The break-even price for Permian basin tight oil plays is about $61 per barrel. That puts Permian plays among the lowest cost significant supply sources in the world. Although that is good news for U.S. tight oil plays, there is a dark side to the story.
Just because tight oil is low-cost compared to other expensive sources of oil doesn’t mean that it is cheap. Nor is it commercial at current oil prices.
The disturbing truth is that the real cost of oil production has doubled since the 1990s. That is very bad news for the global economy. Those who believe that technology is always the answer need to think about that.
Through that lens, Permian basin tight oil plays are the best of a bad, expensive lot.
Not Shale Plays and Not New
The tight oil plays in the Permian basin are not shale plays. Spraberry and Bone Spring reservoirs are mostly sandstones and Wolfcamp reservoirs are mostly limestones.
Nor are they new plays. All have produced oil and gas for decades from vertically drilled wells. Reservoirs are commonly laterally discontinuous and, therefore, had poor well performance. Horizontal drilling and hydraulic fracturing have largely addressed those issues at drilling and completion costs of $6-7 million per well.
Permian Basin Overview
The Permian basin is among the most mature producing areas in the world. It has produced more than 31.5 billion barrels of oil and 112 trillion cubic feet of gas since 1921. Current production is approximately 1.9 million barrels of oil (mmbo) and 6.6 billion cubic feet of gas (bcfg) per day.
The Permian basin is located in west Texas and southeastern New Mexico. It is sub-divided into the Midland basin on the east and the Delaware basin on the west, separated by the Central Basin platform.
The first commercial discovery in the Permian basin was made in 1921 at the Westbrook Field. It was followed in 1926 with the 2 billion barrel (bbo) Yates Field (San Andres & Grayburg reservoirs), the 2.1 bbo Wasson Field (Glorieta and Leonard reservoirs) in 1936, and the 1.5 bbo Slaughter Field (Abo and Clear Fork reservoirs) also in 1936. Reservoirs were chiefly high-quality limestones although the Wasson and Slaughter fields also produced from mixed sandstones and limestones that are equivalent to reservoirs in today’s Bone Springs tight oil play.
The Spraberry Field (1949) was the first discovery whose primary reservoir was among the present tight oil plays. Its ultimate production before horizontal drilling was estimated at 932 mmbo. The field had low recovery efficiency of 8-10% and was only marginally commercial prior to the recent phase of tight oil drilling.
Tight Oil Plays
I evaluated the three main tight oil plays. The Trend Area-Spraberry play is located mostly in the Midland basin while the Wolfcamp and Bone Spring plays are located mainly in the Delaware basin.
The Wolfcamp play has produced the most oil and gas—205 million barrels of oil equivalent (mmBOE)*—and has the largest number of producing wells, followed by the Trend Area-Spraberry and Bone Spring plays. All of the plays produce considerable associated gas and only the Trend Area-Spraberry is technically an oil play. The Wolfcamp and Bone Spring are classified as gas-condensate plays based on liquid yield.
The Bone Spring play is the most commercially attractive of the tight oil plays with an estimated $49 per barrel of oil equivalent (BOE) break-even price for the top 5 operators. The Spraberry play has a break-even price of $55 per BOE for the top 5 operators but considerably higher well density and, therefore, lower long-term potential. Results from the Wolfcamp play are mixed with an average break-even price of $75 per BOE for the top 5 operators but $61 per BOE excluding one operator with poorer well performance.
Trend Area-Spraberry Play
I evaluated the 5 key operators in the Trend Area-Spraberry play with the greatest cumulative production and number of producing wells: Pioneer (PXD), Laredo (LPI), Diamondback (FANG), Apache (APA) and Energen (EGN).
I did standard rate vs. time decline-curve analysis for those operators. The matches with production history were generally good.
Much of the gas production in the Permian basin is irregular because of periodic flaring so matching gas production history was sometimes difficult. Oil reporting in Texas is by lease rather than by well so there are periodic upward excursions of oil production as new wells on the same lease come on line. For these reasons, I feel that the decline-curve analysis results are probably optimistic.
The average Trend Area-Spraberry well EUR (estimated ultimate recovery) for the 5 operators is approximately 265,000 BOE using an economic value-based conversion of natural gas-to-barrels of oil equivalent of 15-to-1. The break-even oil price for that average EUR is approximately $55 per BOE. Laredo has the best average well performance with a break-even oil price of about $43 per BOE and Apache has the poorest well performance and highest break-even price of almost $92 per BOE.
