From The Wall Street Journal
Plunging oil prices once again threaten to force American shale drillers to pull back on production, just as they were preparing to unleash a flood of crude.
U.S. benchmark prices are rising Monday morning, recently at $51.91, but have tumbled more than 30% since October and closed Friday at their lowest level in more than a year.
Falling prices could force shale drillers—who fracture underground rock formations to release the oil and gas trapped inside—to moderate their growth in booming areas such as the Permian Basin in Texas and New Mexico, and the Bakken region of North Dakota. The Bakken pumped a record 1.3 million barrels a day in October, more than Oman or Libya.
As an older field that analysts say needs a higher price to be economic, the Bakken is a test case for the industry’s ability to weather a steep oil-price decline.
Harold Hamm, chief executive of Continental Resources Inc., which helped pioneer horizontal drilling and fracking in the Bakken Shale region 15 years ago, said his company can generate a return even if oil prices fall below $40 a barrel. But he conceded that declining prices could alter the company’s spending plans.
“I wouldn’t say it doesn’t affect your thinking because it does,” Mr. Hamm said earlier this month. “We’re not here to sell our reserves at a marginal cost.”
Large shale companies, such as EOG Resources Inc. and Whiting Petroleum Corp. , have characterized $50 a barrel as an inflection point.
At $50, “we generate enough cash to still grow our production single digits within our cash flow,” Whiting Chief Financial Officer Michael Stevens said at an industry conference this month. “So $50 is an important floor for us.”
EOG Chief Operating Officer Lloyd Helms said at the same event that the company would likely scale back production if oil falls below $50 a barrel.
“We’re going to maintain our discipline in how we allocate capital,” he said. “We’re building a business that’s going to be sustainable through the commodity price, whether the oil price is $40 or $80.”
Shale companies endured a deep downturn that began in 2014 when prices fell about 75% because of a global oversupply of oil the upstarts helped create. The companies largely persevered and pushed up U.S. oil output to a record of more than 11 million barrels a day, according to the Energy Information Administration, vaulting the country past Saudi Arabia and Russia as the world’s largest crude-oil producer in August.
North Dakota’s Bakken region, which fell off steeply after the 2014 price crash, has been on the upswing this year as companies including Continental and Whiting reinvigorate the field with improved drilling techniques. That helped push up a share-price index of the 10 largest Bakken Shale competitors more than 30% before oil prices began falling in October. That index is now down nearly 6% on the year, while an index of U.S. oil-and-gas companies has fallen nearly 15% over the same period.
U.S. drillers are completing budgets for next year, when they are expected to propel American oil production to about 12 million barrels a day, according to the EIA. So far, companies haven’t pulled back on 2019 capital-spending plans, but many had been operating on an assumption that oil prices were unlikely to drop below $60 a barrel.
Prices have been plunging because of concerns that surging American production, combined with falling global demand and fears of slowing economic growth, could lead to a glutted market again. The Organization of the Petroleum Exporting Countries is expected to consider cutbacks at its meeting in Vienna on Dec. 6, but analysts are skeptical it can do enough to support prices.
Earlier this month, before the plunge had fully taken its toll, Mr. Hamm was brimming with optimism on a 12-degree day in North Dakota as he watched a work crew frack two enormous wells, blasting rocks far below the surface with more than eight million pounds of sand.
A child of Oklahoma sharecroppers who later became a billionaire, the 72-year-old wildcatter has seen numerous oil-price crashes in his nearly 50 years in the oil business.
“From one side to the other, it’s oil all the way across,” he said about the region. “We’ll see further expansion.”
Bakken drillers say they are now in much better position to operate profitably. Continental and Whiting have shed billions in debt since the previous oil-price downturn, though both still carry significant debt. Whiting executives said the field is experiencing a renaissance in part because of improved drilling and fracking techniques that allow the company to extract oil for less money.
“We’re in the exploitation phase,” Whiting Chief Executive Brad Holly said in North Dakota earlier this month. “It’s going to be about returns and running a profitable business.” Whiting’s shares are up nearly 6% on the year.
Continental said its average Bakken well now costs $8.4 million to drill and complete, a 17% reduction since 2011.
Early production rates in Bakken wells nearly doubled last year compared with 2014, according to energy consultant Wood Mackenzie, gains it says are being driven by enhancements in fracking technology. Basin-wide, the number of drilling rigs stands at roughly 50, according to data compiled by Baker Hughes , which is majority-owned by General Electric Co. , even as production soars, a sign producers don’t need as many rigs to produce more oil.
“It’s amazing, and basically it’s all due to horizontal drilling and fracking,” Mr. Hamm said.
While the improved techniques are driving productivity, it remains to be seen whether those results can be replicated across noncore areas of the basin, where the geology is less advantageous. Those concerns will become more acute if oil prices fall further.
Analysts say the Bakken needs a higher oil price than other basins to be profitable because of transportation costs and other factors, potentially making the area uneconomic if U.S. oil prices stay around $50 a barrel.
Whiting is currently operating five drilling rigs in the Bakken and has said it can continue that number at $50 oil. Mr. Holly said the advances the company has made will allow it to build a sustainable drilling program. Adding oil rigs when the price jumps by $10 a barrel, and subtracting them when it falls by that amount, isn’t the way the company wants to operate, he said.
“If we’re cycling this all the time, it’s a very inefficient operation and we’re going to spend more money that way,” Mr. Holly said.
Still, Whiting’s contracts on two drilling rigs, which it leases from service companies, expire in the next three months, and the company has said it could drop them if prices decline further.
