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Good News! Production Cost Savings May be here to stay.
One hotly debated topic is whether or not the cost savings achieved by producers during the downturn are here to stay. If they are, drilling, particularly shale plays, is profitable even if oil prices are lower therefore reducing volatility and encouraging production because there is less fear of unprofitable wells should oil prices plunge again
Many have felt that while Shale plays have achieved enormous cost efficiency as compared to its expensive beginnings, these cost efficiencies will quickly evaporate when drilling ramps back up. Logically, this makes sense as service companies, struggling under a decrease in business, have slashed prices in order to attract business. Therefore, the argument goes, once business grows back to more sustainable levels, service companies and others will raise prices again, thereby causing the break-even point per barrel to increase for newer wells. However, this does not account for structural cost changes achieved by the producers themselves. Two recent stories give us some insight that sat least some of the cost savings achieved, which will allow fracking to occur profitably at much lower oil prices, are here to stay.
In an article published by Reuters on June 20, 2016 (link: http://finance.yahoo.com/news/shell-puts-revamped-shale-arm-060456106.html), Shell announced and detailed their growth strategy and shift to unconventional plays. Shell told Reuters that unconventional energy is the center of their growth plan over the next few years. In explaining its new emphasis on unconventional shale plays, Shell provided us with the following insight:
Not to be outdone, Chevron announced substantial cost reduction in Argentina’s Vaca Muerta shale, considered thee world’s second largest shale reserves (http://www.bloomberg.com/news/articles/2016-06-24/chevron-vaca-muerta-costs-drop-20-nearing-goals-moshiri-says). According to Chevron, drilling costs at the Loma Campana field declined from $14 million per well to $11.2 million per well – a reduction of 20%.
These announcements bode well for surface wellhead producers as a lower cost of completion allows producers to continue drilling despite lower oil prices. Moreover, seeing system wide cost reductions indicates that these lower costs will continue even once the market changes.