Did US Shale Really Hit a $25/Barrel Breakeven Price?

According to a Forbes article, US crude oil production efficiency has improved so much that breakeven costs are as low as $25 per barrel... but I'm not sure where or whether this is just a tiny pocket of $25 oil. They make it sound like that's pretty much US breakeven. I mean, it's not close to the under $10 the Saudis get, but it's a far cry from a few years ago. Anyone know what the non-media truth is to the breakeven numbers?

 

 

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Difficult to say what the actual break even price for U.S. Shale oil is.  The decline rates average around 80% decline in 3 years.

I would hazard a guess that the actual break even price would be around $80 or so.  Don't shoot me, let me explain...

Forbes, Bloomberg, MSM tend to ignore the elephant in the room of the massive debt that financed the U.S. Shale oil boom. Still mostly unpaid, and still racking up interest due.

$293 billion of debt just in bonds. Let alone all of the bank loans.  Easily half a Trillion dollars of debt - that is what bankrolled the U.S. Shale revolution.

Most MSM, when they discuss breakeven prices, neglect to include the massive amounts of debt into their calculations.

And the MSM tends to throw out a red herring of "technology advances" that "drove down" the break even costs.

The bulk of these so-called "technology advances" in the U.S. fracing industry is simply squeezing down to virtually no profits, the producer's costs for manpower rates, costs for equipment, costs for Service Companies.

As the price of oil recovers, the manpower that got bled dry by super low day rates, the Service Companies that survived on pretty much no profits for the past few years, the equipment renters who have been idle since 2015 ....  all of these rates will go up, as there services are coming back into demand big time.

And prolly 95% of the price of the so-called "technology advances" in the fracing industry will recover, as manpower, service companies and equipment suddenly become in short supply.

So, back to your question.... I can't accurately answer your question about the actual break even prices for the U.S. fracing industry.  But it sure as heck isn't $25 (what the heck is the article's author smoking?).

Factoring in the huge backlog of debt + interest due on the debt, it must surely be well over $60 break even cost, and I would guess it is closer to $80 break even.

Just my opinion; as always, you are free to disagree.

And in this case, I fully expect an outcry of disagreement from a heck of a lot of people. 

No worries.  I have been over this argument many times before, and if you include the backlog debt + interest, there is no way in hell that there is a break even price of $25 for fracing.

Near as I can tell, up through 2017, the U.S. Shale Oil industry has spent more than it earned. 

In other words, up through 2017, the U.S. Shale Oil industry as a whole has lost money.

Hence my guesstimate of an $80 actual break even price.

Scuse me now, I'll need to duck the bricks that are going to be thrown at me for this comment ...

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No bricks from this corner. $80 sounds much more reasonable as a average, but I'll try to find what the average 'claims' are--and I'm pretty sure they're not $25 even without the debt load. 

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17 minutes ago, TraderTate said:

No bricks from this corner. $80 sounds much more reasonable as a average, but I'll try to find what the average 'claims' are--and I'm pretty sure they're not $25 even without the debt load. 

I did some quick Google searching, and found this fairly recent article from Nick Cunningham here on the Oil Price site.

The Oil Price article cites an average break even cost of $64 in the 3rd quarter of 2017 for the U.S. Shale Oil industry.

(I still tend to think it's closer to an $80 break even cost, because dang it, the U.S. Shale Oil industry as a whole was still losing money up through the end of 2017.)

https://oilprice.com/Energy/Energy-General/Why-Is-The-Shale-Industry-Still-Not-Profitable.html

"Echoing the criticism of too much hype surrounding U.S. shale from the Saudi oil minister last week, a new report finds that shale drilling is still largely not profitable. Not only that, but costs are on the rise and drillers are pursuing “irrational production.”

...

"The Al Rajhi Capital report concludes that operating costs have indeed edged down over the past several years. However, a broader measure of the “cash required per barrel,” which includes other costs such as depreciation, interest expense, tax expense, and spending on drilling and exploration, reveals a more damning picture. Al Rajhi finds that this “cash required per barrel” metric has been rising for several consecutive quarters, hitting an average $64 per barrel in the third quarter of 2017. That was a period of time in which WTI traded much lower, which essentially means that the average shale player was not profitable."

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(edited)

Depending on the Basin, breakeven ranges from $32- 40ish per barrel. Right now, we are facing a few logistical challenges in the completions area, namely quality frac sand and backlog in completion crews

Edited by Justin Hicks
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really? I'd like to see data for this and what the metrics are, and how the basins compare. But that's probably the million-dollar question. And does debt load factor in anyone's math as @Tom Kirkman pointed out?

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Thanks Kate.  I really need to get Enno Peters and Mike Shellman over here on the Oil Price Community forum.  They have researched the heck out of this topic.

