U.S. shale companies are still finding new ways to bring costs down while a host of innovations is powering this race to stay profitable even with crude trading below $40 per barrel.
The chart above tells a dramatic story, and helps explain why U.S. crude production hasn’t fallen off a cliff as global oil prices have come crashing down over the past 21 months. Back in June of 2014, oil was trading well above $100 per barrel and the only question for America’s fledgling shale industry was how high production might go. Since then, oil has fallen $75, trading today under $40 per barrel—well below what many assumed to be the breakeven levels for most U.S. shale projects. America’s overall oil output has tapered off since then as shrinking profit margins have pushed higher cost operations out of play, but the 570,000 barrel per day decline over the past nine months is a far cry from the bust many predicted, and declining well costs (again, illustrated above) have a lot to do with that. The EIA reports:
Costs per well generally increased from 2006 to 2012, demonstrating the effect of rapid growth in drilling activity. Since 2012, costs per well have decreased because of reduced overall drilling activity and improved drilling efficiency and tools. Changes in costs and well parameters, such as the need to drill deeper or longer lateral wells, have affected the onshore oil plays differently in 2015, with recent per-well costs ranging from 7% to 22% below 2014 levels.
Differences in geology, well depth, and water disposal options can affect costs for each onshore oil play area. The adoption of best practices and the improvement of well designs have reduced drilling and completion times, decrease total well costs, and increase well performance. Greater standardization of these drilling and completion practices and designs across the industry should continue to lower costs. The drilling cost per foot, based on total depth, and the completion cost per foot, based on lateral length, are both projected to maintain these lower cost trends through 2018. Sustained lower upstream costs may affect near-term oil and natural gas markets, and ultimately, the prices of these fuels.
This American energy renaissance has been powered by shale, and it’s worth remembering just how young this shale industry is. Companies are still finding new ways to adopt new best practices and bring costs down, and a host of innovations is powering this race to stay profitable even with crude trading below $40 per barrel. There’s still much to learn and plenty of room to grow, and plenty of reasons to be bullish about America’s energy future, even in today’s bearish market.