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U.S. shale's message for OPEC: above $40, we are coming back

Devika Krishna Kumar

 

For leading U.S. shale oil producers, $40 is the new $70. 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 the Petroleum 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 (EOG.N), said on Friday. "EOG's goal is to be competitive, low-cost oil producer in the global market."

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.

 

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