Two months ago, we discussed the potential effects of falling oil prices on the shale boom in "Falling oil prices test shale boom." Since then, prices have continued to drop in the worldwide oil market.
In reaction, OPEC members met, but could not reach agreement on, production cuts. The largest producer in OPEC (Saudi Arabia) appears comfortable with having oil prices settle in the $60 per barrel range. As prices have dropped, additional sources of oil other than from shale have come on line. For example, offshore drilling in the Gulf of Mexico – which had been under a moratorium following the Horizon disaster in 2010 – has picked up once again, with several companies announcing substantial new finds of oil.
Accordingly, it appears that oil producers and those who supply and service them will be facing an extended period (at least several years) of lower prices. The prospect of sustained lower prices has important potential implications for many industry participants, both large and small, as well as for the larger economy. Those industry participants who are heavily indebted or whose production assets are high cost will likely suffer disproportionately. For well-capitalized players, however, the drop in prices may eventually create an attractive buying opportunity to acquire valuable assets at bargain prices. A sustained drop in oil prices may also ultimately impact the attractiveness of other energy industry investments, such as natural gas and renewable energy sources.
However, it appears that for many industry veterans, the longer-term perspective is that oil prices will eventually recover, and that the shale oil boom will continue as a major long-term factor in world oil markets. While some drilling cutbacks have been announced for 2015, those reductions appear limited at this time and focused primarily on oil-driven plays. Drilling in shale formations where the primary focus is on natural gas and natural gas liquids appears to be continuing at current levels.
While the current drop in oil prices may hurt some players, it does not appear that it, as yet, represents a significant threat to the overall shale drilling boom. Difficulties encountered by some industry players may not be suffered in an equal fashion across the broader industry. Those focused on natural gas and natural gas liquids will likely feel only minor pain from the drop in oil prices, and may even benefit from lower drilling rig costs. Those who are well-positioned for the long-term will likely have their investments handsomely rewarded, and should focus on staying the course during this turbulent period.