Economics of Tight Oil Production
Society of Petroleum Engineers Society of Petrophysicists & Well Log Analysts
Economics of Tight Oil Production
Robert Kleinberg Schlumberger-Doll Research Cambridge Massachusetts 2 June 2016
Outline The Question: Why Has Tight Oil Production Responded So Slowly to Oil Price Signals? Business Models: Conventional Oil vs Tight Oil What is the Breakeven Point? How Breakeven Points Change Other Sources of Oil Market Inelasticity
The Answer
2
Why Are We Still Talking About Fossil Fuels?
3
Global Energy Investment, 2014 – 2035
International Energy Agency World Energy Investment Outlook, 2014
New Policies Scenario takes account broad policy commitments and plans that have been announced by countries, including national pledges to reduce greenhouse‐gas emissions and plans to phase out fossil‐energy subsidies, even if the measures to implement these commitments have yet to be identified or announced.
https://www.iea.org/newsroomandevents/graphics/2014‐06‐03‐cumulative‐global‐energy‐supply‐investment‐.html
4
Why Should Petroleum Engineers Care About Economics?
When petroleum prices are rising or high, exploration, technology, and engineering drive new energy production. When prices are falling or low, economics sorts resource holders into winners and losers. From mid-2014 to January 2016, the price of oil fell by 75%.
5
Outline The Question: Why Has Tight Oil Production Responded So Slowly to Oil Price Signals? Business Models: Conventional Oil vs Tight Oil What is the Breakeven Point? How Breakeven Points Change Other Sources of Oil Market Inelasticity
The Answer
6
Tight Oil and Shale Gas are the Products of Massive Hydraulic Fracturing
Tight Oil Shale Gas
Conventional Oil
Tight Gas
Conventional Gas
Source Rock/Low Quality Reservoir 10‐8
10‐7
10‐6
10‐5
10‐4
Good Quality Reservoir 10‐3
Permeability (D) Massive Fracturing
10‐2
10‐1
100
150920
Conventional Fracturing
R. Kleinberg, “Unconventional Fossil Fuels” in M.J. Aziz and A.C. Johnson, Introduction to Energy Technology: Depletable and Renewable, Wiley‐VCH 7
10 8 Tight Oil
6 Conventional Oil
4 2
Apr-2016
Jan-2010
Jan-2000
Jan-1990
Jan-1980
Jan-1970
Jan-1960
Jan-1950
Jan-1940
Jan-1930
0 Jan-1920
US Crude Oil Production (million barrels per day)
12
160529-01
Energy Information Administration: Shale in the United States; US Field Production of Crude Oil
8
Tight Oil Production Can Ramp Up Quickly . . .
Average time to drill, complete and place a 3-well horizontal pad on production (spud-to-POP): 135 days Pioneer Investor Presentation, December 2015
9
. . . and Declines Quickly Relative to Conventional Oil 1200 single well
Production (b/d)
1000
800 Conventional 6% Decline Per Year Initial Production = 1000 bbl/d 10 year cumulative = 2.7 mmbbl
600
400
200
Bakken Initial Production = 1000 bbl/d 10 year cumulative = 0.9 mmbbl
0 0
24
48
72
96
120
150511-02
Month 10
Market, Technical & Managerial Structures of Conventional Oil & Tight Oil Projects Conventional Oil
Tight Oil
Operators
IOCs, NOCs
Small- to Mid-Size Independents
Geography
Offshore, Arctic, Remote
US Land, Canada Land
Project Size
Big
Small
Decision Making
Bureaucratic
Nimble
CAPEX
Front Loaded
Distributed
Start Up
Slow
Fast
Lifetime
Long
Short 11
5 4 3 million bbl/day
Global Supply - Demand US Tight Oil Supply
US Tight Oil Production Greater than Global Oil Supply Excess
2 1 0
Liquid supply includes crude oil, natural gas liquids, refinery gains, biofuels
-1 -2
88 MB/d
-3 2011
2012
World Supply 2013
2014 Year
95 MB/d 2015
2016
2017
160416-01
https://www.eia.gov/forecasts/steo/report/global_oil.cfm http://www.eia.gov/energy_in_brief/article/shale_in_the_united_states.cfm
12
US Crude Oil in Storage
https://rbnenergy.com/fly‐me‐to‐the‐moon‐refining‐margins‐boom‐as‐crude‐inventory‐hits‐the‐roof 13
OPEC Strategy? (1) Drive Oil Price Below Competitors’ Costs (2) Pesky American Frackers Should Respond Quickly
CAPEX+OPEX = $14/bbl
CAPEX+OPEX = $82/bbl
Bloomberg 14 October 2015 http://www.bloomberg.com/news/articles/2015‐10‐14/iran‐is‐even‐more‐tempting‐for‐big‐oil‐after‐the‐price‐slump 14
