At what oil price will shale drilling stop?

By Dan Doyle (@dandoyleoil) and Chris Ryan, CPA, President and CFO of Reliance Well Services and Arena Resources

“I will cut energy prices in half”

A Trump campaign pledge to be sure, but one that has me standing on the CFO’s doorstep, consulting with him and another CPA at the firm, wondering aloud what the hell we’re going to do if the pledge stands.

Our situation is somewhat unusual in that we are both an E&P company and a fracking company, actively drilling in Wyoming’s Powder River Basin and operating fracking camps in Appalachia and the Illinois Basin. Under Biden-Harris, our E&P side did well with higher oil prices, but our fractional revenue went to hell in 2024. “Blame it on the election,” I was told. However, if Harris prevails in the election, I expect the slide from services to continue.

Under Trump — increasingly, it seems to be Trump’s race to lose — I hope I get a reprieve. A Trump victory would be a tailwind for our fracture services company. Anyway, initially, like in 2017, when Trump came in and the industry took off after the moribund years of 2015 and 2016. That’s when OPEC went all-in on market share and decided to crack the shale, it almost broke single.

Trump’s appeal back then, his way of getting us back to work, was his staunch support for an industry that had fallen out of favor during the Obama years. Regulating it was an aphrodisiac for my dejected crowd. We loosened our wallets and jumped in eagerly, borrowing cheap money, not thinking about the low oil prices at the time. With Trump, breaking the regulatory state was so much fun. We all wanted to participate in it.

But eight years later, in a much different world, administrative approval will no longer be enough. Ours has become a smaller industry, no longer the cowboy of the early Trump years. These days, we’re motivated by profit more than horsepower on the service side and elbow room among the drillers. The old hell-on-wheels, growth-at-any-cost industry is gone. The headlong rush into debt has been replaced by a more stealthy attitude, a more restrained crowd with a watchful and weary eye on the bottom line. Better said, we are an industry that has been burned, of our own making. So, naturally, our recovery was driven by caution. If it was an AA meeting, which it was, “one day at a time” became “don’t forget.” Unfortunately, after that, we became adults, boring and predictable. Subprime mortgages against poor cash flow will do that to you.

Related: New Saudi Oil Price Rumors Warn OPEC Cut Violators

If Harris were to win the election, you will no doubt hear a collective groan from my crowd. As if I were working under a cold rain, a Harris-Walz administration would be greeted by my brothers with a new sobriety. We will work, but only because Harris’ policies will support higher oil prices, just like her current administration.

On the other hand, if Trump wins, I expect something different…

2025 will be better than 2024, but headwinds will persist. High interest rates, low oil and gas prices, takeaway problems in Pennsylvania, LNG terminal delays, a Biden-Harris era stalled BLM; all of which will be hard to overcome, even under the rallying cry of “Drill Baby Drill.” No doubt Trump will work to undo Biden’s moratoriums and eventually approve more oil and gas infrastructure, but it will take time. And how do you make well drilling and completion more attractive to my newly stoic crowd when cutting energy prices in half is a campaign pledge?

Regulation will be a welcome relief on day one, but it will take longer. Trump will push domestic drilling to keep prices low, but stimulating work by easing regulations won’t be enough, not like it was in 2017. If prices fall too much, we won’t work. Our new discipline will exacerbate the Trump Administration’s reluctance to allow petrodollars to flow to Iran, as Biden-Harris did. Sanctioning Russian oil, as expected, will take more barrels off the market, as well as a return to Venezuelan production cuts. This leaves most of the heavy duty for US shale, US offshore, Alaska and heavy Mayan and Canadian imports; and the high hope that the Saudis will demonstrate a willingness to cede more supply at lower prices, a long shot given their treatment by the shifting tides of American diplomacy.

The net effect is that supplies will come from a combination of adequate price support and from setting-off. Higher oil and gas prices will trigger E&P, and E&P budgets will trigger services. To gauge what’s to come, the best barometer of service activity is a look back at the number of platforms.

