I have got a response from Norman on my blog “Fracking as Swing Producer”, and as I think that the response is important I publish it as a new blob.
A large part of the significant reduction of the average cost of US shale oil wells is merely temporary. Much of the cost decline is due to price deflation for oilfield services. Service companies have sold services below their true cost. These price declines are not sustainable over the long term – evidenced by over 108 bankruptcies of oilfield service companies.
Another part of the cost decline is because oil companies have retreated from the most expensive areas.
Over 105 shale oil companies declared bankruptcy because they were unable to pay their debts, but these companies didn’t go out of business – they just reduced their payments on tens of billions of dollars of debt – then they continued to operate. Some companies have even declared bankruptcy twice. So another part of the fall in average cost is due to reduction in debt payments.
Whenever prices rise, shale companies will begin paying higher prices as drilling rates rise toward previous levels, and since US oil and oilfield service companies laid off over 100,000 workers, their labor costs could increase dramatically to rates even higher than before.
Technology and processes did not improve so much in 2 years to cause this entire cost decline as many give the impression. How much of the cost decline is due to each factor is difficult to determine without detailed analysis, and probably requires more data for precise estimates, but it might be possible to make some reasonably accurate estimates based on trends and data available.
It will be interesting to see their average cost per well over the next 4 years – after oil prices have risen – whether they’re able to find financing so easily as the last few years – and how many more companies declare bankruptcy.