Energize Weekly, June 13, 2018
Oil companies have cut the costs of shale drilling, leading to the resurgence of activity even without oil prices rebounding to pre-recession levels, though some of the high-priced plays are vulnerable to market forces, according to Bloomberg New Energy Finance (BNEF).
The key to the shale boom has been improved horizontal drilling and fracking technologies, the analysis said.
“Drillers have also gotten more efficient, extracting more oil from wells for less money,” BNEF said. “As a result, more wells are economic, or ‘in the money,’ even though crude futures haven’t reached $75 a barrel since 2014.”
Bloomberg did a basin-by-basin analysis and found a wide range of break-even costs.
BNEF estimated more than half the analyzed oil-producing counties are profitable based on current market prices and cash flows.
Break-even prices range from a low of $31.61 a barrel for the best Permian Midland wells to $188.25 a barrel for the weakest Permian Delaware wells.
The analysis found that the Permian and Eagle Ford basins in Texas and Bakken Basin in North Dakota were the most economical to drill.
Among 10 western shale oil basins analyzed, the break-even prices ranged from an average of $37 a barrel in the Midland Basin to a high of $66 a barrel in Oklahoma’s Anadarko Basin. Colorado’s Denver-Julesburg Basin was just behind the Anadarko with an average break-even price of $63 a barrel.
“The Anadarko basin in Oklahoma and the Denver-Julesburg in Colorado . . . have break-evens closest to current prices,” BNEF said. “A retreat in prices would probably cause a slowdown in drilling there.”
The spot price for Western Texas Intermediate (WTI) oil on June 8 was $65.64 a barrel.
To be sure, estimates on break-even vary widely. In a survey this spring by the Federal Reserve Bank of Dallas, oil companies operating in the Permian Basin, which includes the Midland, said they need $47 to $52 a barrel to break even, though smaller operators said they needed more than $70.
An analysis by Rystad Energy, an industry energy consultant, put the break-even price for the Niobrara, the shale formation that is key to Denver-Julesburg Basin operations, at as low as $34 a barrel.
“BNEF foresees challenges for U.S. producers,” the analysis said. “In the short term, OPEC may put more oil on the market, which would lower prices and cut into U.S. profits. In addition, the next drilling will be farther from ‘sweet spots,’ or prime acreage, leading to lower IP [Initial Production] rates and total output.”
The Trump administration has been urging Saudi Arabia to put more oil on the market to help damper the impact of the U.S. withdrawal from nuclear accord with Iran and the renewal of economic sanctions against that country.
“Drillers have also been using more proppants recently to boost initial production. Proppants are sand or ceramics pumped into source rock to improve hydrocarbon flow,” BNEF said. That leads to a steep decline in the output of wells.
While this technique raises initial flow rates and helps cut costs, it also depletes the source rock faster, according to S&P Global.
“A combination of steep declines from wells using proppants, more drilling in less-prime areas, and increased global supply from OPEC may lead to a rough patch for U.S. producers, especially in the Anadarko and Denver-Julesburg basins,” BNEF said.
