Editorial

Lower 48: Increasing costs push up breakevens

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After a flurry of development activity in Q1 2017, the US Lower 48 onshore sector is beginning to feel the squeeze of cost inflation. Although this development was widely anticipated, impacts vary significantly depending on the source as well as project location.

Our base case assumption of 15% cost inflation draws from an uptick in confidence around oil price, increased capital budgets for operators and negative margins for oilfield services (OFS) companies. However, when we take a granular view at the basin level, the story changes.

NVP10 breakeven price for Wolfcamp, Eagle Ford and Bakken type curves (2016 – 2017)

Areas such as the Permian, which enjoys leading breakevens and high levels of activity, will experience much higher inflation than less active basins. The core sub-plays will continue to make attractive returns, however, secondary sub- plays will struggle to keep up unless productivity improvements and efficiency gains continue.

What’s the future for cost inflation in the Lower 48

Onshore service cost inflation will remain difficult to pin down throughout 2017, and there are three key variables at play: basin of activity, product line and contract length. While we expect activity to continue to rise moderately in 2018, oil price volatility remains a significant factor in OFS sector pricing — we’ve already seen operators react to recent drops by pulling rigs offline. Overall, we expect activity and pricing to increase over the medium-term, with operators may become more selective about their drilling targets.