[HOUSTON] Collapsing crude prices are confronting scores of smaller US oil producers with the grim choice of either shutting older high-cost wells or burning through cash in the hope of riding out the downturn.
As oil prices fell by more than half over the last six months from more than USUS$100 per barrel, the US oil industry responded by slowing its blistering growth and dialing back expansion plans.
Now, with US crude around USUS$46 a barrel, operators are already closing some small old wells, known as strippers, and tens of thousands of similar wells are on the verge of losing money. A further slide could, by some estimates, idle an equivalent of up to 2 per cent of US supply, slowing overall output growth more than expected or even leaving it flat.
Ray Lasseigne, an oilfield veteran and president of TMR Exploration Inc in Louisiana, is deciding which wells to close. TMR looks to close old wells, which produce so much saltwater that disposal costs exceed what the oil can fetch today.
Other running costs include repairs and electricity to run the pump jacks, also known as nodding donkeys because they bob up and down while pulling oil out of the ground. "We've identified about 20 of our wells that are not economic at these prices," said Lasseigne. That figure represents about 10 per cent of the Bossier City, Louisiana company's wells, he said.
His most expensive stripper wells need oil around US$70 to be profitable.
Leslie Tipping, a longtime member of the oil industry profession known as "landmen" who broker mineral rights, said some marginal wells have already been closed.
"There have been some wells that have been shut in already," she said.
Tipping, who manages oil and gas interests for patrons of the bank Northern Trust in Texas, said she was fielding more calls from clients who are nervously watching sliding crude prices.
"Most of our clients have inherited these assets, so they've been through this before," said Ms Tipping. "But there's concern. There's some fear."
She expects well closures at higher-cost fields across much of North America, including older parts of North Dakota's Bakken, and areas where the geology is difficult, such as the Anadarko Basin in Kansas and Oklahoma.
There are about 400,000 stripper wells in the United States, most with operating costs of between US$20 and US$50 per barrel, according to analysts at Wood Mackenzie, a leading energy and commodities consultancy. The cheapest ones are in locations where there is little underground saltwater.
Strippers often produce just a few barrels a day, but together they account for up to one million barrels per day, a ninth of US output.
Not all stripper wells are losing money now and those that do may not be shut in. This is in part because producers can lose their leases forever if they shut wells for more than a few months, so owners are often willing to pump at a loss and store oil until prices rise.
"At US$40, we think you have got about 100,000 to 200,000 barrels per day at risk" from US stripper wells, said RT Dukes of Wood Mackenzie.
That could represent a dent of up to 2 per cent dent in output compared with US Energy Information Agency forecasts that this year's US production will average 9.3 million bpd.
After production hit 9.1 million bpd in late 2014, the agency now expects production to climb to 9.42 million bpd around the middle of this year, then ebb to 9.26 million bpd at year's end.
Its latest Jan 13 outlook forecasts the 2015 average price of the Brent crude global benchmark at US$58 a barrel and the US benchmark at US$3-4 below that.
Some warn the slowdown could be more pronounced given the sharp drop in the number of rigs drilling new wells. The prevailing industry view, however, is that new, more productive, shale oil wells in Texas, North Dakota and Colorado will keep output rising.
Those wells, which typically do not need constant pumping to make oil flow, have helped US crude output to nearly double since 2007.
They have also prompted Opec and Saudi Arabia to let prices fall in what is widely seen as an attempt to force US rivals to cut output.
But publicly-traded shale oil companies talk of cash operating costs between US$10 and US$30 a barrel, suggesting oil prices would have to fall by another third to force them consider well closures.
The upshot? It might take a prolonged slowdown in drilling of new wells to significantly curb US supply.
Break even levels for drilling new wells in most US shale oil fields range between US$50 and US$80 per barrel - well above operating costs for existing shale wells.
In response to the price slump, most oil companies have already cut drilling budgets by 25 per cent or more, but they are still sinking new wells. Furthermore, unlike small stripper well operators, several producers have hedged much of their 2015 output at prices close to US$90 a barrel, keeping lots of their new output profitable.
Vast efficiency gains also mean that more oil can be squeezed from fewer new wells. For example, EOG Resources Inc said in November that output of new fracked wells in the Eagle Ford shale of Texas was up 39 per cent compared with wells sunk at the start of 2014.
"To me, it's going to be extremely difficult for any US production to be cut significantly," TMR's Lasseigne said about the possible impact of well closures.