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 As oil prices fell by more than half over the last six months from
more than $100 per barrel, the U.S. oil industry responded by
slowing its blistering growth and dialing back expansion plans.
Now, with U.S. crude around $46 a barrel, operators are already
closing some small old wells, known as strippers, and tens of
thousands of similar wells are on the verge of losing money. A
further slide could, by some estimates, idle an equivalent of up to
2 percent of U.S. supply, slowing overall output growth more than
expected or even leaving it flat.
Ray Lasseigne, an oilfield veteran and president of TMR Exploration
Inc in Louisiana, is deciding which wells to close. TMR looks to
close old wells, which produce so much saltwater that disposal costs
exceed what the oil can fetch today.
Other running costs include repairs and electricity to run the pump
jacks, also known as nodding donkeys because they bob up and down
while pulling oil out of the ground.
"We've identified about 20 of our wells that are not economic at
these prices," said Lasseigne. That figure represents about 10
percent of the Bossier City, Louisiana company's wells, he said.
His most expensive stripper wells need oil around $70 to be
profitable.
NERVES AND FEAR
Leslie Tipping, a longtime member of the oil industry profession
known as "landmen" who broker mineral rights, said some marginal
wells have already been closed.
"There have been some wells that have been shut in already," she
said.
Tipping, who manages oil and gas interests for patrons of the bank
Northern Trust in Texas, said she was fielding more calls from
clients who are nervously watching sliding crude prices.
"Most of our clients have inherited these assets, so they've been
through this before," said Tipping. "But there's concern. There's
some fear."
She expects well closures at higher-cost fields across much of North
America, including older parts of North Dakota's Bakken, and areas
where the geology is difficult, such as the Anadarko Basin in Kansas
and Oklahoma.
There are about 400,000 stripper wells in the United States, most
with operating costs of between $20 and $50 per barrel, according to
analysts at Wood Mackenzie, a leading energy and commodities
consultancy. The cheapest ones are in locations where there is
little underground saltwater.
Strippers often produce just a few barrels a day, but together they
account for up to 1 million barrels per day, a ninth of U.S. output.
Not all stripper wells are losing money now and those that do may
not be shut in. This is in part because producers can lose their
leases forever if they shut wells for more than a few months, so
owners are often willing to pump at a loss and store oil until
prices rise.
"At $40, we think you have got about 100,000 to 200,000 barrels per
day at risk" from U.S. stripper wells, said RT Dukes of Wood
Mackenzie.
That could represent a dent of up to 2 percent dent in output
compared with U.S. Energy Information Agency forecasts that this
year's U.S. production will average 9.3 million bpd.
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After production hit 9.1 million bpd in late 2014, the agency now
expects production to climb to 9.42 million bpd around the middle of
this year, then ebb to 9.26 million bpd at year's end.
Its latest Jan. 13 outlook forecasts the 2015 average price of the
Brent crude global benchmark at $58 a barrel and the U.S. benchmark
at $3-4 below that.
Some warn the slowdown could be more pronounced given the sharp drop
in the number of rigs drilling new wells. The prevailing industry
view, however, is that new, more productive, shale oil wells in
Texas, North Dakota and Colorado will keep output rising.
CHEAPER SHALE
Those wells, which typically do not need constant pumping to make
oil flow, have helped U.S. crude output to nearly double since 2007.
They have also prompted OPEC and Saudi Arabia to let prices fall in
what is widely seen as an attempt to force U.S. rivals to cut
output.
But publicly-traded shale oil companies talk of cash operating costs
between $10 and $30 a barrel, suggesting oil prices would have to
fall by another third to force them consider well closures.
The upshot? It might take a prolonged slowdown in drilling of new
wells to significantly curb U.S. supply.
Break even levels for drilling new wells in most U.S. shale oil
fields range between $50 and $80 per barrel - well above operating
costs for existing shale wells.
In response to the price slump, most oil companies have already cut
drilling budgets by 25 percent or more, but they are still sinking
new wells. Furthermore, unlike small stripper well operators,
several producers have hedged much of their 2015 output at prices
close to $90 a barrel, keeping lots of their new output profitable.
Vast efficiency gains also mean that more oil can be squeezed from
fewer new wells. For example, EOG Resources Inc said in November
that output of new fracked wells in the Eagle Ford shale of Texas
was up 39 percent compared with wells sunk at the start of 2014.
"To me, it's going to be extremely difficult for any U.S. production
to be cut significantly," TMR's Lasseigne said about the possible
impact of well closures.
(Reporting By Anna Driver and Terry Wade; Editing by Tomasz Janowski)
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