IHS: ‘Tight-oil test’ under way in US amid lower oil prices

The vast majority of potential US tight-oil production growth remains economical in the current crude oil price environment, according to a recent report by IHS. About 80% of potential gross US tight-oil capacity additions in 2015 would remain resilient at West Texas Intermediate prices dropped to $70/bbl, the report said.

IHS examined the outlook for US tight-oil growth in light of the recent drop in oil prices, which have fallen by nearly a third since summer.

IHS estimates 2015 US tight-oil production growth at about 700,000 b/d at an average 2015 price of $77/bbl. Though this would represent a slowdown from 2014 tight oil-growth of more than 1 million b/d, the amount of growth remains significant, the report said.

“Since 2008 the cumulative growth in US tight-oil production has been 3.5 million b/d—far exceeding supply gains from the rest of the world combined—making tight oil the key driver of global supply growth,” said Jim Burkhard, vice-president, IHS Energy.

The report notes that existing tight-oil production is unaffected by the recent drop in oil prices. “Since the highest level of production costs occurs during the initial development phase of a well, existing wells can remain economical at crude oil prices far below the break-even price for new production,” IHS noted.

“Lower crude oil prices have a greater potential to affect supply growth because new wells require significant investment before production begins. In the initial months of production, the oil price is critical to determining the profitability of a new tight oil well,” it said.

“Regardless,” the report said, “there are reasons to believe in the resilience of tight oil growth.” The IHS analysis shows that most of the potential US tight-oil capacity additions in 2015—about 80%—have a break-even price ranging $50-69/bbl. Continued productivity gains, such as improvements in well completion and downspacing, also support the resilience of US production growth at lower prices, the report said.

“Though these are strong reasons to believe in the resilience of tight oil growth, the report acknowledges that the risk of supply growth falling short is much greater now than just a few months ago,” IHS said.

Burkhard noted, “Expectations of the future—and the trajectory of oil prices—means that prices do not need to fall to the breakeven price before psychology, investment, and thus output, is affected. Lower oil prices bring into question the ongoing extent of one of the most profound developments in the world oil market—the great revival of American production. The ‘tight-oil test’ is under way.”