Lower production cost keeping shale plays profitable

Fuel Fix:

The relentless cost-cutting that dissolved a third of the Texas petroleum workforce over the past two years has brought the cost of pumping shale oil in the state down to $41 a barrel, Wood Mackenzie says.

The energy industry’s leaner build after the downturn has given drillers enough financial wiggle room to plow cash back into 70 percent of the U.S. shale plays and conventional oil fields with oil at $60 a barrel, the energy research group said in a new report Wednesday. That’s compared to 50 percent two years ago.

In other words, the oil market collapse that bankrupted more than 80 energy producers and oil-equipment suppliers in Texas has also fixed one of the industry’s biggest problems: high cost inflation.

“Costs had gotten pretty astronomical,” said R.T. Dukes, an analyst at Wood Mackenzie in Houston. “In a high-price world, you really seek out production at all costs. When prices are low, you focus on costs.”

Worldwide, average oil production costs have fallen by $19 a barrel to $51 a barrel. At least for now, the oil industry has squeezed its production costs down to 2009 levels, and drillers could make a profit extracting 9 million barrels a day over the next decade, a 20 percent increase from the days of $100 oil.

In West Texas, oil companies could make money in the Bone Spring and Wolfcamp tight oil plays with $37 a barrel oil, while their rivals in the Eagle Ford Shale in South Texas could turn a profit at $48 a barrel. The average break-even price in North Dakota’s Bakken Shale is $58 a barrel. In Oklahoma’s Scoop region, it’s $35 a barrel, Wood Mackenzie estimates.
...

This is bad news for OPEC,  It has tied its own price structure to the shale plays which means they have imposed a ceiling on the price they can sell their own oil at. Countries like Venezuela which have a high-cost structure because of socialism will take even longer to recover.

When oil prices are high, the costs goes up as drillers  are willing to accept as long as they can remain profitable.

It is also easy to see why companies like Chevron are concentrating on Permian Basin in West Texas rather than the more costly and risky offshore plays.