1. EEA-M14A-1520
Energy Policy, Carbon Markets & Futures
Report:
Impacts of low oil prices
on American unconventional and offshore oil projects
Mohamed LAHJIBI
MSc in Energy Supply for Low Carbon Futures
February 2015

2. 2
Introduction
The balance in Energy markets can be disrupted as volatility and competition dramatically
evolve. The example of the oil market might be the perfect picture. Since the boom of North
American unconventional oil in the late 2000’s, also called the Tight Oil Revolution, the
United States (US) has become the first world producer of oil with almost 9.2 million barrel
per day produced in January 2015 (EIA, 2015b). Thanks to hydraulic fracturing and other
unconventional extraction methods, the oil business has been modified in depth with nations
outside of the Organisation of Petroleum Exporting Countries (OPEC) gaining even more
share on the oil market. Recently, the price of crude oil has been tremendously depreciated;
losing 50% of its value compared with June 2014 and establishing on 20 February 2015 the
Brent barrel benchmark at $60 (NASDAQ, 2015).
However, this very low crude oil prices environment is likely to jeopardise American
unconventional oil expansion owing to similar and even higher oil production breakeven for
onshore wells. So, one can wonder what could be the impacts of lasting low oil prices on
future energy developments in the US.
In order to address the problem, this report will first stress the main features of the current
trend, then present some potential effects of low oil prices on the American energy market
with respect to their likely timescale and finally provide a discussion with deep insights into
possible scenarios regarding upcoming oil prices and the expected American oil production.
I- The US tight oil revolution (TOR) and its implications
The US TOR impacts
The gradual appearance of unconventional extraction methods has played a pivotal role in
the increasing availability and therefore price of crude oil. Moving from a market where oil
was perceived as a scarce commodity to one characterised by abundance and oversupply
(Fattouh, 2014), the US TOR has been an unprecedented “game changer”. Figure 1 shows this
spectacular upturn in US crude oil production which increased by 75% from 2008 to 2014. In
the meantime, US imports decreased by 35% (EIA, 2015b).
Figure 1: Evolution of US crude oil production between 2000 and 2015. The US light tight oil has
been significantly extracted since 2008 (EIA, 2015b)
0
1
2
3
4
5
6
7
8
9
10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Crude oil production
(million barrels per day)

3. 3
Situation since June 2014
Nevertheless, since June 2014, a major collapse in crude oil prices has changed the situation
and disturbed this irresistible dynamic. Figure 2 depicts the evolution of crude oil prices
between January 2014 and January 2015. From $109 to $55, the Brent barrel lost about 50%
of its value. This was the result of an oversupply of crude oil on the market due to the Light
Tight Oil (LTO) boom combined with the decision of OPEC not to cut its output of black gold
(IEA, 2015b; Wirl, 2014). In addition, the slowdown of the demand coming from emerging
countries (principally China) and the European Union significantly accentuated the trend
(Dulaimi, 2014). Hence, such a breakdown is not without any consequences for the American
LTO and offshore oil projects.
Figure 2: Evolution of crude oil prices between January 2014 and January 2015 (EIA, 2015b)
Within the scope to determine the effects of low oil prices, a separation between short term
(1-2 years) and mid/long term (2-5 years) consequences could provide valuable information.

4. 4
II- Short term effects of low oil prices on the American market
Demand stimulation in the US
Contrary to many countries where demand has remained sluggish during the last months
(IEA, 2015), the US has significantly ramped up its oil consumption by 10% compared to
June 2014 level (EIA, 2015b). Indeed, households benefiting from a higher purchasing
power, oil-intensive industries and the transportation sector have made the most of the
current situation (RUSB, 2015). Besides, a low federal taxation on oil retails and the absence
of any currency drawbacks induced by a strong dollar have contributed to the increasing
consumption (IEA, 2015a). Overall, this growing demand follows the US economy’s
flourishing dynamics characterised by an upswing in economic growth with a Gross Domestic
Product (GDP) expected to reach 3.1% in 2015 (EIA, 2015b).
Bankability of shale oil projects
Although positive effects may arise out of low oil prices, what about LTO producers who have
played a crucial role in the sweeping change on the market? Is it still profitable for them to
undertake the drilling of new wells or even to exploit existing ones? Answering these
questions comes to assess the correlation between oil prices and unconventional oil projects
bankability (Difiglio, 2014). Considering the economics of a well struck by considerable
upfront capital costs in order to acquire the land, drill and build up appropriate
infrastructures (pipelines network, roads) along with significant operational costs to ensure
fracking operations, the Brent barrel price is seen as an indicator of projects’ likelihood to
payback within a reasonable time (Fattouh, 2014). Moreover, one of the main reasons why
wells’ projects are so much sensitive to short-term crude oil prices lies on the maximum
output which is expected to be generated during the first year of wells exploitation. The
number of wells required to sustain the level of output from a field is also a main challenge to
the profitability of LTO projects in the US (Difiglio, 2014).
From 2010 to 2014, sufficiently high oil prices (averaging $102 per barrel; EIA, 2015b)
fuelled required investments to boost the sector and the dissemination of unconventional oil
whereby estimates were promising (Dulaimi, 2014). However, a $55 barrel is likely to
threaten the economics of shale projects (Fattouh, 2014). Based on the observation of the
three major places where 85% of the total amount of tight oil was extracted, e.g. Eagle Ford,
Bakken, Niobara and Permian basins, Figure 3 shows the estimated breakeven oil price of
each area made by S&P in 2013. Overall, the economic viability of these projects ranged from
$45 to $72 per barrel. Even though these figures were evaluated two years ago and
technological improvements aiming at diminishing drilling costs have been made since
(allowing an increase in the productivity per well by approximately 20%; CSIS, 2015), a
barrel below $60 is undoubtedly a barrier to US shale oil bankability most of the shale plays
apart from Eagle ford.