Bakken Rig Count Dropped with the Price of Oil 250
140 120 WTI Crude ($/bbl)
100 80
150
60
100
40 50
Rig Count Williston Oil
200
20 0 2014/Jan
2015/Jan
2016/Jan
0
160601-01
Baker Hughes North America Rotary Rig Count, 27 May 2016
15
Bakken Oil Production Has Remained High 250
120
WTI Crude ($/bbl)
4
200 100 80
150
60
100
40 50
Rig Count Williston Oil
Bakken Oil Production (10 bbl/d)
140
20 0 2014/Jan
2015/Jan
2016/Jan
0
160601-01
EIA Drilling Productivity Report, May 2016 Baker Hughes North America Rotary Rig Count, 27 May 2016
16
Outline The Question: Why Has Tight Oil Production Responded So Slowly to Oil Price Signals? Business Models: Conventional Oil vs Tight Oil What is the Breakeven Point? How Breakeven Points Change Other Sources of Oil Market Inelasticity
The Answer
17
What is the Breakeven Point? (also called Breakeven Price, Breakeven Cost) The Breakeven Point is the cost of producing a commodity, for which the net present value (NPV) is zero. The NPV is the sum of a project's discounted cash flows (positive and negative). Breakeven Project NPV = 0 40
Cumulative Cash Flow
Discounted Cash Flow
20 0 -20
Project Termination
-40 -60 -80
Initial Investment = C0
-100 -120
0
2
4
6 Year
8
10
12
160209-02
18
Elements of Breakeven Points
Development
• Finding • • • • • • • •
OPEX
Exploration Geophysics Leases Reservoir Delineation Engineering Well Pads and Roads Gathering Pipelines Other Infrastructure Cost of financing Decommissioning
•
Well Construction o Drilling o Completion o Stimulation
•
Cost of Production(*) o Repairs & Maintenance o Fuels & Electric Power Royalties & Taxes General & Administrative
R Lifting Cost
Half Cycle
DUC
Full Cycle
CAPEX
Various operators break down these categories in various ways
• •
When These Breakevens Are Used Full Cycle – Project Planning $60‐$90/bbl (mid‐2014) Half Cycle – Maintain Level Production $50‐$70/bbl (mid‐2014) Lifting Cost – Continue Production from Existing (Declining ) Wells $10‐$15/bbl (mid‐2014)
(*)Lease Operating Expense (LOE) DUC = Drilled Uncompleted R = Refracture 19
Breakeven Variability: Bakken
Wood Mackenzie, Bakken Key Play Report, June 2015
20
US Tight Oil Breakevens 120
Breakeven ($/bbl)
100
October 2014 80 60 40 20 0 0
10
20
30
40
50
60
70
Cumulative Commerical Resource (Bboe) WoodMac 1410 North American Breakeven
151125-01
21
Outline The Question: Why Has Tight Oil Production Responded So Slowly to Oil Price Signals? Business Models: Conventional Oil vs Tight Oil What is the Breakeven Point? How Breakeven Points Change Other Sources of Oil Market Inelasticity
The Answer
22
Costs Change During Stable Market Conditions Increase
Decrease Geological derisking More efficient drilling/ completion/stimulation Supply chain optimization
Competition for leases
Consolidation of leases
Infrastructure bottlenecks
Infrastructure buildout
Service cost increases o Equipment shortages o Personnel shortages
Service cost discounts o Amortization of CAPEX o Service efficiencies o Increased competition
Tax rate increases
Tax rate decreases
Early in development cycle Late in development cycle 23
24
260
140
240
120
220 100
200
80
180 160
60
UCCI Brent Crude
140
40
120 20
100 80 2000
Brent Crude (USD/bbl)
Upstream Capital Cost Index (2000 = 100)
Oilfield Services Costs Follow Price
2002
2004
2006
2008
2010
2012
2014
0 2016
IHS Upstream Capital Cost Index, November 2015 151117‐01
25
US Tight Oil Breakevens 120
Breakeven ($/bbl)
100
October 2014 80 60
September 2015 40 20 0 0
10
20
30
40
50
60
70
Cumulative Commerical Resource (Bboe) WoodMac 1410 North American Breakeven WoodMac 1509 Lower 48 Breakeven
151125-01
26
Composition of Breakeven Point Changes With Industry Conditions
Lifting Cost
Half Cycle
Full Cycle
Exploration
Maintaining Level Production
Production from Existing Wells
• • • • • • • • •
Exploration Geophysics Leases Reservoir Delineation Engineering Well Pads and Roads Gathering Pipelines Other Infrastructure Cost of financing Decommissioning
•
Well Construction o Drilling o Completion o Stimulation
•
