At what point is oil and gas exploration and production profitable?
In the fall of 2014, the break-even price per barrel was anywhere between $59-$82.
Today, most companies are breaking even for about $40 per barrel and some predict that $20 break-even points are possible in the near future.
Reasons for the decline in production costs include:
During the downturn, companies were forced to become more efficient.
- In 2014, Texas employed 300,000 people in the oil and gas industry. Estimates put that number at about 200,000 today, even though production is at an all-time high.
- Discovery of local sand as a proppant for shale yields a 40% savings on sand expenses, lowering the overall shale production by 5%.
Improved technologies account for 10% of savings.
- Turbines are more efficient than ever. Each percentage of increased efficiency represents millions of dollars of production savings.
- The cost of digital technology is lower than ever.
- The ability to re-drill wells that were previously dry with deeper technologies.
- The use of data analytics allows for more precise drilling.
Tax reform will have an impact on profitability.
- The decrease in the corporate tax rate will equal a $1 billion savings to the industry.
- Companies will be allowed to expense 100% of capital investment over five years.
- Independent producers will benefit from a simplified tax code.
One vulnerability for the industry as oil and gas productions continue to increase is the potential for rising labor costs and field services. Michael Best Strategies will continue to track oil and gas trends in Texas and nationwide.