The top 5 producers in the Wolfcamp play are Cimarex (XEC), Anadarko (APC), EOG, Devon (DVN) and EP (EPE).
The average Wolfcamp well EUR for the 5 operators is approximately 228,000 BOE. The break-even oil price for that average EUR is approximately $75 per BOE. That is because of poor well performance by Devon and EP whose break-even oil prices are more than $100 per BOE.
By eliminating EP from the calculations, the average EUR for the play is approximately 303,000 BOE and the associated break-even price is about $61 per BOE.
Anadarko has the best average well performance with a break-even oil price of about $45 per BOE and EP has the poorest well performance and highest break-even price of almost $177 per BOE.
Bone Spring Play
The top 5 producers in the Bone Spring play are Cabot (COG), Devon (DVN), Cimarex (XEC), Energen (EGN) and Mewbourne.
The average Bone Spring well EUR for the 5 operators is approximately 294,000 BOE. The break-even oil price for that average EUR is approximately $49 per BOE.
Cimarex has the best average well performance with a break-even oil price of about $42 per BOE and Mewbourne has the poorest well performance and highest break-even price of almost $78 per BOE.
Commercial Play Areas
I made EUR maps for the 3 Permian basin tight oil plays using all wells with 12 months of production. I then used the average play EUR to determine commercial cutoffs for $45 and $60 per BOE oil prices using the economic assumptions.
Using the calculated EUR-cutoffs for the two oil-price cases, 26% of Permian tight oil place well break even at $45 per BOE, and 40% break even at $60 per BOE price.
Current well density was calculated by measuring the mapped area of the $60 commercial area and dividing by the number of producing wells within those polygons. The Wolfcamp has the lowest well density of 1,269 acres per well and, therefore, the most development potential. The Bone Spring also has considerable infill potential with 725 acres per well.
The Trend Area-Spraberry has additional development potential but a comparatively lower current well density of 281 acres per well because there are more than 6,000 vertical producing wells within the $60 commercial area defined by horizontal well EUR. These vertical wells have produced 203 MMBOE to date, approximately equal to the 206 MMBOE for all horizontal wells both inside and outside of the commercial area.
Operators routinely stress the large number of potential infill locations in their investor presentations and press releases based on very close well spacing of, for example, 40 acres per well. Although well density is important for determining play life, I doubt that well spacing of much less than 100 acres per well is economically attractive because of potential interference between wells that are drilled horizontally and hydraulically fractured.
Investors should understand that more wells is not better. Superior economics result from drilling thefewest number of wells necessary to optimize production.
Operators also stress the potential for additional potential reservoirs within the same play reservoir. That is undoubtedly true but those are not yet discovered and are, therefore, resources and not reserves of any category based on the SPE Petroleum Resources Management System. If they are so attractive, why haven’t they been drilled and produced already?
*I use a 15 cubic feet per barrel equivalent conversion based on the price of natural gas and crude oil. The conversion based on energy content is approximately 6:1 and is used by most producers to calculate BOE EUR. The EUR reported by producers are, therefore, higher than those shown in this study especially for plays and wells with high gas-oil ratios.
Posted in The Petroleum Truth Report on June 19, 2016
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The 9th edition of the Abu Dhabi International Petroleum Exhibition and Conference (ADIPEC) Awards, hosted by the Abu Dhabi National Oil Company (ADNOC), is now open for submissions.
In this fourth industrial age it is technology, innovation, environmental leadership and talented workforces that are shaping the companies of the future.
Oil and gas is set to play a pivotal role in driving technology forward, and at this year’s ADIPEC Awards emphasis is placed on digitalisation, research, transformation, diversity, youth and social contribution, paving the way towards a brighter tomorrow for our industry.
Hosting the ADIPEC Awards is one of the world’s leading energy producers, ADNOC, a company exploring new, agile and flexible ways to build its people, technology, environmental leadership and partnerships, while enhancing the role of the United Arab Emirates as a global energy provider.
Factors which will have a prominent influence on the eventual decisions of the distinguished panel of jury members include industry impact, sustainability, innovation and value creation. Jury members have been carefully selected according to their expertise and knowledge, and include senior representatives from Baker Hughes, a GE Company, BP UAE, CEPSA Middle East, ENI Spa, Mubadala Petroleum, Shell, Total and Weatherford.
Chairperson of the awards is Fatema Al Nuaimi, Acting CEO of ADNOC LNG, who says: “At a time when the industry is looking towards an extremely exciting future and preparing for Oil &Gas 4.0, the awards will recognise excellence across all its sectors and reward those who are paving the way towards a successful and sustainable future.”
