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Staying Nimble
Why Shale Is Suited for a Bear Market

Oil is trading just under $49 per barrel today, a far cry from a $114 high in June of 2014, and that plunge has forced oil majors to change how they’re doing business. Companies have been forced to slash capital expenditures, staring with high-cost, high-risk projects. But as Bloomberg reports, while these “megaprojects” are being abandoned, oil firms are starting to pay more attention to U.S. shale projects:

Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp., ConocoPhillips and Hess Corp. have all either delayed or abandoned projects that range from the deep seas of the Gulf of Mexico to Canada’s oil sands and the U.S. Arctic. At the same time, Exxon and Chevron both announced plans to substantially increase U.S. crude production, largely as a result of their shale operations.

“What makes more sense in this environment: drill a $100 million well in the deepwater Gulf that might come up empty, or poke lots of holes in west Texas where you already know there’s oil for a few million apiece?” said Michael Webber, deputy director of the University of Texas Energy Institute.

One of the unique facets of American shale production is the relative speed at which a well can be drilled and brought online. True, the output decline of these fracked wells is steep, but the low cost of drilling a new one makes shale in some ways ideally suited for today’s market conditions. With cash-strapped companies increasingly risk-averse, smaller shale projects are looking more attractive.

This comes with the obvious caveat that shale projects only make sense when the companies involved can manage to turn a profit, and that’s a difficult proposition with oil below $50 a barrel. Thankfully for the industry, innovative new drilling techniques have allowed companies to find ways to still make money even as profit margins have shrunk dramatically.

U.S. shale projects allow oil majors to stay nimble and keep overhead costs low, two very valuable assets in today’s bearish oil market. And, if they keep on this course, it’s American energy security that will win out.

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  • Jacksonian_Libertarian

    I don’t think the major oil companies have the expertise and proprietary knowledge to develop Shale, which is dominated by lots of small unrecognizable names. What they could do is buy wells from the little guys, and reduce their risk even further by already knowing what the well is producing. This in turn would let the smart fast moving little guys to capitalize further development.

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