(EnergyAsia, November 28 2014, Friday) — After plunging by a third since peaking in June to their lowest levels in four-and-half years, crude oil prices still have room to fall, going by the conclusions of two recent studies pointing to the resilience of US unconventional oil in a bear market.
Consulting firm IHS said it found that about 80% of potential gross US tight oil capacity additions in 2015 would remain resilient with West Texas Intermediate (WTI) crude prices falling to their current levels of around US$70 per barrel.
According to Bloomberg New Energy Finance, only about 413,000 b/d of shale-based supply out of more than nine million b/d of total US production is unprofitable with WTI at US$75.
Both reports represent extremely bearish news for oil producing countries and companies used to operating at US$100 WTI and US$110 Brent over the last four years.
With Saudi Arabia holding firm, the Organisation of Petroleum Exporting Countries (OPEC) added to the gloom yesterday with its decision to continue with its production quotas. The financially weaker members like Iran, Iraq and Venezuela will likely suffer domestic political consequences from further cutbacks in their already derailed economic programmes.
Worse could follow as some analysts are calling for crude to plunge below US$50, which could inflict long-term damage on the viability of many oil companies, particularly shale-based operators which rely heavily on debt to finance their operations, as well as hydrocarbon-dependent economies like Nigeria, Angola, Malaysia and Indonesia.
OPEC’s decision to maintain the status quo reflects the Saudi view that the oil market should sort itself out, and that includes eliminating potential long-term competition from North America’s booming shale sector that has underpinned the rise of the US as a major oil producer.
According to the IHS report, US tight oil production will still grow by a hefty 700,000 b/d in 2015 based on an average price of US$77 per barrel, down from last year’s expansion of more than one million b/d with WTI at an average US$100.
“Since 2008, the cumulative growth in US tight oil production has been 3.5 million b/d — far exceeding supply gains from the rest of the world combined — making tight oil the key driver of global supply growth,” said Jim Burkhard, IHS Energy’s Vice President.
“While current lower crude oil prices do present challenges for new investment, IHS analysis shows that the vast majority of potential US supply growth in 2015 remain economical at $70 for WTI.”
The report found that existing tight oil production is unaffected by the recent drop in oil prices.
Since the highest level of production costs occurs during the initial development phase of a well, existing wells can remain economical at crude oil prices far below the break-even price for new production, said IHS.
Lower crude oil prices have a greater potential to affect supply growth because new wells require significant investment before production begins. In the initial months of production, the oil price is critical to in determining the profitability of a new tight oil well.
Regardless, there are reasons to believe in the resilience of tight oil growth, the report said. IHS found that 80% of the potential US tight oil capacity additions in 2015 have a break-even price in the range of US$50 to US$69 per barrel.
Continued productivity gains, such as improvements in well completion and downspacing, also support the resilience of US production growth at lower prices, the report said.
Though these are strong reasons to believe in the resilience of tight oil growth, IHS said the risk of supply growth falling short is much greater now than just a few months ago.
“Expectations of the future—and the trajectory of oil prices—means that prices do not need to fall to the breakeven price before psychology, investment, and thus output, is affected,” Mr Burkhard said.
“Lower oil prices bring into question the ongoing extent of one of the most profound developments in the world oil market—the great revival of American production. The ‘tight oil test’ is under way.”
Bloomberg’s analysis found that 19 shale regions in the US, which include parts of the Eaglebine and Eagle Ford in East and South Texas, would sink into the red with US$75 WTI.
But the biggest-producing fields, namely North Dakota’s Bakken and the Permian and Eagle Ford in Texas, which accounted for more than half of US supply last year in producing a combined 4.7 million b/day, will remain profitable at US$55 WTI.
The Bloomberg study found that at least a dozen US shale-based producers would reduce capital spending plans on account of crude oil prices staying at current levels or going lower.