HOW DO YOU MAKE A PROFIT DRILLING HORIZONTAL WELLS?

How do you make a profit drilling horizontal wells? It all begins with a guess. What will the average price for a barrel of oil be during the drilling and first few seminal years of production? Sound easy? It’s not. Just ask any of the 196 North American oil companies that have filed for bankruptcy since 2015. The price of West Texas Intermediate crude is anything but stable and has fluctuated more than $70 per barrel since 2014. Betting what the price of oil will be six months from now is like playing Russian roulette with two bullets loaded. You can employ the best statistical information at hand, and it still comes down to a wild-ass-guess.

Say you decide that oil prices will average $50 per barrel for the next three years. If the horizontal well you are drilling, including land, taxes, royalties and operating overhead, costs $6,000,000 then the well must produce 120,000 barrels of oil to get your money back. If you factor in the time value of money, even this is a net loss. The well must produce 240,000 barrels of oil to double your investment. In many horizontal plays, this is an unlikely scenario. What horizontal drillers have learned is the subsurface isn’t homogeneous, and a very good horizontal well can easily be offset by one that is marginally productive, or worse.

Horizontal drilling was once called a resource play because the technology supposedly eliminated dry holes. Since all horizontal wells aren’t created equal, the premise of a resource play failed to take into account non-commercial producers and mechanical failures, both of which equate to costly mistakes. The result is 9 out of 10 horizontal drillers are cash flow negative. Put another way North American horizontal well drillers have totaled 200 billion dollars in negative cash flow.

What is occurring now in the oil patch is the mid-majors have lost, or are rapidly losing their sources of funding. Horizontal wells have a decline rate of around 70%. Without continuous drilling, our 12.5 million barrels of oil per day will begin declining rapidly, as will our dream of energy independence.

None of this is news to those actively drilling for oil in North America. To make a profit and ensure economic growth, the stable price of oil needs to be $75 to $85 per barrel. Anything less is a lie. The scenario begs the question, how do you make a profit drilling horizontal wells at an average price of $50 per barrel? The short answer is you don’t.