History Tells Proration Would Cause Chaos In The Texas Oil Patch

[Gerry Maddoux + 3,627]

30 minutes ago, Dan Clemmensen said:

Thus, we are overproducing by at least 4 million bbl/day. I'm not making this up. I'm too ignorant to make it up.

HaHa, no you're not, you're too methodical. 

Shale oil production is on the wane, as we speak. It'll go down very fast, with many producers sitting on big new wells producing 2,000 bod @$20 per. Those guys would much rather shut those wells in right now than ever produce them at this price level. I myself have small portions in a half dozen wells like that. Shutting in these big oncoming monsters will take us down to 8M bod. Then we'll be at 6M in no time, due to parabolic decline.

I'm sorry this virus came along, but I'm angry as hell that the Saudis added to this misery. However, something was bound to come along, sometime. There are going to be bankruptcies galore, consolidations, and enough heartache to make plenty of new country and western records, but we'll muddle through this. 

IF we ban Saudi oil. IF. IF. IF.

Otherwise, we can kiss the American oil industry--as we know it and love and hate it--goodbye. This is a national emergency, but it's not being treated as such. Right now, today, we need to do the right thing, but we almost certainly won't. And then, when it's too late, we'll ask that sad old refrain: Why didn't someone do something?

[wrs + 893]

2 hours ago, Dan Clemmensen said:

You probably did explain it, but I did not catch the distinction between the shale and non-shale wells. But my fantasy of an allocation market would accommodate this without requiring some state official somewhere to try to impose per-well or even per-producer restraints or metrics. The individual producers would make these decisions via the allocation market. In essence, all the little stripper wells would end up paying a small amount each in reduced royalties to induce the high-production wells to reduce their output, all via the market.

 

LOL!  Yeah, that's a fantasly allright.

[0R0 + 6,251]

7 hours ago, Prometheus1354 said:

Tom;  the articles are an interesting read.  Both answering yet also inducing questions. My question is on the chart. For Jan-Mar 19 the EIA & RRC data tracks nominally. Then a slight divergence ensues.  Then in the June/July time frame it begins too amplify.  For the remainder of the 2019 reporting period the data is askew.  EIA has Texas continuing a solid growth track of production. Where as the RRC has production in decline month over month with a real fall off Nov-Dec.  

What gives?  Sorry, maybe I missed the answer too my question in what I read.  I'm a Radar/Wastewater guy, not an oil man.   Look forward too your input...

That is because it takes the TRRC 4-9 months to obtain up to date records. When they do, they match the EIA numbers. It isn't that they are counting different things, but the EIA gets numbers from market participants via commercial tracking organizations, while the TRRC obtains the information via regulatory filings that take up to a year to be registered. 

[0R0 + 6,251]

The other side of a TRRC pro rating or other attempt at regulating output is that there is plenty of shale outside TX and they would NOT be restricted and simply obtain market share and rigs and crews. That is why the TRRC didn't develop any capacity to regulate in the first place. There is no point to it if the Dakotas and Colorado . WV, PA and Ohio go fill up the void at the expense of TX production. 

[Dan Clemmensen + 1,011]

30 minutes ago, 0R0 said:

The other side of a TRRC pro rating or other attempt at regulating output is that there is plenty of shale outside TX and they would NOT be restricted and simply obtain market share and rigs and crews. That is why the TRRC didn't develop any capacity to regulate in the first place. There is no point to it if the Dakotas and Colorado . WV, PA and Ohio go fill up the void at the expense of TX production. 

This is the other reason to use a storage allocation market based solely within the private sector. it covers not only shale, but all producers of all types whose oil shares the same storage. If it were not for pre-existing long-term contracts, this this would just be a free market for physical oil, pipelines, trucks, and storage. but pre-pandemic contracts mean that the industry has no mechanism to efficiently reallocate the resources to get us through the lockdown with the minimum overall damage to the industry.

[Prometheus1354 + 178]

4 hours ago, 0R0 said:

That is because it takes the TRRC 4-9 months to obtain up to date records. When they do, they match the EIA numbers. It isn't that they are counting different things, but the EIA gets numbers from market participants via commercial tracking organizations, while the TRRC obtains the information via regulatory filings that take up to a year to be registered. 

