Shales Death Blow?

[James Regan + 1,776]

We have been discussing this on OP for the past two years, and a common phrase was the the LTO sector was "an unhealthy business model" amongst other phrases and buzz words, but being called a "Shale Hater" was the expected reaction if your defending something you are heavily invested in or were profiting from. Shales demise was never the end game for KSA, KSAs end game was a fair market share and supporting price. Popular reaction at the moment is that KSA took advantage of COVID19, the is completely off base the timing was purely coincidental, two years of OPEC cuts while Shale went into hyper drill and production mode became unreasonable.

So it appears that CV19 is indeed preying on its targets as per the WHO advises, it unfortunately preys on the unhealthy or entities with existing chronic issues, and LTO has been in this category for some time.

https://oilprice.com/Energy/Crude-Oil/Do-US-Shale-Drillers-Deserve-To-Exist-In-Free-Markets.html

[BillKidd + 139]

That seems to be a fantastic article, a huge amount of work went into that. I, along with many others, have been saying that shale has been operating like a scam all along.

It's encouraging to read his last paragraph where he says that the shale industry can "thrive" with a new business model. It's intriguing to consider how that could work and I'm thinking, yes, it could work, but my gosh, it seems that the industry will be a fraction of what it was just a few months ago. I also foresee a huge amount of "stranded reserves," acreage that will never get developed... only core acreage would ever get drilled. And they've drilled a lot/most of that.

[wrs + 893]

Here is the problem with your OP, it's facile.  LTO is a solid money maker above $55 and the Saudis need $80 oil.  As long as they cut production to get $80 oil, there will be LTO.  As long as oil is selling for more than $60 there will be LTO and it will be profitable.

I am so tired of this bad business model that is constantly attributed to shale with no consideration for how every other business in the US is run that it's tiresome to refute this vacuous line of argument.  If all the other businesses in the US weren't being run the same way then there would be no need for PPP to float companies that can't even stand one month of interrupted income.

Everyone is swimming naked.

With WTI stuck around $20, nearly every producer is a long way from being able to cover costs let alone develop again.

That statement applies to about 80% of the oil produced in the WORLD.  The bad business model you guys hate is the one that Wall Street pushes on the companies that it backs.  So maybe the problem is that shale was a story packaged to sell for Wall Street.  However, most of the businesses today are run the same way, growth by leverage and that means DEBT!  It also means revenue and sales growth at the expense of  profit.

JC Penney is an example of a company that has been debt fueled and near bankruptcy for 20 years almost.  Why take your ire out on shale? The number of bankruptcies filed as a result of CV-19 is going to shock everyone and I am sure it will include plenty of oil companies around the world and particularly the oil sands.  We can see that Venezuela is bankrupt, PDVSA for example.  How about Iran?  How about Nigeria?  Libya?  Iraq? all bankrupt or headed there in a hurry.

Anyway, I do agree with the conclusion and in fact, that model is how my independent is operating but I am afraid he is going to lose everything in spite of him being conservative.

 

Edited April 19, 2020 by wrs

[James Regan + 1,776]

23 minutes ago, wrs said:

We can see that Venezuela is bankrupt, PDVSA for example.  How about Iran?  How about Nigeria?  Libya?  Iraq? all bankrupt or headed there in a hurry.

Venezuela - 10 x the oil reserves of USA and very low lift cost - meddling by Foreign Gov sanctions- President is a drug dealer...

Iran- 5 x the oil reserves of the USA with in places $3 lift cost- under sanctions being controlled by foreign Gov

Nigeria - Just a tad more than USA - will sell at 20% discount to any other country.

Iraq - 3.5 x Oil reserves of the USA - Controlled by foreign Gov

Libya - 1.5 x reserves of USA - Currently in civil war proxied by foreign Gov.

Guess who the GOV is in these countries.....?

Edited April 19, 2020 by James Regan

[wrs + 893]

24 minutes ago, James Regan said:

Venezuela - 10 x the oil reserves of USA and very low lift cost - meddling by Foreign Gov sanctions- President is a drug dealer...

