Nothing good lasts forever, and a recent analysis by Wood Mackenzie suggests that will include the cost of producing tight oil. In a recent paper presented at the SPE Unconventional Resources Technology Conference in Houston, Robert Clarke, research director of the Lower 48 upstream at Wood Mackenzie, suggested that U.S. Lower 48 tight oil production will become increasingly expensive by 2027 as a result of high-cost new drilling operations and key core acreage having been drilled out.
Another factor contributing to the rising costs of unconventional oil development, Clarke reported, is increased competition from conventional plays. As oil prices dropped in 2014, high-cost conventional projects became uneconomic and were either delayed or completely scrapped. However, Clarke said key conventional projects have emerged as competitors to U.S. tight oil development, particularly in places like Brazil and Guyana, which feature substantially large reserves and high-quality reservoirs with breakevens that Clarke said are “lower even than most tight oil plays.”
Clarke also noted that in more mature plays, like the Gulf of Mexico and the North Sea, operators have worked to bring down their development costs, which have consequently lowered their breakevens.
“Most projects now in the mix have changed in scope since first conception too, often subject to a total reworking of development plans,” Clarke wrote in his SPE-2875019 paper.
“Operator mentality has shifted to value over volume.”
Wood Mackenzie reported that breakevens in the Delaware Basin dropped below $40/bbl in 2017. And although breakevens are highly basin- and operator-dependent and vary greatly (in some U.S. tight oil basins, breakevens run as low as $20/bbl and as high as $90/bbl, according to Wood Mackenzie), future production costs could likely fall in the $60/bbl range. In fact, Wood Mackenzie predicts that U.S. Lower 48 production will become one of the most expensive supply sources by 2027.
“Models suggest that future tight oil drilling will become more expensive,” Clarke wrote. “Well designs and completion formulas are no doubt continually evolving, but cost structures moving forward will be dynamic too with varying degrees of infl ation seen across the supply chain. Additional productivity gains can offset this, but technology advancements will be massively critical as sweet spots become exhausted and less productive reservoir zones become reclassified as core assets.”
Although costs will climb, Clarke said, unconventional oil development will play an increasingly important role as a future supply gap emerges—perhaps as much as 23 MMbbl/d in 2027, Wood Mackenzie estimated.
“[Lower 48 tight oil projects] are the future marginal cost barrels that will play a key role in setting the price in the next decade,” Clarke wrote. “Specifically, the Permian drives this.”
A key takeaway from Wood Mackenzie’s analysis is that as a result of the depressed price environment, both unconventional and conventional operations found ways to survive and thrive. Operators have proven in unconventional operations—and likely soon conventional developments—that low oil prices won’t cripple them in the long term. The future of energy is anything but certain, but the innovation that has helped bring the industry out of the downturn will continue to play a role as energy supply and demand evolve.