One set of data points for the cost of drilling in Bakken and the beauty of pricing signals

The Chicago Tribune provides a few pieces of info for drilling costs in their aricle Insight: Peak, pause or plummet? Shale oil costs at crossroads

The article, by Selam Gebrekidan, gives some pricing data from Occidental Petroleum.

The cost of bringing one Bakken well into production has grown from an average $6.5 million in 2010 to $8.5 million in the first quarter this year, data from company reports and the state regulator show.

Break even point:

Efficient forms of fracking are also helping companies extract more oil from each well, lowering the break-even cost of production, now estimated between $55 and $70 a barrel.

For the economics of drilling, here is some market data:

Bakken crude for June delivery at the Clearbrook, Minnesota hub was bid as low as $85.24 a barrel on Wednesday and offered at $93.69, down 6.5 percent from October levels, according to traders. For now, prices are comfortably above the $68 a barrel breakeven point for a 15 percent rate of return, according to Credit Suisse analysis.

The article mentions that the drop in natural gas prices is cutting back that drilling. Also mentions that the price one key factor of tracking has increased dramatically:

The spot price of guar — a gum processed from tiny seeds and used to thicken fracking water — has ballooned by 10-fold since January 2011 and doubled since the start of this year,

The beauty of the pricing mechanism

That means that drillers will be cutting back on natural gas work and moving rigs to where they can get oil. Producers of guar will be doing everything they possibly can to increase production. Wouldn’t you if prices increase by factor of 10 in a year?

Sorta’ makes you love the pricing mechanism built into free-market, doesn’t it?  Here’s why:

Drillers are very motivated to redeploy their effort from natural gas to oil. Why? Price signals tell them it will be more profitable to do so.

I guarantee you producers of guar are losing sleep and working every weekend trying to figure out how to ramp up production. Why? Because the pricing signals tell them there is a ton of money to be made.

Next: some back of the envelope calculations from this data.

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