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The Truth About Permian Shale Break-Even Prices

drilling rig

Despite OPEC’s best efforts, shale boomers are still alive and kicking—at least some of them. More precisely, those that came first, chose the best acreage, and had the farsightedness needed to make it profitable in the long run, as well as some luck. At least that’s the conclusion of IHS Markit in a new study.

The market researcher’s study focused on the Delaware Basin, which is a particularly prolific part of the Permian. The study found that the best performers were the companies that entered the play first and knew more than most about the local geology, and named EOG Resources as the most successful in that area, thanks to its long presence in the Delaware Basin and the extensive knowledge of the equally extensive plays it is operating, according to author Sven Del Pozzo.

Because of its early entrance and higher-risk appetite, EOG and others like it now remain profitable even with $50 crude, unlike droves of other sector players that have either gone under or are about to, because they simply cannot bring their production costs down enough to survive in the current price environment.

But these best performers have more than just themselves to thank, according to another IHS expert, associate director for Plays and Basins Reed Olmstead. Olmstead explained at a recent industry event that there were four factors that determine oil and gas company success in this area. The first indeed included tactics such as picking and choosing where to drill, which accounted for 35 percent of the overall cut of their breakeven price, but 40 percent of the reduction came from price cuts made by the oilfield service sector – a segment of the oil industry that is having its own problems after being forced to offer service prices at a solid discount plus much shorter contracts to stay afloat.

The other two factors contributing to the success of the oldest Permian players were operational improvements, which accounted for 20 percent; and infield learnings, which accounted for 6 percent.

Meanwhile, the Permian remains the most productive of all shale plays across the U.S.

It’s apparent that luck had a bit to do with the success of those early entrants, but risk-taking was also a defining characteristic, according to Del Pozzo, who is IHS’ director of energy company and transaction research. In those early days of the shale revolution, these companies were the first to try horizontal drilling instead of the traditional, vertical kind.

Horizontal drilling is costlier than its vertical sibling, but it makes for better yields. Higher risk, but higher possible reward. The shale boom pioneers seem to be still reaping the benefits of these yields despite the price downturn.

In June of this year, energy expert Art Berman said that the breakeven in the Permian had gone down to $61 a barrel, making the play the lowest-cost deposits in the world. Still, crude oil prices at the time were notably lower than $61 (and still are).

Despite this discrepancy, the old dogs in the Permian survived. Today, the breakeven point in the Delaware Basin may be as little as $37, assuming the calculations of a Wood Mackenzie analyst, Ben Shattuck, are accurate.

In this light, local E&Ps are not just surviving, they are thriving. No wonder Del Pozzo titled his report “IHS Herold Company Play Analysis: Delaware Basin: The Strong Get Smarter; Remarkable Profitability at Current Prices.”

By Irina Slav for Oilprice.com

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  • chris ray on October 13 2016 said:
    It is impossible for Shale companies to survive even if the WTI reaches $60. Most of companies are in surviving mode and not paying service companies. It is very close to the stages that either oil companies or service companies go bankruptcy if not both. Broken even price for shale production is a little more than $60 on average and don't listen any "experts".
  • JW on October 14 2016 said:
    The above comment is ridiculous! I own a service Company in the Permian Basin including work in The Delaware. I haven't had one Oil Company fail to pay one cent. I work for big majors down to small independents and they all pay! Chris Ray doesn't know what he's talking about.

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