US Shale Oil - The Big Question

The US oil production surge, more crude returning to the market from Iraq and Libya, slowing Chinese demand & a lack-lustre European economic recovery, all followed by Saudi’s decision not to cut production have conspired to cause Brent crude to drop some 40% since June. The real killer issue is, however, US shale oil and its producers will be watched closely by traders waiting for the impact of low prices to hit production. So the big question is how resilient are the US tight oil plays to lower prices?
 
The industry is able to produce shale oil far more efficiently than before and with drilling costs declining and productivity per well increasing and this trend may well continue. But of course costs varies from basin to basin. It is reported that $80/barrel break-even is only valid for only 4% of US shale production and most unconventional plays will support prices at least $50/barrel (i.e. Bakken at $42). Furthermore, lifting costs have been reduced by some $30 per barrel since 2012.
 
A parallel can be drawn from the shale gas industry: when gas prices slumped in 2012, similar fears of an industry collapse prevailed. Production in higher-cost basins did fall, but increased in lower-cost basins, such as the Marcellus Shale. However, shale plays require constant investment in drilling to maintain momentum, as wells decline at up to 60% a year compared to the 7-10% of conventional wells. Therefore the impact of a continuous oil price decline may only become apparent in 2015/16 after companies’ hedged positions have unwound and external finance becomes to increasingly difficult to attract.