Drop in oil price begins to have effect to impact break even because of increased service company charges

Fuel Fix:

Crude prices have fallen to a level that makes drilling most oil wells in the Permian Basin too expensive as service costs continue to rise in West Texas.

The average oil well in the prolific region now breaks even at about $43 a barrel – the price at which U.S. oil settled on Friday – up from about $39 a barrel at earlier this year, according to energy research firm Wood Mackenzie.

That's because oil field service companies have raised prices for equipment and crews that drill wells and bring them into production amid a surge in drilling and equipment there.

"They definitely can't maintain the trajectory they're on," said Ben Shattuck, an analyst at Wood Mackenzie. "For a lot of these pad wells to work, you need those ultralow service prices, and that doesn't happen when you have more than 300 rigs in the Permian."

U.S. oil prices settled at $43.01 a barrel on Friday, down from more than $50 a barrel last month. The number of active oil rigs in the Permian Basin has climbed from a low of 132 in April 2016 to 369 last week, according to Baker Hughes.

More wells in West Texas are still lucrative at lower oil prices than in other fields in South Texas and North Dakota, but service costs are expected to climb 15 percent to 20 percent in the region this year, bringing the break-even level of new wells to $45 a barrel by the end of 2017, according to Wood Mackenzie.

That's in part because oil companies in the Permian have drilled larger wells that require two to three times the amount of sand for hydraulic fracturing, and hauling that sand takes 1,800 truckloads.
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During the big downturn, the service companies reduced prices to try to stay active.  With the current drilling boom, they have had to bring more people on board so that is unlikely at this point.  The current breakeven for drillers in the Permian Basin is well below the costs from most OPEC producers, putting great pressure on the cartel to try to control the supply of oil coming to the market.

Will the Texas Railroad Commission start regulating supply again too?