Risk versus Profit in Fracking Shale Formations

As oil prices fall we would like to look at risk versus profit in fracking shale formations. The United States crude oil production is near a four decade high. With production at historic highs the U.S. imported 3.7 billion barrels of oil in 2014 as opposed to 5 billion barrels of oil in 2006 according to the U.S. Energy Information Administration web page for U.S. Imports of Crude Oil and Petroleum Products. That was twenty-six percent drop in oil imports.

As a result of the U.S. oil shale fracking boom and a lagging world economy the price of crude oil has fallen substantially. Reuters reports that oil is near an 11-year-low due to excess supply. Reuters reports the story.

Oil fell to around $37 a barrel on Monday, trading within sight of an 11-year low, pressured by excess supply that has led to prices more than halving since the downturn began in mid-2014.
U.S. crude was trading above global benchmark Brent, having earlier in December risen to a premium for the first time in about a year following the lifting of a 40-year-old ban on most U.S. crude exports.

“We expect both prices to rise next year,” said Eugen Weinberg, an analyst at Commerzbank. “A short-term slide can’t be excluded, due to persisting over-supplies, negative sentiment and stronger downside momentum.”

Figures from the Organization of the Petroleum Exporting Countries imply a glut of more than 2 million barrels per day, equal to over 2 percent of world demand. Oversupply is expected to persist into the earlier part of next year.

The problem for those pulling oil from share formation via fracking is keeping costs low and production high while staying in business until the price of oil goes up.

Surviving Low Prices

To a certain degree the problem for those drillers who are fracking oil formations is that no good deed goes unpunished! Although the world economy is slowing it is substantially higher U.S. oil production and persistently high OPEC production that is helping keep prices down. The fracking operations that are staying alive are using every possible efficiency they know to stay in the game until prices come back up.

Bloomberg Business reports that many U.S. operators are running out of survival tricks as OPEC refuses to cut production in a costly game of chicken.

In 2015, the fracking outfits that dot America’s oil-rich plains threw everything they had at $50-a-barrel crude. To cope with the 50 percent price plunge, they laid off thousands of roughnecks, focused their rigs on the biggest gushers only and used cutting-edge technology to squeeze all the oil they could out of every well.

Those efforts, to the surprise of many observers, largely succeeded. As of this month, U.S. oil output remained within 4 percent of a 43-year high.

The problem? Oil’s no longer at $50. It now trades near $35.

For an industry that already was pushing its cost-cutting efforts to the limits, the new declines are a devastating blow. These drillers are “not set up to survive oil in the $30s,” said R.T. Dukes, a senior upstream analyst for Wood Mackenzie Ltd. in Houston.

The Energy Information Administration now predicts that companies operating in U.S. shale formations will cut production by a record 570,000 barrels a day in 2016. That’s precisely the kind of capitulation that OPEC is seeking as it floods the world with oil, depressing prices and pressuring the world’s high-cost producers. It’s a high-risk strategy, one whose success will ultimately hinge on whether shale drillers drop out before the financial pain within OPEC nations themselves becomes too great.

There is still oil to be drilled out of shale formations for a long, long time. Those companies that survive should do well into the indefinite future. And those who do not make the cut this next year will go out of business. Companies with substantial cash reserves will likely to better and those with a lot of debt will get bought out or simply go bankrupt. Do your homework before investing in this market sector.

Risk versus Profit in Fracking Shale Formations PPT

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