How do you calculate the break-even point for a new oil well or field?

1 Oil Recovery Factors

The first step to calculate the break-even point is to estimate how much oil you can recover from the reservoir. This depends on several factors, such as the reservoir size, porosity, permeability, pressure, temperature, fluid properties, and recovery methods. You can use empirical formulas, numerical models, or analogies to other fields to estimate the original oil in place (OOIP) and the recovery factor (RF), which is the percentage of OOIP that can be extracted. For example, if your OOIP is 100 million barrels and your RF is 30%, your recoverable oil is 30 million barrels.

2 Oil Production Profile

The next step is to estimate how much oil you can produce over time from the well or field. This depends on the decline rate, which is the percentage of decrease in production per year. The decline rate can vary depending on the reservoir characteristics, the production methods, and the market conditions. You can use different types of decline curves, such as exponential, hyperbolic, or harmonic, to project your production profile. For example, if your initial production rate is 10,000 barrels per day and your decline rate is 10%, your production after one year will be 9,000 barrels per day.

3 Oil Revenue and Costs

The third step is to estimate how much revenue and costs you will incur from the project. Your revenue depends on the oil price and the production rate. You can use historical data, forecasts, or scenarios to estimate the oil price over time. Your costs include the capital expenditure (CAPEX), which is the initial investment to drill and complete the well or field, and the operating expenditure (OPEX), which is the recurring cost to maintain and operate the well or field. You can use industry averages, benchmarks, or detailed estimates to calculate your CAPEX and OPEX. For example, if your CAPEX is $50 million and your OPEX is $10 per barrel, your total cost after one year will be $53.25 million.

4 Net Cash Flow and Break-Even Point

The final step is to calculate your net cash flow and break-even point. Your net cash flow is the difference between your revenue and your costs. You can use a spreadsheet or a software tool to calculate your net cash flow for each year of the project. Your break-even point is the oil price at which your net cash flow is zero. You can use a trial-and-error method or a solver function to find your break-even point. For example, if your net cash flow is -$3.25 million in the first year, your break-even point is $36.39 per barrel.

5 Sensitivity Analysis and Uncertainty

One important thing to remember is that all these estimates are subject to uncertainty and variability. You may encounter unexpected changes in the reservoir performance, the oil price, or the project costs. Therefore, you should perform a sensitivity analysis to evaluate how your break-even point changes with different assumptions and parameters. You can use a tornado chart or a spider plot to visualize the impact of each factor on your break-even point. You can also use a probabilistic approach to account for the range and distribution of possible outcomes. You can use a Monte Carlo simulation or a decision tree to estimate the probability of achieving a certain break-even point or a certain net present value (NPV) for the project.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?