic view in recent days, stating current low oil prices would hurt investment in the industry and likely hurt production growth going forward. That said, slowing production growth is very different from an Opecian view of ‘a lot of oil going out of the market.'

The below graphic of oil break-evens from the Wall Street Journal highlights the current conundrum faced. Not only are shale break-evens wide-ranging from play to play, but they can also wildly vary within each formation itself:

Room To Drill

Further conjecture is stoked as oil prices have been unable to rebound back above $80. Oil producers on earnings calls are shrugging off the suggestion that this lower price environment is having any impact (either that or they are not being completely transparent).

The CEO of Halliburton, David Lesar – the world’s biggest provider of fracking services – endorses this notion somewhat, saying U.S. shale oil producers will be fine, as long as oil remains between $80 and $100. Meanwhile, signs of rigs being idled, from Texas to Utah is providing a counter-point to this argument.

The below chart from Goldman Sachs (via Zero Hedge) points to a price of $75 where production would start to slow, a number affirmed by other bank research:

Brent Oil Price in $/bbl

In addition, the level of financial pain which each individual producer can withstand is going to vary wildly; larger producers may be more financially stable, while smaller producers may be more highly leveraged.

Related: Will US Shale Oil Undermine Its Own Success?

It was this Reuters summary of various bank estimates which instigated me to go all Mencken in the first place, as break-evens are so wide-ranging, given likely different methodologies and assumptions. The below graphic (pilfered from Business Insider) shows a similar trending to the above image, emphasizing the gravitation around the $80 mark:

Wood MacKenzie Estimate Of Shale Break Even Price

So where does this leave us? Despite wide-ranging estimates, consensus indicates that some degree of US shale oil production would be impacted at around current levels. Whether this translates to a mere slowing in the rate of oil production growth due to lower future investments, or a more material crimping of production, is yet to be seen. But if OPEC seems intent on leaving this up to market forces as opposed to intervening to balance it, then it would appear we may well find out.

I leave where we started, and with a quote from H.L. Mencken: time stays, we go.

By Matt Smith

Source – www.energyburrito.com

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  • John Scior on November 20 2014 said:
    Certainly there are going to be different "break even" points for xtracting this tight oil as different drilling companies face different costs for drilling. One cost would be how much debt does the company have to service in their balance sheet. Also from a revenue perspective, each company may have different capacity to recover the natural gas from the well, as more utilization of "cheap" gas from these wells becomes evident, those companies will be induced to recover more and thus the revenue equation is rebalanced. Once invested in a well, the costs are not going to disappear because the price has diminished, however as we are observing, fewer new well development is occurring as the reward to risk ratio diminishes. Just as alternative energy and biofuel research diminishes with a reduction in the price of oil. The economic benefit from substitution makes these paths less attractive.
  • ngass on November 21 2014 said:
    The comparison of break-even prices to Brent is wrong. The US shale oil is sold in the US and there we have the WTI price that is about $75. Hence a number of shale plays are very close to what they can accept.
  • Roger on December 09 2014 said:
    The EIA website says new oil wells average 200,000 barrels in the first year (550 bpd). take a price of $50 and that equals 200,000 x $50 = $10 million.

    If a well can be drilled and fracked for $10m then it pays itself off in the first year and subsequent years are all gravy.

    Such a well might be expected to produce 1 million barrels over 25 years so even at $50 it would generate $50m with only about $10m initial investment which is paid back in year one.

    The big positive of shale wells is quick return. The majority of the production happens In the first 3 years which is much much better than the same 1 million barrels produced at a flat rate of 40,000 barrels a year for 25 years.

    Shale oil may well be profitable at a price of $25 which is closer to the hundred year average oil price
  • Anthony Mathias on December 16 2014 said:
    There is one catch a shale well drilled in one place would be able to extract shale- kerogen or tight oil from that rock for may be one year. It is not a reservoir. New wells are required to be drilled continuously
  • alvin_firpo on January 25 2017 said:
    opec is playing the wrong game. quit supplying the u.s., and force shale producers in west texas, pennsylvania, north dakota to supply u.s. energy needs. shale producers cannot make up the 10 million bopd deficit between u.s. production, and consumption. the resulting oil based commodity prices would wreak havoc on the u.s. economy. food prices, and availability would be deleteriously impacted, and the u.s. consumer based economy would implode preventing among other things its hegemonic pursuits.

    it will take years to rebuild a u.s. based oil industry once the shale plays have dried up. engineers, designers, technicians, et.al. with any ability will have moved on. the resulting derth of know-how will provide a testament to the stupidity of wanton tight oil production.

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