0R0;  Thx for the explanation. I figured I was over looking something.  

[ceo_energemsier + 1,818]

11 hours ago, Jan van Eck said:

You have to wonder how many railroad tank cars are out there, sitting empty in storage on rail sidings.  My guess:  a lot. 

I would suggest filling those up with heating oil, or diesel, products that can sit without quality deterioration. 

There are a not of rail tanker cars that are sitting idle right now. Just over 2 months ago many many many companies were leasing these rail tank cars for very very cheap. Now there arent a lot left idled, if they are idled , they may not meet new safety requirements, or need upgrades, or need repairs or some other defect. When oil companies, traders and mid stream companies went to the rail tanker car owners/operators, they were happy to lease them as fast as they could. Also remember that , a rail tanker car doesnt have a large volumetric capacity for storage, maybe 800bbls to 1,000bbls per rail tanker car.

I know because I have leased many many many of these several months ago for a long term lease  and I used them to move crude to export ports on all US coasts.

So you need a lot of these rail tanker cars to store crude.

[ceo_energemsier + 1,818]

(Bloomberg) -- In the latest sign that the oil market has gone off-kilter: crude oil is once again set to move from the U.S. Gulf Coast to Cushing, Oklahoma, reversing years of flows as tanks along the coast fill up.

Enterprise Interstate Crude LLC, a subsidiary of Enterprise Products Partners LP, said in a filing to regulators Monday that it planned to start a temporary service using leased pipeline capacity after receiving interest from at least one shipper to move oil inland to America’s biggest storage hub. Enterprise plans to ship from its station in Katy, Texas, which is on its Seaway dual-pipe system, from May.

The Houston-based midstream company will be offering dual-direction service on its Seaway Legacy crude pipeline until further notice using a connection to the Katy terminal, according to a person familiar with the matter. Use of this connection has varied month to month on its southbound flow, the person said. Seaway Legacy pipeline has a capacity of 400,000 barrels a day while Seaway Twin can ship 450,000 barrels a day of oil. The Seaway system is jointly owned by Enterprise and Enbridge Inc.

This arrangement allows Enterprise to utilize unused capacity from Katy to Cushing on Seaway, company spokesman Rick Rainey said in an email. “Seaway remains fully committed to fulfilling all shipper demands to move crude oil from Cushing to the Houston area without interruption.”

Measures to stem the Covid-19 outbreak have cut U.S. gasoline demand by almost half from a year ago. Refineries in the Gulf Coast have been forced to cut operations to a minimum just as a price war between Saudi Arabia and Russia flooded the world with crude.

That makes Cushing, which can hold just over 76 million barrels of crude, an attractive spot to store the excess. The hub held 49.2 million barrels as of April 3, according to government data. Oil for prompt delivery is at a steep discount to later months, further encouraging traders with access to tanks to store it.

“The reversal, albeit likely short lived, will cause Cushing stock builds at a continuing blistering pace in May,” Stephen Wolfe, head of crude oil at consultant Energy Aspects Ltd. “So, with any reversal into the hub, even if at low volumes, Cushing easily hits tank tops by early May.”

Enterprise’s 2012 reversal of the Seaway Legacy pipeline to carry crude to the coast from Cushing, the delivery point for West Texas Intermediate futures, was a watershed moment for the U.S. shale boom, as the center of the country no longer needed to rely on overseas supplies.

The reversal allowed growing supplies of low-cost U.S. and Canadian oil to displace seaborne imports, and helped the country become of of the world’s leading suppliers after export restrictions were loosened in 2015. It also led to a substantial narrowing of prices for WTI and the global benchmark Brent, one of the most widely traded crude spreads in the world.

“Given the current turmoil in the crude oil market, including impacts on both refinery and export demand, there is strong market interest to access the Cushing storage market,” Enterprise wrote in the filing.