5. 5
Figure 3: Breakeven points of US shale oil areas (S&P, 2013)
Tight oil producers resilience
Currently, big companies operating in prolific locations can handle this problem thanks to
their capital assets, effective hedging and experience to manage considerable projects within
a short time period (IEA, 2015a; EY, 2014). However, OPEC (2015) highlights the fact that a
slowdown was noticed in both mature and emerging tight oil production areas. Indeed, figure
4 represents the number of operational rigs which decreased from an all-time record of 1,550
in October 2014 to approximately 1,270 in January 2015. Meanwhile, the production of crude
oil kept on rising even with low prices because of the ongoing projects which had already
been undertaken and an upturn in horizontal drilling efficiency.
Figure 4: On the left, US monthly onshore oil rig count vs crude oil output (thousand barrels per
day). On the right, US monthly onshore oil rig count vs percentage change in horizontal drilling
(OPEC, 2015)
Financial aspects
As crude oil has progressively become an investment asset (EIA, 2015a), a thorough analysis
of the market structure is likely to provide deeper insights into investors’ confidence and
ability to keep on supporting LTO projects.
The volatility of oil prices is a key element. Indeed, it reflects the stability of the commodity
0
10
20
30
40
50
60
70
80
Eagle Ford -
oil window
Niobrara Permian -
Wolfcamp
shale
Bakken -
Core
Eagle Ford -
condensate
window
Permian -
Bone Springs
Bakken -
noncore
($US/barrel)

6. 6
and its propensity to be traded at a profit on the market (Dias et al., 2014). Figure 5 shows
the crude oil implied volatility between January 2014 and January 2015. On the note, the last
8 months have been marked by a dramatic implied volatility which averaged 52% (EIA,
2015a).
Figure 5: Crude oil implied volatility between January 2014 and January 2015 (EIA, 2015a)
Furthermore, the market has showed concerns about the sustainable balance between crude
oil’s demand/supply exchanges. The level of inventories has never been so high since 1982,
topping more than 413 million barrels in January 2015 (EIA, 2015a). Consequently traders
have pushed the market into a deep Contango structure (IEA, 2015b) where it becomes more
profitable to buy immediately at cheaper prices and store the commodity on land or in
offshore tankers aiming to sell it later when its value will rise again (Raval, 2015). This
hedging strategy is a strong indicator of the distrust climate that prevails with regards to
crude oil’s value. In essence, the high level of crude oil volatility combined with the market
perception about its future assets contribute to a rampant uncertainty which does not
stimulate further LTO investments in the short run (Dulaimi, 2014).
Following this path, LTO producers and international oil companies’ decision-makers have
decided to review their strategy regarding their forthcoming projects (Giles, 2014). Struck by
the dramatic collapse in crude oil prices which contributed to decrease its profit margins by
21% (Krauss, 2015), ExxonMobil rapidly pulled back on its budget and expenditures
dedicated to onshore and offshore exploration (EIA, 2015a; RUSB, 2015). Moreover, Chevron
recently suspended its ambitious arctic offshore projects (Mine, 2015). Consequently, a
deeper slowdown of LTO growth is expected in the short term.

