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Is fracking still cost effective?

The declining price of oil, which has dropped more than 25 percent since June, is great for consumers, but is making some methods of production less profitable, according to a recent report by National Public Radio.

The drilling boom in the United States is a result of improved technology that allows for the development of unconventional shale formations. On the global market oil is currently selling for around $80 per barrel; however, not all oil is created equal. Some methods and drilling locations are less expensive than others. For example, in the Middle East oil is less costly to produce, sometimes averaging about $30 per barrel. Oil produced in the Arctic sells for about $78 per barrel, and the price of oil produced from Canada’s tar sands averages at about $74 per barrel.

Due to these averages, some companies are able to produce oil at lower costs while others are paying a higher price. Currently, according to Norwegian company Rystad Energy, oil from U.S. shale formations can be produced at a cost of around $62 per barrel.

Jeff Brady reports:

“What is really interesting for the U.S. drillers and producers is how long they are going to continue the high activity levels that they have, now that prices are going down,” says Per Magnus Nysveen, head of analysis at Rystad.

The dropping prices have prompted many companies to reevaluate their plans. Steven Pruett, president and chief executive officer of Midland, Texas-based Elevation Resources, said that the company will be drilling fewer wells as long as prices are low because with less profit, there’s less money to invest in other projects. But, for most companies, it hasn’t become an emergency situation.

Pruett commented, “We do not foresee a scenario where prices get so low that we can’t cover the cash cost of lifting the barrel.” In the event that prices drop to the levels seen in 2008, when oil was selling for around $35 per barrel, some drillers might be required to shut down production, but few are predicting that prices will sink that low.

With growing concerns of climate change and the environmental impact of drilling operations, governmental policies are continuing to shift towards encouraging the use of renewable energy. Although such policies may impact production later on, the market continues to dictate and encourage oil exploration, even in high-cost areas such as the Arctic.

For now, oil companies have a variety of reasons to justify the cost. For instance, global demand is continuing to grow, prices may eventually rise again, and costs of operations will likely decrease as emerging technologies become more commonplace.

According to Erik Milito, director of Upstream and Industry Operations for the American Petroleum Institute, “…That’s the reason why companies are making these investments, because they’re long-term investments in projects that are expected to provide very large quantities of oil and natural gas for the U.S. economy and for the global economy.” In the meantime, U.S. producers are keeping a close watch on their foreign competitors that are able to produce oil at a lower price.

To read or listen to the original report, click here.

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