OPEC´S WAR WON´T BE ALL OVER BY CHRISTMAS / THE WALL STREET JOURNAL

Heard on the Street

OPEC’s War Won’t Be All Over by Christmas

U.S. Oil Output Tends to Hold Up Despite Price Declines

By Liam Denning

Dec. 1, 2014 2:47 p.m. ET

The Vienna headquarters of the Organization of the Petroleum Exporting Countries, seen in 2011. Reuters


Like invasions of Russia and land battles in Asia, a war on U.S. shale promises to be a protracted and unpredictable campaign.

Rising U.S. shale oil output is one target of Saudi Arabia’s push to have OPEC members maintain their output and so depress oil prices. Even leaving aside OPEC’s clutch of internal divisions, though, fighting U.S. shale will prove a grind—with substantial attrition on the cartel’s side.

Part of OPEC’s problem is that U.S. shale is a many-headed beast, with multiple resource basins and operators. So there isn’t a single price below which production gets shut down. Rather, estimates of break-even prices in U.S. shale span a range: Citigroup, for one, estimates this to be around $70 to $90 a barrel using full-cycle costs.

“Full-cycle costs” is the crucial phrase, as it incorporates big up front charges such as acquiring land. In core shale regions where land and infrastructure is already locked up, the cost to keep drilling could be as low as $40, Citi estimates. Benchmark U.S. crude now trades at about $68.

Look at oil’s last big collapse, from almost $150 to less than $40 a barrel between the summer of 2008 and early 2009 amid the financial crisis: The number of oil rigs operating in the U.S. dropped by more than half. Yet production, on a trailing 12-months basis, merely dipped from about 5.1 million barrels a day to 5 million—before starting the surge toward the current level of about 8.5 million. Similarly, while the U.S. rig count collapsed by 85% between 1981 and 1986, output didn’t start falling sustainably until February 1986.

In failing earlier to stop oil running up above $100 a barrel, OPEC let the shale genie out of the bottle. As Bob Brackett at Sanford C. Bernstein writes, a war on shale “simply postpones the date in which a well is drilled.”

Oil’s sudden slide will cause growth in U.S. oil output to slow, but stopping it altogether would take a protracted period of low prices, at least through the end of next year. Even then, the techniques and discoveries already made would simply pass to another set of players—most likely oil majors scooping up distressed exploration and production firms.

Meanwhile, those OPEC members living day to day, such as Venezuela, are likely to be the first big casualties of this war.