Production Remains Resilient Amid Lower Crude Oil Prices

The vast majority of potential U.S. tight oil production growth remains economical in the current lower crude oil price environment, according to a new report by IHS, a global source of information and insight in the energy industry. About 80% of potential gross U.S. tight oil capacity additions in 2015 would remain resilient at West Texas Intermediate (WTI) prices as low as $70/bbl, the report maintains. The report examines the outlook for U.S. tight oil in light of the recent drop in crude oil prices, which have fallen by nearly one-third since summer. IHS estimates 2015 U.S. tight oil production growth at around 700,000 bbld at an average 2015 price of $77/bbl. Though this would represent a slowdown from 2014 tight oil growth of more than 1 MMbbld, the amount of growth remains significant.

“Since 2008, the cumulative growth in U.S. tight oil production has been 3.5 MMbbld—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 2014 remains 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 occur during the initial development phase of a well, existing wells can remain economical at crude oil prices far below the breakeven 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 in determining the profitability of a new tight oil well.

Regardless, there are reasons to believe in the resilience of tight oil growth. IHS analysis shows that most of the potential U.S. tight oil capacity additions in 2015—about 80%—have a break-even price in the range of $50/bbl to $69/bbl. Continued productivity gains, such as improvements in well completion and down spacing, 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.”