Saudi Arabia Won't Win This Oil Price Standoff

Citi is bullish on US shale.

A massive new (ungated) report, “The Rapid Rise of the United States as a Global Energy Superpower” from the bank’s macro analysts, suggests that the price of oil would have to dip to somewhere in the vicinity of $US50 a barrel to completely flatten US production growth.

From the outset of the report, this much is clear: Citi doesn’t believe that Saudi Arabia is going to be successful in bullying the US market by pushing prices down.

From the report: “…indications have emerged that suggest Saudi Arabia could look to allow prices to fall enough until US shale production is reined in. However, should such a circumstance arise, it looks like US shale/tight oil production growth could remain robust even in an environment of sustained lower oil prices, lower capex, and lower rig counts.”

The breakeven price for a well depends on a variety of factors, which the report goes through methodically (skip to page 31 for this). In places where the drilling infrastructure is mature and there’s not a lot of upfront capital costs in order to bring on a new well, breakeven prices are going to be a lot lower than in newer developing areas.

Here’s a key passage:

At what price might US shale production growth be meaningfully reined in?

Full-cycle capex for shale production includes land, infrastructure, and well costs (of which some 40-50% is from pumps, ~10-15% for drilling rigs) and operating costs. In mature plays where the land grab is over and infrastructure is available, the remaining capex required (“half-cycle costs”) to bring on an additional well is far lower than areas requiring “full-cycle” costs. Full-cycle costs might be as high as $US70-80/bbl WTI, but half-cycle costs could be as low as the high $US30s-range. Thus, those fringe and emerging areas requiring full-cycle capex could now face a reassessment, while established areas should continue drilling and growing output.

And here’s a group of charts showing the breakeven prices for well is various areas of the US shale production region:

Shale breakevensCitiCiti’s estimation of shale breakeven prices for various well scenarios

What if WTI prices go below $US70/barrel (it was below $US78 at last check)? Citi predicts a slowdown (about a 25% reduction in growth in 2015 and 50% in 2016), but not a halt, to US shale production.

What would it take to completely flatten production growth?

That “might require prices in the $US50 range in the short-term.”

Read the full Citi report here.

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