There are two easy targets for everything that is wrong in the world, Saudi Arabia and The Federal Reserve...The Gang of Two! This morning headlines from a Google search for "Shale Oil News" delivered a post by Zero Hedge proving beyond any reasonable doubt that because of the Fed's easy money, in 2014 it cost twice as much to drill a shale oil well as it did in 2009. Except for one small little thing, which is that the costs of renting a drilling rig, a coil tubing spread, wire-line services, a lift-boat, you name it, worldwide...doubled (up to mid 2014), since 2009. Could it be that the evil tentacles of the Gang of Two spread further than just North Dakota? Or, just a thought, perhaps the price increase could have something to do with the coincidence that the price of oil in 2009 was less than half what it was in mid-2014? Time will tell. If oil stays around $70, and the cost of renting the kit to drill new oil wells halves, then perhaps the Fed can be forgiven, for once.
But Saudi Arabia...the "cartel," can't expect to get off so easy. Proof of its transgression is the latest news that applications for drilling permits for new shale oil wells were down 40% in November. According to Reuters that is irrefutable evidence of evil fingers squeezing the life out of Freedom. And the Smoking Gun....
U.S. prices fell below $70 a barrel last week after the Organization of Petroleum Exporting Countries agreed to maintain output of 30 million barrels per day. Analysts said the cartel is trying to squeeze U.S. shale oil producers out of the market.
OK, that's certainly proof. Except, one small thing, prior to the decision by OPEC, prices fell from over $100 to just above $70, but that could be a coincidence. Here's a thought, just yesterday there was a post that suggested that at a $70 oil price, about half of the new shale oil wells, slated for development... before oil prices tanked, would likely not get drilled, because at that price, it wouldn't make any sense. That's because to start drilling a shale-oil well you need (outside of a permit and a mole in the EPA), (1) the ability to hedge the price of your first two years production - if you need financing, and shale-oil drillers are all highly leveraged, (2) at a price that will give you a two-year payback on your capex.
That suggests, regardless of the evil fingers of The Cartel... and perhaps the Fed, shale-oil production in the U.S. will likely increase by about two million barrels per day in 2015 over 2014 as all the wells that are currently being drilled get finished. Unless there is a radical move in oil prices down from around the $70 level, which is highly unlikely. That increase in production is about how much Venezuela wanted OPEC to cut back to bring "market forces" into line, which is another reason why oil prices most likely will not bounce, at least until end 2016. In 2016, unless prices get back to above $90, likely shale-oil production will remain flat at about $6 million barrels per day, unless of course the cost of drilling an oil well halves, which is also quite likely. So it could be a toss-up, particularly, as Tom Armistead pointed out, depletion of existing wells may slow due to the increasing use of ceramics instead of sand to keep the wells going.
