As global oil prices fell from more than $100 a barrel in July of 2014 to less than $30 a barrel in January of 2016, industry observers expected to see a precipitous drop in U.S. shale oil production. At the time, these forecasts seemed sensible. Shale wells were definitely not the cheapest source of new crude oil production.  In fact, the breakeven costs for North American shale producers were thought to be about three times higher than for similar costs for Middle Eastern producers.  Shale wells also deplete faster than conventional wells, with production rates falling about 70% after the first year.  On top of this, many shale producers used inflexible debt financing to fund their operations, making a drop in operating cash flow potentially catastrophic for ongoing development efforts.

To the surprise of many, shale production actually increased during that drop in prices.  Total production peaked in March of 2015, and has only fallen by 17% since then. Meanwhile, production in some basins, like the Permian in Texas and New Mexico, is within spitting distance of peak levels. While offshore rig workers around the world are packing up and heading home, oil companies are still drilling new wells in every major U.S. shale play. With this shift in oil resources, it’s no wonder major energy companies like BP are seriously examining how to best tap shale resources.

Why has U.S. shale production proven to be so resilient to low oil prices? I can think of (at least) three reasons. All three come down to costs…

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