Slow Zone in Oil Fields

Published February 5, 2015

Two technologies—hydraulic fracturing, also known as “fracking,” and horizontal drilling—have transformed the United States from an also-ran into a frontrunner in terms of energy production. These breakthroughs allow scientists to tap previously uneconomic reserves of oil and natural gas, making the United States the world’s largest producer of both vital energy sources.

The success of hydraulic fracturing is not the result of a grand energy policy devised by government bureaucrats – it is a natural market response to high oil and natural gas prices, which incentivized drillers to develop new ways to access these resources. However, it appears the “frackers” may have become victims of their own success. Oil prices have plummeted 50 percent from their highs of $107 per barrel in June to their lowest level in over five years.

Falling oil prices are generating a mixed bag of results in oil-producing regions across the county. Some producers are continuing to drill, confident oil prices will recover to the point to where they can break even or make reasonable profits in the near future. Others have begun to retract, focusing their drilling efforts on other profitable areas and reducing expenses by idling drilling rigs and laying off workers.

Because of variations in the quantity and quality of oil resources in shale plays, some regions are more vulnerable to price declines than others. Producers in North Dakota are in a better position to ride out low prices. Texas and Colorado are likely to see reductions in investment and production. Illinois, despite having significant shale reserves, probably has missed the boat on round one of the fracking boom due to a combination of low oil prices and bureaucratic delays that prevented the timely approval of environmental rules that would have permitted fracking.

The Bakken Keeps Rockin’

North Dakota leapfrogged seven states to pass Alaska as the second-largest oil-producing state in the country, behind only Texas, all thanks to hydraulic fracturing. The Bakken and Three Forks formations now produce more than 1.2 million barrels of oil per day, according to estimates from the North Dakota Department of Mineral Resources (DMR).

DMR data show new drilling has already begun to slow, as active rig counts have fallen to 166 rigs, their lowest levels since 2010. Drilling will decline the most in what is called the “outer Bakken,” which encompasses Divide and McLean counties, where breakeven prices are estimated to be between $73 and $77, respectively. DMR reports McKenzie County will not stop drilling unless oil prices dip below the breakeven point of $30 per barrel in that part of the Bakken.

While some areas will slow, the Bakken is still the laboratory of hydraulic fracturing technology. Leading innovative technologies and methods are created here, production costs are among the lowest, and additional efficiencies are likely to make fracking more cost-effective in the future.

Deep in the Heart of Texas

The outlook in Texas isn’t quite as rosy. Although Texas is the home of modern fracking, relatively higher breakeven costs, estimated between $55 and $70 per barrel, have taken their toll on the nation’s largest producer of oil and natural gas, stemming investment and forcing marginal producers in the Eagle Ford Shale and Permian Basin to close up shop.

Oilpro.com reports H&P, a leading oilfield drilling contractor, announced it has started a round of steep layoffs. On Jan. 29, John Lindsay, CEO of H&P, confirmed the Oilpro.com report. “We are making significant reductions to workforce as rigs go idle. It is possible that we will have over 2,000 positions eliminated,” Lindsay stated.

Texas is a tour de force in terms of oil and natural gas production, and the Permian Basin may be better suited to withstand low oil prices than the Eagle Ford. But Bloomberg reports the Dallas Federal Reserve Bank estimates as many as 140,000 direct and indirect jobs could be lost in Texas due to low oil prices in 2015.

Colorado Outlook

Like North Dakota and Texas, Colorado will experience a slowdown in drilling in marginal areas as drillers focus on more lucrative plays. Colorado Public Radio reports the Colorado Oil and Gas Commission says applications for permits in December were down to 70 from 78 applications the month before. However, a spokesman for the commission says it’s not clear whether that’s a normal fluctuation or an indication of a decline.

The Denver Post reports Encana Corp., a large operator in Colorado, has a “supply range cost” of $35 to $45 a barrel, according bto a company presentation. The supply range cost is the price needed to make a 9 percent return, excluding some costs. However, in an interview with KUNC Radio in Colorado, Peter Maniloff, a professor at the Colorado School of Mines, said breakeven prices in the Denver-Julesberg Basin were often estimated around $60 per barrel, which means some areas will experience a more dramatic slowdown than others.

Illinois: Unfashionably Late

Unlike other states discussed in this article, the situation in Illinois concerns not what has been lost but what might have been. Illinois has missed the fracking boat due in part to delays during the administrative rulemaking process undertaken by the Illinois Department of Natural Resources, according to the Chicago Tribune. By the time the rules were adopted, oil prices had collapsed. Landowners who received money for mineral leases four years ago are unlikely to receive another round of checks until energy companies are confident prices will remain high enough to post a sufficient profit.

Low oil prices will dampen but not extinguish hydraulic fracturing in the United States. The Los Angeles Times reports oil prices could be back to $80 per barrel by January 2016, as low energy prices serve to drive demand. When prices recover, those idled rigs will be ready to provide affordable, abundant energy in the United States.

[Originally published at Energy Executive]