What happens when crude prices dip, as Bentek analyst Jay Williams expects them to in the future?
“When we look at $80 oil, we consider a 20% hurdle rate, most of these plays are still very attractive, very economic,” Williams said during a presentation on North American crude oil at Bentek’s recent Benposium in Houston. According to Williams’ model, the Bakken would still see an internal rate of return of more than 50% at $80 oil.
“When we layer on $60 oil with the same kind of analysis, your major plays, the Bakken, the Permian and the Eagle Ford, are still above 20%, with the Bakken being near 30%,” Williams added. “So, even with that $60 oil, these plays are still very attractive and can attract a lot of capital going forward.”
Even with a decline in prices [Williams projected West Texas Intermediate (WTI) to drop to $77 by 2018], North American crude production is expected to grow by 4.2 million bbl. per day during the next five years. The U.S. is expected to account for about 3.2 million of those barrels. The model only takes into account known producing plays, not new or emerging plays, “so if they find another Bakken somewhere, it could be even bigger,” Williams said.
And that could put even more pressure on the midstream, already dealing with full pipes in Western Canada, bottlenecks in and out of the Bakken and Permian plays and constraints at hubs such as Cushing and Chicago. The industry has scrambled to keep up, trying to expand, convert or reverse pipelines. This is especially true in Canada, where the Trans- Mountain pipeline route has been exhausted.
“Until (there are) more expansions out of Canada, this market’s going to rely heavily on rail over the next couple of years,” Williams said. “Similar to what we’re seeing in the U.S., these pipelines are full, or the demand markets are full, so rail is going to play a big role in balancing this market and not causing Western Canadian Syndicate (WCS) or syncrude prices to fall even more.”
Rail moves around 50% of Bakken production out of the play, Williams said. And in addition to it keeping WCS and syncrude prices stable, it will also be crucial in debottlenecking the hubs until the pipelines catch up.
Williams also projected that as prices shift downward, the Bakken differential to WTI will weaken. Meanwhile, as the new Canadian pipelines open up, he expects the WCS differential to WTI to strengthen.
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