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Guest Post: Calculating The Breakeven Price For The Median Bakken Shale Well
Authored by CEO of the SOFA,
A lot of data has been thrown around recently concerning the Bakken shale wells of North Dakota in an attempt to figure out the necessary oil price required to break even on the investment. In order to get a clearer picture of the financial situation in Bakken, it is necessary to develop a financial model of the median Bakken well (attached).
The median Bakken well has the following attributes:
With a discount rate of 15%, the median well has a profitability index of 1.02 (after federal income tax) if $66 per barrel is used. (A profitability index of 1.0 indicates a break even situation at the discount rate that was used in the model). This means that at $66 per barrel, half the wells are uneconomic. If oil prices settle out at this price it can be expected that the number of wells drilled should be reduced by about half.
If the current oil price of $55 per barrel is used, the initial production rate has to be increased to 800 BPD in order to break even. According to the J.D. Hughes data, 25% of the wells have an initial production rate of 1000 BPD or more. Accordingly, if oil prices settle out at the current price, the number of wells drilled will be about a quarter of the present number.
Some people have stated that this shale industry exists only due to abnormally low interest rates. If we use $100 per barrel and increase the discount rate to 20%, the median well has a profitability index of 1.6, which is profitable. The well is still making over 200 BPD after payout. My conclusion is that the shale development would still be profitable in a normal interest rate environment.
The production data used in this model are from only 4 counties, Dunn, McKenzie, Mountrail, and Williams. Very few wells have been economic outside of these 4 counties. Therefore, when these 4 counties become saturated with wells, the Bakken play is over.
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And we already see rig counts falling and jobless claims surging in the Shale states.
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Tentacles of the beast. Bitchez?
http://theglobalelite.org/list-banks-ownedcontrolled-rothschild-family/
My conclusion is that the shale development would still be profitable in a normal interest rate environment.
Your conclusion is stupid.
April:
http://www.bloomberg.com/news/2014-04-30/shale-drillers-feast-on-junk-debt-to-say-on-treadmill.html
“There’s a lot of Kool-Aid that’s being drunk now by investors,”
“People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”
Access to the high-yield bond market has enabled shale drillers to spend more money than they bring in. Junk-rated exploration and production companies spent $2.11 for every $1 earned last year, according to a Barclays analysis of 37 firms.
“It’s a perfect set-up for investors to lose a lot of money,” Gramatovich said. “The model is unsustainable.”
Sept:
http://www.bloomberg.com/news/2014-09-08/halcon-s-wilson-drills-more-debt-than-oil-in-shale-bet.html
Halcon spent $3.40 for every dollar it earned from operations in the 12 months through June 30.
Like Halcon, most are spending money faster than they make it, an average of $1.17 for every dollar earned in the 12 months ended on June 30. Only seven of the U.S.-listed firms in Bloomberg Intelligence’s E&P index made more money in that time than it cost them to keep drilling.
With the U.S. bent on energy independence and investors chasing riches from the fracking boom, there’s one other number to consider. Halcon’s proved reserves from the TMS reported to the SEC: zero.
Ecellent post. Ponzi anyone. Max Keiser, loved by some, hated by many, has been harping on the Ponzi nature of Fracking for a long time. Using the argument of massive leverage used to keep drilling faster than existing wells can run down, thus the miracle of rising production. Only one problem, Ponzi financing. Junk Bonds. Loans. All feeding into Fracking faster than the decline rate of the wells. This has Ponzi written all over it. At $70 dollars a barrel, maybe whay 45-50 dollars at a farcking well-head? The whole levered miracle comes down. At $55 dollars a barrel, and well-head at under 40 dollars? Collapse.
The "happy talk" is all coming form those connected to the Ponzi! Frackers and those holding their debt vehicles, those who are the counter parties to the hedges. Lots of people are psiing themselves as this goes south.
Obama is breaking Russia, yet Russia is much better positioned, being unleveraged and with large FX and gold resrves, to withstand the oil price fall, WHILE Fracking, leveraged to the eyeballs, IS NOT!
