I thought this article on how shale oil might be impacted by falling oil prices in this week’s issue of The Economist was interesting:
Here are a few excerpts:
But much of the burden of adjustment will fall on America’s shale industry. It has been a big swing factor in supply, with output rising from 0.5% of the global total in 2008 to 3.7% today. That has required hefty spending: shale accounted for at least 20% of global investment in oil production last year. Saudi Arabia, the leading member of OPEC, has made clear it will tolerate lower prices in order to do to shale firms’ finances what fracking does to rocks.
Two generalisations can still be made. First, in the very near term, the industry’s economics are good at almost any price. Wells that are producing oil or gas are extraordinarily profitable, because most of the costs are sunk. Taking a sample of eight big independent firms, average operating costs in 2013 were $10-20 per barrel of oil (or equivalent unit of gas) produced—so no shale firm will curtail current production. But the output of shale wells declines rapidly, by 60-70% in their first year, so within a couple of years this oil will stop flowing.
Second, it is far less clear if, at $70 a barrel, the industry can profitably invest in new wells to maintain or boost production. Wood Mackenzie, a research consultancy, estimates that the “break-even price” of American projects is clustered around $65-70, suggesting many are vulnerable (these calculations exclude some sunk costs, such as building roads). If the oil price stays at $70, it estimates investment will be cut by 20% and production growth for America could slow to 10% a year. At $60, investment could drop by as much as half and production growth grind to a halt.
OPEC’s wishes may seem to be coming true over the next year. But adversity will eventually make shale stronger. It will prompt a new round of innovation, from cutting drilling costs through standardisation to new fracking techniques that increase output. Dan Eberhart, the boss of Canary, a Denver-based oil-services firm, says the industry has already “pressed fast forward” on saving costs.
And if and when prices recover, new wells can be brought on stream in weeks, not years. America’s capital markets will roar back into life, forgiving all previous sins. “There is always a new set of investors,” says the boss of a one of the world’s biggest natural-resources firms. He predicts a shale crash—and a rapid rebound.
While it paints a somewhat grim short-term picture, as a Profire investor I actually found the article to be quite positive. Rather than throw in the towel, The Economist believes the industry will do what it takes to increase efficiency and innovate its way to profit. Profire is right there in the middle, offering an easy way to cut costs, reduce downtime, improve safety, and increase efficiency – and with a quick payback to boot.
I have no idea how the drop in oil prices will impact the company in the short term (management was quite clear that they historically haven’t seen a correlation between oil prices and sales). There’s also a natural seasonal slowdown around the holidays, according to management, which may muddy the waters somewhat. But I think once the industry gets over its initial shock and gets serious about making its wells more productive, Profire should be a natural fit.
It’ll be interesting to see what happens!