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Page added on June 23, 2020

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Why Are There ANY Rigs Running In the Permian Basin ?

Production

Oil and natural gas wells make money or they don’t. They don’t start  making money until they have paid back ALL costs associated with acquiring the lease to  put that well on and ALL drilling and completions costs, including corporate overhead to run the business and, in the case of shale oil wells, the cost of financing.   It’s only when wells are marginally profitable, or completely unprofitable, do folks start falling back on  terms like EBITDA, DD&A, IRR and other kinds of funky accounting horse dookey. Actually, well economics need not be any more complicated than this simple exercise…

Check the barrels of oil equivalent (BOE) hooey at the door, they flare the snot out of gas  in W. Texas because its just about worthless. $40 WTI after marketing deductions, State severance taxes and county ad valorem  taxes equals $34 dollars per incremental barrel of oil, give or take a buck. Deduct 25% royalty burdens from that and you get $25. Remember, everybody produces lots of water in the Permian and it ain’t cheap getting rid of that stuff: use $7.00 per incremental BO for lift costs, another $2.85 for general overhead costs and $3.25 for interest expenses on long term debt. That leaves you with $12 per barrel,  net back. I call it take home pay.

Divide $12 per BO take home pay by $9.0 MM, full cost drilling, completion and leasehold expenses per well and you must produce 750,000 B0 just to pay that well back…before you make a nickel of profit.

So, how many unconventional horizontal wells in the Permian Basin will actually produce 750,000 barrels of oil in their lifetime?

The chart above is realized production data filed with the Texas Railroad Commission and presented by shaleprofile.com. I have arbitrarily picked 42 months as the maximum (not optimum)  length of time to reach well payout in the Permian Basin.  Basically if a well is not paid  out in 36 months, it will NEVER pay out. 11,416 horizontal wells out of 26,826 drilled since 2008 in West Texas are now 42 months old and only 0.05% of  of all those wells have reached 760,000 barrels of cumulative oil production or more.  That’s one half of one half of one percent.

So the answer to the 750K BO question is… not very damn many will EVER pay out below $40 WTI. Anybody who says differently is trying to sell you something.

As to why any HZ wells are STILL being drilled in the Permian at the moment…it beats the hell out of me. Those dudes need cash flow to pay interest on debt, they are committed to hedge volumes, loan covenants and continuous drilling provisions in leases and other conveyances and they are using what is left of their revolving lines of credit, getting deeper and deeper in debt, to stay on the drilling hamster wheel. It is not because Wolfcamp, or Bone Springs wells in the Permian Basin are economical. No way; not even close.

Keep well economics simple and tune out all the noise from investor presentations, data-sell companies or self prescribed, shale oil “analysts.”

 

oilystuffblog.com



20 Comments on "Why Are There ANY Rigs Running In the Permian Basin ?"

  1. ANAL REAPER on Tue, 23rd Jun 2020 7:09 am 

    That’s like asking why there are several rig inside Davy ans JuanP’s assholes.

  2. Anonymous on Tue, 23rd Jun 2020 7:26 am 

    Mike has a sunk cost fallacy here.

  3. SocialRevolutionComing on Tue, 23rd Jun 2020 8:06 am 

    COVID-19: South Korea confirms second wave of infections as cases surge

    https://www.youtube.com/watch?v=5ighfVbSBPE

    Here we go. Reopening economies has caused a bigger demand for oil, this is why the price of oil is pickup. Price of gasoline in Montreal is increasing again.

    COVID hoax is oil depletion management tool. So obvious to anyone with a brain. COVID hoax also have other purposes.

    If you don’t reopened you could lose manufacturing permanently, but if you reopen you accelerate depletion or an already depleted resource. You cannot win this.

    Less and less people in Whites Western nations are watching COVID hoax press release. In fact, the COVID hoax has destroyed the political system, if you want the link of confidence between people and politicians.

  4. Dredd on Tue, 23rd Jun 2020 8:27 am 

    Because the “devil’s excrement (oil)” is the source of SARS-CoV-2 (On The Origin Of The Home Of COVID-19 – 6)?

  5. SocialRevolutionComing on Tue, 23rd Jun 2020 8:47 am 

    Russian authorities wage war on ‘fake news’ amid Covid-19 pandemic

    https://www.youtube.com/watch?v=JRPkENqA6o

    I am too tired today to make my list of Death to people.