Fracking may not? LOL why Jack you shouldknow by now that it really doesnt matter to big business how much is lost on a deal, as those losses are socialized. Thats right, the taxpaying public will make their malinvestments pay out. Just watch and see
I completely disagree with most of these articles crying doom on these "low" oil prices.
First and foremost, $60 a barrel IS NOT "low" at all! $60 a barrel is TRIPLE what it was in the late 1990s.
At the consumer level, Joe Sixpack and Jane Soccer mom are all excited about $1.99 gas this week, yet in 2004 they freaked the hell out about gas going over $2 a gallon! It just goes to show the short term memory of the masses.
http://money.cnn.com/2004/05/18/pf/autos/gas_prices/index.htm?cnn=yes
As for this particular article, I'm glad that fracking is closing up shop. It is an uneconomic and extremely inefficient way to obtain energy, and the overinflated crude prices of the last decade allowed this insanity to happen. Now that the market is getting back down to reality, this completely foolish extraction method is being shown for what it is... a total disaster.
Sadly shaking my head........
So were do you think we should get the oil to meet global demand? Can you name specific proven reserves that can be developed to meet this demand? And while you are at it can you please tell me how much it costs to get that oil out of the ground, to the refinery and into your gas tank?
Fracking is one of the last life boats leaving the sinking Titanic....... the band played on...... in the not so distant future the music will stop......
Two days ago an Australian Shale company went bankrupt. And they are just the first across the fracking world.
But the Prez just said energy was booming and we added lots of jobs!!!
Cost of capital is not 5% now....Must recompute...must recompute...must recompute...
Cost of capital on investment (machinery, equiptment ( if one can get financing ( one; meaning probably a recourse loan, w/ excellent credit, and reserves ( of at least 3 mos.
Please recompute
So a 20% interest rate is considered normal?? And compare with the same oil price please. Useless article.
That's the discount rate, not the interest rate. The discount rate is a derivative of the NPV of cashflows over either the life of the well, or the investment time horizon. Most of the well's cash flows appear to occur in the first year, after that, each successive year's cash flows are discounted at the current financing rate (which for oil frackers, is 5%, which in today's interest rate environment is a junk yield).
How about a 10% discount rate and a 8-10% cost of capital.
That would imply that there is only one year of cash flow.
Have to separate out the wells - in production, near completion, leased but not drilled, not leased or drilled.
What will get killed is the new leases and new drilling. Any holes in the ground now will keep pumping as the costs are low to keep producing. You can calculate any break even point you want, but existing wells will keep pumping, but because of the existing debt most companies will NOT start new wells even if the cost of those wells is slightly above break even at today's prices. They cannot risk oil going any lower, so will hold off.
And some companies are likely to still have problems servicing their debt. Their wells will be picked up on the cheap if there is anybody left who can afford to buy anything when this all settles out.
Crowd fund the "buy on the cheap" and cap all these fuckers off with bankers and their related finacial terrorist compatriots. Return all their assets to the general public at fair market prices/values use proceeds to further finance our "war on terrorism" against bankers and their ilk..reverse the trend bitchez
" There are no dreams in a conscious mind, only action or inaction"
quote unknown cause I'm not giving ya my name ;)
Winner winner, chicken dinner.
Operating Expense does not include the principal and interest needed to pay off the amount loaned to the company to develop those wells...... while the company may continue to produce oil from these wells, the company will be going into to default and bankruptcy.... they can't make the loan payments...
Not only will the investors not be getting any return on the investments in these companies.. they will be very very lucky to be seeing a penny of the principal invested...
This is going to be a blood bath....
Some of those numbers can be modified and some can't. Also notice they only used four counties, I'd like an average from the entire play because I know some of the holes can be done cheaper. Production rate is the real variable, if they can't cover cost the rigs get parked.
Good points, in some respects, knuckle. The four counties - Mountrail, Williams, Dunn and Mackenzie are, at over 9,000 combined square miles, larger than New Jersey.
Any novice can quickly discern the state's sweet spots by looking at slide/page 13 from the North Dakota's energy's web site - dmr.nd.gov/oilgas, and downloading the August,2014 presentation 'Spotlight on the Bakken'.