As demonstrated above, activity will follow price. When the price of oil rises, so does the platform. When prices fall, the number of installations falls. But also influential are the differences in the regulatory burden from the Trump vs. Biden. The Trump administration had lower prices, but an increased number of rigs (until the pandemic) directly due to its stance on stopping regulation. This was not without admixture. Trump pushed directly into prices, going so far as to allow Iranian exports for a six-month period when the price of oil hit $70. The result was as expected. Prices crashed back down to $60.

Activity was significantly lower in the Biden-Harris administration, although prices were higher. The first-day pipeline kill and BLM leasing moratoriums signaled regulation, and producers backed off. Services continued, but less so. Production emerged, building on a solid foundation and with all the DUCs set in the Trump years. Improvements have also been made to drilling longer sides and fillings. As a shout out to the service community, we’ve gotten a lot better at extracting shale and tight sands. However, the service industry never reached the same level of profitability as the big E&Ps under the Biden Administration. If Harris wins, the oil services sector is unlikely to see a significant increase in activity.

Capital discipline is a third factor that shows up in the chart above. There was less of it in the Trump years, when the industry was still burning money through shale discovery and chasing rich land deals. Post-pandemic and during the Biden years, the new normal has become the discipline of capital, an evolved standard that will not abate, not with shareholders seeking returns in a downbeat industry fueled by creditor aversion. ROI requirements will keep frack rigs and spreads idle, even with regulation off, unless oil and gas prices hold up. Interestingly, both the Dallas Fed in March 2024 and Statista Research in April 2024 reached the same conclusion. Oil prices need to be in the mid-$60s for work to continue.

If $66 oil is the limit of activity, then we are more or less there. Oddly enough, and not knowing the work of the Dallas Fed, I started thinking about delaying an upcoming 40 stage frack job for E&P when prices fell to $60. If prices stay there, we may still be fracking, but we will let the well taper until prices improve. We will continue to grant permission and may even build roads and forests, but if the expectations are more of the same, we will not drill.

Another way to look at price-activity comparisons is to look back at inflation-adjusted prices. The high oil price of $58 that prevailed in the Trump years (pre-pandemic) is the current equivalent of $72. That puts the current $66 pattern for activity underwater relative to the Trump years. The difference is the current Biden-Harris-on regulation versus the Trump-off regulation. That adds something to the willingness to work, that is, until you subtract today’s capital discipline and tighter budgets.

A final factor to consider is percentages. Our E&P improvement is net income after the big government catch, especially on the heels of the Biden-Harris Administration’s absurdly called Inflation Relief Act of 2022. With Vice President Harris’s tie-breaking vote, the federal royalty rate on oil and gas leases increased 33 percent. Chalk it up to another pro-fracking stance by Ms. Harris after her and President Biden’s Day One moratorium on federal land leases and pipeline takeovers.

From $66 to $44 is a 33% loss in revenue, almost all of which is taken by the government. After that, there is another net decrease in revenue for leasing operating expenses and G&A expenses. Our number is about 12% of crude, leaving $36/bbl in the drilling basket – not very favorable when our business plan calls for old wells to pay for new wells without requiring the intervention of cranky, burned-before bankers. Not to disagree with the Dallas Fed results, but independents without the benefits of legacy acreage and lower lift costs like the majors could stay at $66, forgoing the call to arms.” Drill Baby Drill”.

So where does this leave us? My guess is in the mid to high $70s, plus regulation, before any significant activity takes place; enough to offset what Trump will likely seek to sanction.

If Trump wins, the game becomes one of regulating and maintaining an oil price that satisfies both producers and consumers. It will take moves like restoring lower federal royalty rates, easing regulation and permitting, maintaining accelerated depreciation of tangible assets, assisting natural gas takeovers, and anything else that will spur activity, especially in the lower-price environment that Trump has will do search for. The risk is letting prices fall too far. If that happens, we go back to importing crude oil from America’s adversaries.

By Dan Doyle and Chris Ryan for Oilprice.com

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