The need to produce oil for less drove the shale revolution.

With crude prices now resetting to match shale economics, it will drive those gains even further.

Costs are set to be pounded down by deflation in other commodities, rig rates and oil services as well as substantial productivity gains created by engineers facing tighter margins, said Jeffrey Currie, a researcher for Goldman Sachs.

“A new industry will likely be born out of this environment,” Currie said in a Jan. 11 report, “The New Oil Order.”

As companies enter a more risky environment, spending restraints will require companies to seek higher-quality assets with more conservative capital structures.

Currie said higher-cost deepwater projects, oil-sands assets and other alternative technologies will be abandoned as the industry improves its efficiency.

“Despite being seemingly obvious, the realization that drilling in the ocean is far more expensive than drilling on land is really the key to the recent sell-off, particularly for long-dated prices,” Currie said. “Before July 2014, the market was supported on a longer-term basis near $100 per barrel by higher cost deepwater offshore and oil sands projects.”

After shale production surged in late 2013, the size of the onshore resource base and its profitability has become clear.

“The prolific nature of these projects made drilling in the sea and mining high-cost oil sands a redundant, more expensive source of supply,” Currie said.

Deepwater projects have become increasingly uneconomic and the market moved from pricing them at the margin to pricing shale at the margin, creating the initial match of pricing oil from $90 per barrel (bbl) to less than $80/bbl.

“What the market is experiencing now is a rationalization of the shale industry as it adjusts to being the marginal project,” he said.

That adjustment has included upstream and corporate staff reductions at BP Plc (NYSE: BP), as well as attempts to negotiate price decreases from suppliers, said Steven Wood, analyst, Moody’s Investors Service.

“Lower oil prices also raise the prospect of more mergers and acquisitions as asset valuations decline, and buyers and motivated sellers become more aligned on price expectations,” Wood said.

Wood cited the December merger announcement by Repsol SA to buy Talisman Energy Inc. (NYSE: TLM, TO: TLM) for $13 billion as a starting point.

“Relatively strong integrated oil companies will likely pursue other transactions in 2015, especially if lower oil prices persist,” Wood said.

Repsol had long wooed Talisman. Other companies with poor balance sheets and capital structures might have high-value assets that they will eventually surrender.

Acreage is likely to be purchased by owners of more high-cost, poor assets such as integrated or national oil companies with conservative capital structures and substantial cash reserves, Currie said.

“In return they could scrap their less attractive deepwater, heavy oil and traditional alternatives and help find a new equilibrium with slower non-OPEC growth,” he said.

More conservative companies will have a foot in shale and be more inclined to operate far more moderately.

However, such changes won’t happen overnight.

The current mix of credit, equity and oil prices is likely to achieve the slowdown in supply growth needed to balance the global oil market by 2016.

Overall capex in the U.S. exploration and production sector is down 25%, Currie said. The industry has to cut due to its debt. High-yield defaults are possible if prices were maintained at $40/bbl for six months without conserving cash.

“The more credit intensive companies are already in maintenance mode where cash is being reserved for maintaining fields only,” Currie said.

U.S. supply growth is expected to slow to 400,000 bbl/d year-over-year by the fourth quarter of 2015.

“Excess storage and tanker capacity suggests the market can run a surplus for a very long time, preventing storage blowouts and a collapse in cash prices,” Currie said.