Well economics is the process of evaluating whether an oil or gas well is a profitable investment.
Before drilling a new well, acquiring a producing asset, or deciding to work over an existing well,
engineers and managers use economic metrics to compare alternatives and justify capital allocation.
The four most important metrics are NPV, IRR,
payout period, and breakeven price.
Key Metrics in Plain English
- Net Present Value (NPV): The total profit of the well in today's dollars, after
accounting for the time value of money. A positive NPV means the investment earns more than your
required rate of return. A dollar earned five years from now is worth less than a dollar today, and
the discount rate quantifies that difference.
- Internal Rate of Return (IRR): The discount rate at which NPV equals zero.
Think of it as the effective annual return the well generates on your capital. If the IRR exceeds
your company's hurdle rate (typically 10–15% for E&P companies), the project is worth
pursuing.
- Payout Period: The number of months until cumulative cash flow turns positive
— in other words, how long it takes to get your money back. Shorter payout means lower risk,
especially in volatile commodity price environments.
- Breakeven Price: The minimum commodity price at which the well's NPV is zero.
If WTI is above your breakeven price, the well makes money. If below, it destroys value.
How Discount Rate Affects NPV
The discount rate reflects the time value of money and investment risk. A higher discount rate
penalizes future cash flows more heavily, reducing NPV. Most E&P companies use 8–12%
for proved reserves and 15–20% for probable or possible reserves. The SEC mandates a 10%
discount rate for PV-10 calculations in reserves reporting. When comparing projects, make sure
you are using the same discount rate across all alternatives.
Typical Breakeven Prices by Basin
Breakeven prices vary significantly by basin due to differences in well cost, productivity, and
operating expenses. As of recent industry benchmarks: Permian Basin wells
typically break even at $35–$45/bbl, benefiting from high initial rates and established
infrastructure. Eagle Ford wells range from $40–$50/bbl. Bakken
wells run $45–$55/bbl due to higher completion costs and longer trucking distances.
Appalachian gas (Marcellus/Utica) breaks even at roughly $2.00–$2.50/Mcf.
These figures are averages — individual well economics depend heavily on lateral length,
completion design, and working interest.
When to Use This Calculator
This calculator is useful for AFE (Authorization for Expenditure) review, where
you need to quickly check if proposed well costs are justified by expected production. It is equally
valuable for acquisition screening to evaluate producing properties, annual
budgeting to rank and prioritize your drilling inventory, and investor
presentations to communicate project economics clearly.
Common Mistakes in Well Economics
- Ignoring LOE escalation: Operating costs tend to increase over time as wells
age and require more intervention. Using a flat LOE over the life of the well underestimates costs.
- Wrong net revenue interest (NRI): Forgetting to account for royalties,
overriding royalties, and working interest share is one of the most common errors. An 80% NRI
well generates 20% less revenue than a 100% NRI assumption.
- Overly optimistic decline: Using a low decline rate or high b-factor inflates
EUR and makes any well look economic. Always cross-check your decline assumptions against actual
offset well performance.
- Ignoring price differentials: WTI is a benchmark, not your realized price.
Basis differentials, transportation costs, and quality adjustments can reduce your net price by
$3–$10/bbl or more depending on location.
All calculations run entirely in your browser — no data is sent to any server. Built by
Groundwork Analytics,
an AI and engineering company that builds digital tools and deploys AI agents for the energy industry. We help operators, service companies, and engineering teams automate workflows, optimize operations, and make better decisions with their data. Get in touch or email us at info@petropt.com.