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Hail Shale: Texas Isn’t Scared of $30 Oil

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Dan Murtaugh, Bloomberg

Texas has a message for $30 crude doomsayers: Bring it on.

A handful of shale patches in the state, which would be the world’s sixth-largest oil producer if it were a country, are profitable with crude below $30 a barrel, according to an analysis by Bloomberg Intelligence. In DeWitt County, which produced more than 100,000 barrels a day in November from the Eagle Ford formation, the average well can be profitable with U.S. benchmark crude at $22.52 a barrel, $4 below the lowest level this year.

Drive 200 miles southwest to Dimmit County, and drillers need $58 oil. The wide range of break-evens, a term for the price at which a well goes from unprofitable to profitable, illustrates one reason why shale production from exploration and production companies has been more resilient than expected, filling storage tanks in the U.S. to levels not seen in 85 years.

“It may be harder to kill many U.S. E&Ps than analysts originally thought,” Bloomberg Intelligence analyst William Foiles said in the report. “The wide range of break-evens undermines efforts to come up with a single threshold for U.S. shale producers.”

Since oil started falling in June 2014, U.S. shale drillers have survived by cutting costs, experimenting with new techniques and technology and boosting output to keep their wells competitive. West Texas Intermediate crude settled at $31.72 a barrel Thursday on the New York Mercantile Exchange.

Idling Rigs

Still, the big picture isn’t pretty. Two out of every three drilling rigs in the U.S. have been idled and scores of roughnecks who worked them laid off. Law firm Haynes and Boone LLP says 42 companies filed for bankruptcy as of Jan. 6.

On the other hand, U.S. crude output last week was 9.2 million barrels, the highest January level since 1971 and just 5 percent down from last year’s peak.

It’s easier to survive low prices in some places than in others. Bloomberg Intelligence analyzed everything from average output per well to the level of local school taxes to calculate break-even costs to drill in different rock formations across Texas’s two big shale regions, the Eagle Ford in south Texas and the Permian Basin.

Nine areas had break-even costs at $30 or below. Those include some of the biggest oil-producing counties in Texas, such as DeWitt, Midland, Martin and Reeves, with combined output of 430,000 barrels a day in November, according to the Texas Railroad Commission.

Even Lower

Oil prices can be even lower to justify completing wells that have already been drilled but haven’t yet been hydraulically fractured, or fracked, the last step before production begins. There are more than 4,000 of those wells in the U.S. It makes economic sense to complete wells in 18 areas in the Permian and Eagle Ford at sub-$30 oil. In Reeves County in the Permian, oil prices above $14 justify fracking an already-drilled well.

Even within counties, break-even costs can vary widely depending on which company is drilling and the richness of the rocks they’re tapping, said Kathryn Downey Miller, a principal at Lakewood, Colorado-based energy research firm BTU Analytics LLC. In DeWitt, for example, about 45 percent of wells drilled in 2014 would have been profitable with oil below $20. Another 5 percent would need $70 oil.

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