U.S. shale oil will have ‘sustainability issues’ at $25 a barrel: Chris Faulkner says

Chris Faulkner
Source: Breitling press release, PR Newswire

Oil prices in 2015 will hover around $60 per barrel, with positive drivers for demand pushing the price higher over the next twenty-five years. This is the view of Chris Faulkner, the CEO of Breitling Energy, who speaking at the Shale World UK conference in Birmingham, last Thursday, said that barring a massive geopolitical event that would push the prices up temporarily, Breitling’s analysis doesn’t “show any models that show a $100 oil between now and 2020.”

In his presentation, entitled: Can unconventional exploration be economic at current oil and gas prices?, Mr Faulkner said that despite the doom-sayers in the media, American unconventional oil and gas industry is in a good shape and, in some areas, can sustain production at prices that are much lower than the current levels.

“So, when you see oil prices, say, at the EIA, saying the United States cannot make money at $85, that’s just not true – we can; just not every area’s going to be productive,” he said, adding: “I think if you asked me ‘what is the real number at which the United States will have serious sustainability issues,’ it would be somewhere in the twenties, it would be $20-$25 a barrel, that would really put a hurt on us as far as producing oil form unconventionals is concerned, because fracking is very, very expensive.”

According to the Baker Hughes drilling report, there are currently 1,048 active rigs in the U.S., down from 1,900 three months’ ago. Despite that, the production is on the rise. Today, the United States is producing about 7 Bcf worth of gas in total and 9.5 million barrels of oil a day, which is half a million less than Saudi Arabia. Mr Faulkner believes that ‘the line in the sand’ drawn by Saudi Arabia, refusing to cut production beyond thirty million a day, has forced the United States oil and gas industry to make changes to operate within a lower priced oil environment. In other words; to do more with less.

This spurred a lot of innovation, leading to efficiencies in drilling. Also, companies nowadays  often choose not to complete already drilled wells. The IHS Energy Analysis of Drilled, but Uncompleted Wells (DUC) in the Eagle Ford Shale indicates DUCs can be converted to producing assets for approximately 65 per cent of the cost of a new drill, significantly lowering the economics when evaluated against remaining costs.

Chris Faulkner says: “At $50 oil it doesn’t work well in certain areas. So we’ve had to shift rigs, we’ve had to lay rigs down, we’ve had to create what we call a ‘frack-log’, were about 3,000 wells in the United States have been drilled, and at the drilling point we just stop, we don’t frack the wells, we aren’t producing them. We move to the next location and attempt to hold the acreage. We had a window of time we could drill and stop and then the well could produce. In North Dakota it’s about a year. We’re going to have a year lag and still not lose our acreage and keep the oil in the ground – it’s sort of like virtual storage if you will. So, when oil prices rebound, there’s going to be a tremendous amount of fracking taking place in a very short amount of time, and a lot of oil moving into the market.”

It is true that at $2.50 gas price many areas are uneconomical – that’s even taking into consideration that a shale-well in the Marcellus costs only a fraction of what it would cost in Poland or the United Kingdom. However, in certain areas gas can be produced at $1.50. When we keep in mind that this is new drilling cost, rather than incremental cost, so with wells that have already been drilled and are producting, the Capex on the drilling has already been amortised, then we will find that the costs of producing a barrel of oil will be much less than $50 a barrel – and gas – much less than $2.50.

Mr Faulkner also downplayed the ability of OPEC countries to damage American oil and gas interests. It is true, he said, that Saudi Arabia has enough money to keep the oil price down, wanting to see what the pain point is, at which it will slow the U.S. down. “I think they’re going through that exercise right now,” he said.

Having said that, unlike the U.S., which is unhinged on any particular industry when it comes to it’s budget, OPEC countries are in a difficult situation of relying on oil sales to balance their national spending. Even Saudi Arabia – rich as it is – needs the price of oil to be at around $85-$90 a barrel. Other, poorer, countries like Iran, Iraq, and Venezuela are in serious financial trouble because of OPEC’s decision not to cut production.

“Venezuela is begging for oil prices to go back up, and begging for Saudi to cut market share. We’ll see in June when the next meeting happens in Vienna, but my guess is nothing will happen. Saudi and their two rich partners will do nothing and they will sustain just fine with the amount of money they have in their coffers while the other countries will face serious financial hardship,” said Mr Faulkner.

He also believes that the one wild-card of where oil prices will go is Iran. It is making continued efforts to have the sanctions levied against them removed. If that happens, they will be able to increase their production of 2 net million of barrels a day, where it is today, to 3.5 or 4 within a matter of weeks, flooding the market.

Chris Faulkner says: “What President Obama is doing right now is a very dangerous game. One – I don’t think it helps Israel, obviously, two – it doesn’t help our relations with Saudi Arabia, and three – it could seriously pummel the oil market, if that oil moves into the market. If Iraq is able to increase production, Libya’s production is back up to double of what it was just two months’ ago, which is a third of what it was a year and a half ago.”

“There’s a lot of wild-cards going into the near-term price of oil, a lot of these things will shake-out, these countries will have a real hard time sustaining these levels of production if the prices remain very, very low,” he added.

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