SAN ANTONIO — The price of crude oil has tumbled in recent weeks, raising questions about a historic boom that has swept across South and West Texas.
The price drop doesn’t mean the music has stopped, but the ultimate impact on the Eagle Ford Shale and Permian Basin depends on two things no one can answer yet.
“How far down does it go and how long does it stay that way?” asked economist Karr Ingham, who developed and maintains the Texas Petro Index for the Texas Alliance of Energy Producers.
Around $20 has been lopped off the price of West Texas Intermediate, a light, sweet crude oil used as an oil price benchmark.
Plains Marketing LP’s price for West Texas Intermediate and Eagle Ford Light crude oil was $82.25 per barrel on Thursday. In mid-June, they were priced around $103 per barrel.
“A crude price decline of $10 is going to have an effect. A crude oil price decline of $20 is going to have a bigger effect,” Ingham said. “I think it’s a safe bet that activity levels in the Eagle Ford and Permian and frankly across the board are going to be affected.”
Activity won’t stop, especially in the so-called “sweet spots.” But a sustained drop would mean a sort of chipping away of drilling around the marginally-profitable edges of the oil fields.
R.T. Dukes, senior analyst with Wood Mackenzie in Houston, said that there’s a huge variance in well quality within the fields.
The best part of the Eagle Ford — around a formation called the Karnes Trough — would remain profitable even if prices dropped into the $40s. “In other places you’ve got break-evens in the $80s,” Dukes said.
Likewise, parts of the Permian look good into the $60s. “Some of it is challenged in the $80s,” Dukes said.
In the short term, the effect of the price dip is muted, especially in the Eagle Ford. “The Eagle Ford is competitive on an international scale,” Dukes said.
But a prolonged dip in prices would mean that companies would have less cash flow, and therefore less money to spend on drilling more wells in 2015. It could start to effect plans for capital spending.
“The bigger independents are in a good position. EOG, Marathon, ConocoPhillips — those companies wouldn’t scale back nearly as much as the smaller companies might. The smaller companies are generally leveraged more,” Dukes said.
If prices dip below $80, it starts to have a significant impact, he said. “It’s hard to quantify. Their cash flow is predicated on the oil price, so $90 oil means 10 percent less cash flow. You start dropping 20 percent or more, and you’d see operators contract into those best areas.”
Oil and gas leases often require that drilling starts within a certain window of time, often three to five years. By now, most land in the Permian and Eagle Ford is “held by production,” a term that means that operators have drilled enough wells that they aren’t at risk of losing their leases. That gives them more flexibility in deciding where to move drilling rigs.
“They can develop it when they want to or they can wait for a better day,” Dukes said.
Trevor Sloan at ITG Research said at Hart Energy’s DUG Eagle Ford Conference in September that there are several areas of the Eagle Ford that are profitable at sub-$60 prices for crude oil, including the western and eastern oil windows. Sloan called the eastern condensate window “the crown jewel of almost any property in North America.”
But Ingham called Thursday’s $82.25 price unnervingly close to “a number that has a 7 in front of it.”
He said that many producers in the Permian Basin are already getting $5 to $15 less than posted WTI prices because crude oil is stacking up as producers struggle to get it to market. New pipeline capacity is coming online, but not quickly enough.
“I get the sense that producers live in fear of $70 crude oil. You’re getting too close to that for comfort. You’re going to lose a certain number of wells. Let’s say we get to $75 range,” Ingham said. “A certain psychology begins to take place among operators. Maybe you sit on the sidelines to see where it’s going to land.”
If prices remain low into November, Ingham expects the rig count in Texas to dip along with the number of drilling permits.
Last week, there were 210 rigs in the Eagle Ford and 461 drilling rigs in the Texas portion of the Permian Basin, which also reaches into eastern New Mexico. The two Texas fields had about 35 percent of the nation’s drilling rigs, according to the Baker Hughes Rig Count.
“It’s going to be an interesting few months,” Ingham said.