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Oil-Price Fight: Saudis vs. Strippers

Oil-Price Fight: Saudis vs. Strippers
Oil strippers are more vulnerable than the frackers to being permanently sidelined by today’s low prices  By SPENCER JAKAB
Nov. 26, 2015 12:07 The world’s largest oil producers are hurting. Just how badly may depend on whether the smallest are feeling even worse.

Oil strippers, scrappy operators of old wells often abandoned by big producers, have output that can be as low as a barrel a day. They universally squeeze out less than 15 barrels, the opposite end of the spectrum from giant Middle Eastern exporters. Collectively, though, strippers appear to operate eight out of 10 U.S. wells and produce a 10th of U.S. output, as much as Algeria, a member of the Organization of the Petroleum Exporting Countries.

But with oil hovering below $50 a barrel, these small fry are reeling. And their precarious fate may play a role in deciding the success or failure of OPEC’s attempt to engineer a permanent shift in market share through low oil prices.

Under way for about 16 months now, this effort has entailed OPEC refusing to rein in production. The result: a stunning collapse in the oil price. While this has resulted in many casualties, including the budgets of OPEC nations, the real target was U.S. shale-oil producers, which now account for more than half of production. These often are called “frackers” for the hydraulic fracturing technology that has helped add four million barrels to U.S. crude output in a decade.

Permanently sidelining them, though, may be impossible for OPEC. While the frackers have a serious cost and geological disadvantage, they are resilient.


True, drilling new wells at current prices either is unprofitable or difficult due to weak cash flow from existing fields. That matters because of steep decline rates for shale wells after their first year in operation. Shale output probably peaked this summer.

But a rebound in oil prices to, say, $70 or $80 a barrel might encourage new drilling. That could revive shale growth within several months.

Like frackers, oil strippers also have high costs but are run by thinly capitalized mom-and-pop shops. More significantly, they aren’t as resilient. That may make them the one place in which there could be a permanent shift in market share.

Abandoning a stripper well is often a permanent decision. Amid an OPEC price war in 1986, abandonments surged threefold versus 1980, according to data from the Independent Petroleum Association of America. The collapse was far less severe in 2009 because an even sharper oil-price tumble was short-lived.

Assessing damage today is difficult. While he has no hard data, Mike Cantrell, who heads the National Stripper Well Association, thinks producers are less indebted and more resilient than in the mid-1980s. He adds that cash-rich buyers are willing to take over some distressed operations.

But there is really no way to know just how bad things are. The Energy Information Administration, which produces estimates of U.S. oil production, relies on a survey that skips small producers. It only receives hard data from individual states with a delay of up to two years.

In other words, oil strippers already could be failing in droves or holding up better than in past routs. Not knowing is an issue for investors and for OPEC.

The lack of visibility makes it more difficult for the cartel to gauge one variable that could help determine how long it needs to keep prices low. Allow prices to rise too soon, and it may not have made much of a dent in alternative U.S. production. Wait too long and the group could blow an even bigger hole in members’ strained national budgets.

Chances are, though, that the oil tide may have to stay out for a long time before OPEC can find out who has really been left high and dry.

Write to Spencer Jakab at spencer.jakab@wsj.com