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Crude Economics
Culling the Shale Herd

Oil prices have been creeping up towards $50 per barrel recently in large part due to supply disruptions in Nigeria, but this rebound has been too little, too late for many American shale producers as bankruptcies mount. What’s left in the U.S. shale industry are companies that are leaner than ever before, with a sharp eye on cutting costs and boosting efficiencies any way they can. The WSJ reports:

Cash-strapped operators are dialing back or abandoning North Dakota. But the survivors—many of which are bigger and more diversified players—are finding ways to make the Bakken Shale formation pay even at low oil prices by trimming budgets, improving field logistics and focusing on their best assets. […]

“You can’t shut down the Bakken. The American oil industry is getting smarter and more efficient” in how and where it drills, said Kathy Neset, a veteran geologist who owns a consultancy in Tioga, N.D…Active drillers include a number of diversified companies with deep pockets, such as HessCorp., Statoil ASA of Norway and Exxon MobilCorp. unit XTO Energy. They are targeting their richest reservoirs, getting better at pinpointing where to place drill bits and improving rig logistics so they can drill more wells faster than ever.

Those highly productive new wells are partially offsetting the decline in output from older wells, including some that are being shut because their operating costs surpass the market value of their oil. While North Dakota’s production is expected to fall below the million-barrel-a-day mark by early 2017 unless prices recover to above $50, it has held up better than many analysts expected.

What has happened to the fledgling shale boom is akin to a cull, as the weakest (read: least profitable) projects have been devoured by the bearish market, leaving only the most productive wells still in operation. When you couple this effect with the efficiency gains the industry has been able to produce—the innovations it has doggedly pursued—what you’re left with are fewer but far more valuable rigs.

Predicting the future of the oil market can be a fool’s errand, so we won’t pretend to know what prices are going to look like by the end of the year. But consider this: if they dive again, frackers will be hurt just like every other oil supplier (looking at you, OPEC); if they stay where they are, the shale firms that are left will continue to streamline operations in order to keep output up; and if they edge much higher, the development of the shale boom will be arrested no more as companies once again find it profitable to deploy more rigs.

Whatever happens, America’s energy security looks stronger than it has in decades, and that comes to us entirely courtesy of shale.

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  • Blackbeard

    “By the time we get through all of my conditions, I do not think there will be many places in America where fracking will continue to take place,” Hillary Clinton, March 6, 2016

  • Jacksonian_Libertarian

    In good times inefficient companies can still make a profit, in hard times this deadwood gets sold, and efficient companies get their assets at discount prices. This is the way free markets are supposed to work, and this continuous improvement is good for the consumer and mankind in general.

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