We model how much further well costs would need to fall for leading US onshore projects to break even at a flat price of US$45/bbl.
Tight oil producers' initial response to the 2014 price collapse was to cut costs and improve the capital efficiency of their drilling programmes.
The results were significant. Using our North America Supply Chain Analysis Tool, we can see that for the 127 companies we model, the average well cost fell by 19% between 2014 and mid 2015.
As the chart shows, many companies do not show tremendous differentiation in cost reduction from their peers, suggesting that many of the changes seen since the price collapse began are structural, rather than operator-specific.
However, another wave of concern recently hit the tight oil sector in late summer 2015 as WTI fell below US$45/bbl. Very few companies have discussed breakeven prices around this level.
To understand how much further well costs would need to fall for some leading onshore US projects to break even at US$45/bbl, we undertook an exercise using our new Asset Valuations model, holding prices flat (in real terms) at S$45/bbl for WTI.
We found that costs in most plays would have to fall another 10 or 15% to generate a 10% post-tax internal rate of return (IRR) and, for some companies, costs would need to fall substantially more. However, asset quality is paramount – in an area like the Karnes Trough, development well returns are positive even at US$45/bbl WTI.
Yet in nearly every play we modelled, the additional cost reductions needed for assets to break even are comparable to the cost changes seen over the past few years. Well costs will not fall indefinitely but the necessary cuts could be achievable over the next 12-18 months through additional reductions to drilling days, modified well designs, more efficient use of water, a switch to natural sand or a wider use of engineered completions.
Reaching the new target low will take longer though, as service company price negotiations are now occurring in single, rather than double-digit, percentages. In plays like the Three Forks and SCOOP, where our study indicates that costs need to fall the furthest, operators are drilling less developed acreage, so the scope for costs to fall is actually greater.
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Can tight oil costs fall enough?
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