[ceo_energemsier + 1,818]

North Dakota lost about 40% of its drilling rigs over the course of three weeks in March as the impact of low global oil prices and plunging demand started to be felt in one of the top US oil production regions

 

The state currently has 34 rigs operating, down from 55 in January, 54 in February and 52 at the start of March, Lynn Helms, director of the North Dakota Department of Mineral Resources, told reporters Tuesday.

Helms said he expects the rig count to fall to the mid- to high 20s, in line with the 27 rigs seen during the 2015 price collapse.

About 175,000 b/d of production was shut in during March at 3,600 wells, Helms said. Another 1,000 wells have shut in so far in April, bringing the state's shut-in production to 260,000 b/d.

North Dakota producers also face shrinking oil storage capacity, which Helms said was "nearly full and looks like it could be full by June."

OIL TANK FARMS

Two companies have approached the state with tentative proposals for building major oil tank farms able to hold 300,000-500,000 barrels. Helms said the projects could be completed within six weeks.

"We're close to filling storage capacity and that is going to lead to rapid acceleration in the number of shut-in wells unless some storage capacity gets built," Helms said. "I think these folks see an opportunity for an arbitrage to purchase North Dakota crude at sub-$20/b, and in a year's time be able to sell that for well above $20/b. We're starting to see a great deal of interest."

Helms said the weekend deal by OPEC+ producers to cut nearly 10 million b/d in oil supply was "certainly a good first step" in that it established a $20/b price floor for NYMEX crude. But he said global oil demand keeps falling, with further declines because of the coronavirus expected in the first half of May.

"That's a real serious situation," he said. "We haven't seen the bottom of this market yet."

INACTIVE WELL WAIVERS

Helms said North Dakota drilling activity would only see any boost from the global supply cut in the fourth quarter.

North Dakota producers have been taking advantage of regulatory waivers approved in late March for inactive and non-completed wells, Helms said. The action by the North Dakota Industrial Commission was designed to prevent oil and natural gas producers from either bringing more unwanted crude onto the market or abandoning wells completely.

"It allows the operators to focus their cash flow on paying employees and making jobs but also the more economic, more productive wells," Helms said. "It takes a lot of that marginal production [offline]."

Before the oil market turmoil in March, North Dakota's production showed a 20,000 b/d uptick in February to 1.451 million b/d, the North Dakota Pipeline Authority said Tuesday.

The state's November production of nearly 1.52 million b/d will likely stand as its peak oil output for the foreseeable future as the effects of low oil prices and plunging global demand take their toll on US drillers.

[ceo_energemsier + 1,818]

23 hours ago, Jan van Eck said:

You have to wonder how many railroad tank cars are out there, sitting empty in storage on rail sidings.  My guess:  a lot. 

I would suggest filling those up with heating oil, or diesel, products that can sit without quality deterioration. 

U.S. railroads push against oil industry demands for storage in rail cars

 

- Railroads are clamping down on rising demand from oil companies to store crude in rail cars due to safety concerns, sources said, even as the number of places available to stockpile oil is rapidly dwindling.

 

Oil demand is expected to drop by roughly 30% this month worldwide due to the worsening coronavirus pandemic, and supplies are increasing even as Saudi Arabia and Russia hammer out an agreement to cut worldwide output. Storage is filling rapidly as refiners reduce processing and U.S. exports fall.

Globally, storage space for crude could run out by mid-2020, according to IHS Markit, and most U.S. onshore storage capacity is expected to fill by May, traders and analysts said.

However, railroads including Union Pacific and BNSF, owned by billionaire Warren Buffett, are telling oil shippers that they do not want them to move loaded crude trains to private rail car storage facilities on their tracks due to safety concerns, three sources in the crude-by-rail industry said.

The railroads are telling clients that tank cars are not a prudent long-term storage mechanism for a hazardous commodity such as crude, and do not want to put a loaded crude oil unit train in a private facility and potentially create a safety hazard, they said.

Federal rules typically only allow crude in rail cars to be stored on private tracks. There is no federal data on how much oil is regularly put in rail storage, but analysts said it is very little.

