The effect of low oil prices on shale? It’s complicated.

Shale UK conference logo
Shale UK conference logo

The extent to which low oil prices will affect the shale industry is difficult to pinpoint – Peter Clutterbuck of Global Energy Consultants told the delegates at the Shale UK conference in London (4-5 March 2015).

How much shale can influence the economics of various oil prices is a very complex question, Mr Clutterbuck said, because, in fact, there are two different types of economics; “one for production that’s already been drilled and developed and produced and doesn’t need a high oil or gas price to keep it going; the other are new drilling economics which have to justify five to ten million dollar wells, and those are the ones that are dropping off.”

The recently released Baker Hughes rig count showed the index dropping by about 35 per cent, while at the same time Brent has picked up from about $45 per barrel to about $61 per barrel.

Global Energy Consultants - Shale UK presentation
Global Energy Consultants – Shale UK presentation

“If you look back previously to January 2009, you will see a similar precedence then; the rig count dropping, and the oil price responding from the bottom of the trough, and then climbing back to about $100 mark or so,” Mr Clutterbuck said.

The situation is further complicated by the fact that the process of bringing production online is particularly long for unconventionals.

On average it takes around 6 years to get to the point of reaching a decision and maybe a further 8 years from the point of starting the exploration to getting on to production. During that time, some of the critical steps are: to locate sweet spots, optimise the frack design, engage communities, develop gas markets, get government approvals, raise finance. None of those are easy for a large unconventional resource.

The dramatic rise in shale production within the last five years has been fuelled by high oil prices, but it doesn’t necessarily have to continue to grow.

“Nobody knows whether it will keep growing or flatten out,” said Mr Clutterbuck, “it depends on oil price and geology and so on, but you can see for instance when you look at the the offshore [production], there is a very big spike; it didn’t keep growing and it stabilised.”

Judging by calculations of what basins are viable in the US on what West Texas Intermediate price, it seems that about half of US shale production is marginal on today’s oil price. European economics are worse because of the doubling of costs compared to the US.

“However, on the bright side,” he added, “what always happens when you have a drop in crude oil prices, is you have contracts’ costs go down, and what may be uneconomic at $61 per barrel today, might be economic at $61 per barrel in 3 years’ time, simply because costs are going down.

Also, governments respond over periods of long low oil prices with improved fiscal terms, and that again could be expected.”

“This is also a wonderful time for acquisitions, both conventional and unconventional. Five years’ ago it was a competitive environment – less than that – even 4 years’ ago; shale was expensive, it is now cheaper; almost everything is cheaper to acquire. It’s a wonderful time to be building an asset base,” he concluded.

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