Low-Cost Oil Is Here to Stay

Preston Caldwell: Recently, the Morningstar energy team has undertaken a deep dive into the break-even economics of U.S. shale. Because U.S. shale is the marginal supplier in our global oil framework, shale break-evens are a key determinant of our long-term oil price expectations.

In our view, sustainably lower shale break-evens mean the era of low-cost oil is here to stay. Shale break-evens have fallen sharply, from about $90 per barrel (WTI) in 2013 to about $44 in 2016, and we project them to rise no higher than $55 by 2020.

We believe sustainably lower well cost is a powerful driver for these lower shale break-evens. We are fairly conservative in our forecasts for well productivity, and this means that our differentiated views on shale well costs, which we have substantiated in great depth, form the foundation of our lower shale break-evens.

We've published already on two big categories of well cost, in which costs will remain low moving forward. These two are proppant and pressure pumping. We expect proppant pricing per ton to remain about 40% below peak 2014 levels, driven by low-cost mine expansion, and the adoption of highly efficient unit trains and containers for last-mile trucking. We expect pressure pumping costs per well to remain about 20% below peak 2014 levels, which is quite strong given that 40% more sand per well is being pumped compared to that same time. These savings will come from the switch to better, longer-lasting equipment, as well as faster, more efficient frac job operations.

Altogether, the case for lower proppant and pressure pumping costs is very strong, and in our view, they are quite emblematic of the gains that are being achieved across every component of U.S. shale cost.