Shale Breakevens Face Challenge Despite Cost Relief

Inflation may have peaked in the US shale oil sector, but it has taken a heavy toll on breakeven costs, and producers could struggle to reduce them in the coming years. While cost reductions for oil-field services, materials and equipment will offer some relief, producers are also increasingly tapping less productive acreage these days after exhausting much of their “Tier 1” prospects. Less productive wells could make it challenging to drive down breakevens without technological advances. While results vary by producing region, the average West Texas Intermediate (WTI) price required for profitability was $61 per barrel in the first quarter, up from $49/bbl three years ago, according to a survey of US oil executives by the Dallas Federal Reserve Bank. The true breakeven cost — the price needed to maintain operations — was pegged at a considerably lower $35/bbl in the first three months of 2023. But that’s also up from the first quarter of 2020 — right before the effects of the Covid-19 pandemic kicked in — with the Dallas Fed survey showing $29 WTI then. Shale oil producers are still generating strong cash flow, but profitability appears to have peaked in 2022 when WTI averaged about $95/bbl. The US benchmark has largely traded between $70/bbl and $80/bbl so far in 2023.