The oil price collapse has opened a wide rift between high quality “good” assets, breakeven “bad” assets, and ruinous “ugly” assets. The consequences will impact energy markets for decades to come. In our recently published Drill Down Report, we demonstrate the differences between good, bad and ugly wells by examining the diversity of production economics across the Eagle Ford basin and why producers have been zeroing in on the counties——and areas within those counties—where initial production (IP) rates are highest, and preferably where large volumes of associated natural gas and natural gas liquids can be found as well. Today we consider Eagle Ford counties in more depth—their IPs, their internal rates of return (IRRs), and the number of new-well permit applications in each county in the first quarter of 2016.
As we discussed in our previous Good, Bad and Ugly blog, U.S. oil producers responded to the crude oil price collapse that started in mid-2014 by pulling in the reins on drilling activity. At first, the cutbacks came slowly—a lot of momentum had built up in the boom years, and more than a few prognosticators thought that lower prices were only a short-term phenomenon, so why cut drilling to the bone? But oil prices kept falling, and here we sit, with crude selling for about $40/Bbl and the rig count is now down to a paltry 354 rigs drilling for crude. The catch is that the rigs still drilling are anything but evenly distributed. They are tightly focused on the areas where producers can get the most bang for their buck – the core areas.
In our latest RBN Drill Down Report (available to RBN Backstage Pass holders and for individual purchase), we show that—now more than ever—all production economics is local, and that it is only when we understand the rate of return (or profitability) of wells at a more granular level that we can begin to figure out when it makes sense to drill and complete wells (or not) in each of the counties within the Permian, the Bakken, the Eagle Ford and other major U.S. basins. Today, we zero in on the report’s calculation of county-by-county internal rates of return (IRRs) in the Eagle Ford, and its categorization of the 16 counties responsible for most of the basin’s production as Good, Bad or Ugly from a production-economics perspective. Then, we’ll follow up on the Drill Down Report by considering whether applications for new drilling permits in the counties support the report’s thesis that the drivers in 2016-17 well drilling, as in real estate, are “location, location, location.”
IRRs aren’t inputs to an equation, they are the end result of a production economics model. We reviewed RBN’s production economics model a couple of years back in The Truth is Out There. (There are also three chapters in Rusty Braziel’s book -- The Domino Effect -- on production economics, including an updated version of the downloadable model.) Inputs that determine IRRs include well initial production (IP) rates, decline curves, drilling and completion costs, commodity prices (netbacks), operating costs, royalty rates and other key factors. Usually , producers only drill and complete wells if they believe they can make money—that is, earn a positive IRR (the higher the better). As you might expect, IRRs for crude oil wells are highly dependent on oil prices. When crude was selling for $100/Bbl, producers could achieve acceptable rates of return across most of the Eagle Ford. As we explain in the Drill Down Report, though, oil prices in the $30-$40/bbl range means that many of these wells—especially wells with IP rates of 400 Bbl/d or less—are unprofitable to drill and complete. Wells with IP rates of 400 to 600 Bbl/d are most likely either marginally unprofitable or break-even at current prices, and wells with IP rates of 600 to 800 Bbl/d are more likely to be profitable--even at today’s low prices--because of the sheer volume of oil and gas produced during the first year or two of well operation. Wells producing more than 800 Bbl/d, finally, are almost sure to be profitable.