Updates
Later, 1:41 p.m. Central Time: I found what I was looking for, from May 10, 2019:
In the Whiting earnings call, the CEO said the rate of return on "parent-well-uplift" is "infinite." I thought that was hyperbole and at the linked post, I suggested what he might have met.Later, 11:55 a.m. Central Time:
Having thought about that, technically speaking, he is absolutely correct. The rate of return associated with that well was based on projections and actual production from the well without extra production as a result of the "halo" effect. If one continues to separate all those costs / the rate of return from "halo" production, then, yes, of course, the rate of return is infinite. That production was never anticipated; it was never factored into the original rate of return. The real question, of course, does it "move the needle"?
Google: How much does it cost to produce a barrel of oil in Saudi Arabia? The marginal cost (the cost of producing an additional barrel of oil) is lowest in Saudi Arabia at US$8.98 per barrel; the highest in the U.K. at US$44.33. -- June 28, 2018.
The Motley Fool has an article on this question, March 19, 2017. The Motley Fool needs to do a column on "You Won't Believe What It Costs/Bbl To Drill Oil In The Bakken!"Later, 11:50 a.m. Central Time: in reply to the reader's comments in the original post -- I believe the NDIC has factored a lot of those questions into their analysis. The bigger question is this: how much lower can the breakeven cost go? I will comment on that later. I think a CEO of one of the Bakken operators actually touched on this some months ago. In some cases, the marginal cost trends toward $0.00 (no typo).
Original Post
I really don't have time to go into this now. I'll throw out some data points, some reader's note, etc., etc., and let readers think about these things. I may or may not get back to this.
First, break-even prices as reported in The WSJ just a few days ago, August 11, 2019:
Second, the break-even prices as reported in the Director's Cut, yesterday, for June, 2019, data (look at the breakeven price for oil in Mountrail County):
Third, comments from a reader:
More than a quick glance at the table [above] that shows well breakeven prices by ND counties and one has to question its utility.
Take the "Statewide" value, for example.
What weighting is applied to come up with $12/bo? If the same weighting is applied uniformly, for each county, don't we already have an apples and oranges issue to sort out? Then put a statewide value in the same column? New wells, in one county may be predominantly Red River, another Madison or Bakken. Wildcat or exploration vs. development wells.---I believe you actually just found a Wildcat well.Fourth, the Bakken heat map (linked at the side bar at the right.
Finally, the activity in one county in the Bakken, McKenzie County.
The entire county:
West-central McKenzie County:
Northeast McKenzie County:
Whiting are not the sharpest tools. The way to look at the return is the uplift on the parent well (or downlift if communication) AND the new well production, combined, as your return and the investment as your investment. You treat it as an integrated decision, not saying all the investment goes to the new well and the uplift is free. But then again...it's WLL. Not CLR. Not EOG. Not Anonyme.
ReplyDeleteWhat bothers me most is that WLL reported a huge loss 2Q19 when analysts forecast a significant earnings gain. But that's a story for another day. Having said that, it does bring up some great points that I hope to explore some day.
DeleteWith regard to parent well uplift, there are some there more subtle things that I noted some time ago but have not yet blogged about. However, today, with the Enerplus story, it seems to bear out some of my preliminary thoughts.
Wow, the Bakken never ceases to amaze me.