Everybody strives for efficiency in business, but for fracking companies it may mean the difference between pumping oil and walking away.
As global demand fell while production rose, oil prices have plummeted from $105 per barrel in 2014 to mid-2016’s $41 per barrel, and there has been much talk about the break-even point for oil. How low can the price per barrel go before it costs more to pump it than a company can make selling it? Turns out, there’s no hard, fast break-even point.
It depends when and where you’re pumping. All things being equal, how efficiently an oil company operates determines its break-even point, and the most efficient operators can handle lower prices longer. In the days of oil going for less than $50/barrel, efficiency is the difference between being in the oil business and being in the selling-off-your-oil-equipment business.
The US Energy Information Administration says well drilling and completion costs have dropped by a third across the major US shale-producing areas since 2012. While rig count has fallen in the Bakken Shale oil region in the last six years, production per rig has risen from around 200 barrels a day in 2010 to just below 800 barrels per day in 2016, according to The Wall Street Journal. Last month three oil and gas producers announced quarterly results that bear out these stats.
Factors from linking cost-cutting and executive pay to boosting the amount of sand used in fracking to design changes have led to doubled production and a 40% drop in costs. (The increase in sand use alone has been significant enough to cause a spike in earnings for that industry.) Higher sand use adds to costs, but most of the gains have been from technological improvements, linking executive pay to higher well productivity, and design changes.
During any downturn, companies cut costs and look for efficiencies. While this downturn has been particularly brutal for oil production companies, the survivors are starting to surface, and it’s clear — companies that used innovation and technology to profit from $41/barrel oil are going to be incredibly well-positioned as the glut eases and oil prices rise.
Lynett Oliver is an Industry Specialist with D&B’s First Research, where she covers the oil, agriculture, and mining industries, mostly. Prior to that, she covered companies in a variety of industries for D&B’s Hoover’s. She’s also written for local publications, created training materials for Walt Disney World, and played a lot of board games. You can read her shorter musings on Twitter.