 

“Most federal regulations require rail cars loaded with ... crude oil to be moved promptly within 48 hours. Therefore, federal regulations discourage shippers and railroads from leaving crude oil in transportation for an extended time,” transportation lawyers at Clark Hill LLC wrote in an article Thursday.

BNSF did not respond to several requests for comment. Union Pacific declined to comment.

Nearly 142 million barrels of crude moved via rail in the U.S. in 2019, representing about 10% of what is transported via pipelines, according to the U.S. Energy Department. Unit trains, made up entirely of tank cars, can carry around 60,000-75,000 barrels.

Even on smaller or mid-sized railroads, known as shortlines, there may be capacity constraints or insurance coverage may not be adequate, the railroads have said, advising rail companies not to store oil.

“It is arbitrary, and is happening at a time when it (storage) is an option being heavily considered by all companies that have access to crude by rail right now,” one of the sources said.

As of September, there was enough crude storage capacity in the U.S. for about 391 million barrels of out of about 700 million working capacity, excluding the strategic reserve, according to the U.S. Energy Department. However, U.S. stocks have risen by 32.5 million barrels in just the last 4 weeks, including a 15-million-barrel gain in the latest week, the most ever.

 

Crude-by-rail shipments were not economic when oil prices were high but are expected to rise as prices have plunged. Loadings out of the Permian basin, the biggest in the country, slumped to about 12,500 barrels per day (bpd) in January, the lowest in at least a year, before rising to about 13,200 bpd in February, according to data from Genscape.

Demand is falling so swiftly that rail cars loaded with crude may not be accepted by the time they reach their destination three-to-five days later, leaving barrels orphaned without a storage option, one trader said.

Rates to lease rail cars have dropped sharply due to the crash in oil prices, making them more attractive for storage. Lease rates for rail cars have fallen from about $800 per month to about $500, said Ernie Barsamian, founder and CEO of The Tank Tiger, a terminal storage clearinghouse.

 

 

 

 

 

 

[BradleyPNW + 282]

On 4/14/2020 at 9:26 AM, Gerry Maddoux said:

And also, I know you wouldn't overlook the fact that oil security and energy independence continues to be our Achilles Heel in any war.

War is coming. I don't know when, but if our oil industry is in shambles when it comes, we're in trouble. It has been a long time since I looked at the period of time our SPR would last us during a shooting war but it wasn't long--we could blow through an awful lot of oil when that happens. 

::facepalm:: 🤦‍♂️

War is not coming. This is not the 20th century, we won the Cold War. Further, if "energy independence" was critical to national security (it isn't) we could build Fischer–Tropsch plants to manufacture oil from coal. Do you know what is critical to national security? Competent pandemic response. 

[Jan van Eck + 7,558]

32 minutes ago, BradleyPNW said:

we could build Fischer–Tropsch plants to manufacture oil from coal.

That is certainly very true.  And the US has vast coal reserves.  Concurrently, both the USa nd Canada has gigantic oil reserves in their oil-sands deposits, and if it came to it, those can be activated, albeit at a price.  But the point is that the oil is there, and is not going to run away. 

Edited April 15, 2020 by Jan van Eck

[Dan Clemmensen + 1,011]

8 minutes ago, BradleyPNW said:

::facepalm:: 🤦‍♂️

War is not coming. This is not the 20th century, we won the Cold War. Further, if "energy independence" was critical to national security (it isn't) we could build Fischer–Tropsch plants to manufacture oil from coal. Do you know what is critical to national security? Competent pandemic response. 

War in Gerry's sense (Korean War or bigger) that could place a large demand on our oil resources is not coming, because that slippery slope leads directly to nuclear Armageddon. This has been true since about 1970. Attacks on our economy by foreign powers (deliberate oil shocks) are not only coming, they are already here. Not the pandemic: that's a completely separate and more serious problem in the short term. In the longer term, allowing the Saudis or anyone else to intentionally damage the US oil industry by manipulating the market is a form of economic warfare that we cannot tolerate. The product we need to purchase is secure oil. This is not the product the Saudis are selling. Secure oil is a more expensive product than insecure oil, so we must pay more for it. Not much more, but a bit more.

