Falling Oil Prices Make Fracking Less Lucrative | KERA News

Falling Oil Prices Make Fracking Less Lucrative

Nov 4, 2014
Originally published on November 4, 2014 11:35 am

Oil prices are down than more than 25 percent since June and are staying low for now. Drivers may appreciate that, but for oil companies, it's making some of the most controversial methods of producing oil less profitable — and in a few cases, unprofitable.

Most of the world's oil is selling for about $80 to $85 a barrel now. But not all oil is created equal. In the Middle East, it's cheaper to produce, at a cost of less than $30 a barrel on average, according to the Norwegian firm Rystad Energy.

But in the Arctic, producing a barrel costs $78 on average. From Canada's oil sands, it's an average of $74 a barrel. And because those are averages, some companies have costs that are higher — which means there could be drillers currently producing crude at a loss.

Here in the U.S., the oil drilling boom is due largely to technologies like hydraulic fracturing, or fracking, used to force oil from shale formations deep underground. Producing this oil, Rystad figures, costs an average of $62 a barrel.

"What is really interesting for the U.S. drillers and producers is how long they are going to continue the high activity levels that they have, now that prices are going down," says Per Magnus Nysveen, head of analysis at Rystad.

Already, some companies are rethinking their plans.

"We will drill fewer wells in a lower-price environment," says Steven Pruett, president and chief executive officer of Elevation Resources in Midland, Texas. With less profit, Pruett says, there's less money to invest in future prospects.

But he also says this isn't a crisis situation for most companies.

"We do not foresee a scenario where prices get so low that we can't cover the cash cost of lifting the barrel," says Pruett. If prices collapsed to 2008 levels, when oil was fetching less than $35 dollars a barrel, drillers might be forced to take more drastic steps like shutting down production. But few are predicting crude will fall that much.

Despite The Dip, Exploration Goes On

You might think a slowdown would be good news to environmental groups concerned about the environmental damage associated with drilling for and burning fossil fuels. But it's more complicated than that.

"If oil is high people will burn less — that's a good a thing," says Jackie Savitz, vice president for U.S. Oceans at Oceana. And if oil prices are low, she says, then companies might drill less, and she thinks that could be good, too.

More important, she says, is that the government create policies that speed the country's transition to renewable energy.

Such policies may affect production in the future, but for now, it's the market that determines if drilling will happen. And the lure of billions of dollars in future profits is hard for energy companies to ignore. Even with lower prices, they are still exploring high-cost environments like the Arctic.

There are a few reasons why companies can justify the cost. Oil prices may rise again, for example, and costs tend to go down after new technologies and forms of production have been around awhile. On top of that, global crude demand continues to rise.

"And that's the reason why companies are making these investments, because they're long-term investments in projects that are expected to provide very large quantities of oil and natural gas for the U.S. economy and for the global economy," says Erik Milito, director of Upstream and Industry Operations for the American Petroleum Institute.

Still, U.S. companies have to keep a close eye on their competitors abroad that can produce oil much more cheaply. That's why, when OPEC meets later this month, a lot of people in the oil business will be watching to see if the cartel will push prices up or down.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

DAVID GREENE, HOST:

And we're also reporting this morning on oil prices. They have dropped more than 25 percent since June.

RENEE MONTAGNE, HOST:

And that's pretty good news if you're filling up at the gas pump.

GREENE: Not so good news, though, for businesses who use some pretty controversial methods to produce oil. What they do is becoming less profitable, in some cases even unprofitable. Both crude from Canada's tar sands and oil from fracking here in the United States are relatively expensive processes that require oil prices to stay high. Here's NPR's Jeff Brady.

JEFF BRADY, BYLINE: Most of the world's oil sells for between $80 to $85 a barrel now, but not all oil is created equal. In the Middle East, it's cheaper to produce, less than $30 a barrel on average. In other parts of the world, companies pay a lot more to extract it, sometimes at a loss.

PER MAGNUS NYSVEEN: The Arctic is a high-cost area, also oil sands.

BRADY: At the Norwegian firm Rystad Energy, Per Magnus Nysveen is head of analysis. He says North American shale oil is on the expensive side. That's found in the middle of the country and needs fracking to force it out of the ground. On average, Nysveen says, this oil cost $62 a barrel.

NYSVEEN: What is really interesting is for the U.S. drillers and producers is how long they are going to continue the high activity levels they have now that prices are going down.

BRADY: Already, some companies are thinking about drilling fewer wells.

(SOUNDBITE OF PUMP-JACK)

BRADY: That's a large, tan pump-jack bobbing up and down next to a highway outside Midland, Texas. Fracking combined with horizontal drilling brought new life to the oil business here, but cheaper crude prices are forcing drillers like Steven Pruett of Elevation Resources to re-examine their plans.

STEVEN PRUETT: We will drill fewer wells in a lower-price environment.

BRADY: With less profit, there's less money to invest in future prospects. At current prices, oil will continue to flow, but not as much as if they went back up to $100. Pruett says this is not a crisis, though.

PRUETT: We do not foresee a scenario where prices get so low that we can't cover the cash cost of lifting the barrels. So I don't think in this environment you will see a whole lot of oil and gas production shut in.

BRADY: If prices collapsed to 2008 levels when it was $35 a barrel, drillers might be forced to take more drastic steps, like shutting down production, but few are predicting crude will fall that much. You might think a slowdown would be good news to environmental groups, but Jackie Savitz with Oceana says it's more complicated than that.

JACKIE SAVITZ: You could make the argument either way. If oil is high, people will burn less; that's a good thing. If oil is low, maybe they'll drill less; that's a good thing. Really what we hope we'll do is we'll start making decisions based on the real science and the real impacts of burning fossil fuels.

BRADY: Oceana is among groups calling for policies that speed up a transition to renewable forms of energy. While that could affect oil production, the market rules for now, and the lure of billions of dollars is hard for drillers to ignore. Even if drilling in the Arctic, for example, looks unprofitable for now, companies are committed to exploring there. Production costs tend to go down after new technologies have been around for a while, and Erik Milito with the American Petroleum Institute says global demand for oil continues to rise.

ERIK MILITO: And that's the reason why companies are making these investments because they're long-term investments in projects that are expected to provide very large quantities of oil and natural gas for the U.S. economy and for the global account.

BRADY: Still U.S. companies have to keep a close eye on their competitors abroad that can produce oil much more cheaply. That's why when OPEC meets later this month, a lot of people in the oil business will be watching to see if the cartel will push prices up or down. Jeff Brady, NPR News. Transcript provided by NPR, Copyright NPR.