Breakeven Prices in US Shale Oil

Even though prices have slumped to their lowest in more than a year, output keeps marching ahead thanks to falling operational costs, increasingly efficient well technology, rising reserve estimates and aggressive forward hedging programs. Experts say the 1 million barrel per day (bpd) mark will probably be reached by early next year. _Bakken Breakeven

Improved technology and streamlined operations are allowing US shale producers to make greater profits on lower oil prices. Bakken oil production is estimated by the USEIA to shoot above 1 million barrels per day next month. Investment in new production continues to come in.

What is the significance of “breakeven oil prices?”

Breakeven oil prices are the price of oil per barrel needed for an operator to make a reasonable rate of return for the risk taken.

Typically, oil companies make decisions based on a 10-20% rate of return. It is the bare minimum price a company needs and is NOT necessarily the floor for what will sustain activity at current levels. _Breakeven Eagle Ford

Eagle Ford shale could support production at prices as low as $50 a barrel, but if low prices persisted there would eventually be a significant drop in new investment and production.

In the Bakken, breakeven oil prices are even lower, with most producers well able to survive prices as low as $40 a barrel.

… formulating a break-even price is no simple matter and analysts differ in their calculations as the more than 100 operators in the Bakken have different costs, access to acreage of varying quality and distinct success rates in producing oil.

…for high-quality parts of the formation such as the Parshall and Sanish fields, that number goes down to the $38-$40 range.

North Dakota’s Department of Mineral Resources bases its break-even estimates on a 10 percent return on investment after tax and royalties, it said. Statewide, that price is $36 and for the four top Bakken oil producing counties it is $40 for Williams, $37 for Mountrail, $26 for McKenzie and $31 for Dunn.

… With savings, improved production rates and hedging, the break-even point is still a way off by most accounts. _Bakken Breakeven

Still, some producers in both Bakken and Eagle Ford would be hurting if prices fell below $60 per barrel. The difference in “breakeven costs” between different producers illustrates the “creative destruction” aspect of capital markets. Just like in biological evolution, it’s a jungle out there.

Investors need to research any specific oil & gas companies and service companies before investing.

Shale insiders such as Devon Energy Corp. seem to think that investing in shale is still a good idea.

Update Oct 2014: North American oil production is just getting started. A little thing like a price slump is not about to poop this party.

Various estimates for US shale breakeven from different analysts Some of these estimates did not take into account newer technologies. As new pipelines are built, breakeven costs will drop.

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2 Responses to Breakeven Prices in US Shale Oil

  1. Abelard Lindsey says:

    Even $60 a barrel is way too low for “petro-states” like Saudi Arabia and Iran to finance their social-welfare schemes. Same for the Russians, who have allowed their economy to become too dependent on oil, gas, and other natural resource exports. The Russians seemed to have failed to develop an export-oriented manufacturing economy.

  2. alfin2101 says:

    Sure. And you can extend the list to Latin American petro-states like Venezuela. We may see new popular revolutions coming to Iran, KSA, Venezuela, etc. if the energy revolution from high temperature nuclear reactors is ever allowed to happen.

    If you can make clean cheap diesel or petrol from garbage materials like throwaway biomass, cheap coal, etc. using cheap waste heat from VHTRs, the economics of liquid fuels is turned on its head, with EROEI being the first boogeyman to fall.

    What makes Russia special is its huge nuclear arsenal. If Russia collapses from a combination of demographic decay and economic Armageddon, its nukes (the ones that still work) will either be used or sold to the highest bidder. Putinomics only works with high oil prices.

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