The e and p boys are pulling back their plans on drilling delineation and exploratory wells (the Three Forks formation, described by the USGS as actually bigger than the shallower Bakken, has YET to be delineated!), and are permitting 6/12/16 wells from the more productive, already operating, pads.
Refrac'ing is picking up steam in all the shales. In the Bakken, Marathon is having a tenfold increase in output (11,000boe/m versus 1,100/m pre refrac).
At the end of the day, regardless of how/when this 'good sweating' pans out, there will still be hundreds of billions of barrels of oil in place, hardware, technology, and people able and willing to extract them at a workable financial return.
Quick edit/note ... anyone interested in learning a great deal about the Bakken could spend the ten minutes or so going over that picture/graphic rich 30 page presentation. Very, very informative.
There's a table for that:
https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf
Just argue over how much a well costs.
130bpd per well spread over 8600 wells.
Calculate additional wells versus additionals barrels per day for some fun.
thats pricey
I'd rather get a million barrels of oil from 100 wells and pay fewer workers required to pump 10,000 barrels a day from each one.
(or 200 wells each producing 5000 bpd)
Another frack article let the idiocy and trolling begin Isaid it before and I'm saying it again FRACKING is a BANKSTER SCAM and an ecological fucking NIGHTMARE
don't feed the frcking trolls cause here the bastards come...3 2 1
Joe Sixpac saved $9 on a tank of gas, Obama says buy a house
I have an oil field that produces 500 barrels a day.
That's barrels...not oil.
An aside... http://www.cnbc.com/id/102282721
Billy Sol Estes would love to be in business in these times
Well (pun intended)... let's see who made out like bandits in this Shale (Ka)Boom...
The Drillers and Drilling Services, those providing mid-stream services (in Transport & Storage), Refiners,banks, politicians, shills & brokers, and a host of middlemen acting as Service Providers.
That's quite an Ecosystem of 'participants'.
Any bets if any of these are hanging out on ZH?
So not a "malinvestment" in a $100 oil environment.
Plus you pay to lease land, so use it or lose it.
So oil has been <$70 for like 6 weeks?
Not really time to panic.
I am really waiting to go long uco calls or just uwti but I believe today is due to triple witch and if the price of oil stays below $60, I could see more smashing next week ao I am going to just stay on the sidelines. But...... riches will be made when oil goes back up. It will not remain this low, i don't give a FUCK what anyone says or thinks. This is 100% to punish Russia.
The damage is done. Place your bets as the dominos are about to fall. This is only getting started.
Isn't this proof that the Saudis are not dropping oil prices to kill the US Shale industry?
Investment costs and decline rates indicate it is already "dead man walking" or at least "dead man being financed".
There is no reason for the Saudis to kill the US Shale industry.
Actually this is a stronger explanation that the US would use both the Saudis and the US Shale industry to kill the price of oil, in effect get a bit of QE4-like action and hurt the Russians, knowing that oil will come back in a year or two as the Shale industry implodes.
It's a nice way for the Saudi's to send a warning to the nascent EU Shale industry that will hava a larger impact on thier exports.
there is no demand for oil. the us consumer is TAPPED
And no amount of "what if" math is going to change that. Until such a time as debt is paid down/defaulted on, there can be only one sustainable driver of increased oil consumption. An overly active military. Which of course, will only further burden the consumer.
Sure theres a demand ...in china ..they're turning it into more useless plastic trash we don't need nor want and there in lays the conundrum er curfuckle or ....
Baker Hughes US oil rig count drops to 1875 from 1893
http://investmentwatchblog.com/baker-hughes-us-oil-rig-count-drops-to-1875-from-1893/
Bakken wells are about 7.2 million. You need boots on the ground to get real data. This is a weakness of armchair quarterbacking. 580 boepd is a damn good start. Some people would suck a long hard diick to have 100 boepd after the first year, although the best wells do around 1000 bpd. Long live ZH.
About a dollar a barrel I'd say. Those wells paid for themselves a decade ago.