OPEC production cuts could encourage U.S. shale producers to spin their drills, with producers in the prolific Permian Basin seeing the largest benefits.
S&P Global Platts found that U.S. shale producing regions could see returns in excess of 40 percent once the production cuts become effective.
Running a forecast model that assumes a $50 per barrel and $65 per barrel West Texas Intermediate (WTI) price, Platts said it found clear evidence that U.S. shale producers have “incentive to up step production.”
The firm’s analysis found that wells in the Delaware and Midland basins in the Permian will be the big winners once OPEC cuts production.
According to Platts Well Economics Analyzer, the internal rate of return (IRR) for a typical well in the Permian Delaware currently stands at 21 percent.
Well economics in the Delaware already surpass those of competing plays with an initial production (IP) rate of 550 barrels per day, estimated drilling and completion (D&C) cost of $6.6 million and a production mix heavily weighted towards oil.
In the neighboring Midland basin, return rates currently sit at 18 percent with average oil IP rates that are about 150 bpd lower than the Delaware.
However, average D&C costs for Midland wells is about $5.5 million.
Assuming WTI prices of either $50 per barrel, Platts estimates that the average Delaware well will generate returns of 23 percent.
If WTI prices hit $65 per barrel, the average Delaware well is expected to generate a returns rate of 40 percent.
Platts Analytics is forecasting that total Permian oil production will average a little less than 2 million barrels per day in 2016.
However, if WTI prices stay at the $50 per barrel mark, Platts estimates that Permian production will add 75,000 barrels per day in 2017.
If WTI prices climb to $65 per barrel, Platts estimates that the Permian will add 120,000 bpd in production next year.
The firm added that further upside is possible thanks to continued efficiency gains and an acceleration in completing drilled but uncompleted (DUC) wells.
Platts said that the only other area where production is expected to grow in 2017 under its current price scenarios is the Denver-Julesburg.
Platts is currently forecasting production to average 307,000 bpd in the Denver-Julesburg this year.
Production in the area could increase by 9,000 bpd if WTI stays at $50 per barrel and could grow by as much as 13,000 bpd if WTI reaches $65 per barrel.
Current returns in the Denver-Julesburg stand at 16 percent but the those lower returns are accompanied by a breakeven price of $32 per barrel.
Platts said that under the $50 scenario, IRRs in the DJ are forecast to tick up to 18 percent and could reach as high as $36 percent under the $65 scenario.
The Eagle Ford Basin is not expected to see a dramatic benefit from the OPEC deal.
Production in the Eagle Ford has declined by over 500,000 bpd to 1.1 million bpd last month after peaking in early 2015.
The average IRR for Eagle Ford wells is currently about 16.5 percent but breakeven prices for the play are over $36 per barrel.
Platts expects the Eagle Ford’s IRR to climb to 19 percent under a $50 per barrel WTI scenario and 36 percent under a $65 per barrel scenario.
Platts said that production volumes in both price scenarios are forecast to “remain suppressed and decline slightly into early 2017,” with growth potentially recovering later in 2017.
In 2017, Platts expects average Eagle Ford production to decline 60,000 bpd year-over-year in a $50 per barrel scenario and 30,000 bpd year-over-year in a $65 per barrel scenario.
“If, throughout this downturn, producers have learned anything, it’s that improved efficiencies and cost reductions are the primary keys to survival….However, not all plays are created equal and those areas with the best well economics will flourish,” Platts Well Economics Analyzer energy analyst Taylor Cavey said.