Lower 48 tight oil plays have established the lowest breakeven prices of new-drill supply projects since 2016. This has disrupted the oil market, with many high-cost conventional projects being cancelled or delayed as they have become sub-economic. Conventional breakevens are coming down though, and some older, higher-cost projects are on the cusp of being competitive with tight oil today. Tight oil supply will face competition from conventional plays, particularly as tight oil sweet spots become exhausted.

Lower 48 tight oil is currently low cost

Lower 48 tight oil barrels currently comprise some of the lowest cost, new-drill supply volumes in the world. Many of the best US operators have rapidly evolved into Permian tight oil pure plays, to focus on these low-cost reserves.

Wood Mackenzie models specific tight oil projects for more than 150 US Lower 48 operators. We have constructed and continually update discounted cash flow asset models for over 500 tight oil assets domestically. The post-tax breakeven figures are output from those models and are calculated for future wells.

Permian breakevens, particularly in the Delaware Basin, dropped below the US$40/bbl threshold in 2017. Wood Mackenzie models indicate that tighter cluster spacing was a critical variable in that reduction. Even though the longer-term impact on well EURs has yet to be fully seen, next-generation completions resulted in much higher cumulative 180-day volumes and shorter well payback periods.

Large breakeven reductions were also seen in the STACK Mid-continent play, where average well performance improved as the number of failed completions fell rapidly. We attribute this to better basin models, more robust multivariate analysis for appraisal projects, and higher pump rates used during completions.

Low-cost barrels today may not stay that way though. Models suggest that future tight oil drilling will become more expensive. Well designs and completion formulas are no doubt continually evolving, but cost structures moving forward will be dynamic too with varying degrees of inflation seen across the supply chain. Additional productivity gains can offset some of this, but technology advancements will be massively critical as sweet spots become exhausted and less productive reservoir zones become reclassified as core areas.

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