  6. Duncan Idaho on Tue, 23rd Jun 2020 8:49 am 

    “Oh…and throw out your television and your religion. Read your Darwin.”

  7. Abraham van Helsing on Tue, 23rd Jun 2020 8:57 am 

    Russian meddling one can believe in:

    https://www.dailymail.co.uk/news/article-8450177/Boris-Johnson-Theresa-ignored-claims-Russian-meddling-ex-MI6-spy-says.html

    “Boris Johnson and Theresa May ignored claims Putin may have secretly funded Brexit campaign”

  8. I AM THE MOB on Tue, 23rd Jun 2020 3:02 pm 

    fuck off cloggnatzi

  9. Paul on Tue, 23rd Jun 2020 6:44 pm 

    @socialrevolution I have wondered if the shutdown had to do with petroleum rationing and closing borders. The link you provided for the video isn’t working. I guess YouTube didn’t like it.

  10. JuanP on Tue, 23rd Jun 2020 6:45 pm 

    “I am sui generis.” which means I don’t have a penis

  11. SocialRevolutionComing on Tue, 23rd Jun 2020 6:48 pm 

    @Paul

    This is the good link. It could be a possibility.

    Russian authorities wage war on ‘fake news’ amid Covid-19 pandemic

    https://www.youtube.com/watch?v=JRPkENqA6ow

  12. More from Lunatic Davy on Tue, 23rd Jun 2020 7:58 pm 

    JuanP on Tue, 23rd Jun 2020 6:45 pm

    “I am sui generis.” which means I don’t have a penis

  13. Mike Shellman on Wed, 24th Jun 2020 12:09 pm 

    Nony, is that you?

    Sunk costs equate to debt. Debt must be serviced until it is paid in full; ALL new well economics must include the burden of long term debt. Its how business works and shale oil is a business. I saw the same stupid sunk cost comment in Seeking Alpha to Raw Energy.

    Please stay in the pizza business, or whatever it is you do.

  14. SupertardLivesMatter ZOMFG you guyes MUZZ-19 is codename for psyop Operation CONVICT-19 you guyes so I opened the door cant get in that way my body cant get through the door only your hands on Wed, 24th Jun 2020 1:24 pm 

    i’m very sad and depressed bcau america is #10 in the world rite now. we’re behind s korea and china. the only thing that we scored high and increaseing exponentially is muzzie love. we’re #1 muzzie love for the last few decades and far into the future.

    i don’t like the abuse you guyes give to the doc and supertard goat. they both are saints

    that’s why i say

    SLM !!

    take that

  15. i’m very sad and depressed bcau america is #10 in the world rite now. we’re behind s korea and china. the only thing that we scored high and increaseing exponentially is muzzie love on Wed, 24th Jun 2020 1:30 pm 

    SupertardLivesMatter ZOMFG you guyes MUZZ-19 is codename for psyop Operation CONVICT-19 you guyes so I opened the door cant get in that way my body cant get through the door only your hands on Wed, 24th Jun 2020 1:24 pm

  16. zero juan on Wed, 24th Jun 2020 1:35 pm 

    FamousDrScanlon

  17. REAL Green on Wed, 24th Jun 2020 3:35 pm 

    “Please stay in the pizza business, or whatever it is you do.”

    Nonys a used car salesperson Mike. We got are Detroit Cummins Deisel Real Ram Tuff Truck off her.

  18. Anonymous on Wed, 24th Jun 2020 7:33 pm 

    It’s not just the debt (although yes, that is a sunk cost, of which the whole point is that “not drilling” doesn’t save you from it, whereas the other costs are avoided). The key point is that many of those rigs are under contract. So the money is already spent.

  19. FamousDrScanlon on Wed, 24th Jun 2020 7:52 pm 

    Good point Anonymous, I will save it to my notes.

  20. Anonymous on Thu, 25th Jun 2020 6:35 am 

    Other issues to consider:

    *the whole basin is not at 25% royalty. For instance, CVX actually owns a lot of mineral rights.

    *HBP, based on future development (which the strip has as $45 in 5 years and $50 in 10 years).

    *By looking at all wells since 2008, you are including a lot of worse completions from old completion designs and a lot from during the $100+ oil days. A more recent sample would show stronger performance. No, not 750 in 3 years average, but a higher percentage.

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