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November 02, 2016
Ways to Sustain Gains and Drive Down Cost Further: Anticipating a lower break-even price for tight oil and gas in North America?
By: Muqsit Ashraf and Manas Satapathy

Two years after crude prices began dropping, supply remains plentiful, partly because of impressive gains in productivity and execution efficiency, and aggressive price cuts by service companies. These factors have enabled North America production of tight oil and gas to continue in the low-price environment. But how much lower will the break-even point go?

The downward trajectory is less likely to continue because fracturing intensity is increasing and supplier discounts will likely go away. To keep pushing the break-even point down, operators will need to collaborate more closely with suppliers to devise innovative solutions that are mutually beneficial.

Trends in well costs and fracturing

Well costs have decreased dramatically (Figure 1), declining 12 percent to 20 percent. On a normalized basis, the decline is in excess of 50 percent for some fields. This has occurred despite a rise in fracturing intensity.

Figure 1. Trends in the Eagle Ford basin: Well costs and fracturing intensity

Well Costs                                               Fracturing intensity                                           

Figure 1         

Copyright © 2016 Accenture. All rights reserved.
Sources: Accenture Research, based on data from Rystad and EIA.

The steady drop in break-even economics leads some operators to assume—or hope—that these improvements will be sustained. However, as operators dig farther laterally, with additional stages and proppants for extraction, there are upward pressures on costs.

In addition, large discounts from oilfield service providers are not likely to remain at current levels, further pushing up costs. Offsetting this can be additional gains in well productivity and operational efficiency, but the cumulative effective on the economics overall is uncertain.

Expect a slower rate of cost decline

Break-even is a function of well costs, supplier costs, gains in recovery and operational efficiency. Figure 2 shows the break-even point dropping from $53 to $42. Continuing technology advances, fracking improvements and rigorous production management can help to reduce the break-even point further, but not likely as dramatically as in the past two years.

Figure 2. Evolution of break-even point, Eagle Ford, 2014-2016.

Figure 2

Copyright © 2016 Accenture. All rights reserved.
Source: Accenture Research.  EUR (in column 2) = estimated ultimate recovery.

As previously mentioned, attractive supplier discounts are not likely sustainable. Accenture suggests operators look for new ways. Operators could, for example, follow the example of Japanese carmakers, who several decades ago drove down costs while improving quality by collaborating closely with suppliers to produce safe, fuel-efficient vehicles at attractive prices. In oil and gas, a well-integrated business model across the extended value chain could help drive out inefficiencies and improve production. In addition, risk-reward arrangements between OFS contractors and operators could further innovation to increase production at lower cost/barrel.

To alter the industry’s vicious cycle, operators could provide incentives through the right commercial models, collaborating with service companies and suppliers to advance technical innovation and design, strategy and planning, operational digitization and production optimization. The sustainable path is a virtuous cycle. Break-even costs can continue to decline but it will take productive collaboration, resulting in a win-win that benefits multiple parties—operators, service companies and other key suppliers.  

Read more: creating collaboration to boost upstream output and productivity

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