I guess you’re the person to ask..and I know nothing about oil. Why the panic over $87 oil, and why is production break even at $67 a barrel? ( think I read that just now) Wasn’t oil $60 a barrel six years ago and $25 a barrel ten years ago? Have production costs gone up that much?
Ill answer later. Remind me.
Debt service is the short answer for a lot of the shale people. Drill and Complete costs and the rate of return for investors is another factor. Shale relies on good prices, flush production and quick turn around of money for the investors. Payouts of about a year or less are common but after that the wells don’t sling enough money to drill other wells. Natural production decline is the reason. New money has to be brought in or recycled from old money returned to the investors. A lot of times the investors see, after a year or two, that it is a good return but a treadmill of investment with rising costs and reducing interests. They will stand the promote to get in the door but not forever unless it is a really, really good deal.
The cost of production is variously considered depending on the accounting method but 67 would be fully amortized for drill, develop and produce (DD&A cost). The marginal cost of production is lower so production would continue but the operator would be paper in the hole but paying the bills down to a much lower number than 67 but would not have any free cash to invest in new wells. Full cost and successful efforts accounting are bean counter things that the suits worry about that can legally be used depending on the type of company new or old growth or established you have. Bean counters are really good at counting beans and are necessary for that but are not reliable for much else. They inevitably get involved where they are out of their element and cause lots of problems because counting beans is really boring. But I digress. The old wells will eventually decline, shale probably declines very fast like more than 35% per year (it has done that or worse in most places), and demand fueled by low prices would rise then the system would balance and prices will go up then there will be more drilling again. Wash, rinse and repeat. Drillers hardly never drill at a pace that matches decline and demand and they almost always out drill and overproduce. It has been that way forever. The oil business is one of constant boom and bust especially for drilling.
There was not much drilling at $60 either compared to now. The industry struggled out of the bust in ‘86 and then again in ‘98 and the global downturn in ‘01/’02. After that it took until about ‘04/’05 for things to improve again. It was a tidy business in ‘05 to ‘07 for established operators already in the business and people were doing well, then came the price spike of ‘07/ ‘08 and “peak oil” and that was the start of the shale revolution but you should have been out trying to raise money in late ‘08.... it was a ghost town. Nothing was moving in the fall of ‘08 and into ‘09 prices improved “peak oil” was still in vogue, shale was ready having been primed in the pre-’08 crash (hat tip to Mitchell Energy and the Barnett Shale in the Ft. Worth Basin and Continental et al in the Baaken plus Marcellus and Haynseville where a lot of royalty owners got rich for a bit and a lot of people lost their shirts) and there was also no place else to put money so shale took off. Plenty of investment money around. There is always money around but there are not always good places to invest it so it sits until there are.
Why has the tipping point price gone up? The cost of drilling and completion goods and services has gone through the roof. I believe the oilfield cost index has been rising at about 13% or better per year. That doubles the price of stuff every 6 years or so. For the last 6 years oil has been about the only game in town that keeps some economies going. The Texas miracle may be out of gas but lots of royalty owners are richer than four feet up a bulls butt so that will keep things going in spots ‘cept they can’t spend it all.
If you don’t understand or believe shale production declines look for some presentations by a guy named Art Berman. Here is a start:
http://www.zerohedge.com/news/2014-03-10/shale-last-oil-and-gas-train-interview-arthur-berman
In 1992 it was at $9.00 a barrel and the Saudies were saying the perfect price was $25.00. Oil is like everything else, if there is a glut the price will plummet.....and we’re heading to a glut. Market forces determine price.