The explosive production growth in the U.S. shale patch has surprised even the most optimistic forecasters, but the huge jumps in output belies and obscures the financial state of the industry, which is a bit more complicated than the production figures might suggest.
Shale companies scrambled to cut costs during the oil market downturn between 2014 and 2017, and they successfully lowered their breakeven prices significantly. When OPEC+ agreed on its initial production cut deal, which started at the beginning of 2017, the higher prices that resulted from the agreement allowed U.S. shale to rebound in a big way. Surging production over the past two years suggested that the shale industry was stronger than ever.
This year was supposed to be the year that the money started rolling in – with cost cuts in hand and higher oil prices lifting all boats, shale drillers were supposed to be in the clear. But profits have been elusive.
To be sure, some companies have posted significant earnings. The oil majors, in particular, are earning more money than they have in a long time. But the bulk of the shale industry is still struggling. According to the Wall Street Journal, the 30 largest shale companies earned a rather marginal $1.7 billion combined in 2017.
The latest meltdown in prices, however, puts a lot in the industry right back into hot water. The problem is that despite boasts of low breakeven prices, many shale companies have failed to take a comprehensive look at the all-in costs of producing oil, as the Wall Street Journal points out.
It wasn’t uncommon over the last few years to hear shale executives brag about how their wells were profitable even with oil under $40 per barrel. But often those figures didn’t include the cost of land acquisition, or transportation.
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