The profitability of the US shale industry is slipping away

US shale producers were struggling with profitability. Now this problem has become much more serious.

The battle for oil market share between Saudi Arabia and Russia has made almost the entire US drilling industry an unprofitable endeavor. Only five companies in two areas of the country can boast lower oil production costs than current market prices, according to data collected by Oslo-based consultancy Rystad Energy.

Drilling at Exxon Mobil, Occidental Petroleum, Chevron and Crownquest Operating LLC in the Permian Basin, which spans significant territories in Texas and New Mexico, have the potential to make a profit at an oil price of 31 USD per barrel, Rystad data show. Occidental wells in Colorado are also cost-effective.

But this is not the case for the rest of the shale industry in the US – over 100 operators in a dozen fields. For them, drilling new wells will almost certainly mean going red.

Shale projects are known for their ability to deliver certain amounts of oil in no time. But as production from these wells declines much faster than conventional wells, companies are constantly forced to drill new sites to sustain production. This means a slow return on investors, one of the main reasons for oil and gas companies to represent less than 4% of the S&P 500 index.

At this point, “companies should not burn capital to keep their production base at an unsustainable level”, said Tom Loughrey, a former hedge fund manager who started his own shale industry data firm, Frizo Loughrey Oil Well Partners LLC.

Manufacturers including Diamondback Energy and Parsley Energy said they were cutting their budgets for new wells and shrinking platforms. Others, such as Apache Corp and Occidental said they would resume their business.

According to Frizo Loughrey, a typical drilling site in the middle of the Permian Basin requires a barrel price of 68 USD in order to achieve an adequate return within 24 months.

The shale boom has made the United States the largest oil producer in the world and in recent months a net exporter of oil. But if prices remain around 30 USD per barrel, producers will be forced to abandon so many drilling operations that US oil production could shrink by 2 million barrels per day from the end of this year to the end of next year, warned by Rystad.

That would mean a drop of about 20%.

On Monday, the price of US light crude oil WTI fell by 25% to reach 31.13 USD per barrel, with some analysts seeing the decline continue to 20 USD per barrel.