IEA, OPEC OFFICIALS SAY SHALE CAN COPE WITH $80 A BARREL
Comments Come as Crude Prices Sink Further
By Benoît Faucon, Summer Said and Sarah Kent
wsj.com Oct. 14, 2014 12:08 p.m. ET
Most U.S. shale production would remain profitable even if oil prices fall to $80 a barrel, energy watchdog the International Energy Agency said Tuesday. Its estimate, which is shared by some OPEC officials, suggests crude prices could fall further before supply starts to come out of the market.
In its monthly report for September the IEA said “further oil price drops would likely be needed for supply to take a hit” because most of shale oil “remains profitable at $80 a barrel.”
Its comments came as crude prices sank further Tuesday. At 1545 GMT, Brent crude oil for November delivery was down 2.5% to $86.76 a barrel on ICE Futures Europe, on track to settle at a fresh near four-year low. The U.S. benchmark crude was lower by 1.5% to $84.49 a barrel on the New York Mercantile Exchange.
The Organization of the Petroleum Exporting Countries has said that oil prices should bounce back because of the high cost of producing oil from U.S. rock formations that has fueled the current oil-market supply glut.
However, some within the group agree with the IEA that prices could yet trend lower.
Kuwait’s Oil Minister Ali al-Omair said over the weekend that oil prices could fall to $77 a barrel before U.S. shale oil production is affected.
OPEC officials in the Persian Gulf, including Saudi Arabia and United Arab Emirates, as well as outside the region have also said privately that most U.S. nonconventional production could be sustained at $80 a barrel.
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Replies to This Discussion
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Permalink Reply by Two Dogs, Pirate on
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Some of these folks are the same ones that probably helped fund "GASLAND". Can we drill the TMS with oil at $80? Some of the "Tin Foil Hats" could be onto something. There could be a double edge sword swinging at Russia and Iran but on the back swing hitting USA Shale Oil.
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Permalink Reply by John Matherne on -
Another way to block USA from the export market
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Permalink Reply by jim weyland on
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i have wondered how long the sauds would put up w/our 'oil renaissance'. at our behest, they crushed the soviet economy in the early 80's by producing so much that a bbl traded as low as $10. of course, anyone living in houston, ect. back then can recall what a boon $10 crude was for our local economies.
i view the u.s. unconventional oil economics a bit differently than the eia. imo, eagle ford, bakken and delaware basin drilling will continue, other basins, not so much.
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Permalink Reply by Hopeful About Natural Gas on
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what worries me is if ISIS is selling oil at $50 a barrel or less. has anyone else seen this?
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Permalink Reply by Steve on
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Cheaper oil/gas is bad news for all the global warming hucksters and their politicians(Obama etal), so expect them to do everything possible to prop up the price of gasoline.
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Permalink Reply by Skip Peel - Mineral Consultant on
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OPEC Finding U.S. Shale Harder to Crack as Rout Deepens
OPEC is resisting pressure to cut oil production while demand slumps as it tests how low prices must go to make U.S. shale oil unprofitable. As producers become more efficient, that floor is sinking.
The Organization of Petroleum Exporting Countries boosted output by the most in 13 months in September, even as crude plunged into a bear market and demand growth weakens to a five-year low, according to the International Energy Agency. Saudi Arabia and Kuwait, the largest and third-largest members of OPEC, indicated the price slump doesn’t warrant immediate production cuts, the IEA said.
While OPEC acted as a “swing producer” over the past decade, responding to surpluses by cutting output, it’s now letting oil slide to see if North American production can withstand lower prices, said Antoine Halff, head of the IEA’s oil industry and markets division. So far drillers are showing no signs of cracking, with the U.S. government forecasting record shale output in November, helping boost the nation’s crude supply to the highest level since 1986.
“This is a new situation and will likely elicit a new response from OPEC,” Halff said by phone from Paris yesterday. “We’re more likely to see OPEC let market forces play out and let the higher-cost production be the first one to cut.”
Brent crude, a benchmark for more than half the world’s oil, slumped as much as 2 percent today to a four-year low of $83.37 a barrel on the ICE Futures Europe exchange in London. Brent has dropped more than 20 percent from its June peak, meeting a common definition of a bear market. West Texas Intermediate crude on the New York Mercantile Exchange sank as much as 2.2 percent to $80.01, a two-year low.
Saudi Determination
Saudi Arabia has “appeared determined to defend its market share” in Asia, even at the expense of lower prices, the IEA said in a report yesterday. Kuwait’s oil minister said there may be “no room” to restore prices by trimming supply. Saudi Arabia, Iraq and Iran are offering the biggest discounts to crude buyers in Asia since at least 2009, amid speculation they are seeking to maintain market share.
“It makes perfect sense for Saudi Arabia to let the price drift down,” said Jamie Webster, an analyst in Washington at IHS Inc. “There’s a lot of discussion on what is the break-even price for shale, and whatever you believe, the reality is there’s no clear consensus. It gives the Saudis the opportunity to test” that level, he said.
