Shale oil breakeven prices to rise in 2017: Jadwa

US shale oil producers’ breakeven prices are expected to increase in 2017 for the first time in five years, driven mainly by higher borrowing and operating costs, Jadwa Investment said in a report on Sunday.

Despite cost cutting measures undertaken by shale oil operators over the last two years, breakeven prices are expected to rise to an average of $36.5 per barrel (bbl) this year, although they are still 50 percent lower than their peak in 2012.

Following the recent uptick in oil prices, US shale producers are expanding production this year, with forecasts from the Energy Information Administration predicting 10 percent year-on-year (YoY) growth in American oil output in 2017, and 3.3 percent next year.

However, many “bumps in the road” remain for the industry in the near-to-medium term, such as high borrowing and operating costs and low oil prices, Jadwa Investment said.

During the period of high oil prices from 2010 to 2014, access to cheap finance, due to record-low US interest rates, had helped sustain American shale oil production growth. 

Going forward however, low interest rates are unlikely to persist, with the US Federal Reserve (Fed) already hiking rates thrice in the past two years.

Higher interest rates could increase the cost of financing, as a result of which many shale oil companies would have to engage in further deleveraging to reduce their interest expense.

“Besides higher borrowing costs, shale oil producers also face the possibility of constrained capacity leading to inflated operating costs. One area where costs are likely to rise is related to oilfield services, which includes the cost of rigs, equipment and personnel,” Jadwa Investment said.

Over the past three years, many shale oil producers pushed oilfield service companies to accept lower prices via fixed contracts. The expiration of such contracts over the coming year should, in turn, allow prices to rise for higher demanded services related to drilling and operating wells.

Lower oil prices are another risk for the American shale industry, Jadwa Investment said, noting that major uncertainly remains over what OPEC and non-OPEC countries will do after their output cut agreement expires in March next year.

“The worst case scenario would be where OPEC production levels are restored to levels prior to the cut agreement, which would bring oil prices down and impact shale oil producers,” the firm said.

Write to Yasmin Helal at yasmin.h@argaamplus.com