Link to WSJ Article

by Russell Gold

A surge of oil from outside of the Middle East flooded global energy markets. The world-wide thirst for crude didn’t keep up. The Organization of the Petroleum Exporting Countries stood by and watched as oil prices fell and then fell more.

Welcome to the world of oil in 2015—a repeat in surprising ways of the story 30 years ago. Between November 1985 and March 1986, the price of crude plunged by 67%. Between June 2014 and today, crude prices have fallen by 57% and could well head lower. 

After the mid-1980s bust, it took nearly two decades for oil prices to rebound to pre-bust levels and remain there. Energy executives are now haunted by the question: Will it take as long this time?

The answer may lie in one enormous difference between today and 30 years ago: the speed of shale.

Today, the discovery and development of oil from shale rocks means that oil output is faster paced and near at hand—in Texas and North Dakota, Colorado, Oklahoma, Wyoming, even Ohio. Drilling and hydraulically fracturing a well takes weeks, not years. An expensive well costs $10 million, compared with the billions needed to drill offshore wells and build associated infrastructure. Moreover, expenditure of both time and money are falling fast.

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ConocoPhillips , a major U.S. oil producer, says it can make a profit on its U.S. shale wells as long as oil trades for more than $40 a barrel, a figure that has been falling in recent years. A Conoco spokesman said improved efficiency, better technology and a better understanding of the rocks helped the company reduce costs.

Which Oil Producers are Breaking Even?

And it is not alone. The expense of getting oil from the Eagle Ford Shale fell by about 15%, or $7.50 a barrel, last year, despite intense competition for rigs, truck drivers and oil-field services, says Pers Magnus Nysveen, head of analytics for Rystad Energy, a Norway-based global oil consultant. Costs could fall another 10% to 15% this year as some financially weak companies pull back and competition for services lessens.

“The key driver here is improved efficiency,” Mr. Nysveen says.

Companies like EOG Resources Inc. are drilling better wells faster. EOG said recently it takes 4.3 days to drill its average well in the Eagle Ford Shale in South Texas, down from 14.2 days in 2012. What’s more, as it drills more of them, it has figured out how to locate wells to get the highest oil output.

Combining lowering costs and increasing output means that EOG says it can drill wells at $40 per barrel in North Dakota, South Texas and West Texas, while still earning a 10% return. We “pride ourselves on being a very efficient operator,” Billy Helms, EOG’s head of exploration, said at a recent industry conference.

Since oil prices began to fall, many companies have cut their capital spending plan for 2015 and the number of drilling rigs in the U.S. has fallen. But output has continued to increase.

Mike Rothman, president of Cornerstone Analytics, says that given the decreasing costs of drilling, it is not clear when shale output in the U.S. will fall.

“How quick will the response in shale oil be to this drop in prices? That is a big open question,” he says. “With shale, you are dealing with something very different.”

Write to Russell Gold at russell.gold@wsj.com