Understanding the Break-Even Price for Shale Oil in the USA: A Closer Look

Introduction

The concept of a break-even price for shale oil in the USA is not a single point but rather a range of prices that vary significantly based on the quality and characteristics of individual wells. This article delves into the complexities surrounding the break-even price for shale oil and why the industry has not collapsed despite the current low crude oil prices.

The Variability of Shale Oil Production

Shale oil production per well exhibits significant variability, making it difficult to represent the entire set of producing wells with a single curve. Different wells in the shale oil industry have vastly different production rates, which is a critical factor in determining the break-even price.

Empirical Evidence: Bakken Analysis

To illustrate this variability, let’s examine a study on Bakken shale oil wells in North Dakota. According to Saputra W., Kirati W., and Patzek T., ‘Physical Scaling Predicts Oil Production Rates and Ultimate Recovery from All Horizontal Wells in the Bakken Shale’ (2019), the distribution of cumulative production across wells is quite diverse.

Key Findings from Bakken Analysis

10 wells will have cumulative production of less than 70,000 barrels. 40 wells will accumulate between 70,000 and 300,000 barrels. Another 40 wells will accumulate between 300,000 and 600,000 barrels. Only 10 wells will accumulate more than 600,000 barrels.

Financial Implications

Assuming an oil price of $70 per barrel and future wells performing at least as well as historical data suggests, we can perform some back-of-the-envelope calculations:

Income and Profitability

90% of the wells will have a total gross income of $4.9 million without considering any discount rate or additional gas/liquids revenues. These wells cost between $6 to $8 million, with operating costs per barrel ranging from $70 to $80. This means that about 50% will leave a profit, while 70-80% will still be profitable. The top 10-20 wells will have gross income exceeding $12 million, which is highly profitable.

Industry Resilience and Future Projections

The current low oil price is not leading to the collapse of the unconventional oil industry. However, it is significantly reducing the number of companies operating and limiting operations to the best areas. This reduction in oil production will likely lead to a rise in prices within the next few cycles, potentially making a group of wells economically viable once more.

Conclusion

The break-even price for shale oil is not a single value but varies widely depending on the EUR (Estimated Ultimate Recovery) and operational expenses (OPEX) of individual wells. As the price of oil increases, more wells become economically viable. While current low prices create challenges for low-performing wells, the high-performing ones continue to be profitable.