Cost of Production o Repairs & Maintenance o Fuels & Electric Power Royalties & Taxes General & Administrative
• •
When These Breakevens Are Used Full Cycle – Project Planning $60‐$90/bbl (mid‐2014) Half Cycle – Maintain Level Production $50‐$70/bbl (mid‐2014) Lifting Cost – Continue Production from Existing (Declining ) Wells $10‐$15/bbl (mid‐2014)
27
Outline The Question: Why Has Tight Oil Production Responded So Slowly to Oil Price Signals? Business Models: Conventional Oil vs Tight Oil What is the Breakeven Point? How Breakeven Points Change Other Sources of Oil Market Inelasticity
The Answer
28
Amazing Increase in the Productivity of Bakken Drilling Rigs? 200
900
Bakken Rig Count
150 700 600
100
500 50 400 0 2014/Jan
Initial Production per Rig (bbl/d)
800
300 2015/Jan
2016/Jan 160601-02
EIA Drilling Productivity Report, May 2016
Only the most efficient rigs still in operation Drilling focused on the very best prospects: “ultra sweet spotting” 29
Bakken Drilling Has Withdrawn to Richest Areas April 2014
April 2015
WoodMac 1506 Bakken Key Play Report
30
Fiscal Breakeven: Corporate Debt 62 US E&P Operators: Mostly Shale Gas & Tight Oil
The Economist, Fractured Finances, 4 July 2015
31
Why Has Tight Oil Production Responded So Slowly to Price Signals?
• Normal Cost Reductions Common in Stable Market Conditions • Cost Reductions Driven by Oil Price Reductions • Transition from Full Cycle to Half Cycle to Lifting Cost Economics • Ultra Sweet Spotting • Need of Debt-Financed Independents to Make Payments on Bonds & Loans
32
Robert L. Kleinberg, Ph.D. Unconventional Resources Schlumberger-Doll Research One Hampshire Street Cambridge, MA 02139
Dimmit County, Texas
617-768-2277 [email protected] http://www.linkedin.com/pub/robert-kleinberg/19/177/131 Member of the National Academy of Engineering 33
Economics of Tight Oil Production
Robert Kleinberg Schlumberger-Doll Research Cambridge Massachusetts 2 June 2016
Outline The Question: Why Has Tight Oil Production Responded So Slowly to Oil Price Signals? Business Models: Conventional Oil vs Tight Oil What is the Breakeven Point? How Breakeven Points Change Other Sources of Oil Market Inelasticity
The Answer
2
Why Are We Still Talking About Fossil Fuels?
3
Global Energy Investment, 2014 – 2035
International Energy Agency World Energy Investment Outlook, 2014
New Policies Scenario takes account broad policy commitments and plans that have been announced by countries, including national pledges to reduce greenhouse‐gas emissions and plans to phase out fossil‐energy subsidies, even if the measures to implement these commitments have yet to be identified or announced.
https://www.iea.org/newsroomandevents/graphics/2014‐06‐03‐cumulative‐global‐energy‐supply‐investment‐.html
4
Why Should Petroleum Engineers Care About Economics?
When petroleum prices are rising or high, exploration, technology, and engineering drive new energy production. When prices are falling or low, economics sorts resource holders into winners and losers. From mid-2014 to January 2016, the price of oil fell by 75%.
5
Outline The Question: Why Has Tight Oil Production Responded So Slowly to Oil Price Signals? Business Models: Conventional Oil vs Tight Oil What is the Breakeven Point? How Breakeven Points Change Other Sources of Oil Market Inelasticity
The Answer
6
Tight Oil and Shale Gas are the Products of Massive Hydraulic Fracturing
Tight Oil Shale Gas
Conventional Oil
Tight Gas
Conventional Gas
Source Rock/Low Quality Reservoir 10‐8
10‐7
10‐6
10‐5
10‐4
Good Quality Reservoir 10‐3
Permeability (D) Massive Fracturing
10‐2
10‐1
100
150920
Conventional Fracturing
R. Kleinberg, “Unconventional Fossil Fuels” in M.J. Aziz and A.C. Johnson, Introduction to Energy Technology: Depletable and Renewable, Wiley‐VCH 7
10 8 Tight Oil
6 Conventional Oil
4 2
Apr-2016
Jan-2010
Jan-2000
Jan-1990
Jan-1980
Jan-1970
Jan-1960
Jan-1950
Jan-1940
Jan-1930
0 Jan-1920
US Crude Oil Production (million barrels per day)
12
160529-01
Energy Information Administration: Shale in the United States; US Field Production of Crude Oil
8
Tight Oil Production Can Ramp Up Quickly . . .
