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Energy Market Is Working: Cheap Oil May Slow Shale Oil

Leading oil services firm Baker Hughes Inc (BHI.N) warned on Friday that booming drilling in the shale oil fields of North Dakota and even south Texas could slow if U.S. prices drop below $80 a barrel.

While it has been clear for months that the pull-back in oil prices and searing costs have begun to temper the race to tap into the country’s shale oil plays, Baker Hughes CEO Martin Craighead’s comments were the bluntest yet to suggest that crude oil prices are already hovering near a key break point.

Companies tapping the vast U.S. bounty of shale and other tight oil plays may be scrutinizing some higher-cost production after West Texas Intermediate prices slumped in the second quarter, Craighead said in a conference call after second quarter earnings were released.

“I think the shoe’s dropping in south Texas, no doubt about it,” said Craighead, adding: “I’m a little bit more concerned about the Bakken than I am (about) the Permian.”

With a sustained drop below $80 a barrel, “you could start to see some rigs coming off,” he said.

After sagging under the combined weight of rising output from the United States and Canada, and slumping demand, U.S. crude prices have rebounded to over $91 a barrel.

Analysts this month began warning that unfettered growth in North Dakota’s oil output could be drawing to a halt.

“The largest drillers in the Bakken are all reducing their rig counts this month, although none acknowledge a change in drilling plans,” Barclays analyst Amrita Sen said in a note last week.

The U.S. oil-directed rig count in the latest week fell by the largest margin since February last year, with 13 fewer rigs operating, Baker Hughes data shows. The number of rigs drilling in Texas dropped by 10 while North Dakota’s fell by one.


Technology used in the shale oil and gas boom is expensive, even after oil companies caught a break earlier this year when a cutback in new natural gas drilling due to low prices freed up rigs and fracking crews.

A typical Bakken well costs $10 million, while costs in the Eagle Ford can run up to $7 million a well, according to Bernstein Research. That is why any price drop below $80 a barrel is likely to threaten production.

A Reuters poll of analysts in June forecast WTI prices would average $94.60 a barrel in 2012, and $96.60 in 2013.

Such forecasts, if they hold, would keep production flowing from Eagle Ford and the Bakken, the major dynamos behind the shale oil surge that has redefined U.S. markets.

U.S. oil output declined for 17 straight years, knocking nearly 2.5 million barrels per day off its domestic production before a rebound in 2009. Output jumped 1.175 million bpd from 2009 through 2011, the biggest three year surge since the early 1970s, according to the U.S. Energy Information Administration.


Analysts and oil traders are watching state data for any sign that the boom in unconventional resources is faltering. Data from North Dakota’s state industrial commission showed some 210 rigs were operating in the state this week, down by 5 from June. The rig count peaked in May at just under 220.

But state officials said fluctuations in the rig count were to be expected and that, overall, the count should continue to rise.

“What we expect is a bit of a saw-tooth pattern in our rig count as new-built rigs are brought in. Once they’re up and operating then older, inefficient rigs will be moved out,” Lynn Helms, director of the state Industrial Commission’s Oil and Gas Division, told Reuters in an interview earlier in July.

“It’s not going to be a steady build.”

Reuters, 20 July 2012