It Don’t Come Easy: Low Crude Prices, Producer Breakevens and Drilling Economics

report coverLower crude oil prices are driving U.S. producers to make dramatic reductions in their budgets for drilling new wells. Producers, small and large, are reviewing how much they will invest in new production during 2015 and beyond. The analysis in this report lies at the heart of those investment decisions – determining which plays offer the best rates of return in the lower price environment now faced by U.S. producers.

Those decisions – how much to drill – when to drill and where – will determine the impact on crude, natural gas and NGL production for years to come. As the number of rigs deployed to drill new wells declines, so will the rate of increase in production. Overall production will eventually fall unless enough new wells are drilled to replace the resulting drop in output or new wells are proportionately more productive. Whether enough new wells are drilled to maintain an increase in overall crude production will depend on drilling economics – rates of return -- and the related appetite for new investment by producers. This report provides an explanation and summary of analysis produced using RBN Energy’s Production Economics Model to indicate what we believe are typical returns under different crude oil and natural gas price scenarios for major shale plays across the U.S.

Report highlights include:

  • The more than 50% fall in crude prices since June 2014 and 30% fall in natural gas since November 2014 have crushed producer internal rates of return (IRRs) for typical wells in U.S. shale plays.
  • Analysis of IRRs and crude breakevens provides insight into what will happen to production as producers scramble to respond.
  • Continued growth in shale production is related to IRR economics, but with several caveats that affect producers including high IRRs in drilling sweet spots, the impact of hedging, HBP, lower services costs and the number of hold over completions from last year.
  • This report includes results from IRR and breakeven sensitivity analysis by basin and commodity using the RBN Production Economics model and input well data from a variety of sources.
  • Coming up with input variables that represent wells in different plays is as much art as science. To fully understand the significance of the analysis, it is important that you know what you are looking at. We lay out our analysis so you can make your own judgments about our methodology and model input data.

It Don’t Come Easy: Low Crude Prices, Producer Breakevens and Drilling Economics is the first of RBN Energy’s Drill Down report series, a suite of twelve reports coming from RBN during 2015 covering many of the key issues expected to impact the markets for crude oil, natural gas and natural gas liquids.

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