Average time to drill, complete and place a 3-well horizontal pad on production (spud-to-POP): 135 days Pioneer Investor Presentation, December 2015
9
. . . and Declines Quickly Relative to Conventional Oil 1200 single well
Production (b/d)
1000
800 Conventional 6% Decline Per Year Initial Production = 1000 bbl/d 10 year cumulative = 2.7 mmbbl
600
400
200
Bakken Initial Production = 1000 bbl/d 10 year cumulative = 0.9 mmbbl
0 0
24
48
72
96
120
150511-02
Month 10
Market, Technical & Managerial Structures of Conventional Oil & Tight Oil Projects Conventional Oil
Tight Oil
Operators
IOCs, NOCs
Small- to Mid-Size Independents
Geography
Offshore, Arctic, Remote
US Land, Canada Land
Project Size
Big
Small
Decision Making
Bureaucratic
Nimble
CAPEX
Front Loaded
Distributed
Start Up
Slow
Fast
Lifetime
Long
Short 11
5 4 3 million bbl/day
Global Supply - Demand US Tight Oil Supply
US Tight Oil Production Greater than Global Oil Supply Excess
2 1 0
Liquid supply includes crude oil, natural gas liquids, refinery gains, biofuels
-1 -2
88 MB/d
-3 2011
2012
World Supply 2013
2014 Year
95 MB/d 2015
2016
2017
160416-01
https://www.eia.gov/forecasts/steo/report/global_oil.cfm http://www.eia.gov/energy_in_brief/article/shale_in_the_united_states.cfm
12
US Crude Oil in Storage
https://rbnenergy.com/fly‐me‐to‐the‐moon‐refining‐margins‐boom‐as‐crude‐inventory‐hits‐the‐roof 13
OPEC Strategy? (1) Drive Oil Price Below Competitors’ Costs (2) Pesky American Frackers Should Respond Quickly
CAPEX+OPEX = $14/bbl
CAPEX+OPEX = $82/bbl
Bloomberg 14 October 2015 http://www.bloomberg.com/news/articles/2015‐10‐14/iran‐is‐even‐more‐tempting‐for‐big‐oil‐after‐the‐price‐slump 14
Bakken Rig Count Dropped with the Price of Oil 250
140 120 WTI Crude ($/bbl)
100 80
150
60
100
40 50
Rig Count Williston Oil
200
20 0 2014/Jan
2015/Jan
2016/Jan
0
160601-01
Baker Hughes North America Rotary Rig Count, 27 May 2016
15
Bakken Oil Production Has Remained High 250
120
WTI Crude ($/bbl)
4
200 100 80
150
60
100
40 50
Rig Count Williston Oil
Bakken Oil Production (10 bbl/d)
140
20 0 2014/Jan
2015/Jan
2016/Jan
0
160601-01
EIA Drilling Productivity Report, May 2016 Baker Hughes North America Rotary Rig Count, 27 May 2016
16
Outline The Question: Why Has Tight Oil Production Responded So Slowly to Oil Price Signals? Business Models: Conventional Oil vs Tight Oil What is the Breakeven Point? How Breakeven Points Change Other Sources of Oil Market Inelasticity
The Answer
17
What is the Breakeven Point? (also called Breakeven Price, Breakeven Cost) The Breakeven Point is the cost of producing a commodity, for which the net present value (NPV) is zero. The NPV is the sum of a project's discounted cash flows (positive and negative). Breakeven Project NPV = 0 40
Cumulative Cash Flow
Discounted Cash Flow
20 0 -20
Project Termination
-40 -60 -80
Initial Investment = C0
-100 -120
0
2
4
6 Year
8
10
12
160209-02
18
Elements of Breakeven Points
Development
• Finding • • • • • • • •
OPEX
Exploration Geophysics Leases Reservoir Delineation Engineering Well Pads and Roads Gathering Pipelines Other Infrastructure Cost of financing Decommissioning
•
Well Construction o Drilling o Completion o Stimulation
•
Cost of Production(*) o Repairs & Maintenance o Fuels & Electric Power Royalties & Taxes General & Administrative
R Lifting Cost
Half Cycle
DUC
Full Cycle
CAPEX
Various operators break down these categories in various ways
• •
When These Breakevens Are Used Full Cycle – Project Planning $60‐$90/bbl (mid‐2014) Half Cycle – Maintain Level Production $50‐$70/bbl (mid‐2014) Lifting Cost – Continue Production from Existing (Declining ) Wells $10‐$15/bbl (mid‐2014)
(*)Lease Operating Expense (LOE) DUC = Drilled Uncompleted R = Refracture 19
Breakeven Variability: Bakken
