Industry Trends

The era of cheap gasoline is here again, but it caught the industry in a precarious situation, as it may become an unprofitable business to produce oil and gas from shale formations. It could potentially turn the boom into a bust. However, production is up in the U.S.

By Eric R. Eissler December 19, 2014

Falling oil and gas prices are great for the end user, and everyone champions lower prices at the pumps. However, these low prices are bad for producers, especially those working in unconventional oil and tight gas, where associated costs are much higher. These adverse effects really hit small oil companies operating in U.S. shale plays. As the price of oil wanes, the smaller companies, many of which have borrowed money to start operations, are losing profits—fast. It becomes uneconomical to drill for unconventional oil and tight gas at lower prices.

On the other hand, production in Bakken, N.D., and Eagle Ford, Texas, has been up more than 3% since October 2014. The threat of lower prices has actually spurred smaller operators, which want to pay off debts and disburse dividends, to increase production.

Oil from a stone

Producers are adopting the logic that since no one can predict with 100% accuracy where oil prices will go next, it may be wise to squeeze out as much as possible before the price drops further. No company wants to shut down any producing projects now due to falling oil prices but because of the initial cost to bring new wells online and to produce. In addition, efficiency in well engineering is key to the success in unconventional oil.

Associated costs have come down over the past few years due to advantages in well engineering techniques and methods. Even with the current low prices, the major shale plays are still producing a healthy profit.

The oil-rich Eagle Ford, according to a study by energy investment management company Tudor Pickering Holt, will still be profitable even at between $30 and $40 per barrel of oil. If prices were to fall lower than that, companies may start to close up shop and possibly sell off assets. Many companies will still produce in 2015, but they will have to rein in spending and exploration in favor of using more efficient methods to maintain and increase production during this glut period.

That being said, while there will be fewer new wells, production is set to increase. The U.S. Energy Information Administration (EIA) supports this claim by stating, "projected oil prices remain high enough to support development drilling activity in the Bakken, Eagle Ford, Niobrara, and Permian Basins, which contribute the majority of U.S. oil production growth. EIA expects U.S. crude oil production to average 9.3 million barrels per day (bopd) in 2015, up 700,000 bopd from 2014, but down from expected growth of 900,000 bopd." That is only a 200,000-bopd difference, and in the grand scheme of things it is not very much of a drop.

Supply and demand basics

As with any commodity, prices will fluctuate based on the most basic variable—supply and demand. While it might be simple to say that the supply and demand of any commodity is basic, it is not. There are many factors and variables that determine the price of a barrel of oil. Based on the current situation and speculation, as production rises, the price will continue to drop and export will be seen as a way to move the oil.

Because there is a prohibition on oil exports from the U.S. (this was enacted during the oil crisis of the late 1970s), there is not going to be that natural outlet for exports to relieve downward pressure on the price. The price is only going to go so low until demand goes up stemming from the low price, but the moratorium on U.S. oil exports slows the pace at which the price will be able to increase.

How does this affect guys on the ground? What innovative processes can drilling and production engineers devise to cut costs and increase production in a time of falling prices? How threatening is this to engineers working in the oil and gas industry? The price may be low now, but where will it go next and how long will it take? That we don’t know, but as with anything in life, this is only a temporary phase.

– Eric R. Eissler, associate editor, Oil & Gas Engineering, CFE Media.  

Original content can be found at Oil and Gas Engineering.