The Break Even Cost For Shale Oil
News Article Sponsored by ETR Heat Transfer
I have heard many different numbers cited for the break-even cost of shale oil, but some context is required to properly address the issue. My colleague Art Berman covered a good bit of that context in an article here last fall called Only 1% Of The Bakken Play Breaks Even At Current Oil Prices. In his article, Art explained some of the variables in the economics of drilling for oil, but of significance he noted “There has been much debate about the break-even price for tight oil plays in the U.S. This discussion is largely meaningless because there is no single break-even price for any play.”
Despite that, people often recite a single break-even cost for the Bakken or the Permian Basin, for example. As I explained to a colleague last week, the break-even cost varies from well to well and from company to company. As Art pointed out in his article, there are oil wells in the Bakken that probably break even when the price of West Texas Intermediate (WTI) is $30/bbl. That’s because the break-even price is largely a function of the cost to drill and complete the well and the amount of oil that is ultimately recovered from the well. Some wells produce a lot of oil. But the amount of oil produced from a well can vary a great deal over the course of just a few miles, so you will see a wide range of break-even estimates for a single shale oil play.
It is perhaps better to think of break-even as a bell-shaped curve, where some wells in a shale play can break even at $30, 50% break even at <$60/bbl (for example), but then some small fraction on the far side of the curve don’t even break even when oil prices are at $100/bbl.
The break-even price also depends on the company drilling for oil. Different companies have different business practices, utilize different technologies, and have different cost structures. Those factors will impact break even costs. A company that has too many wells on the far side of that bell-shaped curve is a company this is going to be in deep financial distress when oil prices are $30/bbl.
One often-overlooked but very important point, however, is that break-even costs have fallen as companies have traversed the learning curve. In the early days of the shale boom, break even costs of $100/bbl were common. But oil prices remained at that level for a long enough period of time that operators gained a lot of experience in optimizing hydraulic fracturing in horizontal wells. As a result, the portion of the break even costs that are a function of the well cost and the amount of oil ultimately recovered steadily declined.
This shows that within four years or so this company was able to reduce the cost of producing a barrel of oil by more than $25/barrel of oil equivalent (BOE) as more experience was gained. Note that this is only the cost related to the well and the estimated ultimate recovery (EUR). It does not include ongoing operating costs.
In this particular example, the company was actually spending about 80% more money to drill and complete the well by 2010, but they increased the EUR by nearly 6 times. Thus, what may have only been economical at $100/bbl in 2006 could have been economical at $75/bbl by 2010, and perhaps $60/bbl by 2014.
I have heard some claim that the break even in the Bakken is $30/bbl, while others claim it is $100/bbl. Both answers could be correct, depending on the circumstances. So the lesson here is that one can only talk about break even costs with the appropriate caveats and context. Further, that break-even number is an evolving target. The past few years have seen that number decline, but as depletion of the most productive parts of these shale plays becomes pronounced, that number will undoubtedly head back up.
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