The decline in oil prices has had a clear effect on oil production in the United States. For example, North Dakota production in February was 15,000 barrels lower than in January. Oil and gas companies throughout the United States are laying down rigs and laying off workers. The oil field service providers are especially hard hit.
While oil prices have stabilized after a sharp drop, there may well be some additional movement in oil prices over the next few months. Indeed, some analysts predict even lower prices as inventories build up.
It is important to remember that the current slowing of development follows a substantial expansion. In North Dakota, the total rig count dropped from 183 in December of 2014 to 163 in January of 2015 to a current rig count of 91. There has been similar decline in other shale plays – 39 percent in the Niobrara, 25% in the Eagle Ford and 21% in the Marcellus. North Dakota had less than 50 rigs operating as recently as 2009. North Dakota issued 3030 well permits in 2014, a record number. The production and activity arising from the previous expansion of the industry in shale fields will provide some stability to the current volatile oil price environment.
The greatest effect will be on new drilling. A long horizontal well with a multi-stage stimulation is more expensive than a conventional vertical well, and therefore the break even price will have a greater effect on unconventional development. The break even price for a new well varies widely, even within the same general formation. The North Dakota Department of Mineral Resources says that the break-even price on a Bakken well can vary from US$30 to US$73. Yet, there are several areas in the Bakken where the break-even price falls in the US$40 to US$50 range. As a result, with oil prices hovering in that same range, a lot of producers will choose to lay down rigs rather than drill new wells.
In contrast, the break-even price of oil to keep an existing well producing is much lower, perhaps as low as US$10 or US$15. It is therefore unlikely that the decline in oil prices will cause operators to shut in existing production. Rather, the pace of new production will slow (but not stop). When (or if) prices stabilize above US$50 or US$60, then operators will focus on bringing more new wells into production.
This lag in new production will also have an effect on the development of shale plays outside of the United States. As in the United States, drilling long horizontal wells with multi-stage hydraulic fracturing is more expensive than drilling conventional wells. Also, most shale plays outside of the United States are in their early stages of development, or are in frontier areas. As a result, the new wells present greater risks, or at least greater uncertainty. Morgan Stanley calculates the break-even cost of a Vaca Muerta well in Argentina at US$85, for example. Morgan Stanley characterizes the Vaca Muerta break-even prices as the second-lowest globally. Consequently, the low price environment is likely to keep shale production on the back burner outside of the United States, at least in the near term.
In the United Kingdom, where the shale gas sector is still in its infancy, the impact of falling oil prices is somewhat different. Although there has been some decoupling of oil and gas prices in Europe, this has not been as pronounced as in the United States, but may gather pace in coming years. In contrast to the United States, there is significantly less land-based energy extraction in the United Kingdom. That said, in recent weeks, a discovery of up to 100 billion barrels of oil in the south of England was announced, although the viability and extent has since been called into question. Experts believe that hydraulic fracturing would in many cases be required to extract oil on a commercial basis in the south of England.
There remain significant political, regulatory, and public hurdles for the shale sector to overcome. Recent regulatory developments have been mixed. The Infrastructure Act 2015 introduced a statutory right to use deep-level land (300 meters or lower) for energy extraction, including hydraulic fracturing. This will prevent landowners claiming that deep-level drilling is a trespass on their land, albeit companies may be required to make payments to affected landowners. The level of any payments is yet to be determined but is likely to be nominal by comparison with U.S. landowner payments. The Act will, however, prevent activities in protected groundwater areas and "other protected areas" (not yet defined or specified). An environmental impact assessment and independent well integrity inspection will need to be carried out before well licenses can be granted.
Progress towards commercial production will be much slower than it was initially in the United States, but is being supported with favorable tax treatment. For these reasons, however, decisions taken today will likely not be made on current oil or gas prices, but on projected gas demand over the next 20 to 40 years. Onshore shale, unlike conventional offshore oil and gas, projects are therefore less immediately impacted by the declining oil price.
The fall in oil prices is also bringing some benefits. Cuadrilla Resources, which is planning to drill at a number of test sites in the United Kingdom, has said that falling oil prices and the slowdown of production in the North Sea means that equipment and contractor costs are falling “very significantly”. Although the current low price may make it harder to raise funding, the oil price is arguably currently less relevant to the fledgling shale sector than the political and regulatory uncertainty. Nonetheless, fiscal packages, carbon costs, and oil price will all have a bearing on the success of the sector in the longer-term.
In the U.S., the decline in oil prices has been much more marked than in emerging shale markets, albeit break-even prices need to be carefully appraised and remain key to the pace of development in all jurisdictions. In infant plays, fiscal incentives will need to be evaluated (and may possibly be enhanced by supporting governments) for the economics to stack up, but in many cases production will be some years out from now. In jurisdictions such as the UK, where there has been a huge government drive to promote shale production, other immediate risks also need to be evaluated, particularly the rapidly changing regulatory environment, political risk, and community support and objection.