Crude Economics
Oil Price Plunge Socks One to American Shale

First quarter earnings reports came out this week, and the results weren’t pretty for the oil industry. Exxon Mobil posted a 46 percent drop in earnings, Royal Dutch Shell saw a 56 percent drop itself, and Conoco Phillips had its own 87 percent drop in earnings per share. For Exxon, Shell, and Conoco, struggles in the U.S. accounted for a significant portion of these dour numbers. The FT reports:

[T]he profitability of North American production, which is relatively high cost compared to oil from other areas including the Middle East, has been hit particularly hard by the fall in crude prices. Natural gas prices have also fallen more sharply in North America than in the rest of the world. […]

[Royal Dutch Shell’s chief financial officer Simon Henry] said Shell’s North American shale oil and gas operations faced a “challenge” from low selling prices. “I think it’s fair to say everybody is showing either a loss in the Americas or very close,” he added.

Shale reserves are expensive to drill. Hydraulic fracturing and horizontal well drilling may have unlocked plays that were previously considered unattainable, but they haven’t done so cheaply, and with the price of oil roughly half of what it was last June, the U.S. shale boom is facing its first real gut check.

Many American operators are choosing to put shale crude in storage, or to drill but not yet frack wells with the intention of selling this oil when prices tick upwards. Firms are struggling to find ways to keep the flood of American crude going while still turning a profit, and the oil industry’s balance sheets are reflecting that.

But it’s entirely too early to call this the end of the U.S. shale boom. The industry is already finding ways to cut costs, streamline processes, and innovate new ways to operate in today’s bear market. And let’s not forget that while private companies may be struggling to deal with the rapid decline in oil prices, the world’s petrostates are in an even worse way as their government budgets are threatened by the global oversupply.

OPEC would love nothing more than for U.S. shale companies to fold under increasing price pressures, but if history is anything to go by it’s a bad idea to bet against American innovation.

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