The collapse of oil prices has hurt everyone in the business of producing oil, but not every crude extracting operation is created equal: some projects are more expensive than others. American shale falls under the category of high cost production, and as a result has been especially hard hit by bargain crude that has threatened to make fracking no longer profitable. But so far U.S. production has merely tapered, not fallen off a cliff, surprising many analysts who expected the industry to fold once oil prices dipped below $70 per barrel (America’s West Texas Intermediate is currently trading at $37.36 per barrel).
This surprising resilience—as we’ve noted several times in the past—can be put down to the ability of American shale producers to innovate new ways to drill more for less. And even now, more than a year into the bearish market, they’re finding ways to cut costs. Reuters reports:
Pioneer Natural Resources is increasing the length of stages in its wells, Hess Corp is raising the total number of stages, EOG Resources is drilling in extremely tight windows, while Whiting Petroleum Corp and Devon Energy Corp have loaded up more sand in their wells, fourth-quarter earnings call comments show.
Sector experts say these techniques could boost initial output per well by between 5 and 50 percent, demonstrating the resilience of the industry. . “We have got to keep moving ahead in terms of our knowledge base so that when things improve we can hit it with all cylinders,” Pioneer COO, Tim Dove, said on a recent quarterly results call.
The company plans to cut spacing between clusters, or small perforations that provide fluid and sand access to the formation, to as little as 15 feet – a move it said would have been “unheard of” in the past.
The International Energy Agency said late last week that it believed we may have already seen rock bottom in oil prices, as prices recovered into the $40 range on hopes that a petrostate-led production “freeze” and a drop in output from high cost producers (like American frackers) might help eat away at the glut of crude in the market. That enthusiasm was short-lived, however, as prices tumbled in trading yesterday as OPEC downgraded its expectations for demand this year, and reported that Iranian output grew more in February than it had during any month in the last 19 years.
Even if prices were to rebound, the problem of an oversupplied market won’t disappear—stronger prices will only encourage U.S. shale producers to once again ramp up production, something that, thanks to the nature of fracking, they’re capable of doing quite quickly.
All of this seems to be adding up to a new oil price reality: the days of $100+ per barrel prices are probably over. If this ~$40 crude is the new normal, the focus will shift to how well different producers can adapt. Most petrostate operations don’t require a robust price to turn a profit, but their national budgets have grown accustomed to much higher oil revenues than they’re currently getting. Russia, the Saudis, Venezuela—they’re all being being forced into a dire economic situation as a result of cheap oil. Meanwhile, here in the U.S., rig counts (an admittedly flawed metric) are dropping to levels not seen in more than 70 years. But if the shale boom proved anything, it’s that this industry can find a way to make a buck where no one thought it possible. Bet against American innovation at your own risk.