Despite the relatively dismal state of the energy industry of late, RBN Energy Inc. has reminded investors there is some good news to be found in the fact shale production is hitting some milestones – all the high dollar tech investments of shale’s early recent years have driven up productivity and consequently, drilling costs are down.
In its regular note to investors, “If I Could Turn Back Production – Impact of Crushed Oil and Gas Prices on Production Economics,” analyst Sheetal Nasta laid out that productivity improvements made production a formidable force in the market in 2015 in spite of substantial headwinds from low oil and gas prices, drilling cuts and failing rig counts.
What happened? “Producers very quickly learned to do a lot more with a lot less,” Nasta explained.
For example, EOG Resources is now drilling wells in the prolific Eagle Ford play in one-third of the time it required just four years ago; drilling three times more wells per rig and producing double the volume of each well in the first 20 days, she wrote.
What’s more, EOG’s success isn’t an exception.
“Productivity improvements are occurring in varying degrees across all the major basins, and for both oil and gas,” she said.
But rig activity hasn’t remained static, and its impact on producers’ internal rates of return (IRR) have been dramatic. In fall 2014, when crude oil was at $90 per barrel, the Bakken had an IRR of 39 percent; in the Permian, the IRR was 40 percent; and producers in the Anadarko play got 41 percent back.
Contrast that with December 2015. With crude oil at $40 per barrel, the Bakken has an IRR of -2 percent; the Permian’s IRR is -1 percent; and producers in the Anadarko earn -2 percent.
All told, between dramatically low commodity prices – but also significantly lower production costs – challenges to the industry are certainly present, Nasta said.
“Let’s face it, we’re not going to see $90 oil and $4 gas any time soon. But … a 40 percent cost reduction versus 2014 at $40 oil and $2.10 gas would allow producers in some plays to keep on drilling, and of course, that is what has been happening all along,” she said. “Even at yesterday’s prices, it’s not over yet.”
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