« Low Break-Even Prices Are For Everyone–Not Just Shale CompaniesPosted in The Petroleum Truth Report on April 9, 2017
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).
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.
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.
The Downside of Lower Break-Even Prices
The downside of lower break-even oil prices is that companies make a lot less money in the future. Companies must write down reserves whose development costs are greater than their market value at lower oil prices. Figure 3 shows that future net cash flows were on average reduced by about two-thirds in 2016 compared with 2014.
Companies are effectively high-grading their assets by writing down wells with poorer performance. Break-even price is lower because only most profitable wells are included in the calculation. Plus, the burden of taxes in addition to property and equipment costs associated with written down assets are removed.
The key take-away is that 85% of lower break-even prices were realized in 2015. Incremental improvement in 2016 was only 15%.
Advances in technology and efficiency are real but falling break-even prices are no miracle and are not a shale company exclusive. Instead of celebrating lower break-even oil prices, we should be lamenting lost future cash flows that an oil industry depression has wiped out.