Shell's New Permian Play Profitable At $20 A Barrel

Tyler Durden's picture

Authored by Rakesh Upadhyay via OilPrice.com,

OPEC’s worries about the booming U.S. oil production have increased significantly with the big three oil companies’ interest in shale. Exxon Mobil Corp., Royal Dutch Shell Plc, and Chevron Corp., are planning $10 billion of investments in shale in 2017, a quantum jump compared to previous years. All the naysayers who doubted the longevity of the shale oil industry may have to modify their forecasts.

OPEC lost when they pumped at will as lower oil prices destroyed their finances, and now they are losing their hard-earned market share as a result of cutting production. Shell’s declaration that they can “make money in the Permian with oil at $40 a barrel, with new wells profitable at about $20 a barrel” is an indication that Shell is here to stay, whatever the price of oil.

The arrival of the big three oil companies with their loaded balance sheets is good news for the longevity of the shale industry.

The oil crash, which started in 2014, pushed more than 100 shale oil companies into bankruptcy, causing default on at least $70 billion of debt, according to The Economist. Even the ones that survived haven’t been very profitable, according to Bloomberg, which said that the top 60 listed E&P firms have “burned up cash for 34 of the last 40 quarters”.

Therefore, during the downturn, the smaller players had to slow down their operations, but this will not be the case with the big three.

“Big Oil is cash-flow positive, so they can take a longer-term view,’’ said Bryan Sheffield, the billionaire third-generation oilman who heads Parsley Energy Inc. “You’re going to see them investing more in shale,” reports Bloomberg.

The majors are attempting to further improve the economics of operation. Shell said that its cost per well has been reduced to $5.5 million, a 60 percent drop from 2013. Instead of drilling a single well per pad, which was the norm, Shell is now drilling five wells per pad, 20 feet apart, which saves money previously spent on moving rigs from site to site.

Shell is not the only one—Chevron expects its shale production to increase 30% every year for the next decade. Similarly, Exxon plans to allocate one-third of its drilling budget this year to shale, and it expects to quadruple its shale output by 2025.  

“The arrival of Big Oil is very significant for shale,” said Deborah Byers, U.S. energy leader at consultant Ernst & Young in Houston. “It marries a great geological resource with a very strong balance sheet.”

$30 billion has been spent on land acquisitions in the Permian basin since mid-2016, which is a favorite among oil companies.

Considering the new projects and the resurgent shale boom, Goldman Sachs expects oil output to increase by 1 million barrels a day year-on-year. The outcome is an oversupply in the next couple of years.

"2017-19 is likely to see the largest increase in mega projects' production in history, as the record 2011-13 capex commitment yields fruit," the U.S. investment bank said in a research note on Tuesday, reports Reuters.

The U.S. Energy Information Administration expects the U.S. oil production to top 10 million barrels by December 2018, a level only surpassed in October and November 1970.

OPEC is running out of options.

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wisehiney's picture

Highly deflationary.

Jim Sampson's picture

Good Luck OPEC!!!  HAHAHAHAHAHA!!!!!

Raffie's picture

The Land of Sand will be just that. Only sand and nothing else.

 

dearth vader's picture

Apart from hot air, of course, and lots of it.

Raffie's picture

Wonder if this effect the price of SANDWICHES?

2 pieces of bread and a layer of sand between.

NOM NOM.

Fukushima Sam's picture

Good news!

More dirty energy to bake in!

SILVERGEDDON's picture

Save Gas. 

Fart in a jar.  

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) SILVERGEDDON Mar 27, 2017 7:37 PM

Awesome!  Cheap rawmaterials are great for everyone.  Next tiem I'm getting the extra-large SUV, not just the large SUV.

ipso_facto's picture

'Next time I'm getting the extra-large SUV, not just the large SUV.'

Maybe the US gov't will allow the car companies to build large cars that people want to buy without CAFE extortion.

fx's picture

Really smart. Announcing to ramp up production big way that will barely be profitable. Maybe shell makes a profit @$20 (highly doubtful - what is the $40 number then about?) but what about all those other shale companies with $40-$55 break-even? They ramp production, too, by 15-25 on average.
So WTI is going to collapse down into the low-mid 30s with shell and others makeing some money, others making losses...
It's beyond stupid to drill those wells now, from society's point of view. 'enrgy independent' America will look at depleted shale reservoirs 20-30 years from now. All squandered at very low oil prices. geniuses!

Quantum Bunk's picture

You actually beleive this crap ? Haha. This has Elon Musk written all over it

johngaltfla's picture

The bigger issue for OPEC is that they can not afford to export oil at a final cost of $25-$30 per bbl. like the U.S. shale producers.

Hence, Game Over.

fx's picture

most us shale companies make losses below $50-55 WTI. "exporting at final cost of 25-30" - are you kidding?
So far, it's just a projection by shell and let's see whether these $20 are marginal break-even costs or all-in-break-evens. I suspect, it's the former.

Wulfkind's picture

Here's what the oil cornucopians don't tell you.  It's only profitable at the current loan interest rate of 2%.

Let's see Shell self finance this keragen play and let's see then what the breakeven price would be.

Once the Fed starts to normalize rates then Shell will plug this shit in a heartbeat.

Oh...wait....the Fed is NEVER going to normalize.

Go ahead Shell.  Drill Baby Drill.   It'll be dry in 10 years.

