"Expectations of the future—and the trajectory of oil prices—means that prices do not need to fall to the breakeven price before psychology, investment, and thus output, is affected"
(November 20, 2014) – The vast majority of potential U.S. tight oil production growth remains economical in the current crude oil price environment, according to a new report by IHS (NYSE: IHS), the leading global source of critical information and insight. About 80 percent of potential gross U.S. tight oil capacity additions in 2015 would remain resilient at West Texas Intermediate (WTI) prices as low as $70 per barrel, the report says.
The new report examines the outlook for U.S. tight oil growth in light of the recent drop in crude oil prices, which have fallen by nearly a third since summer.
IHS estimates 2015 U.S. tight oil production growth at around 700,000 barrels per day (b/d) at an average 2015 price of $77 per barrel. Though this would represent a slowdown from 2014 tight oil growth of more than one million barrels per day, the amount of growth remains significant, the report says.
“Since 2008 the cumulative growth in U.S. tight oil production has been 3.5 million barrels per day—far exceeding supply gains from the rest of the world combined—making tight oil the key driver of global supply growth,” said Jim Burkhard, Vice President, IHS Energy. “While current lower crude oil prices do present challenges for new investment, IHS analysis shows that the vast majority of potential U.S. supply growth in 2015 remain economical at $70 for WTI.”
The report notes that existing tight oil production is unaffected by the recent drop in oil prices. Since the highest level of production costs occurs during the initial development phase of a well, existing wells can remain economical at crude oil prices far below the break-even price for new production.
Lower crude oil prices have a greater potential to affect supply growth because new wells require significant investment before production begins. In the initial months of production, the oil price is critical to in determining the profitability of a new tight oil well.
Regardless, there are reasons to believe in the resilience of tight oil growth, the report says. The IHS analysis shows that most of the potential U.S. tight oil capacity additions in 2015 (about 80 percent) have a break-even price in the range of $50 to $69 per barrel. Continued productivity gains, such as improvements in well completion and downspacing, also support the resilience of U.S. production growth at lower prices, the report says.
Though these are strong reasons to believe in the resilience of tight oil growth, the report acknowledges that the risk of supply growth falling short is much greater now than just a few months ago.
“Expectations of the future—and the trajectory of oil prices—means that prices do not need to fall to the breakeven price before psychology, investment, and thus output, is affected,” Burkhard said. “Lower oil prices bring into question the ongoing extent of one of the most profound developments in the world oil market—the great revival of American production. The ‘tight oil test’ is under way.”
IHS (NYSE: IHS) is the leading source of information, insight and analytics in critical areas that shape today’s business landscape. Businesses and governments in more than 165 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and employs more than 8,000 people in 31 countries around the world.