Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Hedging Bets on Oil Prices Decline Has Shale Producers Making Plans on Case-by-Case Basis

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Hedging Bets on Oil Prices Decline Has Shale Producers Making Plans on Case-by-Case Basis

Article excerpt

As oil prices slip from their lofty perch, the effect on U.S. shale producers remains to be seen, but an impact, if any, is going to be on a play-by-play basis, analysts said.

Brent, the international benchmark for crude, had soared above $115 in June, a peak for 2014. Last week, it dropped to $86.16 per barrel. Meanwhile, the U.S. benchmark for crude at West Texas Intermediate (WTI) slipped to $82.75 per barrel last week.

Prices have been dropping because of a combination of factors, including sluggish economic growth and slowing global demand. Also playing a role is growing U.S. oil production from shale plays. U.S. crude oil production soared to about 7.4 million barrels per day in 2013, according to the U.S. Energy Information Administration.

Meanwhile, Saudi Arabia, which produced about 9.6 million barrels per day in 2013, has indicated it would rather cut prices than production, reasserting its place in the market and putting pressure on fellow members of OPEC, or Organization of the Petroleum Exporting Countries.

"Given where we are in the year, in October, we probably won't see much change in 2014, because everyone was set at that $90 a barrel mark," said Jason Wangler, an analyst with Wunderlich Securities.

"We may see certain areas that would slow and certain areas that are not as affected because they're still making good money," Mr. Wangler said.

When natural gas prices plummeted to a 10-year low in 2012, drillers moved rigs from more expensive shale plays to less expensive ones. Even the same shale play can vary. For instance, the Marcellus Shale had spots that offered a good return

for producers, even when gas prices slipped below $4 per thousand cubic feet.

Phani Gedde, an analyst with Wood Mackenzie, said the break-even price varies considerably among the major oil shale plays - the Bakken of North Dakota and the Eagle Ford and Permian shales of Texas.

"A great majority of that production breaks even at around $75," Mr. Gedde said.

If operators shift rigs, it will likely mean a move away from fringe areas to focus on more reliable core areas if prices fall and stay low for a while, he said.

"I think there will be some reduction but not pronounced reductions," he said.

When natural gas prices began to fall, it took time for drillers to respond. "It wasn't until gas prices reached $2 did we see a big slide," Mr. Gedde said. "There's a psychological threshold for oil at around $70 per barrel."

If this pricing sticks around for a long time, it will impact operators that are not hedged against such swings, he noted.

There's no one-size-fits-all price.

Among the oil-rich shale plays, the Williston Basin of North Dakota and some plays in the Mid-Continent area would see some slowdowns if price weakness continues, since they are higher-cost plays, Mr. …

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