Wood Mackenzie, Bakken Key Play Report, June 2015
20
US Tight Oil Breakevens 120
Breakeven ($/bbl)
100
October 2014 80 60 40 20 0 0
10
20
30
40
50
60
70
Cumulative Commerical Resource (Bboe) WoodMac 1410 North American Breakeven
151125-01
21
Outline The Question: Why Has Tight Oil Production Responded So Slowly to Oil Price Signals? Business Models: Conventional Oil vs Tight Oil What is the Breakeven Point? How Breakeven Points Change Other Sources of Oil Market Inelasticity
The Answer
22
Costs Change During Stable Market Conditions Increase
Decrease Geological derisking More efficient drilling/ completion/stimulation Supply chain optimization
Competition for leases
Consolidation of leases
Infrastructure bottlenecks
Infrastructure buildout
Service cost increases o Equipment shortages o Personnel shortages
Service cost discounts o Amortization of CAPEX o Service efficiencies o Increased competition
Tax rate increases
Tax rate decreases
Early in development cycle Late in development cycle 23
24
260
140
240
120
220 100
200
80
180 160
60
UCCI Brent Crude
140
40
120 20
100 80 2000
Brent Crude (USD/bbl)
Upstream Capital Cost Index (2000 = 100)
Oilfield Services Costs Follow Price
2002
2004
2006
2008
2010
2012
2014
0 2016
IHS Upstream Capital Cost Index, November 2015 151117‐01
25
US Tight Oil Breakevens 120
Breakeven ($/bbl)
100
October 2014 80 60
September 2015 40 20 0 0
10
20
30
40
50
60
70
Cumulative Commerical Resource (Bboe) WoodMac 1410 North American Breakeven WoodMac 1509 Lower 48 Breakeven
151125-01
26
Composition of Breakeven Point Changes With Industry Conditions
Lifting Cost
Half Cycle
Full Cycle
Exploration
Maintaining Level Production
Production from Existing Wells
• • • • • • • • •
Exploration Geophysics Leases Reservoir Delineation Engineering Well Pads and Roads Gathering Pipelines Other Infrastructure Cost of financing Decommissioning
•
Well Construction o Drilling o Completion o Stimulation
•
Cost of Production o Repairs & Maintenance o Fuels & Electric Power Royalties & Taxes General & Administrative
• •
When These Breakevens Are Used Full Cycle – Project Planning $60‐$90/bbl (mid‐2014) Half Cycle – Maintain Level Production $50‐$70/bbl (mid‐2014) Lifting Cost – Continue Production from Existing (Declining ) Wells $10‐$15/bbl (mid‐2014)
27
Outline The Question: Why Has Tight Oil Production Responded So Slowly to Oil Price Signals? Business Models: Conventional Oil vs Tight Oil What is the Breakeven Point? How Breakeven Points Change Other Sources of Oil Market Inelasticity
The Answer
28
Amazing Increase in the Productivity of Bakken Drilling Rigs? 200
900
Bakken Rig Count
150 700 600
100
500 50 400 0 2014/Jan
Initial Production per Rig (bbl/d)
800
300 2015/Jan
2016/Jan 160601-02
EIA Drilling Productivity Report, May 2016
Only the most efficient rigs still in operation Drilling focused on the very best prospects: “ultra sweet spotting” 29
Bakken Drilling Has Withdrawn to Richest Areas April 2014
April 2015
WoodMac 1506 Bakken Key Play Report
30
Fiscal Breakeven: Corporate Debt 62 US E&P Operators: Mostly Shale Gas & Tight Oil
The Economist, Fractured Finances, 4 July 2015
31
Why Has Tight Oil Production Responded So Slowly to Price Signals?
• Normal Cost Reductions Common in Stable Market Conditions • Cost Reductions Driven by Oil Price Reductions • Transition from Full Cycle to Half Cycle to Lifting Cost Economics • Ultra Sweet Spotting • Need of Debt-Financed Independents to Make Payments on Bonds & Loans
32
Robert L. Kleinberg, Ph.D. Unconventional Resources Schlumberger-Doll Research One Hampshire Street Cambridge, MA 02139
Dimmit County, Texas
617-768-2277 [email protected] http://www.linkedin.com/pub/robert-kleinberg/19/177/131 Member of the National Academy of Engineering 33