Ms Al Nuaimi, continues: “we call upon our partners across the globe to submit their achievements in projects and partnerships which are at the helm of technical and digital breakthroughs, as well as to nominate the next generation of oil and gas technical professionals, who will spearhead the ongoing transformation of the industry.
These awards are recognising the successes of those companies and individuals who are responding in the most innovative and creative manner to the global economic and technological trends. Their contribution is pivotal to the development of our industry and to addressing the continuous growth of the global energy demand. “
Christopher Hudson, President of the Energy Division, dmg events, organisers of ADIPEC, says: “With ADNOC as the host and ADIPEC as the platform for the programme, the awards are at the heart of the worldwide oil and gas community. With its audience of government ministers, international and national oil companies, CEOs and other top global industry influencers, the ADIPEC Awards provide the global oil and gas community the perfect opportunity to engage, inspire and influence the workforce of the future.”
Entries can be submitted until Monday 29th July for the following categories:
Breakthrough Technological Project of the Year
Breakthrough Research of the Year
Digital Transformation Project of the Year
Social Contribution and Local Content Project of the Year
Oil and Gas Inclusion and Diversity Company of the Year
Young ADIPEC Technical Professional of the Year
A shortlist of entries will be announced in October and winners will be revealed on the first day of ADIPEC 2019, Monday 11th November, St. Regis Saadiyat Island, Abu Dhabi.
Held under the patronage of the President of the United Arab Emirates, His Highness Sheikh Khalifa Bin Zayed Al Nahyan, and organised by the Global Energy Division of dmg events, the Abu Dhabi Petroleum International Petroleum Exhibition and Conference (ADIPEC) is the global meeting point for oil and gas professionals. Standing as one of the world’s leading oil and gas events. ADIPEC is a knowledge-sharing platform that enables industry experts to exchange ideas and information that shape the future of the energy sector. The 22nd edition of ADIPEC will take place from 11th-14th November 2019, at the Abu Dhabi National Exhibition Centre (ADNEC). ADIPEC 2019 will be hosted by the Abu Dhabi National Oil Company (ADNOC) and supported by the UAE Ministry of Energy & Industry, Department of Transport in Abu Dhabi, the Abu Dhabi Chamber of Commerce and Industry, Masdar, the Abu Dhabi Future Energy Company, Department of Culture and Tourism - Abu Dhabi, the Abu Dhabi Department of Education and Knowledge (ADEK). dmg events is committed to helping the growing international energy community.
Source: U.S. Energy Information Administration, based on World Input-Output Database
Note: Dollar values are expressed in 2010 U.S. dollars, converted based on purchasing power parity.
The industrial sector of the worldwide economy consumed more than half (55%) of all delivered energy in 2018, according to the International Energy Agency. Within the industrial sector, the chemicals industry is one of the largest energy users, accounting for 12% of global industrial energy use. Energy—whether purchased or produced onsite at plants—is very important to the chemicals industry, and it links the chemical industry to many parts of the energy supply chain including utilities, mines, and other energy product manufacturers.
The chemicals industry is often divided into two major categories: basic chemicals and other chemicals. Basic chemicals are chemicals that are the essential building blocks for other products. These include raw material gases, pigments, fertilizers, plastics, and rubber. Basic chemicals are sometimes called bulk chemicals or commodity chemicals because they are produced in large amounts and have relatively low prices. Other chemicals—sometimes called fine or specialty chemicals—require less energy to produce and sell for much higher prices. The category of other chemicals includes medicines, soaps, and paints.
The chemicals industry uses energy products such as natural gas for both heat and feedstock. Basic chemicals are often made in large factories that use a variety of energy sources to produce heat, much of which is for steam, and for equipment, such as pumps. The largest feedstock use is for producing petrochemicals, which can use oil-based or natural-gas-based feedstocks.
In terms of value, households are the largest users of chemicals because they use higher value chemicals, which are often chemicals that help to improve standards of living, such as medicines or sanitation products. Chemicals are also often intermediate goods—materials used in the production of other products, such as rubber and plastic products manufacturing, agricultural production, construction, and textiles and apparel making.
Source: U.S. Energy Information Administration, WEPS+, August 2018
Note: Dollar values are expressed in 2010 U.S. dollars, converted based on purchasing power parity.
