US shale oil revolution far from over- Gibson

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US shale production is still declining despite efficiency gains made, a recent report said. 

  

However, the sector has proved more resilient at lower prices than originally anticipated.

The oil price drop, which put the brakes on the shale revolution forced producers to find innovative ways of cutting costs and maximising output, Gibson Shipbrokers said.

As technology improves and service costs fall, producers are lowering their breakeven costs, prompting a rise in the US rig count.

The Baker Hughes North American oil rig count has risen from a low of 316 at the end of May to 381 recently, having gone up almost every week since the end of May.

Much of this increase was driven by rising oil prices, which reached $50 per barrel in June as outages in Nigeria and Canada supported prices, only to ease back. However, the rig count continued to rise, as changes in drilling activity lagged behind the oil price fluctuations.

Whether or not the rig count continues to rise over the coming weeks may have already been influenced by easing prices over the previous month, yet the significant factor remains that producers have been adding rigs in a $40-50 per barrel price

Environment, Gibson said.

Exact cost breakevens may be unknown but many analysts suggest the majority of wells could now be profitable at $60 per barrel whilst several wells in the Permian Basin, which account for over 30% of US shale production, could be economical at prices below $40 per barrel.

In addition,, decline rates have improved drastically in recent years. When the shale industry first started a decade ago, decline rates stood near 90% but are now said to be nearer 20% over the first four months of a well’s life.

Whilst oilfield services costs may not be able to fall any further, technical innovation and new drilling techniques could see lower dollar per barrel costs bring more marginal wells online.

Perhaps it is important to put the number of rigs into context. The 381 rigs in operation fall well short of 1,609 peak seen in October, 2014.

Even with the latest additions, US crude production is likely to continue to fall, as well decline rates exceed new capacity brought online.

However, with breakeven costs said to be at much lower levels, it can be argued that shale oil is now a medium, not a high cost source of oil. Longer term this indicates

that as oil prices recover; shale production will become an increasingly important source of supply.

Furthermore, with lower costs, it is likely that tight oil production will recover before higher cost projects (eg deepwater), impacting on tanker trade flows.

Current projections from the EIA indicate that US crude production will begin to rise again in the second half of 2017, subject to oil prices firming.

As domestic oil supplies increase, crude export from the regions are likely to rise, whilst imports into the US would again ease. Rising exports of US light sweet crude and falling imports of similar grades would likely support long haul trades, pushing more West African barrels East, whilst also generating increased flows from the US Gulf.

However, everything comes down to price, so any further fall in oil prices could delay the anticipated recovery in shale oil production, Gibson concluded.