Three days ago, Pioneer surprised oil market watchers when it not only said that it has already produced more oil than it had initially forecast, but that once crude returns to $50, all systems are go. This is what it said in its Q1 press release:
- producing 222 thousand barrels oil equivalent per day (MBOEPD), of which 55% was oil; production grew by 7 MBOEPD, or 3%, compared to the fourth quarter of 2015, and was significantly above Pioneer’s first quarter production guidance range of 211 MBOEPD to 216 MBOEPD; oil production grew 10 thousand barrels oil per day during the quarter, or 9%, compared to the fourth quarter;
- expecting to deliver production growth of 12%+ in 2016 compared to the Company’s previous production growth target of 10%; the higher forecasted growth rate reflects improving Spraberry/Wolfcamp well productivity;
- expecting to add five to ten horizontal drilling rigs when the price of oil recovers to approximately $50 per barrel and the outlook for oil supply/demand fundamentals is positive
Then yesterday it was another US shale giant to admit that $45 oil is good enough, and that it is "increasing its production forecast to a range of 131,400 BOE/d to 136,900 BOE/d" adding that "with the majority of completions scheduled for the second half of the year, the Company expects to realize the full production benefit in late 2016 and 2017."
It was not immediately clear if Pioneer and Whiting were restoring production due to recently implemented hedges. What is clear is that as the EIA reports, drilling costs have tumbled in recent years, which suggests that breakeven drilling prices have followed suit.
EIA report shows decline in cost of U.S. oil and gas wells since 2012
The profitability of oil and natural gas development activity depends on both the prices realized by producers and the cost and productivity of newly developed wells. Overall trends in well development costs are generally less transparent than price and productivity trends, which are readily observable in the markets or through analyses of well productivity trends such as EIA's monthly Drilling Productivity Report.
In an effort to increase understanding of the costs of upstream drilling and production activity, EIA commissioned IHS Global Inc. (IHS) to study these costs on a per-well basis in the Eagle Ford, Bakken, Marcellus, and Permian regions, analyzing the Permian's Midland and Delaware basins separately. Upstream costs in 2015 were 25% to 30% below their 2012 levels, when per-well costs were at their highest point over the past decade. Changes in technology have affected drilling efficiency and completion, supporting higher productivity per well and lowering costs, while shifts towards deeper and longer lateral wells with more complex completions have tended to increase costs.
Costs per well generally increased from 2006 to 2012, demonstrating the effect of rapid growth in drilling activity. Since 2012, costs per well have decreased because of reduced overall drilling activity and improved drilling efficiency and tools. Changes in costs and well parameters, such as the need to drill deeper or longer lateral wells, have affected the onshore oil plays differently in 2015, with recent per-well costs ranging from 7% to 22% below 2014 levels.
Differences in geology, well depth, and water disposal options can affect costs for each onshore oil play area. The adoption of best practices and the improvement of well designs have reduced drilling and completion times, decrease total well costs, and increase well performance. Greater standardization of these drilling and completion practices and designs across the industry should continue to lower costs. The drilling cost per foot, based on total depth, and the completion cost per foot, based on lateral length, are both projected to maintain these lower cost trends through 2018. Sustained lower upstream costs may affect near-term oil and natural gas markets, and ultimately, the prices of these fuels.
But going back to Pioneer's $50 oil price bogey, that is also what Bloomberg dubs oil's magic number becomes $50 a Barrel for Promise of Recovery. It notes that BP, Nabors and explorer Pioneer Natural Resources "all said in the past 24 hours that prices above $50 will encourage more drilling or provide the needed boost to cash flow."
BP said on its call earlier this week that next year it will be able to balance cash flow with shareholder payouts and capital spending at an oil price of $50 to $55 a barrel, down from a previous estimate of $60, the London-based explorer said. Pioneer expects to add as many as 10 horizontal drilling rigs when oil reaches $50 and the outlook for supply and demand of crude is positive, the company said Monday in its earnings statement.
Others agree that the closer we get to $50 oil, the more concerned Saudi Arabia will be that its plan to put US shale out of business is failing: at an average price of $53 per barrel of oil means the world’s 50 biggest publicly traded companies in the industry can stop bleeding cash, according to Wood Mackenzie. Nabors, which owns the world’s largest fleet of onshore drilling rigs, said it has already been talking with several large customers about plans to boost work in the second half of the year if prices rise "comfortably" above $50.
Incidentally, what is happening right now is a rerun of last summer when oil also tumbled then rebounded into the summer only to see shale production spike at whic point oil tumbled again.
As Bloomberg writes, "even talk of ramping up again is bringing a stinging reminder of last year’s failed attempt to restart activity too quickly after oil prices rose. We got out ahead of ourselves -- bit of a head fake there," Tony Petrello, chief executive at Nabors, told analysts and investors Tuesday on a conference call. "We’re going to be a little more guarded here."
Judging by the actions of Pioneer and Whiting that is hardly the case and as WTI rises above $46, the market is once again ahead of itself. Bloomberg concludes:
Exactly when oil prices hit that level and how long they need to stay there is a question no one can say for sure. Nabors said the activity could start up in the middle of the third quarter or into the final three months of this year. Continental estimated that supply and demand could be nearing balance later this year and be "absolutely in balance" or in need of more oil next year.
Actually we know "when" - it is right about now, as ConocoPhillips admitted just hours ago:
- CONOCOPHILLIPS CEO SAYS WITH OIL PRICES AT $45 PER BARREL, COULD KEEP PRODUCTION FLAT WITH CASH FLOW FROM OPERATIONS
And with every incremental dollar, the supply will only increase.