Immunity? | Russell T. Rudy Energy LLC
In an article in “Oil Voice”, Tsvetana Paraskova makes the case for U. S. shale oil’s immunity to low prices. Shale operators seem to be producing at a rate which could offset the production cutbacks implemented by OPEC, Russia and 10 other nations (N/OPEC). This has limited any crude oil price increases. Shale producers can afford to do this for a couple of reasons which also could make them immune to further price drops, and insure continued increases in output.
Last November, when N/OPEC announced its intention to curtail production in order to reduce global oil inventories to the 5 year average, prices spiked to $50 per barrel. Many shale operators quickly hedged their future production at prices between $50 and $60, according to consulting firm Wood Mackenzie. This provided the companies with the cash and stability to increase output.
Another major factor contributing to the surge in domestic production is the shale operators who survived the oil price collapse of 2014, are more resilient and have learned to dramatically reduce the breakeven points of their projects. Norwegian consulting firm, Rystad Energy, believes that the wellhead breakeven price for key shale plays has already been reduced from $80 to $35.
Since December of last year oil production in the Lower 48 states, excluding the Gulf of Mexico, has continued to expand and is currently 430,000 barrels of oil per day (bopd) higher. Rystad expects this trend to continue, even if oil drops to $40. At $50 a barrel Rystad sees production growing by an additional 390,000 bopd by yearend.
Rystad notes that drilling activity has outpaced completions, thereby contributing to an increase in the number of drilled but uncompleted (DUC) wells. If the price of oil were to drop to even $30, the majority of these wells would still be viable candidates for completion as sunk drilling costs are irrelevant, and prices would still support the cost of completion.
In essence, Paraskova sees N/OPEC’s stated intention of sticking with production quotas through the first quarter of next year as providing a floor for prices around current levels. Even if that fails, which she sees as unlikely, shale operators are well-positioned to survive, even in a $30 world.
To read the article in its entirety, please go to https://oilvoice.com/Opinion/4839/US-Shale-Is-Immune-To-An-Oil-Price-Crash-In-2017#.WSLwBiA6VsE.email .
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