Falling Shale Break-Even Costs May Not be Enough to Spur Rebound

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The oil price needed to profitably drill a shale well has fallen by almost a fifth since last year, but that may not be enough to revive production, according to a new report by BloombergNEF.

For an explorer to turn a profit in the Permian’s Delaware, the lowest-cost U.S. basin, an oil price of $33 a barrel is needed, down from $40 in 2019, the release showed. Breakevens refer to the cost of bringing supplies online that’s less than or equal to the expected revenue.

“Contract renegotiations, ongoing efficiency gains and process improvements have allowed the oil industry to slash the cost to drill and complete a well,” according to the report. “Most U.S. oil companies have also been able to lower their operating and administration expenses.”

However, cheaper drilling costs may not be sufficient to help shale recover from a pandemic-induced slump. Faced with unprecedented pressure from investors to returns profits to shareholders, the industry is in cost-cutting mode.

U.S. oil output is expected to close out next year at about 11 million barrels a day, about the same as it is now, according to forecasters IHS Markit, Rystad Energy, Enverus and the U.S. Energy Information Administration.

West Texas Intermediate will need to trade around $35 to $45 a barrel to keep 2021 output flat for the four major oil plays, the report showed.

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