Some North Dakota operators to deactivate 40% of rigs as price falls render them uneconomic.
America’s fracking revolution is becoming a victim of its own success. The controversial boom in shale gas and oil has driven the US economic recovery and helped lower world crude prices. But a price plunge from $115 (£75) a barrel last June to just above $50 last week means many shale operations no longer pay.
Rigs across the US are being deactivated at a rate of nearly 100 a week. In the final week of January, 94 were pulled offline – the most since 1987, according to oil services company Baker Hughes. The number of active rigs fell by from 1,609 in October to 1,223 in January and some experts predict fewer than 1,000 will remain by the end of the year.
“The low oil price is bringing to a halt the world’s great engine of supply growth over the last five years,” said James Burkhard, head of global oil market research for IHS Energy. “The US upstream is very responsive to changes in price and drilling is likely to slow down further until prices recover.
“The great revival of US production has been from intensive onshore drilling. These aren’t massive $7bn projects that can’t be stopped: these are mostly onshore fracking that be started and stopped much more easily.”
Burkhard said the US fracking boom accounted for more than half of global oil supply growth over the last five years, and it is the easiest tap to turn off while the world waits for the oil price to recover. The US has built up its largest stockpile of crude in 84 years.
Barrel price is the key
The profitability of onshore US wells varies considerably, with some only turning a profit when oil price is as high as $90 while others can make money at $30. IHS says nearly 30% of new wells started in 2014 can break even at $81 a barrel. By comparison, Morgan Stanley says some Middle Eastern onshore production is profitable at $10 per barrel.
Oil companies big and small have been knocked by falling prices. Chevron last month reported a 30% fall in quarterly profits (its worst since 2009), while oil exploration company ConocoPhillips swung to a loss as its average realised price fell 19% to $52.88 per barrel. Continental Resources, one of the largest drillers in North Dakota’s Bakken shale, said late last year it would cut its active rigs by 40% this year, with three-quarters of cuts coming by April. North Dakota’s Department of Mineral Resources says the state’s producers need a wellhead price of around $55-$65 to sustain current output of 1.2m barrels per day.
If similar cuts were made across the industry, the rig count would fall below 1,100 by the end of March and 950 by the end of the year.
A collapse in US oil production – now at 12m barrels a day after rising from 5m in 2008 – is likely to have a big impact on the nation’s economy. The fracking boom has made millionaires out of landowners, strengthened the country’s energy security and created hundreds of thousands of well-paid jobs. It’s a very different story from 2012, when President Obama told the nation in his State of the Union address that fracking could create 600,000 jobs by the end of the decade.
“Lower oil prices tend to have a net positive impact on the US economy as [petrol] and consumer goods get cheaper,” Burkhard said. “But the impact is more mixed this time because the US oil industry has been such an important engine of economic growth.”
John White, a senior research analyst at Roth Capital Partners, said: “All the economics for shale exploration are being reset. There is going to be much lower levels of drilling activity.
“In the sweet spots of shale, drilling will continue, but you’re going to see fewer wells drilled but more production per well.”
Momentary pause
Other experts reckon the decline in production will only be temporary. “We’re going to be punished here for six months, but then it will get back to normal,” said Steven Kopits, president of Princeton Energy Advisors. “There is a tremendous roll-off [in production] at the moment: the industry is going to be hurting until the surplus is absorbed. But if I were a shale explorer I would want to survive for six months and wait for prices to recover.”
Raoul LeBlanc, IHS’s energy director, said: “If oil prices remain weak and confidence in future prices remain shaken, US production in 2016 could possibly flatten or even decline. But there is plenty that could happen – a recovery in oil prices, lower upstream costs and improved well productivity – that would quickly change the calculus of drilling new wells and reinvigorate US production growth.