BRB, off to invite these gents to join this forum ...

Enno's site:

https://shaleprofile.com

Mike's site:

https://www.oilystuffblog.com

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I'm with Tom on breakeven; low ball figures are likely overstating expected cumulative production and not including all costs.

Few more shale skeptics:

https://www.peakprosperity.com/blog/113557/great-oil-swindle

https://srsroccoreport.com/u-s-shale-oil-industry-swindling-stealing-energy-stay-alive/ (disagree with Steve on idea that low EROI will drive oil price down - in my view if it cost more to produce, price should go up)

http://www.artberman.com/wp-content/uploads/ACS-Presentation-21-MAR-2018_REDUCED.pdf Art suggests Eagle Ford break-even is ~$50; 73% of oil companies lost money in 2017.

Will be "interesting times" if interest rate keeps rising.

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I think the real breakeven for US drillers will forever be a bit of an enigma. Unlike state run oil, there are many many many drillers in the US--all in different basins (where costs vary widely), with different levels of overhead, different technology, different manpower expenses--different everything. 

I can say with certainty, however, that US drillers are pumping out more barrels of oil with significantly fewer rigs. While production in the major basins have increased, they are doing so with less--this should cost less. Fat, dumb, and happy from the days of $100 oil, I would have guessed the breakeven was $80ish. Now that oil is trading much less, I would expect breakevens are much less, but of course this will vary widely between drillers. 

The World Bank in October said that US drillers had seen costs diminish by 42% since 2013. That's pretty significant.

https://www.energyindepth.org/average-u-s-shale-breakeven-oil-price-has-dropped-42-percent-in-four-years/

World-Bank-US-Shale-Breakeven.jpg

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When you take into account less prolific reservoirs in the Rockies or for example the Woodbine Formation in East Texas you come out with an average well above $50/bbl. 

There are some sections of the Bone Spring and Wolfcamp in the Permian that breakeven sub $40.

But all of those are half cycle....

When you bake in $70,000 an acre like some recent Permian acquisitions it gets unlikely the breakeven is so low.

 

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Financial Times article:

US shale groups reach self-financing milestone as oil price rises

"The US shale oil revolution has reached a landmark moment, with the sector’s top companies for the first time earning enough cash to cover the cost of new wells.

... From the time the first shale oil test wells were drilled in the US in 2008-09, the industry’s capital expenditure has exceeded its cash from operations, with producers only able to stay in business by attracting hundreds of billions of dollars in financing from bond and share sales and bank loans.

From 2008 to 2017, US exploration and production companies raised $293bn from bond sales, according to Dealogic."

================================

So, erm, about that break even price ....

Financial Times says so far (up until last week) the U.S. Shale Oil industry has spent more than it earned.

Earlier in this thread I guestimated the break even price was around $80.  Seems I may have low balled that number, though.

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On ‎5‎/‎4‎/‎2018 at 2:10 AM, Tom Kirkman said:

Thanks Kate.  I really need to get Enno Peters and Mike Shellman over here on the Oil Price Community forum.  They have researched the heck out of this topic.

BRB, off to invite these gents to join this forum ...

Enno's site:

https://shaleprofile.com

Mike's site:

https://www.oilystuffblog.com

Tom,

I agree Mike and Enno have great stuff.  I have discussed breakeven prices for the Permian at peakoilbarrel.com.  Mike uses a 36 payout rule, another oil man uses a 60 month payout rule where essentially net revenue (not discounted) must pay for the capital cost of the well over 36 or 60 months in order to earn a decent ROI over the life of the well.

Using average Permian well data for well starting production in 2016 (from shaleprofile.com) and reasonable LOE, royalties, taxes, interest, G&A, etc and average well costs (including land cost), with a 10% nominal discount rate (7% real rate assuming 3% inflation), the 60 month payout rule is equivalent and requires about a $71/b wellhead price to earn the 10% ROI and payout in 60 months.

The more conservative 36 month rule is equivalent to a 17.3% nominal discount rate (14.3% real rate at 3% inflation) and requires $81/b at the wellhead over the life of the well to earn the 17.3% annual ROI.  "Breakeven", which I take to mean a 0% real rate of return or 3% real ROI, would require $60/b at the well head, that price would require 10.33 years to pay out and net revenue (with no discount) over the 16.5 year life of the well (I assume shut in occurs under 10 b/d) would be about 1 million on a 9 million dollar investment over 16.5 years.

At $56/b the average 2016 Permian well has a net revenue (discount rate = 0) over its life of $59,000.

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On ‎5‎/‎3‎/‎2018 at 8:07 PM, TraderTate said:

No bricks from this corner. $80 sounds much more reasonable as a average, but I'll try to find what the average 'claims' are--and I'm pretty sure they're not $25 even without the debt load. 

