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U.S. Shale Set to Compete with OPEC

U.S. Shale Set to Compete with OPEC

One of the frequent updates we have given you throughout the many editions of The Five Star Standard is what the breakeven production costs are in the United States? We have tackled this topic on several occasions, but it’s a topic worth continuous investigation as technology, service costs, employment costs, and other factors mean that this number is subject to some change over time. Now that OPEC has reached a deal, the question becomes: are U.S. shale producers drooling and about to start yelling “drill baby drill”?

As we have noted in prior editions, U.S. shale costs have been in a continuous decline since the market dropped. Some of these are structural costs savings (here to stay) and some of them have been driven off the backs of the service companies making pricing concessions to keep any market share they could in a drillers market.

In a recent article published by Reuters, we got a comparison of U.S. shale oil costs currently vs major mid-east producers. Below is a chart for the major mid-east producers:

usa shale opec

Since 2014, in Texas and North Dakota, costs have roughly been sliced in half. In parts of the Bakken, the break-even costs is about $15.00 per barrel and seems to be falling. Over the entire Bakken, the breakeven has fallen from $59.03 in 2014, to $29.44 currently.

In Texas, the Eagle Ford has dropped from over $80 to less than $40, as has the Permian Basin (Delaware and Midland). Wood MacKenzie predicts that technological advances will allow U.S. drilling costs to continue to decrease over time.

But here is what the above chart doesn’t show: the amount each OPEC nation needs to balance their budget. Bloomberg News combed through all the data out there (and some countries aren’t exactly transparent with these kinds of numbers), to provide us an estimate. Click here to read more (https://www.bloomberg.com/news/articles/2015-11-30/oil-states-need-price-jump-to-balance-budget-opec-reality-check). I will summarize the data for you below:

Country $ Price Per Barrel to Balance Budget
Algeria $96
Angola $90
Ecuador $120
Iran $87
Iraq $81
Kuwait $67
Libya $269
Nigeria $120
Qatar $55.50
Saudi Arabia $106
United Arab Emirates $73
Venezuela $125

So yes. OPEC can produce break-even costs, theoretically, at prices well below the U.S. But to do so, it hurts OPEC a lot more than it hurts the United States. When considering break-even pricing, I think you also have to look at how it will effect a country’s budget. Saudi Arabia would have been in for a long, painful grind had it not looked to limit production to increase pricing.  

By: Ty Chapman

Five Star Metals, Inc.

Raising the Bar for Customer Service and Quality

Twitter: @FSM_TY

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