Did You Know...Basins

By PFS President, Creg Hughes

 

 

Each basin has certain characteristics that make the basin economically viable and dynamic in the market place. Assuming the basin has large reserves, the most important factor in making a basin productive is the costs of production. These production costs are incurred by a producer to drill, frack, complete, gather, transport, and deliver production to the market. Ultimately, the overall production costs, minus the final sales price of a barrel of crude, will determine the gross margins for any given producer, and establish the Internal Rate of Return (IRR) for that producer. Also, those production costs will establish what any given producer’s “break-even” levels will be.

Based on current information published in the Oil & Gas Journal of the largest 32 plays in the United States, the Niobrara-Wattenberg ranks 3rd, with an average IRR of 53%. The Niobrara play is a close 3rd to the Eagle Ford play (54%) in Texas, and behind the Marcellus Shale Play (56%) in Pennsylvania, which is currently the highest average IRR play in the US. The Bakken play is currently running in 13th place with an IRR average of 31%.

However, what’s really interesting about all these basins is the average “break-even” level, and how that factors into the rankings. The “break-even” level is the price point of a barrel of oil, for which the production costs and the final sales barrel price are equal to West Texas Intermediate Crude (WTI). Today, WTI is trading at $106.79/bbl.

According to data collected by Tudor Pickering & Holt, an independent industry research firm; the Niobrara has the lowest average “break-even” level of all the 32 active large plays in the US. The Niobrara has an average “break-even” level of $38.00/bbl for WTI crude. The Bakken Shale play has an average “break-even” level of $65.00/bbl for WTI crude. In comparing how the “break-even” values of the Niobrara and the Bakken rank in the top 32 large plays; they rank 1st and 17th respectively. Now compare those average “break-even” levels with where WTI oil is currently trading and you’ll get an idea of how much momentum each play has in economic terms.

Knowing these numbers and continuing to watch how they evolve is very important in judging the project opportunities for these basins. Production basins like the Niobrara and the Bakken can be very dynamic, and right now both basins are very well positioned to continue to grow and provide great opportunities.