Wood Mackenzie's breakeven analysis of more than 800 individual assets in the US Lower 48 reveals dramatic variations in the viability of company asset bases and sub-plays. While the majority of production is not at risk in the long term, cash flow and funding limitations could impact activity.
“Experts have repeatedly underestimated unconventionals,” said Cody Rice, senior research analyst for Lower 48 upstream research for Wood Mackenzie. “While low prices certainly hurt project economics, reports of the demise of unconventionals have been greatly exaggerated.”
Oil and condensate production in the Lower 48 is expected to grow through 2016, but the pace of growth will slow considerably starting in the second half of 2015, according to Wood Mackenzie. Tight oil production grew by 1.2 million barrels a day (Mb/d) in 2014 and is expected to grow 673,000 barrels a day (kb/d) in 2015 and 425kb/d in 2016.
“We forecast that tight oil production will reach 7.5 million barrels a day in 2020,” Rice added, “but the growth rate has clearly decelerated.”
The following are the key considerations from Wood Mackenzie's analysis:
There are three distinct areas (sub-plays), Springer (Mid-Continent), Karnes Trough (Eagle Ford), and Nesson Anticline (Bakken) that generate at least a 10% Internal Rate Of Return (IRR) at a US$50 per barrel flat real WTI price. The 35 remaining top oil-weighted sub-plays need an average drilling and completion (D&C) cost reduction of 30% to be economic at US$50 per barrel WTI. Wood Mackenzie believes reductions of this magnitude are achievable as some companies have already announced them. However, the most prolific sub-plays, including the Parshall Sanish (Bakken) and SCOOP Woodford (Mid-Continent), require less than a 5% cost reduction.
In the Lower 48, North American independents have 20% more of their liquids production breakeven under US$60 per barrel than majors and NOCs. However, flowing production – important for cash flow – accounts for 75% of the majors’ oil production and 83% of their gas production in 2015. In the three marquee oil plays (the Bakken, Eagle Ford, and Wolfcamp), independents dominate the remaining resources with 12 billion barrels identified on an entitlement basis.
Wood Mackenzie expects the Lower 48 M&A market to remain depressed until participants reach consensus on oil price and appropriate financial metrics. Deal activity has declined dramatically, with associated spend in the first quarter of 2015, 85% lower than the fourth quarter of 2014. Wood Mackenzie says that it expects activity to pick up in the second half of 2015, but, given the appetite for the best assets, bargain hunting will be difficult.