OPEC, led by its biggest producer Saudi Arabia, has so far chosen not to cut production to stabilize the plunging price of oil, instead apparently happy to duke it out with American shale producers for market share. With oil now going for less than half of what it was last June, oil exporters are running up massive budget deficits, while U.S. shale producers are ratcheting down their growth forecasts as fewer plays can be economically exploited. The Saudis are playing a game of chicken with American shale, but they may regret that gamble, as producers are already busy finding ways to keep the crude flowing in this bear market. The Economist reports:
Technology is continuing to change the industry’s economics. Halliburton is pushing ahead with upgrades to the equipment and techniques it uses at drilling sites, including improvements to pumps and storage systems. All this, the company says, can cut a typical well’s capital spending by a quarter, maintenance by half, labour by a third, and development time by more than half, compared with the previous approach. So far 30% of its North American operations have been upgraded. The aim is to reach 50% by the end of the year.Such new techniques, and falling costs for everything from rigs and pumps to steel and labour, are helping the drillers who are still in business. “We used to think everything worked at $80-85 per barrel. Now it’s $70-75,” says R.T. Dukes of Wood Mackenzie, an energy-consulting firm. Looked at another way, he says, two-thirds of the shale drillers needed oil at $70 to break even. Productivity gains and lower costs have now pushed that down to $60 (though that is still uncomfortably higher than this week’s crude price).
Shale drilling is still a remarkably young process, and operators are still finding ways to get more oil and gas out of the ground for less money and time. The margins may be slimming, and drilling in some of the more expensive formations may be tapering off, but there’s no sense that the industry is fated to retrench. OPEC take note: it’s generally not a good idea to bet against America’s ability to innovate.