7. 7
III- Mid/Long term implications of low oil prices
The previous part exposed the consequences of low oil prices in the short run. However,
midterm and long-term repercussions could be even more catastrophic for the development
of the sector.
Persistence of a strong dollar and deflationary concerns
Figure 6: Cross correlation between ICE Brent and US Dollar Index (IEA, 2015b)
The value of the US dollar is deemed as a strong contributor to oil’s price volatility (Zebende
et al., 2014). Figure 6 shows the comparison between the evolution of the US Dollar Index
and the ICE Brent. The downturn observed between June 2014 and January 2015 is
symptomatic of the situation induced by a breakdown in the US dollar value. When the dollar
becomes too strong against other foreign currencies, the ICE Brent plummets. Due to the fact
that oil is priced in US dollar and traded around the world on a global market, a stronger
dollar will mobilise more resources to afford oil purchase (IEA, 2015b). In the short run, it is
a bargain for the US because it can stimulate the oil demand in the country. Nonetheless, the
persistence of a strong dollar combined with a low inflation will inevitably contribute to
diminishing US exports which, in the long run and if the federal reserve does not implement
appropriate monetary policy, could increase the trade deficit and threaten the reviving
economic growth of the country (RUSB, 2015; Giles, 2014).
Shale oil producers’ adjustment
Previous forecasts made before the drop in crude oil price in June 2014, predicted a
continuous growth of the LTO sector which was expected to allow the US to be self-sufficient
in oil by 2035 (Neff et al., 2014). However, a lasting low-price environment will not act in this
sense. Big oil companies have already cut their budget and revised their strategy to cope up
with alarming results and forecasts. Thanks to their low breakeven, prolific basins, also called
“sweet spots” will still be praised by investors (OPEC, 2015). However, a more thorough
selection of bankable projects will participate in the slowdown of the activity in the sector
(EY, 2014).
Therefore, in the long run, emphasis is likely to be placed on major technological
enhancements and innovative extraction methods so as to drastically decrease the drilling
costs while improving the productivity per well (CSIS, 2015). And this is a critical issue to
address. Currently, a relative lack of experience and knowledge on wells’ peak production and

8. 8
lifespan hampers an accurate estimate of wells’ potential in the long term (Neff et al., 2014).
The optimisation of the operational efficiency will be the key element in order to effectively
offset the postponement and cancellation of future projects (IEA, 2015b). Moreover, the
service oil companies will offset part of the drop in crude prices by reducing headcounts and
costs for their contracts – including drilling (Said, 2015).
Natural Gas market as a possible casualty
As IEA (2011) suggests, the US is experiencing the “golden age” of natural gas, making the
most of this commodity which has played a fundamental role in the reviving economic
growth of the country. However, this stimulation was the result of the dissemination of
drilling projects, stimulated by high oil prices (Dulaimi, 2014). If rigs become too expensive
to run, the future projects’ likelihood to be fostered will be negatively affected. In the long
run, this could end up with a lower supply of natural gas, jeopardising the profitability of the
sector. Furthermore, taking into account the progressive upturn from coal firing to natural
gas in the US in order to produce electricity (EIA, 2013), a slowdown of the natural gas
market could incite decision-makers to review their position and abandon the development
of new Combined Cycle Gas Turbines.
Additionally, the Liquefied Natural Gas (LNG) business could be the major victim of this
crude oil’s crash. The shale gas boom has allowed the US to launch big LNG projects (API,
2014); taking advantage of very low gas prices to massively export the commodity around the
world. Nonetheless, contrary to the gas price which is set on the Henry Hub market, the LNG
future contracts are indexed to the crude oil’s price (Cunningham, 2015). Therefore, lasting
low oil prices will harmfully impact the capacity of the US to export LNG to Asian countries at
competitive prices. As a result, Asia (mainly Japan and China) could subscribe contracts to
closer actors such as Russia or Qatar which will deliver the commodity more quickly at
similar prices (Dodge, 2015). Finally, as the example of the controversial Keyston XL pipeline
showed, the development of infrastructures related to oil and gas transport to refineries will
face more reluctance (Said, 2015).
Table 1 compiles short and mid/long term consequences of low crude oil prices.
Table 1: Summary of short and mid/long term consequences of low crude oil prices
Impacts Short term Mid/long term
US Economy
- Increasing demand (households,
oil-intensive industries,
transportation) stimulating
economic growth
- Persistence of a strong US dollar and
deflationary concerns threatening the
economic growth
Financial
aspects
- Uncertainty and volatility of the
market
- Contango structure
- Investors’ reluctance to finance US shale gas
projects
- LNG exports impacted
Bankability
and resilience
of LTO
producers
- Breakeven points close (or higher)
to ICE Brent heading LTO
producers to reduce active rigs
number
- Shale projects’ postponement and
cancellation
- Technological enhancements and innovative
extraction methods to decrease drilling costs
while improving wells’ productivity
- A more thorough selection of projects
- Rush to sweet spots
Big companies
- Review and revise strategy/
expenditures dedicated to
exploration
- Focus on existing projects, waiting for the
reflation of oils’ price
- Layoffs to offset slowdown in the sector
Small
producers
- Undergo huge difficulties to stay in
the market
- Bankruptcy of small producers or
absorption by big companies
- High barriers to entry for small producers

