Q: How can I analyze drilling wells at different oil prices with so many variables to keep track of?
A: This month Reuters reported that, “As U.S. oil rises toward $100 a barrel, producers in some high-cost shale basins are buying properties and adding rigs and frack crews in places that fell silent when prices crashed early in the pandemic two years ago.” Adding, “Some executives say current high prices and relatively low service costs make production economics the best in years.”
But how do you figure out how far to go, what variables to investigate, and the best strategy at different oil prices? "The significance of the price of oil is determined differently by different companies,” Dr. Brendon Hall, VP of Geoscience begins. "Operators have different economic KPIs that they work towards that’s influenced by the price of oil.”
Kyle LaMotta, VP of Analytics continues, “The way to think about the variability across different oil prices is looking at the number of rigs, the number of wells that are drilled, and the particular assets that can be developed. You can take more risk when the oil price is higher. You can get away with more.
“The price is going to affect not only which project you develop but how you drill those assets. If oil was $30 then you might only be able to use your widest spacing to make sure you don’t have any interference between wells and you’re getting the most out of every well.
“But if the oil price is much higher you can get away with downspacing and actually hurting the individual well performance because you make up for it with the higher prices.
“Let’s say there’s six wells per section is economic at $30 oil. Eight or ten wells per section might be economic at higher oil prices because the extra capital you’re spending is being offset by the higher oil prices and increased revenue. On an individual well basis, the well performance may not be as good, but because you’re generating so much more revenue it doesn’t matter.
“It matters what companies are trying to optimize on. If they’re just trying to drill the most economic wells possible, then you could downspace, put more wells in.
“Other operators are going to be optimizing on capex, so there’s not an unlimited amount of money that someone can spend on a pad. They might have budgeted a certain amount so that would be their limiting factor.
“Then other operators will only drill wells that maximize EUR. They want to drill the best wells possible that are also economic.
“Certain operators have locked in their well spacing. They know they’re always going to drill 8 wells per section. So, the increased oil price is going to give them either higher revenues or allow them to rethink the number of rigs that they’re running so that they can develop as many wells as possible, so they’ll double their rig counts for example or add a few new rigs. This way they can start in on the wells that they were going to hold for next year and develop that raised revenue for a longer period of time.
“They might explore non-core acreage.This would mean putting a rig on an asset that they’ve been sitting on for a while that hasn’t been economic at lower oil prices.”