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US crude price drop is expected to hit the high cost producers the most namely shale oil producers and Canadian tar sands producers.
- Before the price drop, average cost of production shale oil was close to $80/ barrel and current market price of $43/ barrel would mean that shale producers should shut shop.
- Some evidence points at that direction, like active operating rigs in US are 822 as of now, down more than 46% from its peak in October.
- Some shale producers like Dune energy and BPZ resources had to file for bankruptcy whereas many like Goodrich, Oasis, and Bonanza Creek sought high cost financing to live through the time.
However, remarkably so the doom gloom story for shale oil has not played out entirely. Oil production in US continued to go up, despite fall in oil price. Current production stands at 9.4 million barrels/day.
- Shale oil is very young compared to conventional storage and this is the first time it is going through the cycle of supply shock. Maybe it is the hard way but companies are learning fast to sustain themselves through the period by cutting down unnecessary costs and streamlining the production.
- In spite of falling prices production has gone up in all the shale producing region. Permian saw increase in production from 1.5 million barrels/day from 2014 to 2 million by February 2015. Bakken area saw rise by 1.3 million barrels/day to 1.7 million barrels/day. Eagle ford area saw similar rise. Only recently the region is seeing some fall in production.
- Shale producers are reported to be hiring expertise from manufacturing to streamline their production and reduce unplanned drilling and erratic decision making to reduce the production cost.
The companies are cutting down costs to compete and the industry is not dead by the shock. Future of oil price will depend on how these companies fare in cost reduction and actual production cost of shale is revealed. WTI is currently trading at $43.6/barrel, down 0.7% for the day.
