Opinion

Low Break-Even Prices Are For Everyone–Not Just Shale Companies


Shale companies have pushed break-even oil prices below $40 per barrel—but so have major oil companies.

Analysts commonly portray cost reduction as something unique to the tight oil companies. Data from annual reports filed with the U.S. SEC (Securities and Exchange Commission) suggests otherwise.

Along with tight oil companies, ExxonMobil, Royal Dutch Shell, ConocoPhillips and ChevronTexaco all had 2016 break-even prices below $40 per barrel (Figure 1).

Figure 1. Break-Even Prices for Majors and Tight Oil Companies Were All Less Than $40/Barrel in 2016. Source: Company 10-K and 20-F SEC filings and Labyrinth Consulting Services, Inc.

SEC 10-K and 20-F filings include the standardized measure, a projection of discounted (10%) future net cash flows from production of proved oil and gas reserves. By dividing the standardized measure by the volume of proven reserves, break-even prices can be calculated by subtracting the future cash flow dollar-per-barrel amount from the SEC average price for the year.

How is it possible that ponderous major oil companies have similar break-even prices as much smaller, innovative shale companies? Simple–costs have fallen for everyone since 2014 as oil field service companies competed for limited projects by working at a loss.

In fact, the oil and gas well drilling producer price index fell 45% between March 2014 and January 2017 (Figure 2). As I wrote in an earlier post, sharply lower break-even prices are 10% technology and 90% industry bust.

Figure 2.The Cost of Drilling Oil and Gas Wells Fell 45% After The Oil-Price Collapse;Unconventional Plays Resulted In a 4-fold Increase in Drilling Costs. Source: U.S. Federal Reserve Bank, EIA and Labyrinth Consulting Services, Inc.

And for those who think that unconventional oil and gas are low-cost resources, those plays resulted in a 4-fold increase in the cost of drilling wells between March 2003 and March 2014. That's why oil cost more than $90 per barrel for 4 years before the price collapse.

So much for technology solving all of our energy problems.

And when you hear about tight oil companies breaking even at $20 to $30 per barrel—that's not what they told the SEC in filings made just a few weeks ago.



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