April 14, 2016 -- Update and IRRs For Eagle Ford Provided By RBN Energy; First Time Jobless Claims Plummet -- The Worse Must Be Behind Us

From the print edition of The Wall Street Journal, page C1: OPEC trims view for oil production:

OPEC forecast yesterday (Wednesday) that a long-expected contraction in non-OPEC oil suply was shaping up to be steeper than expected. In March, it forecast non-OPEC output would fall by 700,000 bopd this year; it now estimates the drop will be 730,000 bopd.

Who are they trying to kid. World production is about 96 million bopd. 30,000 / 96 million = 0.03%. That's not even a rounding error, and yet the story is at the top of the fold, front page, section C.

Earlier this year it was reported that the IEA lost track of 800,000 bopd. 

Active rigs:

	4/14/2016	04/14/2015	04/14/2014	04/14/2013	04/14/2012
Active Rigs	30	91	188	186	206

RBN Energy: how the economics of the Eagle Ford vary by location.

IRRs aren’t inputs to an equation, they are the end result of a production economics model. 

Inputs that determine  IRRs include well initial production (IP) rates, decline curves, drilling and completion costs, commodity prices (netbacks), operating costs, royalty rates and other key factors. Usually , producers only drill and complete wells if they believe they can make money—that is, earn a positive IRR (the higher the better).

As you might expect, IRRs for crude oil wells are highly dependent on oil prices. When crude was selling for $100/Bbl, producers could achieve acceptable rates of return across most of the Eagle Ford. As we explain in the Drill Down Report, though, oil prices in the $30-$40/bbl range means that many of these wells—especially wells with IP rates of 400 Bbl/d or less—are unprofitable to drill and complete.

Wells with IP rates of 400 to 600 Bbl/d are most likely either marginally unprofitable or break-even at current prices, and wells with IP rates of 600 to 800 Bbl/d are more likely to be profitable--even at today’s low prices--because of the sheer volume of oil and gas produced during the first year or two of well operation. Wells producing more than 800 Bbl/d, finally, are almost sure to be profitable.

Figure 1 at the link shows the IRRs for each of the 16 Eagle Ford counties in our analysis based on representative input variables (IP rate, decline curve, etc.) for each county and what we call our “Cutback” crude oil price scenario.  This is one of several price scenarios that we used in our analysis of energy markets.  The Cutback Scenario assumes a WTI price at Cushing of $37.50/Bbl in 2016, rising to about $42.50/Bbl in 2017, and to $50/Bbl by 2021.  This is pretty close to where the current CME/NYMEX forward curve gets to in 2021.

Based on those inputs, our model indicates that only three Eagle Ford counties (DeWitt, Karnes and Webb) show positive IRRs and therefore qualify as Good based on our criteria, while six counties show IRRs of between breakeven (0%) and -6%  and fall into the Bad category.

Jobless claims:

The number of Americans filing for unemployment benefits was 253,000 in the week ended April 9th, a decrease of 13,000 from the previous week's revised level of 266,000, and matching March 3rd level, which was the lowest since November 1973. Figures came below market expectations of 270,000, marking the 58th straight week claims are below 300,000, the level associated with a healthy jobs market. Initial Jobless Claims in the United States averaged 359.73 Thousand from 1967 until 2016, reaching an all time high of 695 Thousand in October of 1982 and a record low of 162 Thousand in November of 1968. 

Reuters reports analysts had forecast a rise to 270,000. The four-week moving average of claims fell 1,500 to 265,000 last week.