Why Crude Oil May Not Rise Above $50 a Barrel

Energy

Published: May 24, 2016 1:25 pm

Last Updated: March 31, 2020 9:54 am

U.S. crude oil production is expected to drop by about 1 million barrels a day between the end of the first quarter of 2016 and the third quarter of 2017. That decline comes on top of a decline of 600,000 barrels a day since April of 2015. Quantity aside, the speed with which production fell is truly amazing.

Just as amazing could be the speed with which producers once again rev up output when the price of crude offers at least a break-even point. In some producing regions, profits are already trickling in.

In a short press release issued Monday, energy research firm Rystad Energy said that the lowest completion cost per barrel in any U.S. shale play was available in the Denver-Julesburg (DJ) Basin, specifically in Weld County, Colo. Rystad estimates completion costs of $4.70 per barrel for the nearly 600 drilled, uncompleted (DUC) wells in Weld County, making production economic at around $30 a barrel.

In a report published in March, the U.S. Energy Information Administration (EIA) figured estimated total costs for an onshore well ranged from $4.9 million to $8.3 million, with completion costs averaging $2.9 million to $5.6 million.

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At the low end of both scales, a completed well would average about $7.8 million. At 700 barrels a day initial production (21,000 barrels in a month) at today’s WTI July-delivery price of around $48.65, the monthly revenue would total about $1.02 million. The well’s cost would be completely amortized in less than eight months.

Completion costs in Reeves County in the Permian (Midland) Basin average about $4.80 a barrel, according to Rystad and costs in the Bakken’s McKenzie County average about $5.10 a barrel. DeWitt County in the Eagle Ford shale play averages about $5.25 a barrel.

Rystad concludes its press release with this statement:

[Current economics imply] that the major part of the US shale DUC inventory is commercial in the current oil price environment, and significant support to the US Lower 48 oil supply can be expected in the near months as market sentiment gradually moves in a positive direction.

Here’s a chart from Rystad showing completion costs by the county and basin:

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