How OPEC Lost The War Against Shale, In One Chart

Tyler Durden's picture

At the start of March we showed a fascinating chart from Rystad Energy, demonstrating how dramatic the impact of technological efficiency on collapsing US shale production costs has been: in just the past 3 years, the wellhead breakeven price for key shale plays has collapsed from an average of $80 to the mid-$30s...

... resulting in drastically lower all-in breakevens for most US shale regions.

Today, in a note released by Goldman titled "OPEC: To cut or not to cut, that is the question", the firm presents a chart which shows just as graphically how exactly OPEC lost the war against US shale: in one word: the cost curve has massively flattened and extended as a result of "shale productivity" driving oil breakeven in the US from $80 to $50-$55, in the process sweeping Saudi Arabia away from the post of global oil price setter to merely inventory manager.

This is how Goldman explains it:

Shale’s short time to market and ongoing productivity improvements have provided an efficient answer to the industry’s decade-long search for incremental hydrocarbon resources in technically challenging, high cost areas and has kicked off a competition amongst oil producing countries to offer attractive enough contracts and tax terms to attract incremental capital. This is instigating a structural deflationary change in the oil cost curve, as shown in Exhibit 2. This shift has driven low cost OPEC producers to respond by focusing on market share, ramping up production where possible, using their own domestic resources or incentivizing higher activity from the international oil companies through more attractive contract structures and tax regimes. In the rest of the world, projects and countries have to compete for capital, trying to drive costs down to become competitive through deflation, FX and potentially lower tax rates.

The implications of this curve shift are major, all of which are very adverse to the Saudis, who have been relegated from the post of long-term price setter to inventory manager, and thus the loss of leverage. Here are some further thoughts from Goldman:

  • OPEC role: from price setter to inventory manager In the New Oil Order, we believe OPEC’s role has structurally changed from long-term price setter to inventory manager. In the past, large-scale developments required seven years+ from FID to peak production, giving OPEC long-term control over oil prices. US shale oil currently offers large-scale development opportunities with 6-9 months to peak production. This short-cycle opportunity has structurally changed the cost dynamics, eliminating the need for high cost frontier developments and instigating a competition for capital amongst oil producing countries that is lowering and flattening the cost curve through improved contract terms and taxes.
  • OPEC’s November decision had unintended consequences: OPEC’s decision to cut production was rational and fit into the inventory management role. Inventory builds led to an extreme contango in the Brent forward curve, with 2-year fwd Brent trading at a US$5.5/bl (11%) premium to spot. As OPEC countries sell spot, but US E&Ps sell 30%+ of their production forward, this was giving the E&Ps a competitive advantage. Within one month of the OPEC announcement, the contango declined to US$1.1/bl (2%), achieving the cartel’s purpose. However, the unintended consequence was to underwrite shale activity through the credit market.
  • Stability and credit fuel overconfidence and strong activity: A period of stability (1% Brent Coefficient of Variation ytd vs. 6% 3-year average) has allowed E&Ps to hedge (35% of 2017 oil production vs. 21% in November) and access the credit market, with high yield reopen after a 10- month closure (largest issuance in 4Q16 since 3Q14). Successful cost repositioning and abundant funding are boosting a short-cycle revival, with c.85% of oil companies under our coverage increasing capex in 2017.

That said, the new equilibrium only works as long as credit is cheap and plentiful. If and when the Fed's inevitable rate hikes tighten credit access for shale firms, prompting the need for higher margins and profits, the old status quo will revert. As a reminder, this is how over a year ago Citi explained the dynamic of cheap credit leading to deflation and lower prices:

Easy access to capital was the essential “fuel” of the shale revolution. But too much capital led to too much oil production, and prices crashed.  The shale sector is now being financially stress-tested, exposing shale’s dirty secret: many shale producers depend on capital market injections to fund ongoing activity because they have thus far greatly outspent cash flow.

This is the key ingredient of what Goldman calls the shift to a new "structural deflationary change in the oil cost curve" as shown in chart above. As such, there is the danger that tighter conditions will finally remove the structural pressure for lower prices. However, judging by recent rhetoric by FOMC members, this is hardly an imminent issue, which means Saudi Arabia has only bad options: either cut production, prompting higher prices and even greater shale incursion and market share loss for the Kingdom, or restore the old status quo, sending prices far lower, and in the process collapsing Saudi government revenues potentially unleashing another budget crisis.

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thatthingcanfly's picture

Non sequitur.

He just destroyed your bullshit argument about extraction costs overwhelming the value of oil produced in a horizontally fractured shale well.

So in response to that, you write some blather about, umm, durr, uhhhhh looting everyone else's resources and durr fee durr. And you're completely ignorant of the blatant logical fallacy you just committed.


SelfGov's picture

Haste makes waste.

