Sanford C. Bernstein, the Wall Street research company, estimates that non-OPEC marginal cost of production rose last year to $104.5 a barrel, up more than 13% from $92.3 a barrel in 2011, according to the Financial Times.
New production is capping price rises, but the average cost of production is rising rapidly, impacting some producers and regions more than others.
In the long run, this is not sustainable and nor is the shale oil industry itself, some believe, if prices fall much lower.
Andy Hall, oil trader guru at the $4.5-billion Astenbeck hedge fund run alongside Phibro’s trading house, is betting heavily on a rising oil price within a couple of years. Mr. Hall argues that while output from shale oil wells is initially prolific, production declines rapidly because each well only taps a single pool of rock-trapped oil, rather than an entire reservoir.
In an FT article, he is quoted as telling his investors that it is “impossible to maintain production…without constant new wells being drilled [which would] require high oil prices.”
If prices fall, new drilling will stop; only high prices will maintain the impact of shale or tight oil. Similarly, the cost of producing oil from Canadian Tar Sands is rising, partly due to the cost of the energy needed in the production process, but also due to environmental and transport to market factors.
So while shale oil is having a transformational short-term impact, it would not be safe to assume this will continue to deliver significantly lower prices than we currently pay.
Unlike shale gas, the infrastructure for exporting oil from the US is well-established, and as such, the North American market will pay closer to a world price for its crude than it does for its natural gas.
Don’t bet on oil prices dropping sub-$100/barrel for Brent or sub-$90 for WTI for the medium term…the cost of production just doesn’t support it.