Occidental Petroleum is shifting its focus from the Bakken to Texas and California due to high costs of production in the Bakken. A recent story in the Chicago Tribune reiterates Occidental’s concern over higher costs, and suggests that some analysts suggest the pullout may be ill-timed.
Pressure pumping prices, which cover a range of costs associated with fracking a well, have already dipped by up to 25 percent in natural gas-rich basins, with signs of a knock-on effect emerging in the Bakken, according to Barclays analysts. Within the next six months, these costs could fall by as much as 10 percent in the Bakken shale, analysts at Bernstein Research estimate.
Efficient forms of fracking are also helping companies extract more oil from each well, lowering the break-even cost of production, now estimated between $55 and $70 a barrel.
The push and pull of production costs in the world’s fastest-growing oil frontier is adding uncertainty to the outlook for U.S. oil prices. The issue is already in the limelight this election year, with both political parties touting shale oil as a step toward energy independence, even as environmentalists fret over the controversial fracking process, which has been blamed for the pollution of water supplies and minor earthquakes.
If costs start to slip, the explosive output growth could keep a lid on U.S. oil prices, regardless of tensions with Iran that have threatened global supply. If they continue to rise, breakneck output growth may stall as more companies follow Occidental’s lead and begin to pare back drilling and investment.
The two biggest plays — the Williston basin in North Dakota and Eagle Ford in Texas — produced an estimated 1.2 million barrels per day (bpd) in April, close to the output from OPEC member Algeria, according to data from analytics company Bentek Energy. A year ago, they were producing only a third as much.
Unfortunately, rising costs don’t equate to rising oil prices. Actually, the inverse is true currently, particularly for oil from the Bakken shale.
Bakken crude for June delivery at the Clearbrook, Minnesota hub was bid as low as $85.24 a barrel on Wednesday and offered at $93.69, down 6.5 percent from October levels, according to traders. For now, prices are comfortably above the $68 a barrel breakeven point for a 15 percent rate of return, according to Credit Suisse analysis.
At the same time, very low natural gas prices have caused the shut down of many gas drilling rigs, increasing the number of rigs and fracking crews available.
While these events might suggest there’s a decrease in Bakken production costs on the horizon, many other factors play a role in the current price structure, not the least of which is the still inadequate pipeline capacity. Until this problem is resolved, and Bakken oil can get to market more efficiently, oil from the area is likely to continue to be discounted. And, that discount is on top of the already declining price of oil globally due to the stagnant economy.