Saudi Arabia started its war on US shale oil in the autumn of 2014. Oil prices in June 2014 were around $110 per barrel and were on the way down as US shale oil producers were ramping up production. The expectation was that the OPEC cartel would reduce production to hold prices up. The conventional wisdom was that whereas Saudi Arabia had a production cost of about $3 per barrel, shale oil had a production cost of over $50 per barrel and upto close to $100. Oil from Canadian tar sands was thought to have a production cost of above $70 per barrel. Both were though to require oil prices well in excess of $70 and close to $100 to be viable.
But Saudi Arabia decided to strangle the burgeoning shale oil industry and started an oil war. It forced other OPEC members to focus on market share and hold production levels. Even though there was a glut of oil on the market. Oil fell to below $30 per barrel earlier this year before recovering to around $45. Saudi’s strategy was based on the assumption that rock-bottom prices would kill off the upstart non-OPEC, US shale producers. Low production costs would allow the OPEC producers to take some pain for a year or so. Certainly this strategy has had some effect. U.S. oil production is about one million barrels per day lower than a year ago.
Certainly some shale oil producers have gone out of business. But US oil production is much higher than thought possible at the prevailing price. The main effect of the Saudi strategy has been counter-productive. There has been a remarkable burst of innovation among the shale frackers which has drastically reduced shale oil production costs. The costs for shale production that I had reported 2 years ago no longer apply.Then the cheapest shale oil to produce was from Marcellus shale at around $24 per barrel. But the cheapest today costs $2.25 a barrel on horizontal wells in the Permian Basin of West Texas. That is directly – and even favourably – comparable with the Saudi production costs.
Reuters: Improved fracking techniques have helped cut Pioneer Natural Resources Co’s production costs in the Permian Basin to about $2 a barrel, low enough to compete with oil rival Saudi Arabia, CEO Scott Sheffield said on Thursday.
The comments from Sheffield, who is retiring soon, were perhaps the most concrete sign yet that the fittest U.S. shale oil producers will survive the price crash that started in mid-2014 when Saudi Arabia and OPEC moved to pump heavily to win back market share from higher-cost producers.
Dozens of shale companies, many with marginal assets, have filed for credit protection in the biggest wave of corporate bankruptcies since the telecoms crash of the early 2000s. Sheffield said high costs would continue to make U.S. shale plays outside the Permian basin relatively less competitive.
On Pioneer’s second-quarter results call, Sheffield said that, excluding taxes, production costs have fallen to $2.25 a barrel on horizontal wells in the Permian Basin of West Texas, so it is nearly on even footing with low-cost producers of conventional oil.
“Definitely we can compete with anything that Saudi Arabia has,” he said.
“My firm belief is the Permian is going to be the only driver of long-term oil growth in this country. And it’s going to grow on up to about 5 million barrels a day from 2 million barrels,” even in a $55 per barrel price environment, he added. ……..
Pioneer expects output to grow 15 percent a year through 2020 after posting production of 233,000 barrels of oil equivalent a day this past quarter. It sees most of its growth in the Permian, though it also has acreage in the Eagle Ford.
Pioneer helps limit costs by doing much of its oilfield services work in-house. It also has its own sand mine, and uses effluent water from the city of Odessa for frack jobs using pressurized sand, water and chemicals to unlock oil from rock.
Pioneer said it is now introducing its third generation of well completion techniques, called version 3.0, that is using even more sand and water than the super-sized volumes introduced at the start of the price crash to pull more oil out of rock.
Even at prices less than $20 per barrel, some considerable quantities of shale oil would continue to be produced.
The Saudi strategy is backfiring.