In all the Sturm und Drang over the collapse in commodity prices, we have all rallied around two numbers that we can hang our hats on – the price of Brent and the price of WTI.Pundits around the globe use WTI in particular to opine about the health or weakness of many domestic oil and gas producer’s balance sheets. We hear statements like “If only WTI could get to X then companies A,B,D,F could get back to drilling and producing thereby securing their finances.”
While we all appreciate a shorthand number that we can sling about in our conversations, we would do well to remember that upstream companies with no downstream asset base do not get WTI prices at the wellhead – they get posted prices which vary from basin to basin, and even within basins/plays, depending on who’s doing the buying, and the quality of what the seller/operator is selling.
To illustrate the point, this graph of Domestic Crude Oil First Purchase Price from the EIA is illuminating.
The red dot represents the price of WTI (monthly value) at $37.24/bbl for 12/2015(US EIA.
What’s particularly striking is that the EIA stipulates that every basin/play shown on the graph has a realized first purchase prices that is anywhere from about 90% of WTI (Oklahoma) to 65% (West Virginia) of WTI. Bakken oil is discounted about 20% compared to WTI, at least in December 2015.
You can get a clearer sense of the variability in dollars realized at the wellhead across several basins by looking at the Enterprise Crude Oil Price Bulletin published today 3/10/2016.
So, assuming that Eagle Ford prices of about $34.70/bbl are ok for running napkin IRRs on Bakken oil is a really bad thing to do.
We should also understand the penalties that buyers impose on oil whose gravity does not fall within their stipulated API gravity ranges.
For example, Plains All American’s price bulletin for today (3/10/2016) stipulates that their posted price for Eagle Ford Light is payable for gravities between 40.0-44.9. A barrel of 46 gravity oil will get $.30/bbl less.
Here’s the distribution of reported oil gravities (DI Desktop) in the Eagle Ford:
It’s clear that a large percentage of Eagle Ford production will see some downward price adjustments due to out-of-spec oil gravities.
When posted prices are used to calculate well economics it’s clear that what looks nominally ok at $50 /bbl quoted WTI, would not work when honestly discounted to assumed posted price in the Bakken($39). [graphs from Production Scenario analysis-DI analytics/Bakken type curve]
So when we’re running economics – even approximations – be careful out there! Understand how fragmented the wellhead pricing market actually is.
What do you think? Leave a comment below.
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