At a time when oil prices are low and expected to stay that way, shale producers have survived by scaling back drilling activity and costs. John Norton, a partner with Bain's Oil & Gas practice, describes new opportunities for controlling costs and reveals the key lever for the future health of the industry.
Read the transcript below.
JOHN NORTON: The resiliency of the North American shale producers has surprised many industry observers. Deep price concessions by suppliers, along with cutting back drilling to only the most prolific areas, have allowed the shale operators to survive despite the low-price environment. However, given that we're likely to persist in a low-price environment for some time into the future, it's important for the shale operators to find additional opportunities to reduce cost. In fact, they need to reduce their break-evens by up to 30% in order to obtain acceptable rates of return on new wells to be drilled.
The first step in doing this is to understand their true cost position on a fully loaded cost per barrel basis, including both capex and operations expenses. Once they understand their true cost position, they can set both cost and productivity targets. On the cost side, there are opportunities that historically haven't received the same level of focus, such as operations, maintenance and back-office expenses that represent significant opportunities of cost reduction.
In addition, there'll be meaningful opportunities associated with working closely with their suppliers to reduce more structural costs associated with the well delivery and operations. Although cost will be important, the key lever for the future health of the industry is productivity. Recovery rates today are still very low, in the 3% to 7% range. Increasing recovery rates by as little as 1% can reduce break-evens by up to 15% and thus allow the shale operators to not only survive, but thrive in today's low-cost environment.
Read the Bain Brief: How Shale Companies Can Transform to Survive