AQUA BOOK 2016 | Page 6

SHALE OIL CYCLE The advent of pad drilling has helped lower production costs. . . Depending on calculation models, in early 2016 global daily crude oil production averaged around 96-97M bpd. Daily consumption of crude ranged from 93-95M bpd. This means that global oversupply averaged around 2-3M bpd. Even as US total production decreased by around 600,000 bpd from its high of 9.6M bpd, global oversupply remained constant. Looking towards the future, as the effect of sanctions lifting in Iran, an additional 500,000 bpd may come onto the market in late 2016. Without geo-political influences, or OPEC (and other) producers directing reduced production in a meaningful way, oil prices are likely to remain low for at least the next 18-24 months. Other factors such as a rapid Asian economic recovery stimulating demand would be required to buoy global oil prices. As such, the more leveraged producers, and the more costly/inefficient drilling and recovery, will likely struggle. New drilling and rig activity throughout the US will remain subdued unless prices recover. This being the case, the two largest South Texas energy fields; Eagle Ford and the Permian Basin, remain some of the lower cost, and thus more efficient, shale plays in the US. As such, the impact in South Texas may be more muted than in other regions. BREAK-EVEN PRICES In early 2015, a typical shale oil well in the U.S. remained profitable to drill. Despite the dramatic decline from the recent peaks over $100 just half a year earlier, crude oil prices then remained above the break-even prices for most U.S. oil producers. This means that oil revenues could at least cover the total cost of drilling a well and pumping oil out of the ground. According to Rystad Energy, the total cost averaged $32.6 per barrel for U.S. oil production in 2015. Out of this total, $21.5 covered capital expenditures for building facilities, pipelines and so on; and $14.8 went to operational expenditures, which included salaries of employees and administrative staff. World Oil Costs & Supply Curve 2015 Per Barrel $60 Operational Costs $50 Capital Costs January 2015 $40 $30 Break even at $32.6 Early 2016 $20 $10 $0 Sources: Energy Information Adminstration, Rystad Energy, and author's calculations. 4 Annual Review of South Texas Economy Shut down at $14.7