Crude production is poised for records
U.S. oil production is expected to surge to new records through the rest of this year and into 2020 with healthier crude prices and the cost of profitably drilling a shale oil well falling to a modern low.
Led by West Texas’ booming Permian Basin, the break-even cost for developing shale wells has fallen 4 percent — or $2 a barrel — down to a recent low of $50 per barrel, likely ensuring the growth of the onshore shale industry for years to come, according to the latest survey Tuesday by the Federal Reserve Bank of Dallas.
Those efficiency gains coupled with oil prices above $60 a barrel — the U.S. benchmark settled Tuesday at $62.99 — are why both the federal government and energy research groups project U.S. crude output will rise above 13 million barrels a day by the end of 2019.
A combination of weather and depressed oil prices at the beginning of this year slowed the growth of U.S. oil production in early 2019. But that is expected to change. The Norwegian research
firm Rystad Energy estimates that shale oil output will jump 16 percent over the rest of 2019 as exploration and production firms pick up the pace to meet or exceed their 2019 projections.
“The slow first quarter implies an even steeper expected growth curve for the remainder of the year,” said Veronika Akulinitseva, a senior analyst at Rystad. “In fact, acceleration of oil production for many operators is already underway and oil additions are thus likely to increase notably.”
Help from OPEC
U.S. crude oil production began the year at 11.7 million barrels a day and is now fluctuating between 12.1 million barrels daily and a record high of 12.2 million barrels per day each week, according to U.S. Energy Department estimates.
The Energy Department projects an average U.S. oil output of 13.4 million barrels per day in 2020. Oil prices have trended upward most of this year and the Organization of the Petroleum Exporting Countries and Russia indicated on Sunday that they are considering extending their production cuts until at least the end of 2019.
Anything above $60 per barrel is considered relatively healthy for the industry, although most energy companies would still prefer higher prices. But a $50 break-even price makes drilling profitable for most companies. That same break-even price was closer to $75 a barrel in 2014 when oil prices last exceeded $100 per barrel.
Rigs today are able to drill more wells from single sites than before and to deeper depths to produce more oil and gas. That’s largely why the U.S. is producing record volumes of crude oil and natural gas with fewer than half the rigs that were operating in 2014.
“Horizontal drilling and hydraulic fracturing have made accessible significant amounts of oil reserves previously considered uneconomical to develop,” the Dallas Fed report said. “Moreover, production costs for those reserves have declined dramatically over the past 10 years.”
Loving Loving
Geography plays a key role though. The sweet spot areas of the Permian in its Delaware and Midland basins are both showing break-even prices closer to $48 per barrel, while South Texas’ Eagle Ford shale averages about $51 per barrel. The prime oil acreage in Oklahoma is higher still at an average of $53 per barrel.
The Dallas Fed cited Bloomberg New Energy Finance’s break-even prices in the Permian, noting they range from $46 per barrel in Loving County to a high of $87 per barrel in Reagan County. Loving is west of Midland along the New Mexico border in the heart of the Permian’s booming western portion, called the Delaware Basin. Reagan is southeast of Midland more along the Permian’s less prolific periphery.
Essentially, the quality of the shale rock in Loving County offers greater oil volumes at lower costs.
The Loving-Reagan comparison shows a massive range in potential shale well costs, so companies simply opting against drilling in the more expensive areas like Reagan County can further help drive down the break-even cost.