Low Crude Prices Not Good for All

Low prices impacts Texas economy
Low prices impacts Texas economy

Texas gasoline prices are averaging under $2.00, the lowest we have seen in years. While this was a nice perk for consumers over the holiday season, it is still unclear how cheaper crude will impact the overall health of the Texas economy.

One Washington think tank has estimated that, though many parts of the country will experience a slight economic stimulus in 2015, the lower oil prices will bring a significant downturn in the economic health of energy dependent states.

Unprecedented production in the United States shale plays have contributed to an increase in worldwide oil supplies, resulting in gasoline prices plummeting to their lowest level in almost five years. This has proven to be an economic boom of sorts to American families who are pocketing an additional $25-$75 per month. An additional perk will come as reduced fuel costs will eventually affect the pricing of consumer goods and services.

The reduction in oil prices provides US consumers with what amounts to an annual increase in disposable income of $350 billion (about 2.0 percent of US GDP) through reduced prices for gasoline, diesel fuel, other petroleum products, and goods and services whose production uses petroleum products. The average US household will see a raw gain that amounts to $2,790 per year.
— Stephen Brown with Resources for the Future

The economic picture is not so rosy for everyone. Energy producers and states that are heavily invested in oil production will take a hit in 2015. Some companies have announced they will slash their budgets, with many predicting cuts in their exploration efforts. This will have a ripple effect that will impact local economies and support industries as tax revenues are reduced and layoffs are inevitable.

And Texas is not immune. The New york Times reports that Hercules Offshore has plans to lay off some 300 employees. This is in addition to the already 2,300 oil and gas jobs lost in Texas from October - November.

Download the entire report from rff.com.

OPEC Not Likely to Stop Shale Boom

OPEC's decision last week to not cut production was a direct assault on U.S. shale production, but its not likely to stop the U.S. shale boom. Across the board, U.S. shale production growth will slow at lower prices in 2015, but is still expected to remain high. Energy research consultancy IHS estimates U.S. shale production will grow by 700,000 b/d at an average price of $77 per barrel in 2015. The Energy Information Administration (EIA) predicts WTI crude oil prices will average $78 per barrel in 2015.

Read moreU.S. Shale Production Growth Still Strong, Despite Lower Oil Prices

The shale oil boom has been made possible by advancements in horizontal drilling and hydraulic fracturing, putting the U.S. in a prominent position on the world stage once again for crude oil production.

The Eagle Ford Shale alone accounts for more than 1.5-million barrels of crude oil per day, and Texas and North Dakota, which encompasses the most active areas of the Bakken Shale, currently make up almost half of the nation’s crude oil supply.

Read more: EIA: Eagle Ford Shale Expected to Hit 1.614-Million b/d in Nov. 2014

In the Middle East, production costs are less than $30 per barrel on average, according to the Norwegian firm Rystad Energy. OPEC is betting as prices fall, higher relative costs for U.S. shale production, will put the brakes on growth. But in certain "sweet spot" areas for drilling in the Eagle Ford and Bakken Shale in North Dakota, new wells can be drilled profitably, even if crude falls to $25 per barrel, according to ITG Investment Research Inc., cited in a recent Bloomberg article.

Ultimately, nobody has a crystal ball to predict futures prices for crude oil, but with WTI now below $70, some operators in the Eagle Ford may consider scaling back their drilling programs in certain areas in 2015, and wait to see what will happen with crude oil prices.

Eagle Ford Facts That Might Surprise You

Eagle Ford Shale Map
Eagle Ford Shale Map

A recent article published at Motley Fool shared "5 Mind Blowing Facts About the Eagle Ford" and we thought they were worth sharing here.

If you aren't intimately familiar with the Eagle Ford, you might be surprised to hear it could be the largest onshore discovery EVER in the U.S. and more capital is invested in the play than any other oil & gas development in the world.

The takeaways include the following:

  • If the Eagle Ford lives up to its potential and reserves are greater than 10 billion barrels, it will be the largest U.S. onshore discovery ever
  • It's the fastest growing shale play in the world and has grown to almost 700,000 b/d of oil production in five years since its discovery
  • Light, sweet crude oil production near the Gulf Coast petrochemical complex make it more valuable than other grades that must be transported longer distances
  • Wells are getting cheaper as companies gain experience and shift to pad drilling
  • More is invested in the Eagle Ford than any other play in the world - Eagle Ford Capital Spending Makes the Play To the Largest in the World

Read more at fool.com

What is the Breakeven Oil Price in the Eagle Ford?

Eagle Ford Breakeven Oil Prices
Eagle Ford Breakeven Oil Prices

Breakeven oil prices needed in the Eagle Ford can range quite a bit by operator and by acreage, but we know the price need is much lower than where oil trades today. There are more rigs actively targeting the play than any other oil and gas development in the world.

A Baker Hughes official recently noted that the breakeven oil price needed in the South Texas Eagle Ford is somewhere between $50-57 per barrel. Read the full story at mysa.com

The $50-57 number is for liquids-rich areas of the play. We don't know the answer in the dry gas areas to the south. Gas prices haven't reached high enough to entice operators to target gas alone. Most industry analyst assume it will take $5/mcf natural gas prices before we see significant exploration in the dry gas window.

Breakeven Economics Are Deceiving

Breakeven oil prices are the price of oil per barrel needed for an operator to make a reasonable rate of return for the risk taken.

Typically, oil companies make decisions based on a 10-20% rate of return. It is the bare minimum price a company needs and is NOT necessarily the floor for what will sustain activity at current levels.

The Eagle Ford is the prime example of a play that can survive at much lower oil prices, but there would not be 200+ rigs running if oil was $50 per barrel. Yes, operators could make money, but their operating cash flow would be devastated. US operators are known for pouring capital back into developments and at $50 oil there would NOT be much cash to invest.

Now, don't get me wrong. The Eagle Ford is a best in class play. Even if oil prices were to fall, it would still be best in class and would still garner the lion's share of capital budgets. Very much like it is today.

On the other hand, there are also sunk costs that have been invested that would make single well economics or breakeven prices even lower in certain areas. Imagine if you've already built the pipelines, processing, and have an existing well pad. The breakeven economics for that well will be much lower. All that to say, even if oil dropped below $50 per barrel, you'd still see a few rigs active in South Texas.

Oil Prices Will Tell Eagle Ford Story

Nice article from the chronicle over the weekend detailing the Dallas Fed report in light of falling oil prices. The article focuses on the world economy's role in the Eagle Ford story. It's much more important than you'd think. If the world economy falters and oil prices crash, activity in South Texas will slow in step.

Read more at chron.com. What are your expectations for the Eagle Ford? Is it a short boom, multi-decade development, or somewhere in between?