Friday, May 10, 2019

Re-Posting -- US Shale Oil - Second Least Expensive Oil In The World -- May 10, 2019

U.S. shale oil—which just four years ago was the world’s second most expensive oil resource—is now the second cheapest source of new oil supply globally, just behind the giant onshore oil fields in the Middle East, Rystad Energy said on Thursday.
North America’s tight oil has reduced costs over the past four-five years and has proven to be a competitive source of oil supply even when oil prices are not very high, according to the energy research firm.
Rystad Energy estimates in its latest cost of supply curve update that the average Brent Crude breakeven price for tight oil is now US$46 a barrel, just four dollars above the average $42 per barrel breakeven oil price for the giant onshore fields in Saudi Arabia and other Middle Eastern countries.
US oil: second least expensive in the world. In. The. World. But California prefers Saudi oil.

I think the biggest story line is the "minimal" difference between breakeven costs.

It would be interesting to see how Rystad determines "breakeven costs" for Saudi Arabia. $42 seems very high for actual production costs for Saudi Arabia (I would have assumed in the $5 to $10 range) and $42 is way to "cheap" for Saudi's budgetary requirements (publicly stated to be around $80).

Break-Even Costs

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.

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"?


  1. It's not infinite. He's saying it is infinite because he is crediting all the cost to the child well but that's proper project economics. The appropriate calculation is total returns versus total cost. So you add the increased production from uplift of parent to the production from the child; then compare that total versus the cost of the child.

    1. Thank you. That would be my interpretation but right, wrong, or indifferent, I understand now why the CEO used the word he used. I originally thought he mispoke or "SeekingAlpha" made a transcription error (which happens fairly often in these transcripts especially when it comes to industry jargon).

      So, again, whether one agrees with the CEO or not, whether he's right, wrong, lying, stretching the truth, or using a different type of accounting, I understand what he was saying.

      I don't want to beat a dead horse, but let's say that one well, continues to produce more and more with no other cash put into it -- the original cost stays the same, but year over year production from that well increases (rather than declines), the rate of return for that well would keep increasing. In fact, even if production falls several years from now, if there is minimal cash put into maintain the well, the rate of return does in fact keep going up.