The New Oil Order

So you thought the US shale oil industry would have to draw the blinds if oil stayed weak for a prolonged period of time? Well think again.

Goldman Sachs published a report titled ‘New Oil Order’ in which it said the unconventional oil’s breakeven costs have fallen by $20/bl in a year, to $60/bl, which “flattens and lowers the oil cost curve.” 

“If the three main US shale plays continue to improve, breakevens can fall to $50/bl by 2020, meaning shale growth and Opec alone can meet global oil demand growth to 2025,” it said. The top US shale producing areas are – the Bakken in North Dakota, the Eagle Ford and Permian in Texas.

And as shale producers are able to sustain operations at much lower prices, Goldman expects Brent to average $55/bl in 2020 from $65/bl in 2016-18.

So the fallout of $60 oil in the long-run? More than half of key global pre-sanction projects become uneconomic, putting over $750bn of future investment at risk.  High cost LNG, heavy oil and marginal deepwater are particularly vulnerable, with regional concentration in Canada, the US, Angola and Nigeria.

For Encana, based on a $50/bl WTI, the Permian, Eagle Ford, and Duvernay may deliver an average netback of about $26/barrel of oil equivalent (boe). EOG Resources generates an after-tax return of 35pc or greater, with $55/bl WTI, in its top oil areas – the Eagle Ford, the Delaware basin, and the Bakken in North Dakota.

Solid drilling economics, add to that a recovery in prices, of over 40pc from the near six-year lows and a decline of anywhere between 20pc-30pc in costs of services. The combination is prompting Occidental, Devon and Chesapeake to raise their 2015 output guidance.

The latest rig count data by oilfield services provider Baker Hughes also points to a recovery. The US rig count fell by six, at its slowest rate in six months, in its third straight week of slowing declines. Activity increased in the Eagle Ford, with three additions.

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