The scramble to get the stuff out of the ground added a lot of cost that was probably unnecessary.

Practice makes perfect.

We had a lot of relative newbies working harder than they had to. They've installed thousands of these now and the least skilled have been laid off.

Between those two things and technological improvements I can see the price falling like that for the sweet spots.

And I think the sweet spots are what that graph covers. 

Gator05's picture

I work the Permian; the average breakeven price for an entire play is somewhat misleading.  Oil fields exist across a distribution of so called break even pricing, sweet overpressured areas with thick pay are more productive than marginal off trend areas.  For the primary trends in the Spraberry and Wolfcamp both Midland and Delaware Basin in the Permian, breakeven price is closer to $35 - $40 a bbl.  Price varies by operator, reservoir quality, infrastructure etc.

Regarding the year over year cost cutting a well from 2012 - 2013 might represent a new well in a field and costs may be 8.0 - 10.0 MM $ for D&C through Completion.  As the field is developed and practices are optimized the same horizontal 1 mile well has dropped to 5.5 - 7.0 MM$ over this time period.  This is a combination of efficiency improvements, infrastructure and increased service company pressure from competition and lower oil prices.


mkkby's picture

Close, but STILL A FAIL. 

Drilling prices and returns were always spread across a distribution.  When prices were high, everything got drilled as fast as possible.  But when prices dropped, the more expensive plans were dropped.  Now only the easier, cheaper wells are taken.

It's just basic logic.  Only a wall street analyst could miss something so obvious.

Bank_sters's picture

It is bullshit.  I work in the oil patch in the bakken.  The decline in rig counts tells the real story.

phaedrus1952's picture

Pretty accurate, considering a few other factors come into play.

With the exception of the Permian wells - and the fast emerging SCOOP/STACK plays in Oklahoma (not shown) - the expensive related infrastructure such as  pads, supply and takeaway lines for water and production, are already in place by now.

The operators are targeting the very best acreage and getting way more output from recent wells.

Drill times have declined.

Completions, (frac'ing), continue to rapidly evolve in increasing  effectiveness.

Most highly skilled workers have been retained to do the work.

Gator05's picture

Fracing right now, we continuously develop and implement new technology, practices and methods.  It is an ever evolving field.  As far as tight oil and shale goes, there remains massive upside potential to the way we recover oil from these fields.  Most shale and tight plays have a recovery factor of oil in place only 2 – 8%.  Most of the oil remains in the field, technology and new practices will unlock this oil.

Offthebeach's picture

Just when we could really cash in on some large hydrogen blasting......everyone has gone all atomic limp wrist.....

Under Pennsylvania ten or twenty deep Tsar bomb'blasting events ' and we'd all be back to driving 454 Fleetwoods and driving on heated, toll free highways in the winter...

( fkn pinko commie bunny lovers!)

unsafe-space-time's picture

How?Predictions are easy. some think trowing money at something will fix everything magically. I can predict we will start mining hydrogen on the sun or jupiter. Or convert mater to antimatter

third string plug's picture

The first rule is to never include any environmental externalities.

the second rule is to use double entry book keeping based on fiat extension of credit.  Then all this becomes real with a few signatures.

Ran into a hedge fund manager last fall.  I said it was nice for him that he didn't have to worry about fundamentals anymore.  He laughed out loud and didn't say another word.

CHX13's picture

Agreed, this reads very much like a bunch of oily hopium to me... I think the industry would be in very dire straits should prices stay below 40$ for an extend period of time... Also, these companies have taken on debt loads in the 100s of billion$; is paying these loans back incorporated into the cost structure??? My hunch is, no way, José... 

Offthebeach's picture

Isn't  it some sort of crime to.."pay back"?  Patriotic Mericans roll over and are loyal to our fiat overlords. 

Offthebeach's picture

Oil used to be recovered by wiping rags, hand squeezed over barrel.  Once,  a computer the size of a two car garage, couldn't do what a music chip in a greeting card does.  Bypass jet engine operating life has gone from a hour to tens of thousand.

People figure stuff out.

Reichstag Fire Dept.'s picture

I'm not so sure if it can't be true...given the proximity of the shale wells to each other (near) and that fact that they don't have to ship it in a tanker half way around the world (literally) and that fact the shale oil is lighter and requires less refining (and produces less by-product to dispose of) I think it might just be possible. However, I'm not saying they oil boys won't stretch the truth regarding output or reserves.

Also, with the expenes of shale wells initially, they are cheaper per barrel over the long run because the well keeps producing at a very low cost once well and infrastructure established. Also, the shale reserves are enormous compared conventional wells. Well life is much longer and they are grouped together much tighter.

