With every bounce in the price of oil, US producers used enhanced techniques to get more and more oil out of existing wells. So even as rig counts collapsed, production is barely off the highs, at a price that isn't even profitable.
Oil Flirts with $40 Again
Prices are once again flirting with $40. Crude has not hand a monthly close below $40 since mid-2004. And $40 to $50 is not even profitable, putting producers into a bind.
Oil Patch Problems
The Wall Street Journal explains Low Crude Prices Catch Up With the U.S. Oil Patch.
U.S. companies have stunned global rivals by continuing to produce oil—particularly from shale deposits—ever more cheaply as American crude prices plunged from over $100 a barrel in 2014. But the recent drop toward $40 a barrel and below puts even the most efficient operators in a bind.
“Forty-dollar to fifty-dollar oil prices don’t work in this business,” Ryan Lance, chief executive of ConocoPhillips (N:COP), the largest independent U.S. oil producer, said in an interview.
The worst-case scenario most major producers have discussed in the past six weeks with investors involved a price of $50 a barrel. That is beginning to look optimistic as Saudi Arabia continues to produce near-record volumes and major exporters such as Iraq have increased output. Many oil executives, including BP PLC CEO Bob Dudley, expect prices to be “lower for longer.” The U.S. Energy Department is forecasting the price of oil will average around $50 a barrel next year.
Breakeven Price
More than 250,000 people world-wide have lost their jobs in the industry over the past year, according to Graves & Co., a Houston consulting firm. Many companies that were hoping to weather low energy prices without new rounds of layoffs and salary cuts may be forced to slash those costs yet again, said Eric Lee, an energy analyst with Citigroup).
“We’re really reaching the limit of what people can do,” said Allen Gilmer, chief executive of DrillingInfo, an Austin, Texas company that compiles data on tens of thousands of shale wells across North America. “Right now, you are down to the best areas, the best rigs, the best people. Any cuts from now on are bone rather than fat.”
Earlier this month, EOG Resources Inc (N:EOG)., a Houston-based shale driller, said some of its most prolific wells would yield a rate of return above 40%, even with U.S. oil prices at $50 a barrel.
But break-even prices don’t always give the whole picture of how much money a shale company must spend to pump oil and move it to market. They can exclude land costs, which for some companies amount to billions of dollars, and they don’t include the cost of using pipelines to transport crude, according to company financial statements and analyst reports.
In nearly all of its investor presentations this year, EOG has said it can turn a profit at prices at or below the prevailing oil price at the time of the presentation. Yet more than $6 billion in capital spending this year has produced nearly $4 billion in net losses over the past year for the company, which is an industry bellwether.
The company, which has said $40 oil is unsustainable, didn’t respond to requests for comment.
EOG isn’t alone. In the past 12 months, the 24 largest shale companies have reported losses totaling more than $62 billion and many show negative returns.
At $40, oil patch bankruptcies will soar.