Tom and Tradertate,

 

Besides Enno Peters

https://shaleprofile.com/

and Mike Shellman

https://www.oilystuffblog.com/

There is also Rune Likvern

https://fractionalflow.com/2017/10/08/a-little-on-the-profitability-of-the-bakkennd/

and Art Berman

http://www.artberman.com/tight-oil-money-return-investment-eagle-ford-shale-case-history/

and peak oil barrel

http://peakoilbarrel.com/tag/lto/

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Thanks Dennis, I already know about Rune Likvern and Art Berman, and respect the work of both of these fine gents.  

The peak oil barrel site I'm not familiar with, and I'll check it out.

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16 hours ago, Brandon M WM said:

When you take into account less prolific reservoirs in the Rockies or for example the Woodbine Formation in East Texas you come out with an average well above $50/bbl. 

There are some sections of the Bone Spring and Wolfcamp in the Permian that breakeven sub $40.

But all of those are half cycle....

When you bake in $70,000 an acre like some recent Permian acquisitions it gets unlikely the breakeven is so low.

 

Brandon,

There may be some individual sweet spot areas, with more prolific wells that breakeven, but if we consider the average Permian basin horizontal well that was completed in 2016 the EUR when fitting a hyperbolic to output data is about 320 kboe (with 304 kbo) over a 16.5 year life (assuming shut in at less than 10 bo/d).  That average well breaks even at about $60/b.  When looking at the industry it is the average well that matters.

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16 minutes ago, Dennis Coyne said:

Tom,

I agree Mike and Enno have great stuff.  I have discussed breakeven prices for the Permian at peakoilbarrel.com. 

...

Dennis, many thanks for that fine breakdown on shale oil return on investment and break even prices.

I'm going to check out your work over on peakoilbarrel.com to get more information.  It's pretty dang hard for me (and presumably others also) to sort out fact from frothy fiction on the actual profitability of the Shale Oil industry.  And your comment above provided a much clearer explanation than what much of the reporting on shale oil does.

Well done, and very much appreciated.

(Tomorrow I'm flying to Dubai for business meetings and a site visit in UAE ... so my reading up on peakoilbarrel.com will need to wait till I return later next week.  I'll be mostly offline for the next few days.)

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Thanks Tom.  I have learned much from Mike Shellman, Rune Likvern, Art Berman, and Enno Peters, as well as Shallow sand over at Peak Oil Barrel.  Also have learned a lot from Rockman over at Peakoil.com (and previously he commented at the Oil Drum).

 

A recent model I did for US LTO, is below.  Assumes well cost of 7.5 million (2017$), OPEX=$12/b, royalties and taxes 32%, transport $4/b, downhole maintenance $3500/month (all dollar figures in fixed 2017$), annual real discount rate 10% and Brent oil price in 2017$ shown on right axis.

A DCF analysis is used to ensure wells have positive net present value over their life.  The model assumes no further increases in well productivity for average US well after Feb 2018 and that sweet spots get drilled up by Dec 2018 and new well EUR starts to decrease.  The rate of decrease of new well EUR is a function of well completion rates (higher completion rate increases the rate that new well EUR decreases).

bakmodel2.png

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58 minutes ago, Dennis Coyne said:

A recent model I did for US LTO, is below. 

Dennis, you have made several pretty amazing comments in this thread, with facts and figures about LTO wells.  Looking forward to reading your work on Peak Oil Barrel next week once I get back from Dubai.  It's 4 am now, on my way to the airport shortly, and I'll be mostly offline for the next few days or so.

Please do keep commenting, it's pretty rare for be to bump into people online who are well versed with Enno, Mike, Rune and Art's work, rather than the usual Mainstream Media nonsense about the U.S. Shale Oil industry.

I'm really liking this new Oil Price Community forum ... some really good comments and insights being shared on this forum.

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Well, if we have $80 break even the upside is that natural gas will take over as the fuel of choice for internal compression engines of all sizes. It will take a long time though. The oil companies are in the habit of selling oil and promoting it whenever possible. Bad habits die hard. 

See The Natural Gas Revolution: https://docs.google.com/document/d/156PkEaVAhcZJzgthgjFaNwz88gZIVx4XXG1nBlWq04I/edit

Also Section Eleven of Natural Gas Stories: https://docs.google.com/document/d/156PkEaVAhcZJzgthgjFaNwz88gZIVx4XXG1nBlWq04I/edit

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I am wondering how do I buy oil stock or buy a barrel of oil. 

 

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https://apnews.com/8c285008daf44649af761e2a55751b26

This article is talking about a rare bird that will cause the drilling to cease in the Rocky mountain areas. This will cause a huge shift for debt and barrel prices but leave us with a happy birdie. :) 

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