SAme thing is happening in the Nat. Gas patch in NE B.C. in western Canada. Nat Gas wells are 10 metres apart and drilled in a grid with a rig that can "walk" to the next hole!! Anybody that owned a rig moving company could see it was time to go...very little service required to run these walking drilling rigs. That's why I got out...too many guy fighting over not enough service work. 

Zen Xenu's picture

Pay attention to Enno Peter's research and hard facts on U.S. shale oil:

I'm not connected to Enno. Posting the link to his site, as it flies in the face of MSM crap about the breakeven prices and productivity of U.S. fracing.

halcyon's picture

Nope. Middle East is the crown jewel. Breakeven there is from 10 to 15 USD per barrel. Less than half of shale, which btw has a short source run due to production profile.

Why do you think Israel took the hydrocarbon hills from Syria and natgas offshore from Lebanon?

Or why US is meddling in Yemen, Qatar, Iraq, Iran, Syria, Libya and SA?

Hint: it is not due to sand or human rights.

SA alone could totally kill the shale market by flooding the market down to 20USD/brl, but they are wise and rather cut deals with US and the rest.

Shale will have its run and the US deep state is hoping that when it runs out they will have installed puppets in all pil producing ME nations.

That is why you have the swamp and 8500 billion that Pentagon cannot account for.

adr's picture

Actually break even is closer to $5. Just because you made promises to your people that require $50-75 a barrel doesn't mean that is the breakeven price for getting it out of the ground.

The trade premium is what adds the extra $45 before it gets to someone who can use it.

Diamonds on a wedding ring are really worth $1 or less. The Jews who run the diamond trade add the value premium. Yeah some guy cuts and polishes the stone, but the same thing can be done in China and they won't charge you $2500.

The belief of what something is worth is more important than what it actually costs to make. That is why the Jews control trade and the media. If people really found out what products really cost, they wouldn't pay the Jew premium for anything.

It doesn't matter what store you buy your shirt from, if it was made in the 3rd world it cost less than $8 to sew together. The expensive fabrics cost $7 a yard, but that is rare. Most fabric is in the $2.50-$4.75 range.

Oil is no different. You can't believe anything about what it costs to extract. What originally had a breakeven of $30 all of a sudden had a breakeven of $80 when oil went to $120. That is because why would anyone say that they can extract oil for $20 when they could get $100 a barrel. The high breakevens were a lie to support the artificially inflated price of oil.

unsafe-space-time's picture

Even synthetic diamonds are expensive to produce. But screw diamonds, moisonite is a good substitute. Price of diamonds correlates with insanity of women and fags who buy them.

All of the cheap oil is gone. You want it to be cheaper than bottled water?

Offthebeach's picture

It might be even less, but try getting it out of the country at that price.  


Logan 5's picture
Logan 5 (not verified) Mar 21, 2017 7:39 AM

"That said, the new equilibrium only works as long as credit is cheap and plentiful."


So what does Yellen do? She <dovishly> raises rates... What could possibly go wrong?

Ghordius's picture

well, yes

but OPEC aren't the only "losers" in this game. It hurts Russia, too. in fact, it hurts even Scotland's bid for independence, up to a certain point

"That said, the new equilibrium only works as long as credit is cheap and plentiful"

well, imho there are other scenarios, too. like... mass defaults and big players gobbling up all those relatively small shale oil producers, and... a continuation of this new equilibrium

Arnold's picture

The Boom /Bust nature of the "small" fry in the American oil business has been a path to lower development costs.

Still not real price discovery, though.
The steep production fall off from the hard rock wells is a swing factor.

A. Boaty's picture

For people who supposedly know the oil business, they sure got chumped big time.

Ghordius's picture

 relatively chumped. after all, recently the Crown Prince unveiled in Washington plans to invest 200 billions in the US (cough...Yemen... cough)

but I spoke to some Saudis, recently, and listened to how they cope with taxes. they were not used to pay taxes, the poor chaps

BandGap's picture


They made assumptions, bad assumptions. And they probably believed the rhetoric. Too bad, the world reset started a while back. They should have seen that coming.

Tomorrow Iran starts selling oil without using the petrodollar. Another step in the reset.

BritBob's picture

Falklands oil - worth considering?

Rockhopper Exploration has issued an update on planning for Phase 1 of the Sea Lion oil field development in the offshore North Falkland basin. Operator Premier's latest estimate of capex to first oil is US$1.5 billion, with life of field costs (capex, opex, and lease) of around US$35/bbl for Phase 1.

 Rockhopper CEO Sam Moody described this as “highly attractive” in the context of the current oil price. The estimated break-even price is US$45/bbl.
The partners have submitted an environmental impact statement and revised draft field development plan to the Falkland Islands government, and discussions are set to continue on a range of operational, fiscal, and regulatory matters.
They have also reached a settlement on an insurance claim relating to costs incurred on the Isobel Deep exploration well during the 2015/16 North Falkland basin exploration campaign. Value is US$90 million (after deductions) on a gross basis. (MercoPress 23.12.16)

What about the Argentinians?

