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Texas has a message for $30 crude doomsayers: Bring it on.
A handful of shale patches in the state, which would be the world's sixth-largest oil producer if it were a country, are profitable with crude below $30 a barrel, according to an analysis by Bloomberg Intelligence. In DeWitt County, which produced more than 100,000 barrels a day in November from the Eagle Ford formation, the average well can be profitable with U.S. benchmark crude at $22.52 a barrel, $4 below the lowest level this year.
Drive 200 miles southwest to Dimmit County, and drillers need $58 oil. The wide range of break-evens, a term for the price at which a well goes from unprofitable to profitable, illustrates one reason why shale production from exploration and production companies has been more resilient than expected, filling storage tanks in the U.S. to levels not seen in 85 years.
"It may be harder to kill many U.S. E&Ps than analysts originally thought," Bloomberg Intelligence analyst William Foiles said in the report. "The wide range of break-evens undermines efforts to come up with a single threshold for U.S. shale producers."
Since oil started falling in June 2014, U.S. shale drillers have survived by cutting costs, experimenting with new techniques and technology and boosting output to keep their wells competitive. West Texas Intermediate crude settled at $31.72 a barrel Thursday on the New York Mercantile Exchange.
Still, the big picture isn't pretty. Two out of every three drilling rigs in the U.S. have been idled and scores of roughnecks who worked them laid off. Law firm Haynes and Boone says 42 companies filed for bankruptcy as of Jan. 6.
On the other hand, U.S. crude output last week was 9.2 million barrels, the highest January level since 1971 and just 5 percent down from last year's peak.
It's easier to survive low prices in some places than in others. Bloomberg Intelligence analyzed everything from average output per well to the level of local school taxes to calculate break-even costs to drill in different rock formations across Texas's two big shale regions, the Eagle Ford in south Texas and the Permian Basin.
Nine areas had break-even costs at $30 or below. Those include some of the biggest oil-producing counties in Texas, such as DeWitt, Midland, Martin and Reeves, with combined output of 430,000 barrels a day in November, according to the Texas Railroad Commission.
Oil prices can be even lower to justify completing wells that have already been drilled but haven't yet been hydraulically fractured, or fracked, the last step before production begins. There are more than 4,000 of those wells in the U.S. It makes economic sense to complete wells in 18 areas in the Permian and Eagle Ford at sub-$30 oil. In Reeves County in the Permian, oil prices above $14 justify fracking an already-drilled well.
Even within counties, break-even costs can vary widely depending on which company is drilling and the richness of the rocks they're tapping, said Kathryn Downey Miller, a principal at Lakewood, Colorado-based energy research firm BTU Analytics. In DeWitt, for example, about 45 percent of wells drilled in 2014 would have been profitable with oil below $20. Another 5 percent would need $70 oil.
"You see a great amount of variability between operators, even in a small geographic area like a county," she said by phone.
That variability makes it difficult to tell when companies will give up drilling. Companies reduced the number of new wells in Dimmit County to 65 in the third quarter last year from 226 in the first quarter, while boosting activity in DeWitt County by 77 percent.
For shale drillers that have been battered during the price downturn, there may be a silver lining. Those that can maintain the cost reductions and productivity improvements when prices eventually rise may be stronger than before the crash.
"The good news is we're primed and ready for when we need to see a return to activity in North America," Miller said. "This lower price environment is making companies defer big oil projects, so there will be an opportunity for U.S. shale producers to contribute to production growth, and they'll be better able to compete than they've ever been."