The first is from an August 2014 study, “The Economic Impact of the Permian Basin’s Oil and Gas Industry,” produced by a team of researchers in the department of Petroleum Engineering at Texas Tech University. It estimates that average breakeven costs for shale plays have declined by 10 percent since early 2012 and now average $55 a barrel.
The Wall Street Journal took up the question in October, before the rout in prices. It notes that many exploration and production companies have already “sunk millions into buying land and securing licenses and access to infrastructure,” making the “real benchmark for drilling . . . the return from that point on.” It cites Paul Goydon, a partner at the Boston Consulting Group, who argues that “production in the three big shale basins—Bakken, Eagle Ford, and Permian—breaks even at $60 a barrel or less.” Two years ago, the break-even price was $75. Canada’s oil sands are much more expensive. Though projects already underway can keep operating in the short term with oil at $40 a barrel, new projects require a break-even price of nearly $90 a barrel. (Surely this will have an impact on the economics of the Keystone Pipeline.)
Another estimate prepared by Morgan Stanley appears to give breakeven prices for North American shale at a higher level than the Texas Tech experts. This chart, reproduced by Business Insider, should be compared with one produced a few years ago by the French oil major Total, which showed estimates for oil shale at over $100 a barrel, well above oil sands and Arctic exploration. The estimates plainly are something of a moving target.
The following chart, also from Business Insider, is even better, showing the breakeven cost for every international oil company project through 2020. (The chart was taken from a presentation by Ed Morse, an oil economist for Citigroup.) This plainly shows that oil cannot stay at $55 a barrel indefinitely, that price being well below the breakeven for most international oil company projects.
One more chart from the New York Times reinforces the message from the foregoing. About 80% of planned oil projects would be uneconomical with prices at $60 a barrel. Notes the Times: "A recent study by Goldman Sachs estimates that many large new oil and gas projects being planned around the world will not be commercially viable with oil at $70 per barrel. 'The shale revolution is making $1 trillion worth of new oil projects potentially obsolete,' said Michele della Vigna, a London-based Goldman analyst. 'The industry needs to reduce costs by 30 percent to go ahead with these projects at the current oil price.'”
Given the severity of the price decline, one might surmise that oil production and consumption is badly out of whack. Estimated in news reports at 1 to 2 million barrels a day, the imbalance between production and consumption is barely noticeable in this chart from the Energy Information Administration. The EIA explains: "EIA estimates that global consumption grew by 1.3 million bbl/d in 2013, averaging 90.5 million bbl/d for the year. EIA expects global consumption to grow by 1.0 million bbl/d in 2014 and 0.9 million bbl/d in 2015. Projected global oil-consumption-weighted real gross domestic product (GDP), which increased by an estimated 2.7% in 2013, is projected to grow by 2.7% and 2.9% in 2014 and 2015, respectively."
The breakeven costs are also reviewed in a Goldman chart that is (wittily) annotated by Tom Randall of Bloomberg. Randall explains: "The chart below shows the break-even points for the top 400 new fields and how much future oil production they represent. Less than a third of projects are still profitable with oil at $70. If the unprofitable projects were scuttled, it would mean a loss of 7.5 million barrels per day of production in 2025, equivalent to 8 percent of current global demand."
Another chart in Randall's piece shows the impact of $75 oil on shale production. It's not clear what $55 oil would mean for the America's shale revolution, but the $75 level shows only a 40% drop in growth, not an absolute decline.
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For links to several of these charts, a tip of the hat to Mr. Cain Thaler, "My Worst Day in Three Years," ibankcoin.com, November 28, 2014