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 Less than a year ago major shale firms were saying they needed oil
above $60 a barrel to produce more; now some say they will settle
for far less in deciding whether to crank up output after the worst
oil price crash in a generation.
Their latest comments highlight the industry's remarkable
resilience, but also serve as a warning to rivals and traders: a
retreat in U.S. oil production that would help ease global
oversupply and let prices recover may prove shorter than some may
have expected.
Continental Resources Inc <CLR.N>, led by billionaire wildcatter
Harold Hamm, is prepared to increase capital spending if U.S. crude
<CLc1> reaches the low- to mid-$40s range, allowing it to boost 2017
production by more than 10 percent, chief financial official John
Hart said last week.
Rival Whiting Petroleum Corp <WLL.N>, the biggest producer in North
Dakota's Bakken formation, will stop fracking new wells by the end
of March, but would "consider completing some of these wells" if oil
reached $40 to $45 a barrel, Chairman and CEO Jim Volker told
analysts. Less than a year ago, when the company was still in
spending mode, Volker said it might deploy more rigs if U.S. crude
hit $70.
While the comments were couched with caution, they serve as a
reminder of how a dramatic decline in costs and rapid efficiency
gains have turned U.S. shale, initially seen by rivals as a
marginal, high cost sector, into a major player - and a thorn in the
side of big OPEC producers.
Nimble shale drillers are now helping mitigate the nearly 70-percent
slide crude price rout by cutting back output, but may also limit
any rally by quickly turning up the spigots once prices start
recovering from current levels just above $30.
The threat of a shale rebound is "putting a cap on oil prices," said
John Kilduff, partner at Again Capital LLC. "If there's some bullish
outlook for demand or the economy, they will try to get ahead of the
curve and increase production even sooner."
Some producers have already began hedging future production, with
prices for 2017 oil trading at near $45 a barrel, which could put a
floor under any future production cuts.
GLOBAL AMBITIONS
While the worst oil downturn since the 1980s sounds the death knell
for scores of debt-laden shale producers, it has also hastened the
decline in costs of hydraulic fracturing and improvements of the
still-developing technology.
For example, Hess Corp. <HES.N>, which pumps one of every 15 barrels
of North Dakota crude, cut the cost of a new Bakken oil well by 28
percent last year.
What once helped fatten margins is now key to survival in what Saudi
Oil Minister Ali al-Naimi described last week as the "harsh" reality
of a global market in which the Organization of Oil Exporting
Countries is no longer willing to curb its supplies to bolster
prices.
While Deloitte auditing and consulting warns that a third of U.S.
oil producers may face bankruptcy, leading shale producers say their
ambitions go beyond just outrunning domestic rivals.
"It's no longer enough to be the low cost producer in U.S.
horizontal shale," Bill Thomas, chairman of EOG Resources Inc , said
on Friday. "EOG's goal is to be competitive, low-cost oil producer
in the global market."
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Thomas did not say what price would spur EOG to boost output this
year, but said it had a "premium inventory" of 3,200 well locations
that can yield returns of 30 percent or more with oil at $40.
Apache Corp , forecasts its output will drop by as much as 11
percent this year, but said it would probably manage to match 2015
North American production if oil averaged $45 this year.
One reason shale producers can be so fleet-footed is the record
backlog of wells that have already been drilled but wait to get
fractured to keep oil trapped in shale rocks flowing.
There were 945 such wells in North Dakota, birthplace of the U.S.
shale boom in December, compared to 585 in mid-2014, when prices
peaked, according to the latest available data from the Department
of Mineral Resources. Their numbers are growing as firms like
Whiting keep drilling, but hold off with fracking.
Some warn that fracking the uncompleted wells can offer only a
short-term supply boost and a sustained increase would require
costly drilling of new wells and therefore higher prices.
"It's going to take a move up to $55 before we see anyone plan new
production," says Carl Larry, director of business development for
oil and gas at Frost & Sullivan.
To be sure, it is far from certain whether oil prices will even
reach $40 any time soon. Morgan Stanley and ANZ expect average
prices in the low $30s for the full year.
Some analysts also warn resuming drilling quickly may prove hard
after firms laid off thousands of workers and idled more than
three-quarters of their rigs since late 2014.
In fact, John Hess, chief executive of Hess Corp last week took
issue with labeling U.S. shale oil as a "swing producer." Hess told
Reuters in an interview that U.S. shale firms should be rather
considered as "short-cycle" producers, which might need up to a year
to stop or restart production. [L2N1620W4]
And even scarred veterans of past boom-bust oil cycles are not sure
what will happen once prices start to recover - during the last big
upswing a decade ago, shale oil did not even exist.
“We are a little concerned that this time there is one dynamic we've
never had previously," said Darrell Hollek, vice president of U.S.
onshore at Anadarko Petroleum Corp.
(Reporting by Devika Krishna Kumar in New York; Editing by Jonathan
Leff and Tomasz Janowski)
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