Oil: Rising costs and falling prices pressure shale oil – Standard Chartered

Analysts at Standard Chartered explain that the US oil-drilling activity is in a strong uptrend as it has increased for the past 10 weeks, and in 20 out of the past 21.

Key Quotes

“YTD it has increased by 127 to 652 rigs. This is not, however, a widespread upsurge in activity across the US oil patch; it has a relatively narrow base. Three regions (the Delaware basin within the Permian, Eagle Ford in south Texas, and the state of Oklahoma) account for 73% of 2017’s increase in activity. Within the Permian the centre of gravity has headed to the west into the Delaware basin of Texas and New Mexico which has less infrastructure and local service industry support capacity than the Midland basin. The latter has been less of a hot spot this year; nine rigs have been added in the Midland, 33 in the Delaware. Even within regions, activity has been concentrated in relatively small areas. In the Delaware basin most of the increase has occurred in two counties: Reeves in Texas and Eddy in New Mexico. Likewise, Oklahoma’s increase has been dominated by the STACK (Sooner Trend Anadarko Canadian Kingfisher) oil play.”

“The concentration of activity increases has implications for costs. The first signs of this have involved difficulties in Texas in sourcing enough drivers to move sand for fracking operations. There have also been reports of increasing time lags between drilling and completion, because of a relative tightness in fracking crew availability close to the areas of highest activity. This is relatively early in the cycle for costs to be rising due to capacity bottlenecks along the supply chain.”

“We expect mid-cycle breakevens for new drilling to be significantly higher than current, as service companies regain some of their lost pricing power. In the hottest regions, we think it likely that cost inflation will exceed 20% this year despite productivity gains. The current combination of rising costs and falling prices appears unsustainable. Either prices must rise to allow supply to expand, or shale oil activity is likely to fall again.”