​Low cost shale drilling might not boost oil production this time

U.S. shale producers are at a crossroads as they find themselves more efficient than ever. They can keep drilling, and potentially dent oil prices, or use the money to pay down debt.

Producers across the Permian Basin are saving about 20 per cent on well costs compared to last year, Macquarie Group Ltd analysts including Vikas Dwivedi said in a note Thursday. This could be bearish for oil prices if it means that shale producers have found a way to keep producing oil below the $40 a barrel level, Macquarie said in a note Thursday.

In years past, savings from efficiency improvements led producers to boost production but this time it’s likely they’ll use extra cash for dividends and to pay off debt, according to BloombergNEF analyst Tai Liu.

Other indicators point to lower production for longer. Oil drilling dropped to a 15-year low last week, signalling a fundamental shift in the industry that once was obsessed with growth but is now drilling to just ward off production declines.

Still, lower prices and apparent high-grading, or focusing on drilling their most profitable acreage, could mean “improving well productivity as the industry settles in at lower activity levels,” according to Macquarie.

© 2020 Bloomberg L.P.