Texas energy expert explains why no true shale breakeven exists

By Luke Geiver | March 08, 2017

Ken Medlock is the Senior Director for Energy Studies at the Baker Institute for Public Policy which is affiliated with Rice University. We caught up with Medlock roughly one month after the release of his team’s unique look at shale play production. At a time when headlines are centered around “Permania” or another boom starting in West Texas and New Mexico’s Delaware Basin, Medlock’s team took a deep look at a basic question that seemed to have been passed over: how fast will shale producers be able to ramp-up production? The question is very complex, as Medlock’s team reveals in their work, which we first covered here

To start, can you explain why your team felt compelled to pursue and complete this piece, “Assessing Shale Producers’ Ability to Scale-up Activity”? 

The recent increase in oil prices on the heels of OPECs agreement for production cuts stimulated a lot of commentary on how rapidly US shale producers would respond.  We have been tracking the changes in costs for upstream activity in the US and have noted both productivity changes as well as renegotiations with upstream service providers.  Disentangling the two issues is fundamental to understanding how domestic production will respond as prices rise and demand for wellhead services rise.  In particular, the shape of the supply curve, will depend on how much costs respond to an uptick in activity. 

The piece did a great job explaining the parameters that will be part of a activity ramp-up. After having this available for roughly 1.5 months now, which factors (service costs, oil prices, oil storage volumes, etc.) seemed to stand-out to your team as leading factors impacting activity levels now? 

It is still a bit early to tell.  There was enough slack in the supply chain to allow for some uptick in activity without any material impact on costs.  However, we are now seeing, at least anecdotally, that service companies may begin to raise costs soon.  As we move through the next 6-9 months, as long as drilling activity continues to rise, we will begin to get a better sense of how much costs may rise as a result of stresses in the supply chain for drilling activity. 

What went into the making of this piece? 

This work built from ongoing research we have been involved with for the past few years.  Hence, it was a matter of collecting our thoughts and compiling the data for this specific piece.  The motivation was based on the speculation we had seen—in blogs, press, and soundbites—that was hypothesizing a rapid increase in activity under the assumption of a new, lower “breakeven” price for shale.  Costs are dynamic and reflexive to field activity, and we wanted to point this out as a potential check. There is no “one” breakeven price for shale—neither within or across plays nor across time. These types of things are important because too often the myopic view creeps into the minds of decision makers, particularly in the policy arena, and it can be misleading. 

If you were able to add additional information into this piece in a few months, what would you add? 

Of course, this assumes price remains healthy enough to stimulate activity.  So, taking that as given, it will be good to perform a review of the increase in activity and the production increases that have occurred in 6-9 months’ time.  This will shed light on the persistence of the productivity gains realized over the past couple of years and the extent to which higher prices are pushing commercial interest and activity into more marginal acreage.  This, in turn, will help better identify how much additional production we can expect to see as prices rise.  In addition, a review in 6-9 months’ time will highlight the areas in the value chain that are experiencing the most stress as activity ramps.  This is important because industry responds differently to every cycle.  Currently, there is a lot of discussion about automation of field services, which can alleviate potential stress from a lack of skilled labor; we will better see how much there is to this story as filed activity continues to ramp up.