US tight oil Tier 1, or premium, inventory activity has increased from 47% to 49% as a share of total onshore liquids drilling this year, as operators high-grade their acreage amid investor pressure to lower costs and improve efficiency, according to Rystad Energy estimates. At the current pace, with close to a quarter to go for the year, the share this year could exceed the 50% mark.

Our previous assessment of the remaining Tier 1 inventory in the major US liquids basins suggested that the high-grading process accelerated after the oil price crash in March. In June, based on preliminary permitting and rig activity trends we estimated the share of Tier 1 drilling to increase from 40% in 2019 to 47% in 2020. Latest data suggest an upward revision, from 40% to 42%, of the Tier 1 share in 2019 amid generally robust well results of spuds in the second half of last year that were completed in the first half of this year, resulting in the reclassification of some Tier 2 acreage to Tier 1 in our dynamic Acreage Grade Classification model.

When it comes to the difference in well economics between Tier 1, Tier 2 and Tier 3-4 positions in recent years, the difference in P50 wellhead breakeven prices is not as large in the more recent vintages, from 2018-2020 YTD. The difference between P50 Tier 1 and Tier 2 breakevens has recently been at only $5 per barrel, with an additional $6 from Tier 2 to Tier 3-4 acreage. On a wellhead basis, cheaper and less productive wells in the DJ Basin still offer the lowest wellhead breakeven prices, followed by the Delaware, Midland and Bakken regions. Tier 1 wellhead economics in Eagle Ford are inferior compared to the other basins, but the region benefits from lower overall overhead costs thanks to its proximity to key Gulf Coast markets. There are several reasons why we no longer see a wider range in wellhead economics for the different tiers. First, some operators do not have access to Tier 1-2 positions, and we have seen significant high grading of activity in their non-core acreage from a rock quality perspective. In other words, a typical Tier 4 well today has much better rock quality than a Tier 4 well from 2013-2014. Plus, several major drillers chose to develop their entire acreage together instead of just focusing on the Tier 1 locations. Hence, modern frac design and completion methods were also adopted by the industry outside the core Tier 1 acreage, resulting in a significant improvement of well economics overall.

Latest estimates for the remaining Tier 1 inventory range from 4,000-4,600 locations in the Bakken and Eagle Ford and 15,000-18,000 in the Midland and Delaware regions. We no longer include unleased acreage in our estimated Tier 1 inventory, which has resulted in a slight reduction of the Tier 1 number across all basins. Midland’s Tier 1 inventory has increased marginally since the June version, primarily due to an extension of the acreage in the Eastern Midland sub-basin, driven by the most recent well results. The inventory potential has also increased in the DJ Basin amid robust results, with more aggressive well spacing in several positions. The inventory in Delaware was reduced by about 1,000 wells, because of a combination of activity in the last few months, wherein more Tier 1 locations were drilled, and the exclusion of unleased acreage in the previous model. The Bakken and Eagle Ford also saw downward revisions – driven by more conservative well spacing in some positions.

Taken together, the inventory size corresponds to 18-25 years of drilling at the pace expected in 2020. It should be noted, however, that current activity levels are being influenced by the crash in oil prices and is not necessarily representative of the pace we will see on average over the next few years. If Tier 1 activity returns to the record level of 2019, then we can have six-eight years of drilling capacity in the Eagle Ford and Bakken, and 11-15 years in the DJ Basin and Permian. In the Permian Basin, the total size of the remaining Tier 1 inventory is about 33,000 locations, assuming there are no changes in the current well spacing strategies. This roughly corresponds to a long-term share of Tier 1 acreage of 40%, as we modeled about 86,000 future locations in the Permian in our base case in the report from early 2020.