It Don't Come Easy

On Friday (January 23, 2015) West Texas Intermediate (WTI) futures prices closed under $46/Bbl for the second time this year. RBN’s analysis of producer internal rates of return (IRRs) for typical oil wells indicates that Bakken IRRs have fallen from 39% in the fall of 2014 to just 1% today. IRRs for typical Permian wells are down to 3% and typical Eagle Ford wells are at breakeven. Everything is underwater or close to it except for the sweet spot wells with higher production. Today we present highlights from RBN’s IRR and breakeven analysis – published in full today in our latest Drill Down Report.

There was no open outcry trading on the CME NYMEX yesterday because of the MLK holiday but after rallying on Friday U.S. crude prices resumed their descent here in electronic trading and the London ICE Brent contract lost $1.40/Bbl to close at $48.77/Bbl. Unsurprisingly the Baker Hughes oil drilling rig count is down by 209 (13%) since December 2014 as producers take a hard look at their production budgets. Yet production is still expected to increase in the short term – in part because the rigs that are left will focus on “sweet spots”. In today’s blog “It Don’t Come Easy – Low Crude Prices, Producer Breakevens and Drilling Economics – Part 2” Sandy Fielden looks at the assumptions behind RBN’s IRR and breakeven scenario analysis.

By Friday (January 9, 2015) crude prices had fallen 55% since June 2014, natural gas prices are at the lowest since 2012 and natural gas liquids are suffering as well. The potential revenues from U.S. shale oil production in 2015 would be a whopping $66 billion lower at $50/Bbl than when oil was  $100/Bbl last year. In this new world where prices may not return close to pre-crash levels for a number of years, producers are scrambling to reconfigure drilling budgets and locations. The exercise is all about rates of return and figuring out breakeven prices. Today we start a new series looking under the hood at production drilling economics including results from our own models.