VooDoo Economics | Russell T. Rudy Energy LLC
For some time now, shale operators have been patting themselves on the back for having brought down the break-even point on new wells to the extent that some domestic plays are among the most economically attractive in the world. Now, in an article in “Oil Voice” entitled “Shale Cost Reductions are 10% Technology and 90% Industry Bust”, author Art Berman bursts the bubble of euphoria.
Berman contends that most shale operators’ break-even calculations are primarily based on well cost, flow rate and EUR (Estimated Ultimate Recovery). Even in calculating well costs, he contends that general and administrative expenses (overhead), royalty payments, federal income taxes, depreciation and amortization are routinely ignored.
Berman goes on to say that defining wells costs as primarily those associated with drilling and completion is not only incomplete, but also misleading. He believes that dramatic cost reductions for these services are only 10% related to technology and innovation, and the remaining 90% is attributable to desperation pricing by drilling contractors and service companies. He cites several examples of how operators are receiving prices that are just a fraction of what they used to be. He even makes the case that these cost reductions are not confined to shale, but are being realized across the entire upstream industry.
While Berman does not take issue with how flow rates are calculated, he has an unkind word for how EUR’s are determined. He points out that reserves are stated as barrels of oil equivalent, based on BTU (British Thermal Units or heating value) parity. This means that 6 million BTU’s have roughly the same heating value as a barrel of oil. This 6:1 ratio, while thermally defensible, can imply a gas price of about $6.25 per MMBTU (million BTU), when gas is actually being sold for around $2.50. By using a 6:1 ratio, instead of the more economically realistic 15:1, EUR’s are being overstated as well.
To read the article in its entirety, please go to https://oilvoice.com/Opinion/3183/Shale-Cost-Reductions-Are-10-Technology-and-90-Industry-Bust .
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