mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Crude Economics
Shale Producers Cinch Belts Tighter

It’s hard to make a profit if you’re in the business of selling oil these days. With the market oversupplied, prices are hovering just below $35 per barrel, and a number of America’s biggest shale companies are slashing spending in 2016 to help staunch the bleeding. The FT reports:

Oklahoma-based Continental Resources, controlled by its founder Harold Hamm, said it would cut capital spending by 66 per cent this year to $920m, following a 46 per cent reduction last year. New York-based Hess said it would cut spending by 40 per cent this year, following a 29 per cent cut in 2015. Noble Energy, based in Houston, said it planned a 50 per cent cut in spending for 2016, as it also reduced its quarterly dividend from 18 cents per share to 10 cents. […]

The costs of drilling and completing wells in the US has fallen sharply — in some cases by 40 per cent in the past year — but not as fast as oil prices.

The slowdown in activity at both Continental and Hess means their production is set to decline. Continental predicted average output of 200,000 barrels of oil equivalent per day this year, down 5 to 9 per cent from 2015. Hess said production would be 330,000 to 350,000 b/d for 2016, a drop of 7 to 12 per cent from its rate in the first nine months of last year. Noble did not predict a fall in production, but said it expected oil and gas sales to be “consistent” with last year’s levels at abut 390,000 b/d.

Cheap crude is wreaking havoc on the balance sheets of oil companies all over the world, and here in the United States our overall crude production numbers reflect that, retreating nearly 350,000 barrels per day (bpd) from a high of just under 9.7 million bpd in April of last year. But that’s just a 3.5 percent decrease, hardly the sort of reckoning many expected was coming America’s way as shale producers fell victim to vanishing profit margins.

The industry has surprised everyone with its ability to keep the oil flowing even as prices have dipped well below what was considered the low end of its breakeven range—or the price level at which companies need to sell their product to stay in the black. To no one’s surprise, Continental, Hess, and Noble are all cutting capital expenditures this year, but their output predictions are hardly dire. Even our smallest-scale producers are finding ways to keep operations going. The same experimental spirit that launched the shale boom is keeping it afloat with oil barely above $30. It’s a lesson that bears repeating: don’t bet against American innovation.

Features Icon
Features
show comments
  • Jacksonian_Libertarian

    The fact is that once the costs are sunk into developing a new well, it has to be pumped to service the lender. And even if the developer goes bankrupt, and the lender takes its assets, the oil will still get pumped to reduce any of the lender’s losses. So all the lower oil prices have done is stop the unprofitable developments at these prices. The highly productive oil fields that can still be developed and produce a profit, will still get developed.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service