U.S. Shale Oil Output Seen Growing Even as Prices Drop

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Oil output is expected to grow in all major U.S. shale plays in November despite falling global prices as drillers become more efficient.

Production per well was projected to increase in fields in North Dakota, Texas and Colorado, the Energy Information Administration said today in its Drilling Productivity Report. Brent futures fell to $85.04 a barrel on the ICE Futures Europe Exchange, the lowest settlement since Nov. 23, 2010.

Only about 4 percent of U.S. shale oil production needs prices above $80 for drillers to break even, the International Energy Agency said today in its monthly oil market report. Producers are getting more oil per dollar spent drilling, driving costs down as much as $30 a barrel since 2012, Morgan Stanley analyst Adam Longson said in a report yesterday.

“Prices aren’t low enough to put these projects at risk,” Matthew Jurecky, head of oil and gas research for the London-based research company GlobalData Ltd., said by e-mail today from New York. “The profit margin on most commercial unconventional oil plays will support prices as low as $50, many below that even.”

Total production in the Permian Basin in Texas and New Mexico, the largest U.S. oil field, is expected to rise 42,000 barrels a day to 1.81 million, the EIA said. Output from new wells will climb 4 barrels a day to to 176 per rig.

Hydraulic Fracturing

In South Texas’s Eagle Ford, production will increase 35,000 barrels a day and in North Dakota’s Bakken output will climb 29,000 barrels, the EIA said.

Horizontal drilling and hydraulic fracturing in hydrocarbon-rich underground shale layers has helped U.S. oil production grow 65 percent in the past five years to the highest level since 1986. That’s reduced U.S. crude imports by more than 3.1 million barrels a day since peaking in 2005.

The cargoes that the U.S. isn’t using have added supply into the world market at the same time that economic growth has slowed, leading to a 26 percent drop in Brent prices since June 19.

About 2.6 million barrels a day of crude production worldwide comes from projects with break-even prices above $80, the IEA said. U.S. tight oil contributes less than 200,000 barrels a day of that.

“Technological and organizational improvements that have enabled faster drilling rates, greater drilling density, and higher new-well production have all been important to maintaining production in the face of increasingly steep decline curves,” the agency said in its report.

Production Outlook

Research desks have varying views on how low oil prices can fall before shale production is affected.

U.S. shale producers could keep pumping oil economically even if Brent dropped to $60 a barrel, Bjornar Tonhaugen, an analyst with Oslo-based Rystad Energy, said in an e-mailed report. Brent would need to remain at $50 a barrel for 12 months before North American shale output drops 500,000 barrels a day, he said.

Morgan Stanley said Eagle Ford break-even costs range from $30 to $60 a barrel. Most U.S. tight-oil reserves break even from $60 to $80, Barclays Plc said in slides presented at the Argus European Crude Conference in Geneva last week.

“We continue to be impressed by how much operators are improving their operations,” R.T. Dukes, an upstream analyst for Wood Mackenzie Ltd. in Houston, said by phone. “There’s enough out there that significant development would continue even at $75 or $80.”

Lag Time

If West Texas Intermediate, the U.S. benchmark, fell to $80 or less for an extended time, drilling activity in U.S. tight oil plays would decrease, RBC Capital Markets said in a note today. WTI fell to $81.84 today on the New York Mercantile Exchange, the lowest since June 28, 2012.

There will be a lag time between falling prices and any drop in drilling activity, Jurecky said. When oil prices dropped by $111 a barrel between July and December 2008, the oil rig count didn’t begin to decline until November, according to data from oil services provider Baker Hughes Inc.

“Many developments will be insulated by contracts and hedging,” Jurecky said.

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