Cost deflation and the effect on 2015 breakeven prices

July 30, 2015

Authors: Per Magnus Nysveen, Senior Partner & Head of Analysis, and Leslie Wei, Analyst, Rystad Energy

Publisher: Oil & Gas Financial Journal, July Edition

As the oil price remains low exiting the first half of 2015, operators are emphasizing the lower unit costs, or cost deflation, expected for the year. Lower costs are the combined effect of two reduction categories: efficiency gains (structural) and lower service costs (cyclical). Both points are important when estimating 2015 breakeven prices.

Since operators have started drilling unconventional wells in the early 2000s, rigs have been getting more efficient. To illustrate this, figure 1 shows the drilling speed of a typical rig, measured as feet drilled per day, for the main shale plays. Drilling speed has increased across most plays, especially Bakken, Niobrara and Eagle Ford, where the average rig was able to drill 30% faster in 2014 than in 2012. The only play that shows a slight decrease in the drilling speed is Permian Delaware, where the checkerboard leasing structure of the play makes it difficult for operators to drill from pads (ref. January 2015 article). 

The second cost deflation category is the reduction in service costs. As low oil prices persist, there has been a 50% drop in US land rigs from December 2014 to June 2015. To remain in business, service companies must squeeze their margins and reduce costs. Figure 2 shows the unit cost reduction in the US as reported for 10 E&P companies. Companies are reporting an average cost reduction of 23%, where 16% of the reduction comes from lower unit prices and the remaining 7% reduction comes from additional efficiency gains. Going forward, the price reduction from efficiency gains will last, while the price reduction from service fees will gradually return to its original level.

 

The overall lower unit costs can be used to estimate the breakeven price for wells drilled in 2015, assuming a 1% reduction in price equals a 1% reduction in the breakeven price. Figure 3 shows the breakeven prices for the main plays and how they have developed from 2011 to 2015. Historical values are calculated looking at decline curves, production mix and well cost for each year, and the 2015 values estimated, assuming a 23% decrease in prices.

 

On average, breakeven prices for the main oil plays have decreased ~50% since 2011. This is because operators are able to produce more as they find sweet spots, and rigs are able to drill more as rig companies better understand shale characteristics. This year, Bakken, Eagle Ford, Permian Delaware and Niobrara are all expected to have average prices less than 50 $/bbl, where the best areas are even lower. The current breakeven price of shale and the steady trend proves that shale is a very competitive source of production, and going forward, when prices recover, operators will increase rig counts just as quickly as they dropped it.

For link to article, click here

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Article Contacts

Contact: Per Magnus Nysveen, Senior Partner & Head of Analysis

Phone: +47 24 00 42 16

Mobile: +47 99 16 13 09

per@rystadenergy.com

Contact: Leslie Wei, Analyst

Phone: +47 24 00 42 00

Mobile: +47 90 22 00 76

leslie.wei@rystadenergy.com

About Rystad Energy

Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products.


Rystad Energy’s headquarters are located in Oslo, Norway, with additional research teams in India. Further presence has been established in Norway (Stavanger), the UK (London), USA (New York & Houston), Russia (Moscow), Africa as well as South East Asia.