Falklands – Territorial Waters:


All hot air...


BandGap's picture

This has just gotten annoying, Bob. Stick the Falklands where the sheep don't shine.

crossroaddemon's picture

Can you PLEASE stop inserting the Falklands into every goddamn thread? I couldn't even find the place on a map. Nobody. Here. Cares.

CRM114's picture

I care about them - I used to defend them!

But it is probably just me who can find them on a map,

and I am also fed up with the continual interjections.

justdues's picture

BritBOT created by Deepstate City of London spooks , MI5/6/7 whatevah


francis scott falseflag's picture




Kinda like you.

DavidJ's picture

I calll BS on these optimtistic Break Even Price numbers fior various US oil producing regions.  These numbers might be reasonable for the best locations (top 10%) in these regions.     

assistedliving's picture

Agreed DJ.  The calls have re-started offering 'fabulous returns' in West Texas, Permian, Midland blah blah blah.  Debt is driving prductivity gains not opportunity.

jmack's picture

"We drink your milkshake all up."

Putrid's picture
Putrid (not verified) Mar 21, 2017 7:53 AM

I'd get the hell out of the market if I were you. 90-95% collapse in gasoline retail sales, and these are government figures.

BandGap's picture

First new gas refinery in 40 years.

If I had to guess I would say the US is moving towards energy independence. And all that coal is reserved now.

swmnguy's picture

I get the feeling Goldman is selling some fracking debt, super-cheap, special price just for you.

Have the frackers been able to roll over their mountains of old debt?  Oil prices still aren't at the breakeven point for most of these "plays," even if you accept the very rosy breakeven figures.

My wife's relatives in the Bakken region are still seeing people move away, leaving collapsing particleboard buildings, ruined roads, trashed infrastructure, drug addictions, hookers, and unpaid debts.  

Until there appears to be actual productive activity in the fracking regions, and the longstanding operations debt is addressed, Goldman Sachs can say what they want, and I'll give it the consideration it deserves.

crossroaddemon's picture

You and I are in a unique position... we both live in MN and know people out there. Me, I still do the occasional show in western ND. This meme about shale being back... there's some bullshit going on here. I don't know if they're trying to roll over their debt or suck in one more big round of investment money to run off with.

just the tip's picture

in 1979 alaskans said happiness was an okie with a texan under each arm heading home.  the transalaska pipeline was built and the alaskans wanted these construction workers gone.  of course the hookers and bar owners didn't agree, but you can't please all the people all the time.  what your relatives are describing is the the boom bust  cycle of construction.  it happened twenty years ago with the internet.  the industry had to build  the infrastructure to process all the porn that was to be sent into cyberspace.  no different in the bakken.  where 50% of the license plates say something about the lone star state or an okie, or longhorns suck or sooners suck.  i seriously doubt you will see a license plate saying north dakota sucks.  and they are all headed to their next  job.  it's just that construction takes more resources than does maintenance.

Privyet_Jet's picture

It was never a war on shale, ZH. 


Nice controlled opposition joint you got going on here




Putrid's picture
Putrid (not verified) Privyet_Jet Mar 21, 2017 8:11 AM

Interesting that Tyler won't publish that above article, from BW Hill himself, but peak prosperity did.

Break even bullshit Tyler

Cutter's picture

Don't believe it.  Goldman talking their own book, probably have a bunch of investment packages they are trying to sell to suckers, and trying to convince them that shale is just fine at these prices.  Great interview recently on the podcast Macro Voices with oil expert Art Berman.  If you don't subscribe, do so, its very good, and its free.  He said that the shale infrastructure companies are a disaster and that shale is simply exploiting existing wells, which they can do cheaply.  Once these wells are depleted, and new wells must be drilled, guess what, costs will go back up.  And how does shale, which is heavily dependent on cheap financing, do in a rising interest rate environment where the Fed is tightening?  Pity the fool that buys into this Goldman BS.

SelfGov's picture

Because there never was a war on shale.

The price of oil was dropping like a stone LONG LONG before Saudi Arabia ramped up production.

This story is a narrative over nonsense.

JB Say's picture

The Saudis have to pay upkeep, bribes and welfare to their subjects, incliding the Shias who actually live on top of their proved reserves. Their B/E including indirect costs and overhead is higher than for most US shale and conventiomal plays. Its hard to really compare the two but OPEC can no longer set a floor over the mid 50s bbl.

Grandad Grumps's picture

Cartels are slowly being busted. Now we need to see banking and government cartels busted.

daveO's picture

The banking cartel is taking over the oil cartel.