US Shale Oil Dynamics in a Low Price Environment
One of the biggest unanswered questions facing the market is whether or not relatively high-cost US shale oil production can survive in a relatively low oil price environment (sub $60 per barrel). This is the first economic test of the shale oil renaissance. While shale production has thus far proved resilient (due to a combination of factors, such as enhancing efficiency gains, lowering the cost of services, and retreating to the more productive areas), signs of weakness are beginning to show. This paper seeks to answer a number of questions, including:
• Can the efficiency gains made over the past several months sustain current production levels?
• Which of the main shale plays are likely to be impacted the most?
• Will debt levels and bankruptcies put US companies and production at risk?
The paper reaches some interesting conclusions:
- Despite efficiency gains, the number of rigs drilling for oil continue to decline as oil prices falter. This depressed rig count is just now beginning to impact production levels and will further impact production in the coming months.
- Companies are spending more efficiently and wisely, but profitability was tough to come by at $100 oil. The stronger and larger independent companies should be able to survive a long-term lull intact, but acquisitions can be expected given depressed equity values. In addition to oil price risk, rising interest rates and a reduction in risk appetite among lenders pose survivability risks for some operators, particularly for companies who plan to borrow to survive until oil prices recover.
• How long oil prices remain low is a key determinant in the flexibility of US crude production. The US will not be a swing producer in the conventional OPEC sense where production can quickly be turned on and off within months. Should oil prices remain depressed through the duration of 2016, it will take additional time to raise production levels. Many people have already lost their jobs and much deeper cuts remain a reality. Service providers will go out of business. While the US is a flexible and liquid market, it will take time to bring the workforce back when oil prices rise.
- Low oil prices will not kill the US shale industry, but they may put it into hibernation. Further rock analysis and technological advances need to be made in order to move the industry forward and reduce costs. Severe CAPEX cuts will reduce these advances in the near term.