Breaking even despite the lower oil prices

Much speculation and analysis is being published on the volatility of the oil price, the oil price floor and the impact it has on shale development in North America. A significant focus has been given to the breakeven price for different shale plays to predict which plays will be most affected with the currently falling oil price. Rystad Energy estimates an average WTI breakeven oil price of US$58/bbl for the main shale plays in the US for the given selection (Figure 1). However, not all companies are exposed to the same acreage quality within the same shale play. Hence, when analysing average breakeven prices per play it is important to remember that companies in the core areas of a play and first movers i.e. EOG in Eagle Ford will have a significantly lower breakeven price than the average for the play. Figure 1 shows that at WTI oil prices below US$50/bbl only the core areas of the Eagle Ford and Niobrara will remain economical.

Bigger picture

When looking at the bigger picture and comparing breakeven prices among global developments, Rystad Energy estimates a Brent breakeven oil price of US$65/bbl at a US$90/bbl scenario for shale development (Figure 2). This Brent breakeven price includes the entire lifecycle of an average shale well and such value is among the lowest when compared to other global developments. Only legacy onshore developments have a lower breakeven oil price. Shale and deepwater have a similar Brent breakeven price. Consequently, shale competes with offshore developments when it comes to breakeven prices; however, there are other parameters to take into account such as IRR and payback time for which shale offers significantly better metrics than other developments.

Shale breakeven prices falling every year

North American shale has the largest IRR among other common global oil developments while it also has the shortest payback time. The latter has been the strongest trigger for the steep shale activity increase of recent years and the emergence of small independent players. The latter needed just enough up-front investment in order to obtain an economical return in a timely manner. These companies will most likely either continue developing shale if they are in the core areas of a play or significantly drop activity in a low oil price reality. However, for bigger players i.e. majors and large independents, the flexibility of shale activity (short payback time) is driving them towards non-shale developments for the allocation of their 2015 budget in the low oil price reality. This is based on the belief that shale activity can be easily turned on and off according to oil demand and that breakeven price for shale is constant, as it normally does for other developments. However, recent analysis shows that for most plays breakeven prices for shale are falling every year (Figure 3).

A yearly reduction of the shale breakeven price in the main plays is a result of both a reduction on well cost and an increase in EUR per well. A reduction in well cost (Figure 4) is due to shorter drilling time (increase pad drilling) and shorter completion time (increased use of zipper fracs). An increase in EUR has been observed when estimating it at 30 years with wells decreasing initial decline thanks to better well placement and advances in known completion techniques i.e. modified zipper fracs.

 

Written by analysts at Rystad Energy, edited for web by Cecilia Rehn

Published on 06/01/2015


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