9. 9
IV- Upcoming oil prices and production scenarios
Considering the relative instability and uncertainty of the market, it seems challenging to
predict the future price of crude oil. However, CSIS (2015) provided three plausible scenarios
to predict the future oil prices and production in the US until 2020. These are summarised in
Table 2 and illustrated in Figure 7.
Table 2: Recap of the potential scenarios regarding the future evolution of US oil production and
ICE Brent (CSIS, 2015)
Scenario Production tendency
Demand
response
Production level
expected by 2020
(million barrels
per day)
Price
2020
($US)
1- Growth Volumes steadily increasing
Positive
and
consistent
12.1 80-100
2- Cutback
Volumes increasing in prolific
basins
Flat in others
Modest 10.7 70-90
3- Contraction
Volumes rising in 2015 but
then decreasing to 2014 levels
Low 8.7 50-60
Figure 7: The three scenarios put into perspective with their expected level of production by 2020
(CSIS, 2015)
Discussion of the results and recommendations
Among these three scenarios, the most plausible appears to be the second one. Indeed, the
market expects the prices to remain relatively low compared to the last five years’ level.
Globally, the production will continue to rise but at a less important rate. This makes sense in

10. 10
the extent that the “sweet spots” are being taken by storm by crude oil producers who could
exploit them at relatively low breakeven (S&P, 2013). Hence, they will be major contributors
to the US crude oil output on the market. Moreover, technological improvements and
sophisticated ways to extract oil are projected to participate in the reduction of drilling costs
and optimise the productivity per well (EY, 2014). About, small producers of LTO, these are
expected to be the major casualties of these lasting low prices. Without any upturn in oil
prices and considering their rates of return which are close to zero and even negative in given
areas (CSIS, 2015), they are likely to be absorbed by big oil companies and quit the market as
fast as they entered it (Said, 2015).
Massively carrying on investing in alternate technologies development such as fracking or
offshore oil projects does not seem feasible in the next five years. Big oil companies have well
understood that by successively announcing postponements and reduction of exploration
budgets. However, one should not ignore that thanks to sky-high oil prices, the big profits
these companies made during the last decade allowed them to undertake impressive and
ambitious exploration projects in order to discover and harness remote locations and very
deep areas potential resources (for example ultra-deep waters in the Gulf of Mexico; Klump,
2013). They have not yet exploited all these basins and are appealed to lay emphasis on it and
begin the production there during the next years (Said, 2015).

11. 11
Conclusions
This report highlighted the effects of low oil prices on the future energy developments related
to unconventional and offshore oil in the US. The diversity of the fallout of low oil prices is
likely to raise major concerns about the cost-effectiveness, the bankability and the viability of
current and forthcoming American oil projects. The market is characterised by a high
volatility, perfect illustration of the uncertainty in the sector. In the short run, the demand in
the US will be more important which will contribute to strengthening the economy recovery.
However, the production is expected to grow less significantly with several rigs projects being
postponed or cancelled due to non-economical breakeven. In the midterm/long term,
deflationary concerns spawned by the US dollar’s value are likely to raise major concerns
about crude oil’s recovery and threaten the US capacity to keep an acceptable trade balance.
Driven by fewer drilling rigs, American producers will prioritise profitable sweet spots and
technological improvements so as to diminish drilling costs and get more out of each well.
Otherwise, LNG futures contracts, indexed to crude oil prices appear to be a major casualty.
Overall, as long as crude oil prices will remain low, such energy projects will suffer from less
funding by big oil companies worried about the hypothetic revival of the market. However,
considering the current conditions on the market, an upsurge in crude oil prices could
possibly happen over the next years, establishing the Brent barrel around $80-90 by 2020.
Given the uncertainty and unpredictability of the market raised by multiple factors like the
OPEC’s decisions, the geopolitical situation in the Middle-East, monetary policies, the
supply/demand picture and impacts of emerging countries’ demand, forecasting crude oil
prices seems to be a daunting task. Thus, the market might just be entering a low cost cycle.
How long will it last? Only time will tell.

12. 12
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13. 13
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14. 14
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