As of about December 2019 (i.e., pre-pandemic) the US was in rough production/consumption balance for oil, and if you include Canada we were quite comfortably in surplus.  If there were a "war" or its modern economic equivalent an OPEC embargo, we would not need to build coal-to-gasoline plants, Instead, we would need to reconfigure some existing refineries to handle the available input mix. This is costly, but it's a lot faster and cheaper than building coal-to-gasoline plants. In the immediate short term we would impose gasoline rationing as was needed in WWII and during the 1973-74 OPEC embargo, but this would ease very quickly, much more quickly than in 1973. Then, within  months, we would begin shifting out of our F-150s and into EVs, and cranking up renewables and energy storage.

[wrs + 893]

We didn't have rationing in the embargo, we had odd-even license plate days and long lines for gas that cost twice as much as before.

[Jan van Eck + 7,558]

Just now, wrs said:

We didn't have rationing in the embargo, we had odd-even license plate days and long lines for gas that cost twice as much as before.

That is a form of rationing. Rationing access is still rationing.

[BradleyPNW + 282]

7 minutes ago, Jan van Eck said:

 both the USa nd Canada has gigantic oil reserves in their oil-sands deposits, and if it came to it, those can be activated, albeit at a price.  But the point is that the oil is there, and is not going to run away. 

Correct. Once you add Canada & Mexico it makes the "energy independence is national security" argument especially laughable. It's really just ignorant nationalism masquerading as national security. 

[Jan van Eck + 7,558]

1 minute ago, BradleyPNW said:

It's really just ignorant nationalism masquerading as national security. 

All - I mean ALL - so-called "national security" blather and gobbldygook is nothing more than ignorant nationalsim. 

Security comes from the vigilance of the people - not from knuckleheads with their guns and body armor running around shouting incomprehensible commands.  

[Dan Clemmensen + 1,011]

3 minutes ago, wrs said:

We didn't have rationing in the embargo, we had odd-even license plate days and long lines for gas that cost twice as much as before.

We didn't have ration coupons. We had the cruder form of rationing you mentioned, because it is a lot quicker to implement. Recall that we also had min and max constraints on the amount of gasoline you were allowed to pump, and that things were not terribly uniform.

[wrs + 893]

Just now, Dan Clemmensen said:

We didn't have ration coupons. We had the cruder form of rationing you mentioned, because it is a lot quicker to implement. Recall that we also had min and max constraints on the amount of gasoline you were allowed to pump, and that things were not terribly uniform.

I don't remember any min or max restrictions.  Probably because I never filled up back then as I didn't have a lot of money since I was a senior in high school and I was filling a TR-3.  

[Dg56 + 16]

There are  lot of people who will suffer from the oil and economic downturn. Sorry for you Gerry, and millions of others who were caught in that. I mean it. 

Shale oil was a Ponzi Scheme from the start. There were warning signs all along. The world is moving along. Sorry you got caught. 

I wish you find a sustainable future soon, for you and your family. 

[ceo_energemsier + 1,818]

48 minutes ago, Jan van Eck said:

That is certainly very true.  And the US has vast coal reserves.  Concurrently, both the USa nd Canada has gigantic oil reserves in their oil-sands deposits, and if it came to it, those can be activated, albeit at a price.  But the point is that the oil is there, and is not going to run away. 

Jan,

How have you been?

good to see you back and kicking.

I dont know if you recall, last year I had said that we had funded two techs for coal to liquids -- coal to fuels and coal to petchem techs , we tested them last year till the end of the year for several pilot plants right here in the US and then with their successful results we had scaled up the size to 30,000bpd conversion capacity.  Earlier this year we had these plants (3 of them) in operation for just about 65 days then we had to shut down because of the lock downs. During those 65 days they operated at 90% capacity and performed with excellent results. We were going to have a major media release with several high ranking politicians to observe the operations and the results over a period of 3 days. That has been put off till whenever ...

We do have massive coal reserves and we dont need F-T plants to convert coal to oil, we can bypass that whole process and end up with high value petchem feedstock and drop in fuels or fuel ready feedstocks.

