Is $60/bbl crude really the new $100/bbl? This saying has come about in light of the apparent stabilization of WTI spot prices (with the notable exception of the 15% drop this week) around the $60/bbl mark over the last three months. We have all heard it now, but what does that entail? While it’s unlikely we will start seeing economics that are on par with last year, the recent period of $60 range-bound WTI does present the opportunity to look at what crude oil price levels provide rates of returns equivalent to last year, given increasing well productivity and falling service costs. At BTU Analytics, we are approaching this by looking at a major oil field that is highly sensitive to oil price swings: the Bakken.
The above graphic shows that horizontal drilling activity in the Central Williston (which accounts for over 90% of the drilling activity in the area) has fallen off since the price crash in Q4 2014, as one would expect. However, what we also see is a recent uptick in drilling, which, interestingly enough, occurred as WTI stabilized back to the $60 price level. This falls right in line with what we are seeing with rig counts as well, with a 2015 year-to-date average rig count of 98 versus an average rig count of 170 rigs in 2014.
Diving in a bit deeper, we look at three of the biggest operators in the Bakken. These are Whiting (WLL), Continental (CLR), and Hess (HES). What does it take to be the new $100? This would mean that we begin to see wellhead Internal Rates of Return (IRRs) and months to payout (the number of months required to make your money back on a drilled and completed well) that are on par with the numbers we were seeing last year, when WTI was around $100/bbl.
Based on the above slide, we see that rates of return are far from their 2014 levels, even in the face of decreasing well costs. Keep in mind also that the 2015 IRRs are using type curves based on a sample of about 40 wells per operator, versus the 2014 curves that have about 200 wells per operator in the sample size. Given the sample size differences, as well as differences in the actual numbers, a weighted average of the two years is used in the analysis for 2015. In the following slide, we can see that months to payout are still not close to what they were during 2014. Based on BTU Analytics’ Wellhead Economics Model, for each of these three producers, the new $100/bbl is much closer to $90/bbl than it is $60/bbl. Using the same model, in order to have $60/bbl produce comparable results, well costs would need to drop to roughly $4.5 MM per well.
Is $60 the new $100? It’s not in the Bakken. To get more on BTU Analytics’ view of Bakken production, click here for a sample of the Upstream Outlook.