Shale Oil: Price Recovery Brings Opportunity and Risk – 1/17/17

Oil prices appear to be stabilizing, so what does that mean for U.S. shale drillers who survived the price collapse?

Today, the price of crude is hovering in the mid-$50’s a barrel range and that is triggering a revival in U.S shale patches that were devastated during the last two years.

The good news: U.S. producers are capable of rising production quickly and as output rises so do job numbers.

Since OPEC began talks to cut production in November, oil prices have risen by about 25% allowing shale oil drillers to hedge prices for 2017. As a result, the total oil rig count has gone from a low of 316 to 529 in a matter of months. In the past three months, US shale provided an extra 500,000 barrels a day or more than Saudi Arabia committed to cut as part of the OPEC deal.

And though the increase is small relative to what was lost over the past two years, jobs have started to reappear and more are expected, according to analysts from Simmons & Co. Reuters reports that they also forecast the number of active oil and gas rigs to average 763 in 2017 and 877 in 2018, from the average 509 in 2016.

The bad news: cost saving measures made during the last couple of years may not be sustainable and high US production will put a ceiling on prices.

Much of the cost cutting that U.S. producers accomplished in the downturn came at the expense of oil-field-services companies. And as the price of oil has rebounded so have the prices charged by companies that help them tap new wells. The cost of an experienced drilling crew and oil-field supplies has risen between 10% and 20% in the winter of 2016, experts say. From running rigs, trucking water and sand, and providing the labor, the US oil industry is in a time of renegotiation that could send costs surging.

Advances in production techniques made drilling wells economic at around $55 a barrel as opposed to $90 just two years ago, however rising prices for supplies and services would increase the price companies need to break even.

In Oklahoma’s Scoop formation, one of the cheaper drilling areas in U.S., a typical well can now make money at $51 oil, according to Simmons. But factoring in a 15% to 30% escalation in service costs, those same wells would need between $57 and $63 a barrel to break even, the bank estimates. If such an increase in expenses occurs while increased US production keeps prices around $58 as analysts forecast, then all but the best shale plays in the US could struggle in 2017.

Still, more than 5,200 drilled-but-uncompleted wells, known as DUCs, stand ready as another option. Those wells could be completed and pumped profitably at $40 barrel, according to Ryan Duman, a senior analyst with consultancy Wood Mackenzie, which allows many companies to keep output up in the short-term.

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