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