Yesterday's BLM Sale
I put this over in the Natural Gas Group because that is what everybody is playing for now, associated natural gas from tight oil wells to run AI data centers and to send to the poor folks in Europe as LNG. This is particularly true in the very gassy Delaware Basin where this Fed sale occurred.
15 years ago I leased Eagle Ford acreage in South Texas for $1,200 an acre and thought the Lessees are out of their freakin' minds.
Devon yesterday paid $161,500 per acre to the government. On a standard 10-11,000 foot lateral layout Devon will be able to drill 400 locations/benches on this new acreage, theoretically...that works out to $6.5 MM per location, or roughly $ $17 MM per well. I promise you, however, you will never hear about these actual full cycle well costs nor will you ever get the corresponding truth whether this lease…
At $75 WTI Midland/$71 net at the WH, 1/8th royalty deducts, on a full cycle basis the net back oil price would be $30. These Devon wells will then have to produce 566K BO just to breakeven on $17 MM well costs, including new BLM land costs.
When, not if, royalty on BLM land is increased back to 3/16ths, Devon's new wells on these new tracts will have to produce 653K BO to pay back full cycle $17 MM wells.
Coterra and Devon combined have long term debt of $11.9 B. That debt, and its future P, A and D liability has to come from production revenue, somewhere. Its legacy PDP, like all legacy PDP in the Permian, is declining at the rate of 43-45% per year. It's now replacing that declining PDP with oil and condensate that costs 60% more to find and extract.
I might ask, please; does this explain the absolute fallacy in exporting America's crude oil to foreign countries, below costs, only to have to replace it with oil that costs 60% more?
When you drill up all your good locations and good acreage, as fast you can borrow the money to do so, then have to pay $6.5 MM per future drillable location...does that make sense to you? Was that a good business plan?