The energy intensity of the basic chemicals industry, or energy consumed per unit of output, is relatively high compared with other industries. However, the energy intensity of the basic chemicals industry varies widely by region, largely based on the chemicals a region produces. According to EIA’s International Energy Outlook 2018, Russia had the most energy-intensive basic chemicals industry in 2015, with an average energy intensity of approximately 98,000 British thermal units (Btu) per dollar, followed by Canada with an average intensity of 68,000 Btu/dollar.
The Russian and Canadian basic chemicals industries are led by fertilizers and petrochemicals. Petrochemicals and fertilizers are the most energy intensive basic chemicals, all of which rely on energy for breaking chemical bonds and affecting the recombination of molecules to create the intended chemical output. These countries produce these specific basic chemicals in part because they also produce the natural resources needed as inputs, such as potash, oil, and natural gas.
By comparison, the energy intensity of the U.S. basic chemical industry in 2015 was much lower, at 22,000 Btu/dollar, because the industry in the United States has a more diverse production mix of other basic chemicals, such as gases and synthetic fibers. However, EIA expects that increasing petrochemical development in the United States will increase the energy intensity of the U.S. basic chemicals industry.
The United States exports chemicals worldwide, with the largest flows to Mexico, Canada, and China. According to the World Input-Output Database, U.S. exports of all chemicals in 2014 were valued at $118 billion—about 6% of total U.S. exports—the highest level in decades.
The threat of military action in the Middle East has gotten more intense this week. After several attacks on tankers that could be plausibly denied, Iran has made its first direct attack on a US asset, shooting down an unmanned US drone. The Americans say the drone was in international waters, while Iran claims that it had entered Iranian air space. Reports emerging out of the White House state the US President Donald Trump had authorised a military strike in response, but pulled back at the last minute. The simmering tensions between the two countries are now reaching boiling point, with Iran declaring that it is ‘ready for war’.
Predictably, crude oil prices spiked on the news. Brent and WTI prices rose by almost US$4/b over worries that a full-blown war will threaten global supplies. That this is happening just ahead of the OPEC meeting in Vienna – which was delayed by a week over internal squabbling over dates – places a lot of volatile cards on the table. Far more than more than surging US production, this stand-off will colour the direction of the crude market for the rest of 2019.
It started with an economic war, as the Trump administration placed increasingly tight sanctions on Iran. Financial sanctions came first, then sanctions on crude oil exports from Iran. But the situation was diffused when the US introduced waivers for 8 major importers of Iranian crude in November 2018, calming the markets. Even when the waivers were not renewed in April, the oil markets were still relatively calm, banking on the fact that Iran’s fellow OPEC countries would step in to the fill the gap. Most of Iran’s main clients – like South Korea, Japan and China – had already begun winding down their purchases in March, reportedly causing Iran’s crude exports to fall from 2 mmb/d to 400 kb/d. And just recently, the US also begun targeting Iranian petrochemical exports. Between a rock and a hard place, Iran looks seems forced to make good on its threats to go to war in the strategic Straits of Hormuz.
As the waivers ended, four tankers were attacked off the coast of Fujairah in the UAE in May. The immediate assumption was that these attacks were backed by Iran. Then, just a week ago, another two tankers were attacked, with the Americans showing video evidence reportedly show Iranian agents removing mines. But still, there was no direct connection to Iran for the attacks, even as the US and Iran traded diplomatic barbs. But the downing of the drone is unequivocally the work of the Iranian military. With President Donald Trump reportedly ‘bored’ of attempting regime change in Venezuela and his ultra-hawkish staff Mike Pompeo and John Bolton in the driver’s seat, military confrontation now seems inevitable.
This, predictably, has the oil world very nervous. Not just because the extension of the current OPEC+ deal could be scuppered, but because war will impact more than just Iranian oil. The safety of the Straits of Hormuz is in jeopardy, a key node in global oil supply through which almost 20 mmb/d of oil from Iraq, Saudi Arabia, Kuwait and the UAE flows along with LNG exports from the current world’s largest producer, Qatar. At its narrowest, the chokepoint in the Straits is just 50km from Iranian land. Crude exports could be routed south to Red Sea and the Gulf of Aden, but there is risk there too; the mouth of the Red Sea is where Iranian-backed Yemeni rebels are active, who have already started attacking Saudi land facilities.
This will add a considerable war risk premium to global crude prices, just as it did during the 1990 Gulf War and the 2003 invasion of Iraq. But more than just prices, the destabilising effects of a war could consume more than just the price of a barrel. If things are heading the way the current war-like signs are heading, then the oil world is in for a very major change very soon.
Historical crude price responses to wars in the Middle East