Shale Oil: Constraints, Cash Flow and Breakevens

OilPrice had a number of articles up on shale, as always. I found a few to be of interest. This article focuses on some of the constraints that shale has:

Also, more water and more sand and longer laterals all have their limits. 

In 2018, the industry spent $70 billion on drilling 9,975 wells, according to Hughes, with $54 billion going specifically to oil. “Of the $54 billion spent on tight oil plays in 2018, 70% served to offset field declines and 30% to increase production,” Hughes wrote. 

Better technology and an intensification of drilling techniques have arrested decline, and even led to a renewed increase in production. But ultimate recovery won’t be any higher; drilling techniques merely allow “the play to be drained with fewer wells,” Hughes said.

What is interesting here is that better technology doesn't mean that shale producers are able to get more oil out of the ground. It just means they're able to recover it quicker. Also, as a capital expense number, it costs around $7 million for a well to be drilled.



Next, Rystad Energy writes on OilPrice that only 10% of shale drillers are cash flow positive. They than have this note:

Without additional funding and any debt refinancing, capex would have to be cut. However, no US shale company has made a public offering since the sharp fall in oil prices – and subsequent share price slide – late last year, marking the longest gap in public capital issuance since 2014. 

So around half a year has passed since the last capital raising. This seems to indicate that Wall Street is skeptical of shale.

OilPrice also wrote about the Federal Reserve Bank of Dallas findings:

According to the Federal Reserve Bank of Dallas, the breakeven prices for producing oil in the Delaware Basin is $49 per barrel and $48 per barrel in the Midland Basin, both of which are in the Permian. Meanwhile, what the Dallas Fed classifies as “other U.S. nonshale” has a breakeven of $49 per barrel. So, despite all the hype, shale is not more competitive on a cost basis than conventional and offshore production.

Chrone takes a slightly different spin than OilPrice with the following:

That same breakeven price was closer to $75 a barrel back in 2014 when oil prices last exceeded $100 per barrel.

At the moment, it appears that shale breakeven is about the same as nonshale. Based on prior research, I do know that nonshale breakeven has also dropped.

Even with all these issues, Rystad writes on OilPrice:

The growth in US onshore production from the first quarter through the fourth quarter could come in at around 1.1-1.2 million barrels per day (bpd), or 16% for the full year, according to Rystad Energy.

Shale oil has difficulty raising cash. Only 10% of shale producers are cash flow positive. And they're running into constraints such as water and sand. Yet, production is still going to increase.

As a check on that Rystad production increase, earlier this year I wrote the following based on estimates from Continental Resources chief executive Harold Hamm:

Regarding shale growth: Energy Information Administration (EIA) mentioned that US shale was estimated to hit close to 8 mb/d in December 2018 and was at 6.3 mb/d in Dec 2017. A 50% decrease in the growth would indicate we'd end up at around 8.9 mb/d in Dec 2019 (assuming his 50% decrease carries throughout the year).

So it looks like Rystad numbers are higher than what I had come up with, which was 0.9 mb/d. But I'd say still in the ballpark.