How rising well costs are reshaping the oil patch

How rising well costs are reshaping the oil patch by Peter Tertzakian, August 21 2012, The Globe and Mail
A well in western Canada today, on average, costs three times as much to drill and complete as it did six years ago (see attached Figure 1). The big ramp up in the transition period between 2004 and 2010 – from $1.3-million to $3.6-million per well – was not because of general inflation, but the quick migration into the capital-intense world of unconventional plays like shale gas and light, tight oil (LTO). … Steep production declines are a hallmark of unconventional wells; it’s not uncommon for a well’s output to fall off by 80 per cent just one year after it comes online. There is a narrow window of time after well completion for a company to generate enough cash flow to fund drilling of the next expensive hole. If commodity prices are weak immediately after initial production, the company will never recover it’s upfront investment fast enough to keep drilling. As such, companies can easily find themselves in a position where they have a strong inventory of prospective wells but are too cash poor to drill them. … Private equity firms and other moneyed institutions are backing most of today’s entrepreneurial companies. But it’s not only startups that are sourcing deep pockets. Larger independents are tapping Asian investors for the bigger ante required to participate in expensive and unconventional resource plays. Everyone needs more money. … Oil and gas companies are well known to spend all their cash flow, plus more. The greater sensitivity to commodity prices as described above means that there is a greater need to hold a larger reserve of capital to sustain drilling and production if prices fall. … The ratcheting up front-end capital costs, combined with the assembly-line-style operations of today’s drilling programs, points to an industry that will be increasingly reliant on achieving economies of scale to compete. … Expect to see more consolidation as the industry eats its young to gain advantage. … Normally, 15,000 was a good year. Now, higher well costs and constant budgets are forcing service providers in the field to retool their equipment for greater efficiency and a new normal of 10,000 wells a year.

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