[Jan van Eck + 7,558]

6 minutes ago, ceo_energemsier said:

with their successful results we had scaled up the size to 30,000bpd conversion capacity

Good for you!   Kudos!  Nice work.  I love it when a project really works out. 

[ceo_energemsier + 1,818]

4 minutes ago, Jan van Eck said:

Good for you!   Kudos!  Nice work.  I love it when a project really works out. 

Thank you Jan.

Its good for the engineers who came up with the idea , they will be making a lot of $$$ in royalties, it is good for the mineral owners, good for taxes, good for school districts, good for employment, good for the economy overall, we can go into the states and counties which have been decimated because of the death of coal and last but not least, its good for me hahah!!!

[BradleyPNW + 282]

46 minutes ago, Dan Clemmensen said:

Secure oil is a more expensive product than insecure oil, so we must pay more for it. Not much more, but a bit more....Then, within  months, we would begin shifting out of our F-150s and into EVs, and cranking up renewables and energy storage.

If we choose to invest in energy independence we could just as easily invest in batteries for hybrids and PHEV rather than price supports/tariffs for shale oil. In other words, demand destruction for petroleum fuels. I'm not against EV, I'm just saying PHEV and hybrid are better at reducing domestic oil demand than EV because EVs have large batteries that sit idle relative to miles traveled in a day. Although, that will change as battery prices fall. 

As far as KSA goes, they aren't our enemy. Not our friend but not our enemy. Our enemies pursue behavior that is intentionally hostile toward the United States. They use gray zone warfare in conjunction with escalation control strategies. I don't think the concept of gray zone warfare is difficult for Americans to grasp but I think most Americans have no concept of escalation control and how our superior military force -- in current organization and structure -- can work against us if we don't understand how our enemies use escalation control. The recent IRI exchange is a now classic example of how a US enemy engaged in escalation control. Donald, ignorant buffoon that he is, got easily suckered into a losing position by Iran. Of course, Donald always loses in every single international engagement so that's no surprise. 

https://warontherocks.com/2018/04/time-to-terminate-escalate-to-de-escalateits-escalation-control/
 

[Dan Clemmensen + 1,011]

9 minutes ago, BradleyPNW said:

If we choose to invest in energy independence we could just as easily invest in batteries for hybrids and PHEV rather than price supports/tariffs for shale oil. In other words, demand destruction for petroleum fuels. I'm not against EV, I'm just saying PHEV and hybrid are better at reducing domestic oil demand than EV because EVs have large batteries that sit idle relative to miles traveled in a day. Although, that will change as battery prices fall. 

As far as KSA goes, they aren't our enemy. Not our friend but not our enemy. Our enemies pursue behavior that is intentionally hostile toward the United States. They use gray zone warfare in conjunction with escalation control strategies. I don't think the concept of gray zone warfare is difficult for Americans to grasp but I think most Americans have no concept of escalation control and how our superior military force -- in current organization and structure -- can work against us if we don't understand how our enemies use escalation control. The recent IRI exchange is a now classic example of how a US enemy engaged in escalation control. Donald, ignorant buffoon that he is, got easily suckered into a losing position by Iran. Of course, Donald always loses in every single international engagement so that's no surprise. 

https://warontherocks.com/2018/04/time-to-terminate-escalate-to-de-escalateits-escalation-control/
 

EV versus PHEV: I think you are about 3 years behind the curve here. Why should my electric motor be forced to cart around an entire IC drive train that I don't need, just because the dinosaurs in Detroit and especially the auto dealers cannot stand it that I don't want to take my car in for service every 3 months?  3 years ago, maybe the range tradeoff made sense. No longer.

KSA: I evaluate "enemies" by their actions, not by their intentions. If I am threatened by a schizophrenic homeless veteran with PTSD who deserves my sympathy and respect, I am still being threatened and I must still defend myself: he is my "enemy" at that particular instant. KSA threatened us. Again. The threat was overtaken by the pandemic, but it was still a threat and those 14 VLCCs are still on their way here, last I heard.