Shale boom shows resilience as rigs rebound with oil under $60

For the first time in almost seven months, America’s shale drillers put rigs in oil fields back to work, and they’re doing it at a lower price.

The last time they added rigs, crude futures were trading near $70/bbl. Now, even after a rebound, they’re under $60. And yet drilling rigs rose in almost every major U.S. oil basin in the country this week, raising the total by 12, according to field-services company Baker Hughes Inc.

The sudden rebound is a testament to how resilient U.S. shale has become in the battle for global market share. Spurred by last year’s collapse in prices, shale explorers have brought down their break-even costs by $15 to $20/bbl, a Bloomberg New Energy Finance analysis shows.

“As much as anything else, the rise this week is a testament to break-evens coming down just over the course of this year,” James Williams, President of energy consultancy WTRG Economics, said by phone from London, Arkansas, on Friday. “Shale is a lot more resilient than we thought it was, and it means we’re going to be able to keep producing shale oil at a lower cost than we thought we could.”

While U.S. benchmark West Texas Intermediate oil has gained 6.8% this year, it’s still down 46% from a year earlier. Futures for August delivery slipped after Friday’s rig report, settling at $56.93/bbl on the New York Mercantile Exchange after reaching $57.95 in intraday trading.

Cheaper Services

The costs of various drilling services have fallen by 20% to 50% in the U.S., Charles Blanchard, a BNEF analyst in New York, said by phone Wednesday.

The break-evens in plays including parts of Texas’s
Permian basin and Eagle Ford shale formation and the South Central Oklahoma Oil Province, known as SCOOP, are below $40/bbl.

Producers are getting the most relief on items that are specific to the oil world, such as frack sand and rental rates on drilling rigs and pressure pumps, said Scott Mitchell, Director of upstream research for Wood Mackenzie Ltd. in Houston.

U.S. oil explorers are homing in on their most productive areas and renegotiating drilling costs as they face increasing competition from the Organization of Petroleum Exporting Countries. The 12-nation group, which accounts for more than a third of the world’s crude supply, has resisted calls to curb its own output and instead pumped the most last month since August 2012, based on a Bloomberg survey.

“If you have core acreage in places like the Permian or the Eagle Ford, you can keep producing a lot,” Blanchard said.

Producers could add about 100 oil rigs by the end of the year, Mitchell said. As activity increases, the cost declines may come to an end.

“Drilling rigs and fracking require a quite specific technical workforce, and there were a lot of layoffs as a result of the drop in activity,” Mitchell said by phone. “We may find the supply of people becomes short very quickly if activity ramps up, leading to price increases again.”

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