In the staring contest that’s lasted for more than a year between Opec and US oil producers, the indies may have blinked.
Recent commentary from US independent producers is pointing to a growing willingness to cut output next year — marking a turnaround from talk of continued output growth that dominated their second-quarter earnings reports just months ago.
That’s because, based on Goldman Sach’s forecast for a Nymex WTI average of $45/bl next year, even the most profitable US shale acreages — such as the Bakken in North Dakota, Cana-Woodford in Oklahoma and the Eagle Ford in Texas — may struggle to cover costs.
“Futures prices are currently below the average cost of production for all the main shale plays,” the Paris-based IEA says in its latest monthly Oil Market Report.
Most producers including Apache, Hess, Continental and Chesapeake had raised their output guidance for 2015. That’s changing to this mantra: no matter what, limit spending to cash flow. But cash flows are set to fall further amid a plunge in prices to six-and-a-half-year lows and will stay weak based on current 2016 forecasts.
Without additional drilling, top Bakken producer Whiting would face a 40pc year-on-year decline rate this year, 30pc in 2016 and 20pc in 2017. “We are designing Whiting to run in a $50/bl flat oil price environment,” chief executive James Volcker says. For Devon, the decline rate would be 18-20pc.
Producers are running out of options. They spent 83¢ for every dollar they earned to repay debt as a plunge in prices squeezed cash flow, the Energy Information Administration (EIA) said. The percentage of funds devoted to debt repayment, measured for 12 months ending 30 June, was the highest since at least 2011.
The situation is becoming so dire that state governments are stepping in to help. North Dakota is considering allowing drilling firms to let uncompleted wells sit idle for an extra year in “temporarily abandoned” status, Department of Mineral Resources director Lynn Helms says.
To further lower costs, US independents may follow ConocoPhillips in reducing headcount. So far in the current downturn, oilfield services companies have been at the forefront of layoffs.
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