Wednesday, June 24, 2015
Shale Oil's Last Roundup
It was inevitable given the economics of the oil "bidness" and the price behavior of scarce commodities. Shale oil drillers have always spent more to get the "tight" oil and gas to the surface than what they collected in revenues. Now that the price of shale oil has dropped to $65/barrel the cost-revenue differential is becoming unbearable. Operators have relied heavily on debt financing as this chart [yellow] shows:
What controls oil production are variable costs. Once the well is dug, the expenses associated with digging it are, excuse the pun, sunk. Each subsequent barrel produced contributes to defraying the initial capital outlay. But if the well cannot produce enough-- to cover operating expenses because the price per barrel is too low, that is another matter. Fracked well are more expensive to operate than conventional wells and the heavy product sells at a discount to "sweet, light" crude. Wells costing $20 to $30/barrel can be produced at prices of $60-80, but not when prices drop below variable costs. So what this all means is that the frackers, those cowboys of the patch, appear to be headed for the last well.