Drilling and completion costs

In the past few years, producers in shale and tight-oil plays have made great strides in reducing their drilling costs and improving the productivity of their wells. But the trends toward much longer laterals and high-intensity well completions have significantly increased the volumes of sand being used—some individual well completions use enough sand to fill 100 railcars or more! An even bigger concern for many producers is the rising cost of disposing of produced water—that is, the water that emerges with hydrocarbons from these supersized wells. Today we begin a surfing-themed series that focuses on how the two key components of any beach vacation—sand and water—are impacting producer profitability.

With today’s low crude oil and natural gas prices, the survival of exploration and production companies depends on razor-thin margins. Lease operating expenses––the costs incurred by an operator to keep production flowing after the initial cost of drilling and completing a well have been incurred––are a go-to variable in assessing the financial health of E&Ps. But it’s not enough for investors and analysts to pull LOE line items from Securities and Exchange Commission filings to find the lowest cost producers, plays, or basins. More than ever we need to understand—really, truly, deeply—what LOEs are, why they matter, how they change with commodity prices, production volumes, and other factors, and how we should use them when comparing players and plays. Today we begin a series on a little-explored but important factor in assessing oil and gas production costs.