US Tight Oil: What's Behind the Competitive Cost Curve?

Abstract

The cost of supply for US tight oil is the lowest it has ever been. Some specific project areas support development well breakevens less than US$40/bbl. Other areas can require prices above double that, but these higher cost areas are fortunately not important assets to near term supply and investment. For the lowest cost assets though, what has allowed breakeven prices to fall by over US$20/bbl since early 2014? It has really been driven by two groupings of variables: costs per well and recoverable volumes per completion. The former is dropping and the latter is rising. Drilling and completion costs have been reduced by over 30% on a per well basis, while many 2016 horizontal wells have an additional 2,000 feet of horizontal lateral and utilised more material: an extra 500 pounds of proppant per lateral foot. On a like for like unit basis, well costs are down over 40%. New bit design, faster rates of penetration, and top quality rigs and crews staying in the field have all contributed. The adoption of new technologies like diverters, higher resolution reservoir mapping, and more field automation (including machine learning) will continue to place a ceiling on well costs. In Wood Mackenzie's analysis, the unavoidable service cost rebound will only negatively impact about 35% of the efficiency gains seen in 2016. The larger driver on the falling cost of supply has been well gains, particularly cumulative volumes seen during the first year of production. At a fixed WTI price of US$50/bbl, Wood Mackenzie now models roughly 22 bn bbl of commercial tight oil resource in the US. In 2015, the commercial tight oil volumes that generated a 10% post tax rate of return at this price was approximately 15 bn bbl, or 32% less. Much of this increase is driven by upgraded recovery factors. Better choking practices, superior lift systems, and larger volumes of stimulated rock close to the wellbore are material drivers. This recovery uplift per well has been one of the reasons US production declines have been shallower than many industry observers anticipated. Companies who have successfully executed the implementation of a cost-slashing culture, while also embedding new technologies have weathered the downturn best. More importantly, these are the firms that have built the largest inventory of undrilled, low-cost tight oil locations. Many of these PUD and 2P locations are located in the Midland and Delaware Basins.

AAPG Datapages/Search and Discovery Article #90291 ©2017 AAPG Annual Convention and Exhibition, Houston, Texas, April 2-5, 2017