The American shale industry has cut the cost of producing new oil by up to 40 percent over the past two years, not so much trimming the fat as excising it with laser precision as it continues to innovate new ways to stay profitable in a market that has seen prices crash from $110+ per barrel two summers ago all the way down to $27, before rebounding to their current level just under $50. The bearish market has forced shale operators to boost efficiencies and, in the process, made them one of the most competitive group of new oil producers in the world. The FT reports:
About 60 per cent of the oil production that is economically viable at a crude price of $60 a barrel is in US shale, and only about 20 per cent is in deep water, said Wood Mackenzie, the consultancy. Companies with US shale assets are likely to be at a competitive advantage over the next few years. Producers that rely on oilfields in higher-cost regions such as the North Sea and the deep waters off west Africa will have to cut costs or face shrinking output. […]
Investments in the Eagle Ford shale of south Texas on average need a Brent crude price of $48 a barrel to break even, on Wood Mackenzie’s calculations, while projects in the Wolfcamp formation in the Permian Basin in west Texas need $39. “There are more opportunities to invest in the US, and that’s where the investment will take place,” said [Simon Flowers of Wood Mackenzie]. “If your investment options are in deep water, you’ve got quite a task on your hands. You might be asking: ‘Should we be getting into tight [shale] oil?’”
The shale industry has been far more successful than its more conventional competitors in adapting to falling prices, successfully slashing costs three to four times as much. That’s a remarkable accomplishment, but it shouldn’t come as a huge surprise to anyone that’s been following the remarkable advances and innovations frackers have been pulling off over the last few years. In some ways, shale producers benefit from just how new their entire field of operations is—there’s a lot more room for improvement in these early years as companies experiment with new and different ways to extract a natural resource out of rock formations that were previously thought to be inaccessible.
Shale has another leg up on conventional drilling, too: the relatively small size of shale projects and their high output depletion rates mean firms have to constantly keep drilling new wells to keep the crude flowing. Those iterations provide plenty of opportunities for fine tuning and risk taking, and are generally more conducive to an evolutionary process than larger projects with longer time scales and bigger capital outlays. In that context, the fact that shale costs are dropping quicker—much quicker, in fact—than offshore costs makes a great deal of sense.
It’s important to note that, despite all of this progress in becoming a leaner, meaner oil producing industry, shale production has suffered over the past year in the face of bargain prices. The effects of this market downturn are going to continue to be seen for months yet, but the fundamentals for America’s oil output look remarkably solid. And maybe more importantly than that, the future of U.S. energy security is looking ever brighter.