Iran, OPEC’s fifth-biggest supplier, isn’t concerned about the drop in prices, which will pass, Roknoddin Javadi, deputy oil minister and managing director of National Iranian Oil Co., was quoted as saying by Mehr, the state-run news agency.
Break-Even Costs
About 2.6 million barrels of daily production, or 2.8 percent of global output, requires an oil price of $80 a barrel or more to be profitable, the IEA said. Only about 4 percent of U.S. shale output needs prices above that level, it said. Canadian synthetic oil projects are the most dependent on high prices, with about a quarter needing oil to remain above $80, the agency said.
Horizontal drilling and hydraulic fracturing in hydrocarbon-rich underground shale layers have helped U.S. oil production grow 65 percent in the past five years to the highest level since 1986. That’s reduced crude imports by more than 3.1 million barrels a day since peaking in 2005.
Production per well was projected to increase in fields in North Dakota, Texas and Colorado, the Energy Information Administration said yesterday. Companies are getting more oil per dollar spent drilling, driving costs down by as much as $30 a barrel since 2012, Morgan Stanley analyst Adam Longson said in a report Oct. 13.
Lower Prices
“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 yesterday from New York. “The profit margin on most commercial unconventional oil plays will support prices as low as $50, many below that even.”
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 yesterday. Brent would need to remain at $50 a barrel for 12 months for North American shale output to drop by 500,000 barrels a day, he said. Morgan Stanley (MS:US) said break-even costs at the Eagle Ford shale formation in Texas range from $30 to $60 a barrel.
“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 yesterday by phone. “There’s enough out there that significant development would continue even at $75 or $80.”
Expensive Projects
Oil may have already fallen sufficiently to curb the most expensive shale projects, according to estimates from Goldman Sachs Group Inc. Drilling may slow down in North Dakota with WTI below $90 a barrel, Jeff Currie, the bank’s head of commodities research, said in an interview in London on Oct. 1. Producers in the area decreased activity when WTI plunged below this level in 2012, Currie said.
Jefferies LLC, which advises on mergers and acquisitions, estimates that a drop to $80 a barrel or lower in WTI would trigger a reduction in drilling operations, Ralph Eads, the bank’s vice chairman and global head of energy investment banking, said in an Oct. 1 interview.
Weaker Demand
Global oil consumption will expand by about 650,000 barrels a day this year to 92.7 million, the lowest growth since 2009 and about half the increase projected in June, the IEA said. OPEC boosted production in September, pumping 30.47 million barrels a day, the most since August 2013, the group said Oct. 10 in its latest monthly oil market report. Its next meeting is scheduled for Nov. 27 in Vienna.
Saudi Arabia, which pumped almost one-third of the group’s output last month, won’t alter its supplies much between now and the end of the year, a person familiar with its policy said on Oct. 3.
“They’ve not come out and said ‘we will do what it takes to balance the market’,” said Mike Wittner, head of oil market research at Societe Generale SA in New York. “Right now the economy is weak, and demand is weak in Europe and China. The market wants to see something fairly dramatic.”
To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Dan Murtaugh in Houston at dmurtaugh@bloomberg.net
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The Saudi's need oil to be at $83 to break even due to their near total reliance on petroleum sales, per this article. I doubt they will be able to withstand prices low enough and long enough to kill the shale industry unless the price and export volume of dates increase enough to offset lost oil revenues.
http://www.energypost.eu/trouble-oil-paradise-domestic-challenges-s...
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Typically demand rises substantially when prices drop so it may take a while but prices will go back up. Maybe lower oil prices will help pull the World out of recession. Also, when drilling slows competition for fewer drilling programs means suppliers and service providers will have to lower prices. The TMS will benefit from lower costs if the price of oil doesn't go too low and stop development completely. I think just below $75 is about break even for the TMS at current well costs. IMO
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Permalink Reply by tc on
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These break even numbers, sometimes don't include the cost of capital, the corp. office expense, etc. Goodrich on their presentation has the breakeven cost at $64/Bbl., but that assumes $13m well cost and EUR of 600m and as every one know that is not happening with EVERY well in the TMS, so the real breakeven price to currently drill in the TMS is higher than $64/Bbl.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Saudi cost to produce a barrel are ~ $30. Most OPEC members have much higher costs. Members like Venezuela have considerably higher cost to produce. The actual Saudi limit for price per barrel is a complicated political calculation that only they can make because they subsidize their society heavily from oil revenues. Low prices could equal unrest in the Kingdom.
Has anyone seen the actual cost of recent TMS wells? I expect they are north of $15,000,000 when everything goes right.
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Cost to produce may be $30 but they need to sell at $83 to prevent riots in the Kingdom.
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I guess that is why one of the operators(not GDP) told me on Monday that they need $70-$75 to really break even in the TMS, instead of $64. As a side note: I am hearing that the last 2 ECA wells yet to be announced may have estimated EURs over 800K. Sanchez recently drilled a well in 26 days. Costs may be coming down.
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