Quantum Bunk's picture

10 years??? Try 5.

Shale is living off of you guessed it... cheap petro$ recycled credit from Opec to Wall St

 

earleflorida's picture

http://www.globalpetrolprices.com/usa/gasoline_prices//               Mar/2017*

~0.265 liter / gal.

winning...[!]

johngaltfla's picture

Shell has no problem selling 20 year paper at less than 5%. It's very profitable to put their competition in the sandboxes out of business.

divingengineer's picture

Snake oil.
They are not making dark matter.

Giant Meteor's picture

That settles it. Humvee it is ...

Lurk Skywatcher's picture

Shame oil price only correlates to pump price when it goes up.

curbjob's picture

The only possible way to trump the pile of piss poor engineering represented by a Humvee is if you couple a trailer to it, load that with a Harley and, put a Colt 1911 in the glove box. 

Wulfkind's picture

You mean put all that stuff in a rebadged Chevy Suburban.

curbjob's picture

It's a lil more than a rebadge... don't forget those chromed D shackles capable of holding 13.7 X it's weight.

Wulfkind's picture

(Chuckle)....how could I forget??

curbjob's picture

As an aside; word is back in the day when Hummers were all the rage,  the gals at the Vegas Bunny ranches would fall over each other to service those drivers ...

apparently less wear and tear than inserting a tampon.

Guess they read Freud during slow days ?

Giant Meteor's picture

No downvote by me btw, I just like to start shit every once in awhile, without downvoting ;)

Never owned a Humvee in my life, nor do I envision such a thing .. least not in my future ..

Some old beater pick up I can still work, on the other hand, priceless ..

curbjob's picture

I've never voted either way.

It would be a pretty sad existence if my feelings were affected by the direction of a pixelated arrow, no ?

Giant Meteor's picture

First belly laugh of the day, no shit ..

Well done!

lol, upvote by the way ..

sfjsynfuels's picture

$20/bbl.....   maybe at the wellhead, ex-debt service, transport costs, taxes, roylaties, SG&A, and god knows what else?

Even with CAPEX down to $5.5M, these numbers are pure fantasy.

back to basics's picture

I logged in just to up vote you. The $20 is pure fiction. 

Quantum Bunk's picture

There is wells with a depletion life of 12 months in the shale space. Its all fun and games until Shale see's its very first recession

jmack's picture

  First,  there are no wells being drilled that have a depletion life of 12 months, that is the equivalent of a dry hole for a shale well.   Second, Shale has already seen its first recession when nat gas went from over $13 per thousand to under $3 per thousand. 

 

   The ignorance and idiocy on this site is getting pretty pathetic.  although sporadically humorous.

Shemp 4 Victory's picture

 

The $20 is pure fiction.

Not pure fiction - it's been adulterated with fantasy and propaganda.

ArgentoFisico's picture

It's a typo. It's profitable at MINUS 20.

Yeeeeeeah!

webmatex's picture

Proven reserves = higher stock price = lies.

As post mentioned above near negative interest rates help for a while.

The big oil companies are shadows of their former selves, very over valued.

Petro dollars will be petro dollars.

jmack's picture

based on what, your opinion?

wait. wait. What.'s picture

Like you said pure fantasy.  Edit tho.  Not even at wellhead.  Not even with servicers pricing power reduced which has changed recently. Will $1/bbl be profitable?  Of course.  Evidently people will believe anything re oil drilling.

boattrash's picture

Exxon Mobil Corp., Royal Dutch Shell Plc, and Chevron Corp., are planning $10 billion of investments in shale in 2017

Yet just during this hitch, Chevron said they were investing $20 Billion in the GOM...Come to think of it, they didn't specify if that would be spent on development, or pulling out...

squid's picture

Yah but....

if they're not......

 

And then, lets say they're 50% off.....US$30 oil?

 

Squid

skbull44's picture

Excellent, now shale oil extraction can go everywhere. Who needs drinking water? And what's a tremblor now and again?

MuffDiver69's picture

You ever been to the Permian....Didn't think so...

Moe Hamhead's picture

I think you mean temblor.

skbull44's picture

Doh...didn't proofread well enough!

me or you's picture

Dobt it. Fake news from Shell.

Arnold's picture

Thrill going up the inside of my leg.
Does that count?

Capn Mike's picture

What's not to like? Drive the OPEC price down with the THREAT of domestic shale, but burn the fuckin' Arab's oil in the meantime. To re-iterate: Burn the Arab's oil NOT ours. Then when the supply squeezes, THAT's when we start to consume ours. Hopefully by that time Thorium, or fuel cells or some other fuckin' tech will have replaced oil.

Quantum Bunk's picture

Keep on dreaming. Like Elon Musk, shale has yet to see an actual recession.  Like Elon Musk, shale lives in a zero cost of capital world.

 

If the US wants real oil, they have to drill  ANWR.

fx's picture

It's the other way around happening, Capn Mike. OPEC has cut back (albeit slightly) and shale is ramping up, no matter the price of WTI. hedged boatloads of oil at $55-60 a barrel 5-6 years out (just look at the futures curve and the COTs) and now it's drill, baby, drill. 2-3 from now depletion of the 2013-2015 wells will kick in big time and by 2020 at vthe lates you will see peak shale production.
shale executives will have another 2-3 decent years, though, because they get fat bonuses for ramping production - not for making money. Shareholder. Value. #Destruction