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Crude stubbornly drills toward record

By Joe Carroll, Bloomberg

December 18, 2014 • Reprints

Crude oil production from U.S. wells is poised to approach a 42-year record next year as drillers ignore the recent decline in price pointing them in the opposite direction.

U.S. energy producers plan to pump more crude in 2015 as declining equipment costs and enhanced drilling techniques more than offset the collapse in oil markets, said Troy Eckard, whose Eckard Global LLC owns stakes in more than 260 North Dakota shale wells.

Oil companies, while trimming 2015 budgets to cope with the lowest crude prices in five years, are also shifting their focus to their most-prolific, lowest-cost fields, which means extracting more oil with fewer drilling rigs, said Goldman Sachs Group Inc. Global giant Exxon Mobil Corp., the largest U.S. energy company, will increase oil production next year by the biggest margin since 2010. So far, the Organization of Petroleum Exporting Countries’ month-old bet that American drillers would be crushed by cratering prices has been a bust.

“Companies that are already producing oil will continue to operate those wells because the cost of drilling them is already sunk into the ground,” said Timothy Rudderow, who manages $1.5 billion as chief investment officer at Mount Lucas Management Corp. in Newtown, Pennsylvania. “But I wouldn’t want to have to be making long-term production decisions with this kind of volatility.”

A U.S. crude bonanza that has handed consumers the cheapest gasoline (NYMEX:RBF15) since 2009 has left oil exporters like Russia and Venezuela flirting with economic chaos. The ruble (CME:R6F15) sank as much as 19% on Dec. 16 to a record low of 80 per dollar before recovering to close at 68; Russian bond and equity markets also crumbled. In Venezuela, the oil rout is spurring concern the country is running out of dollars needed to pay debt and swaps traders are almost certain default is imminent.

Profitable Wells

U.S. oil production is set to reach 9.42 million barrels a day in May, which would be the highest monthly average since November 1972, according to the Energy Department’s statistical arm.

Output from shale formations, deep-water fields, the Alaskan wilderness and land-based wells in pockets of Oklahoma and Pennsylvania that have been trickling out crude for decades already have pushed demand for imported oil to the lowest since at least 1995, according to data compiled by Bloomberg.

Existing wells remain profitable even as benchmark crude futures hover near the $55-a-barrel mark because operating costs going forward are usually $25 or less, Tom Petrie, chairman of Petrie Partners Inc., said in a Dec. 15 interview on the Bloomberg Surveillance television program.

Shut Ins

That’s why prices that have tumbled 47% from this year’s peak on June 20 haven’t prompted any American oil producers to shut down wells, said Petrie, a U.S. Military Academy at West Point graduate who has advised Saudi Arabia, Alaska and the U.S. government on energy issues.

The average cost to operate an existing well in most parts of the U.S. “is about $20 a barrel,” Petrie said. “It might be $5 higher or it might be $5 lower, that’s the out-of-pocket costs that we’re talking about. Until you dip into that and start losing money on a cash basis day in, day out, you don’t think about shutting in” wells.

Benchmark U.S. crude futures (NYMEX:CLF15) rose 0.3% to $56.63 a barrel at 9:55 a.m. in New York Mercantile Exchange trading. The futures are still on track for their fourth straight weekly decline.

Once oil companies sink cash into drilling wells, lining them with steel pipes and concrete, blasting the surrounding rocks into rubble with hydraulic fracturing, and linking them to pipeline systems, they have no incentive to scale back production, said Andrew Cosgrove, an analyst at Bloomberg Intelligence in Princeton, New Jersey.

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About the Author

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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Related Terms
Oil 4835Crude 4042energy 3806Texas 1372OPEC 1172U.S. government 1118New York Mercantile Exchange 1061Goldman Sachs Group Inc. 864oil production 666New Jersey 590Department of Energy 546Oklahoma 523Gasoline 497Pennsylvania 471Alaska 464North Dakota 254oil producer 237oil producers 226oil markets 183Exxon Mobil Corp. 181Organization of Petroleum Exporting Countries 162energy producers 66imported oil 36natural gas project 21Rex Tillerson 20Continental Resources Inc. 19oil explorers 12Oil 11crude and natural gas 9Harold Hamm 9Bloomberg Intelligence 7oil last year 7Crude oil production 6steel pipes 6U.S. Military Academy 4Andrew Cosgrove 3oil rout 2Laredo Petroleum Inc. 1Eckard Global LLC 1Mount Lucas Management Corp. 1Petrie Partners Inc. 1left oil exporters 1Timothy Rudderow 1Tom Petrie 1Troy Eckard 1

Free Newsletter Modern Trader Follow

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