The latest report from Wood Mackenzie on U.S. and other non-OPEC oil exploration and production into 2025 is worthy of a very deep dive, because it gives terrific information, not just on where U.S. oil will be coming from in the next 10 years, but where the best likely places to invest will be.
I truly rely upon Wood Mackenzie as one of the finest, if not the finest energy analytics service out there – and their latest report serves as a tremendous template for our investment purposes. While the report is fairly long and wonky, the major takeaways can be culled from this one very important slide:
(Click to enlarge)
There’s so much information here, it’s hard to know where to start. But let’s start where Wood Mackenzie did, pointing out the tremendous gains in efficiencies, spacing and techniques for shale drilling, and discussing at length the terrific gains (drops) in breakeven production prices for various shale plays here in the U.S.
This note of dropping breakeven prices was heralded by most of the energy world as the important point of the report, showing that oil was much more likely to remain under $100 a barrel for a very long time, considering the profits that several core plays could achieve even at $40 a barrel.
But this, I submit, is an ultimately incorrect conclusion. Let’s look deeper.
First, it can be seen in the chart that the breakeven prices that are represented are weighted averages, meaning that while much of the oil that might be produced in a certain area will be at or below that average number, a healthy portion will be above it and sometimes far above it. Indeed, the Woodmac chart goes a good way to showing just how healthy each area is, how much oil is likely to be produced and how much of it is at or below their average breakeven price and also, importantly, how much will be above it.
Look, for example, at the Wolfcamp bar on the slide, a prime Permian area. The breakeven for that play lies low in the bar, implying that a large portion of those wells will deliver breakevens below $40, but it also implies a sharp cutoff once those core wells are counted, with other portions of the play requiring upwards of $75 to be profitable. The Eagle Ford bar shows a similar profile.
It is essential that we take the slide in its entirety, because Woodmac points out that 9 million barrels a day of new production will likely come online at a breakeven price of…