Study: Tight oil still profitable even if crude prices plummet

HOUSTON — Even if global oil prices fell more than $30 per barrel, the overwhelmingly majority of U.S. tight oil production still would be profitable, analysts with Wood Mackenzie said Tuesday.

More than 70 percent tight oil reserves would be economically viable if global oil prices fell to $75 per barrel, said Harold York, the firm’s principal downstream research analyst, in a new report.

Brent crude, the global benchmark, currently is trading around $106.90 per barrel. It last traded at $75 in August 2010.

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Industry observers often question at what price oil production will become unprofitable in the unconventional plays that have driven the current U.S. energy boom. As York sees it, that’s not happening any time soon.

“The question we get asked by our clients is what does it take to knock tight oil off the rails, off the path it’s on,” York said. “It would have to be something pretty extreme happening.”

Wood Mackenzie presented the findings at the American Fuel and Petrochemical Manufacturers annual conference Tuesday in Orlando.

Deal breakers

York said it’s difficult to make generalizations about U.S. tight oil, since even individual wells within the same play can have dramatically different break-even points. But broadly speaking, he said there’s only a few things that could cause tight oil plays in the U.S. to stop being profitable: a dramatic decline in global oil prices, the failure of drilling technology to improve, or a dramatic changes in regulations like a broad fracking ban.

York believes none of those things is likely to occur.

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York says he doesn’t predict a drop in global oil prices since demand — especially in the developing world — continues to increase. And even if prices did drop, they could have to fall dramatically and remain depressed for months or even years, he said.

Pipeline shortage

Meanwhile, even though limited infrastructure has hurt the profitability of tight oil plays in the past, he’s confident that the country is adding enough pipeline capacity and will be able to use rail to accommodate the production.

While some have worried that shale production slows at a more rapid pace that conventional plays, York echoed many in the industry who say they’re confident technological advancements can help turn the tide.

“The industry has a track record of solving problems,” York said.  “It’s part of the DNA of the industry.”

There’s not universal acknowledgement of that view. Some skeptics have said that shale plays cost too much to be financially sustainable in the long-term.

Earlier this year, for example, Michelle Michot Foss, chief energy economist at  Bureau of Economic Geology’s Center for Energy Economics at the University of Texas, suggested that many producers would shift their focus back towards offshore plays.


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