"Breakeven" oil prices is a really, really dumb metric to use when analyzing the tight oil phenomena. It suggests any oil price over, for instance, $60, makes it profitable to drill a new $8.5 MM HZ well and the sector, as of last Friday, is making $10 a barrel profit. Well, that is indeed "profit, " no arguing with that.
The metric is further confused by suggesting the breakeven price is whatever price pays the well out in two years, which I don't even remotely understand. Left, typical Midland Basin wells (T1/2) make 220.5K BO in there first two years, at $70/$1 that does NOT pay an $8.5 MM well back on a full cycle basis.
The goal is not to breakeven, its to make money and, in the case of the shale oil sector, still deeply in debt and facing $40 billion of plugging, abandonment, decommissioning of surface facilities, processing plants, compression stations, tens of thousands of miles of pipe buried in the and restoration of the land sometime in the future, it needs to now be making enormous sums of money.
Take Devon, just as an example. It has $6.5 billion dollars of long term debt and produces 317,000 BOPD of oil over its 30,000 well inventory. It pays over $300 MM a year in interest on that debt. Its got unconventional wells all over the country, 2,500 in the Permian Basin alone (Novi). If it self-proclaims its Tier 1 and 2 level drilling inventory is good for another 5 to 6 to 7 years, it be smart to deleverage all that long term debt completely before it starts drilling the crummy stuff out on the flanks, where costs will be higher and EUR's significantly lower.
To pay back $6.5 B of long term debt in 6 years it has to come up with $1.1 B a year from operational net income. Based on its current production levels that adds nearly $9 per incremental barrel to breakeven prices. In my opinion if it can't get out of debt by the time its drilling C- level wells in West Pecos County, it won't be able to pay that debt back.
Nor will it be able to pay its well retirement costs. If 20% of its 30,000 operated and not operated well inventory is HZ wells, its facing, in my opinion, another $4 billion in P,A&D costs, including removal of all infrasture and land restoration. That adds about $6 to the oil price necesarry to it to pay its liabilities and paying those liabilities is the cost of doing business. Part of the breakeven calculation. Devon says its future plugging liability for these 30,000 wells is a little south of $700MM (10Q). Right.
Consolidations in America's tight oil basins ADDS debt and shifts large well inventory retirement costs from two companies to one. You can use EOG, FANG, COP, CVX, XOM, whomever you want and they all have enormous liabilities not included in the magical "breakeven" price.
A "flat" price deck means oil and associated gas prices are flat, sustained, never change; good luck with that. Waha gas in West Texas is negative $1.50, up recently from negative $3,25...not positive $2.00, another reason breakeven is always breaking bad. It changes constantly.
Add about $15 per barrel to each one of these estimates, above, and real breakeven prices necessary for the tight oil sector to pay its liabilities are out of reach, short of $100 oil/$ 5 natgas...sustained.
Or, you can manana that, like everybody else does (its just Texas, right?) and stay on the drill baby, drill mission. Which, by the way, does NOT help the American consumer more than a few pennies per gallon of gasoline, but is going to be a helluva mess for us to clean up someday. By us I mean us taxpayers.
Mike , looking at those pictures -- would it be good prospect to get into the iron scrap business in the future ? Asking for a young nephew . 😁
Some are waking up .
https://oilprice.com/Energy/Crude-Oil/Is-Peak-Investment-Coming-for-the-Shale-Patch.html
Reality dawns , It is not the quantity but the quality that matters .
https://www.reuters.com/business/energy/us-permian-crude-turns-lighter-it-risks-losing-favor-with-refiners-2024-10-22/
Mike, for your interest: https://wentworthreport.com/conserve-to-convert/
Thanks Mike,
Excellent piece.
Hello Mike. Thank you again for sharing your knowledge and experience. On a previous post you indicated your ideal spacing and lateral length If you can give your opinion again, please. I don't know if my message will be understandable, my English is not very developed
Thanks for the reponse
I am a big fan of the shale oil extraction process, how that process has evolved over the past decade and the people that work in it. A BIG fan. I made money in shale oil and I've got brilliant friends in it.
I do not like the way the asset has been developed, the buisness model, the CEO's that have skimmed billions of dollars off the top and how everybody lies about it. Shale, to me its just another resource play that came along late in the game and delayed the envitable. IN 60 years I've seen a lot of these sort of "miracles."
Now it is a depleting American asset and like much of history, we don't know its being made while we live thru it. I am 100% positive people are going to look back on all this and ask why the hell we exported it all alway to foreign countries. 100% sure.
Anyway, should we trust the U.S. tight oil and tight gas sector to do the right thing henceforth, to pay its debt, plug its wells and clean up its mess?
You decide for yourself based on history but don't forget...the unconventional oil and gas business is STILL not in the black. Its publically traded companies are, after 13 years, $140 billion in debt and that debt is going up, not down. Its wells are getting worse, not better, and it has drilled its best wells first; as it moves out toward the rind its wells will cost more, have even lower EUR's and make LESS money. Its giant corporate America... interested only in one thing. Nobody has any vested interest in it, nobody personally guranteed its debt or the weak, flimsy bonds that gurantee it plugs its wells.
Trust it at your own peril. I don't.
Hi Mike.
$23,333 per P & A is BS in 2024. Yes, there are wells that are inexpensive to plug but not HZs for that price. Just outright misinformation.
5 years left? I would be selling those stocks if I was dumb enough to have them. I prefer companies with 30 - 50 years sustainable proven reserves that are currently cash flow positive. I don't get why anyone would bet on these guys. 'Murican pride maybe. I don't understand, I'm not in that arena. Beats me, but from every metric I can see, Mike is spot on. Thanks for keeping up with this stuff, Mike. This blog is essential reading for anyone whose future is tied to the patch. Side note. Mike, why the hell do rigs always break down after supper when you already put in a long day? Seems like boogie man sleeps all day
Nuff said. But the responses? Mike stay calm.