US shale economics challenged as crude, natural gas prices collapse

The plunge in crude oil prices over the past six months has led to a predictable deterioration in well economics across key US oil and gas basins, with virtually all major plays now earning average internal rates of return of less than 20% – a scenario that contrasts sharply with July 2014, when many were generating IRRs well in excess of 50%.

 

According to January estimates from Platts unit Bentek Energy, average IRRs for 24 major US oil and gas plays have all sunk below 20%, while returns for a small handful of predominantly dry gas plays have even slipped into negative territory.

 

The top five most economical plays in the current price environment, according to Bentek, are the Anadarko Cleveland, the Permian Delaware, the Anadarko Mississippian, the Bakken, and the Marcellus Wet, all with IRRs north of 14%.

 

Also in this feature: Shifts in shale producers’ capital spending, allocation

 

All five, with the notable exception of the wet gas regions of the Marcellus, are oil-rich plays featuring oil cuts of 45% or higher.

 

 

Meanwhile, the five weakest basins – the Arkoma Woodford, the Uinta, the Barnett, the Marcellus Dry, and the Piceance – are predominantly gas-rich plays, with the notable exception of the Uinta.

Average IRRs in the Arkoma Woodford and Uinta are estimated to be just over 2% and just under 2%, respectively, while returns for the Barnett, Marcellus Dry, and Piceance plays are currently negative, Bentek found.

 

By comparison, IRRs for the majority of US oil and gas plays were well above 20% as of July 2014, according to Bentek data.

 

For instance, average returns in the Anadarko Cleveland, Permian Delaware, Anadarko Mississippian, Anadarko Tonkawa, Niobrara DJ, Eagle Ford Oil, and Utica Wet plays were all 60% or greater, while only the Fayetteville, Haynesville, Pinedale, Arkoma Woodford, Barnett, Marcellus Dry, and Piceance plays had average IRRs of under 20% in July.

 

It is worth noting, however, that despite the across-the-board decline in IRRs from July 2014 to January 2015, three of the top six most economical plays are located within the Anadarko Basin, which spans large swathes of western Oklahoma, southeastern Colorado, western Kansas and the northeastern portion of the Texas Panhandle.

 

These three plays are the Anadarko Cleveland, where IRRs average roughly 18%; the Anadarko Mississippian, with IRRs of approximately 15%; and the Anadarko Tonkawa, where Bentek estimates IRRs to average just over 13%.

 

To calculate representative IRRs for different basins, Bentek used 12-month forward average oil and gas prices for the regional pricing points associated with each play and 12-month forward average prices at Mt. Belvieu for NGLs.

 

It also assessed play-by-play production data including drilling and completion costs, operating expenses, initial production rates, BTU content, decline curves, production taxes and royalty rates.

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