Most shale oil wells drilled in the United States are unprofitable at current oil prices, Rystad Energy has warned. The Norwegian consultancy said, as quoted by Bloomberg, that drilling new wells would be loss-making for more than 100 companies.
Just four shale drillers - Exxon, Chevron, Occidental, and Crownquest - can drill new wells at a profit at $31 per barrel of West Texas Intermediate.
The problem is the nature of shale oil wells: while quick to start production and expand it, they are also quick to run out of oil, so drillers need to keep drilling new ones to maintain production, which is what U.S. shale patch players have been doing for years.
However, this has affected investor returns, Bloomberg notes, and now it is affecting spending plans.
“Companies should not be burning capital to be keeping the production base at an unsustainable level,” Tom Loughrey from shale oil data company Friezo Loughrey Oil Well Partners LLC told Bloomberg.
“This is swing production -- and that means you’re going to have to swing down.”
The situation is more positive for drilled but uncompleted wells, according to Rystad. The consultancy said yesterday that as much as 80 percent of DUCs in the U.S. shale patch have a breakeven price of less than $25 per barrel of WTI. Yet this is dangerously close to current prices.
"If nobody blinks in this supply war, prices may have to go this low in order to properly reduce production and get supply-demand back in balance,” Rystad’s head of shale research, Artem Abramov, said in the news release.
“This could turn out to be one of the greatest shocks ever faced by the oil industry, as coronavirus containment measures will add to the headache of producers fighting for market share. And OPEC has clearly stated that it won’t be coming to the rescue in the second quarter of 2020,” he also said.
“Even the best operators will have to reduce activity, it’s almost impossible to be fully cash flow neutral this year with this price decline” he concluded.
Even before this, America’s shale producers already had a profitability problem. It just got a lot worse.