Riding Out the Storm: Oil Bust Considerations
Each Well is Unique Like a Fingerprint
Oil wells have been compared to fingerprints – each one is unique. The same thinking applies to each shut in. There is no specific protocol to follow when turning your wells back on, and each well is different. As the oil and gas industry slowly emerges from the current bust, producers will need to evaluate each well with an eye to its unique costs before bringing it back online. Doing so will help contain production costs and preserve precious cash during the ramp up.
Oil producers are no stranger to booms and busts. With this most recent oil crash, most businesses shut down a majority, if not all, of their production. As business gradually picks back up, there are some items that oil producers should be thinking about when adapting to the “new normal.”
Knowing the lifting cost for your entire operation was vital before the pandemic and before the Russia and Saudi Arabia dispute, but it is even more pertinent now. Lifting costs should be analyzed alongside storage capacity, production history, and formation location to help determine your break-even points.
- Do you know when you’re losing or making money on each of your wells?
- Have you taken the time to analyze your lifting costs by well?
Some wells may not break even until prices are well above $35 per barrel while other wells can operate positively in the $25- to $35-per-barrel range. On rare occasions, wells may be efficient enough that they are never shut down to begin with. Each of your wells is unique – like a fingerprint.
Managing your operating cost is essential to keeping a business up and running. Whether wells have been shut in, production has been slowed down, or they have continued to run, some operating costs may look different than they did a few months ago. The changes the oil industry has recently gone through are forcing businesses to evaluate their operating costs from a different point of view.
Questions to consider include:
- Did your corrosion preventatives work?
- Will you have the capital to fix any unanticipated issues?
- Are there any payment options or discounts available with service companies to retain loyalty?
- Have you asked vendors and suppliers about cheaper, alternative products that will provide the same results?
Determining when the industry’s prices will become more favorable is difficult. There are some positive trends and many experts are optimistic, but it may depend on how the pandemic shakes out in the weeks and months ahead. While the industry waits for prices to rebound, are you taking advantage of the down time?
- It may be beneficial to gather and analyze data on your wells that you normally wouldn’t be able to access while they are running. This could include reservoir information or various well levels.
- If you run a service company, have you considered looking for consolidations? Could you potentially merge with a company that offers allied services that complement your service lines?
Although oil prices are slowly improving, a return to normal activity and average prices is not likely until the end of the year or early 2021. Planning for the best scenario, worst scenario, and a scenario in-between will provide you with peace of mind and set you up for continued success while staying afloat in such an uncertain time.
How are you riding out the storm? Reach out to your Adams Brown advisor with any questions or to discuss planning for the future.