The oil price crash just can’t keep a good shale driller down. According to a Bloomberg Intelligence analysis, parts of North Dakota’s Bakken shale formation continue to be profitable at less than $30 per barrel, half the amount of some predictions gave last year when prices began to drop.
As companies tap larger wells and reap the benefits of decreased costs, the profit margins continue to shrink, one reason why U.S. oil production has maintained its 40-year high, even though crude prices fell by over half since last year. David Hackett, president of Stillwater Associates LLC, an Irving, California-based energy consulting firm, told Bloomberg, “One of the explanations for why production hasn’t fallen off is that the cost has gone down so much. The marginal cost to produce has shrunk pretty dramatically with the drop in prices. The efficient drillers are now able to take advantage.”
Yesterday, West Texas Intermediate crude futures settled just above $43. For oil produced in the Bakken, a discount must be applied to compensate for the extra cost of transportation. According to Royal Dutch Shell PLC, the discounted price of Bakken crude dropped to $30.58 yesterday. In some areas of the play the breakeven costs remain below this threshold, though, not by much. Breakeven prices can vary within a play and are dependent on production and drilling rates, completion and other costs, the area’s geology and a company’s efficiency.
In the core of the Bakken formation sits McKenzie County, North Dakota, where the average breakeven price is just slightly above $29 per barrel, reports Bloomberg Intelligence analyst William Foiles. North of McKenzie County in Williams County, the breakeven price is almost three times that. Last week, drillers had 26 horizontal wells on the pursuit of oil in McKenzie County, the most in the state as wells of that area continue to have the best returns in spite of the price drop.
As reported by Bloomberg, Foiles explained, “A single break-even price doesn’t actually exist. Rather, what the model indicates is that at a realized oil price of $29.42, half of wells will generate returns exceeding 10 percent. This price is considerably lower than the $70 breakeven estimated by industry watchers at the start of the oil price slump.”
Since the peaks seen in the Bakken last December, oil production has dropped by less than 2 percent, but the number of active drilling rigs has fallen by more than 60 percent. EOG Resources reports that it is still able to make a 30 percent return after taxes on $50 oil in its best acreage. Whiting Petroleum, meanwhile, is preparing to grow production at $40 and $50 prices. Although operators are still able to produce at a profit, many are choosing to bide their time until the market improves.