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March 19, 2020

Bakken shale operators must idle half their rigs for 40% reduction in capex

By GlobalData Energy

With the US West Texas Intermediate (WTI) reaching as low as $30.4 per barrel (bbl) on 12 March, most of the Bakken shale players are expected to bear the intensified pain at such pricing condition.

Following the current price fall, operators have been forced to reduce their capex, which is primarily lowering the number of rigs operating and crews associated with the drilling and completing of wells.

Whenever available companies will try to focus on their best acreage to reach the highest initial production (IPs) per well, which should help generate the most revenue and best economic metrics at a well level. However, besides new wells brought into production, operators need to make their complete position (i.e. all their wells) profitable and generate enough free cash flow to cover operating expenses. In other words, even if companies focus on their best acreage for future wells, the operator’s acreage position also has legacy producing wells at different stages of their life.

These wells require different levels of oil price to both recover their investment and cover their ongoing expenditure. In particular relatively recent drilled and completed wells, for instance, wells brought to first production during the last two years, are very likely to still be in a period of recovering their investment and from this perspective, a full-cycle breakeven (BE) oil price gives a better indication of what price is needed to make the complete operator’s position profitable.

Overall operators in the Bakken shale will reduce capital expenditure in direct proportion to the number of rigs reduced with a similar percentage loss in remaining net present value (NPV) of the total acreage position. For key operators in Bakken, a reduction of 50% in the number of rigs brings down their capex an average of 40%.

Bakken

Capex reduction for Bakken operators in a post-price fall scenario. Credit: GlobalData.

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