10% ROR requires $71-$90/bbl and $4.20-$5.00/Mcf

U.S. shale required prices to break even are higher than many are asserting, according to research by KLR Group released today. But if the IEA’s current demand/supply analysis is correct, it’ll be a moot point in three years.

KLR’s models show U.S. oil and gas breakeven WTI prices are $50/bbl and $3.35/Mcf, significantly above many estimates. Using a standard 10% ROR forces cost of supply much higher, with oil ranging from $71/bbl to $91/bbl and gas from $4.20/mcf to $5.70/mcf.

Several factors contribute to costs being higher than expected. According to KLR, all-in well costs across a company’s entire drilling program are about 120% above single well estimations.

Trouble costs double

Trouble wells can easily cost double expectations. Actual well recoveries are generally 15%-30% below type curves. Almost all anomalous events in a well’s lifetime are negative, and these occurrences are typically not included in forecasts. The higher full-cycle well cost and lower well recoveries make actual industry capital intensity about twice the values given in single well representations, according to KLR.

Midland and Eagle Ford show lowest oil breakevens

The Midland basin and eastern Eagle Ford have the lowest required oil costs due to lower capital intensity and higher oil cuts. These basins require a WTI price of $71/bbl-$80/bbl to create a 10% ROR. The Bakken has higher capital intensity than the Midland basin and lower realized oil price, but does have the highest oil cut of major U.S. oil plays. An oil price of about $90/bbl is required for a 10% ROR in the Bakken, according to KLR. The Midland basin is considered the lower bound of the cost of U.S. supply, while the Bakken is considered the upper bound of supply cost.

Gas: Marcellus is lowest breakeven

According to John Gerdes and the KLR team, the Marcellus has the lowest breakeven costs of any major U.S. gas play.

Low capital intensity drives this advantage, but is partially offset by lower realized prices due to transportation bottlenecks. KLR estimates that $4.20/mcf-$4.50/mcf gas prices are required to generate a 10% ROR in the Midland. The Utica sees similar price realizations but higher capital intensity than the Marcellus, driving its 10% ROR cost up to $5.00/mcf.

Marginal cost:

“Assuming a 4% unleveraged mid-cycle return, and 5%-10% incremental cost inflation relative to the ’17 industry cost structure, the marginal cost of U.S. gas supply is NYMEX $3.75-$4, while the marginal cost of global oil supply is NYMEX $75-$80,” according to KLR Group.