Crude Economics
Shale Ready to Boom Anew

American shale has weathered the storm better than anyone expected. U.S. oil output has flagged over the past year, beaten back by plunging oil prices, but it would be dishonest to call this a bust. Instead, with oil prices back up around $50 per barrel, shale once again seems ready to boom anew. Reuters reports:

That shale giants Hess Corp, Apache Corp and more than 25 other companies have beaten back OPEC’s attempt to sideline them would have been unthinkable just months ago, when oil plumbed $26 a barrel and collapses were feared. […]

[S]o far no U.S. producer that pumps more than 100,000 barrels per day (bpd) has gone bankrupt. The survival of these big producers partly explains why overall U.S. production has slipped only about 10 percent since peaking at 9.69 million bpd. Their agility – which required slashing costs in half while doubling down on improved techniques to squeeze more oil from each new well – is now allowing the industry to cautiously focus on growth again.

The crude oil price collapse was a crucible for shale producers, and it forced companies to accelerate their plans to cut costs, boost efficiencies, and innovate new ways to frack new reserves in greater quantities. Drillers weren’t the only ones in the industry forced to trim the fat: oil services companies had to settle for significantly narrower margins as they offered operators large discounts to keep the crude flowing. And while that has some concerned that shale’s breakeven costs could increase as oil prices go up, others are convinced shale has pioneered some lasting new fixes. Reuters has more:

Industry consensus holds that costs for oilfield services – fracking and the like – may rise in tandem with oil prices, though high-tech advancements in sand, drilling and chemical technologies should stick around. “Real progress for us has come on the cost side,” said John Christmann, Apache’s chief executive. “We plan to maintain a methodical approach to the cycle with a focus on returns.”

We heard murmurs that shale’s rebound was underway last week, and within the industry at least there seems to be a shift away from a “damage control” mentality and towards a more forward-looking, “what’s next” outlook. OPEC bet the house on shale’s inability to withstand a bearish oil market, but that gamble doesn’t seem to be paying off as producers around the world start to settle into today’s new market equilibrium. We’ve said it before but it bears repeating: bet against American innovation at your own risk.

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