A Hiccup in the Shale Fairytale?

Brian Hicks

Written By Brian Hicks

Posted July 24, 2012

The shale revolution seems to have an almost unstoppable momentum right now. But the CEO of Baker Hughes (NYSE: BHI)—one of the major oil-services companies—recently sounded an alert over rising U.S. oil prices.

If prices drop below $80, he said, we could see drilling operations in the shales of North Dakota and southern Texas slow down. Since February of last year there are now 13 fewer rigs overall—10 less in Texas and 1 in North Dakota.

Of course, it has been clear for some time that rising costs and the accompanying effect on oil prices has been exerting a restraining force on oil companies’ inroads into domestic shale reserves, but this is the most direct statement yet.

Following a quarterly earnings release, Baker Hughes CEO Martin Craighead said to Reuters:

“I think the shoe’s dropping in south Texas, no doubt about it. I’m a little bit more concerned about the Bakken than I am (about) the Permian.”

U.S. crude has recently gone back over $91 per barrel after falling from a production glut within North America and the dropping demand worldwide.

Domestic oil output fell steadily for 17 consecutive years, finally bouncing back in 2009 with the largest 3-year surge since the 1970s, putting production at 1.175 million barrels per day.

But shale operations are expensive. Reuters cites studies by Bernstein Research which indicate that an average Bakken well can be almost $10 million, while one in the Eagle Ford shale would be around $7 million.

And oil demand continues to fall on unsteady economic growth, threatening to push prices down again.

What matters is that as prices threaten to sink below $80 a barrel, oil companies will have to look into inevitably higher costs of production, which could lead to many proposed shale operations or rigs being shelved.

Analysts and other interested parties are keeping a keen eye on rig development data from states across the U.S., watching for any clues regarding the health of unconventional oil and gas operations.

The shale boom has been a great boon to the U.S. economy and has fired up the dreams of oil companies worldwide, but many fear what falling prices mean for production.

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