Iran- 5 x the oil reserves of the USA with in places $3 lift cost- under sanctions being controlled by foreign Gov

Nigeria - Just a tad more than USA - will sell at 20% discount to any other country.

Iraq - 3.5 x Oil reserves of the USA - Controlled by foreign Gov

Libya - 1.5 x reserves of USA - Currently in civil war proxied by foreign Gov.

Guess who the GOV is in these countries.....?

The copious reserves in Venezueala are extra-heavy oil and cannot be sold or transported without diluent.  That's the more expensive part and the part that Venezueala must import.  So in fact, lifting cost is irrelevant because the cost of the oil they must buy to mix with the extra heavy is going to be a different cost than lifting but a cost just the same.  That is why they can't sell their oil profitably.  Here is a good article on how Venezuela has ruined their oil industry.

https://www.forbes.com/sites/rrapier/2017/05/07/how-venezuela-ruined-its-oil-industry/#4cbab7247399

In any case, these govts are the same as the companies that produce the oil and they are not effective business models.  That will never change, Iraq is headed to the same place as all the others.  These countries really don't produce oil at a profit, they all borrow money and owe a lot of money to the ROW.  The operators get their part but these countries keep on losing more and more money each year.  They take a cut of the gross revenue and don't care much about anything else, how can that be a viable model for oil production?  

Here is a good analysis of Nigeria.

https://www.forbes.com/sites/ikebrannon/2019/08/06/nigerias-deceptively-large-external-debt-could-threaten-its-economy/

Since assuming office in 2015 President Buhari’s governments have added considerably to the nation’s debt, which now exceeds $85 billion. In essence, the nation’s debt is about where it was in 2005-06, just before Nigeria benefited from massive debt relief as part of a program coordinated by the Paris Club, IMF, World Bank and the African Development Bank. To have squandered the debt reduction in just fourteen years and have no tangible economic progress to show for it is beyond disappointing. 

[James Regan + 1,776]

Okay dont want to get into a Shale fight, I just saw this report and the bold part jumped out at me, can anyone explain if there rigs are different in set up or is it just terminology being used by publisher?

I dont think anyone sector has to dominate the industry, if LTO can get its act together surely we can all eek out a living together in harmony, I just thought the article was very brutal, but I know OP has Shale lover and haters who write for them, my bios comes from it being so one sided, there is room for all if managed well.

Number of active US drilling rigs decreases this week

 

The number of active drilling rigs in the United States decreased by 73 to 529 this week, down by 483 year-on-year, according to the weekly data released by Houston-based oilfield services company Baker Hughes.

These active drilling rigs included 438 oil rigs operating in the US oil fields, down by 66 from the previous week; 89 gas drilling rigs, down by seven; and two miscellaneous rigs, unchanged from last week.

The 529 rigs included 512 land drilling rigs, down by 72 from the previous week; and 17 offshore drilling rigs, down by one from the previous week. There were no inland waters drilling rig this week, same as last week.

Of them, 28 are directional drilling rigs, 483 are horizontal drilling rigs, and 18 are vertical drilling rigs.

During the week, the number of drilling rigs decreased the most by 40 in the state of Texas to 262. New Mexico and North Dakota lost nine and seven rigs, respectively.

By far, the Permian Basin in western Texas and eastern New Mexico has been the largest source of shale oil production growth in the United States, having become an engine of supply growth outside the Organization of the Petroleum Exporting Countries in the past years.

Edited April 19, 2020 by James Regan

[wrs + 893]

James, I think your title is a little to narrow.  I am beginning to think that this CV-19 is oil's death blow.

[RSD + 41]

Shale's problem is that it is a square peg in a round hole and its influenced by but not controlled by political forces that want an oil price within a certain price range to suit their bigger picture - be that the economy or their re-election chances.  Shale only knows how to pump oil one way - flat out, and can't control the valves like OPEC can - but the politicians blame OPEC for under-producing, and then blame OPEC for over-producing - but the same politicians won't do anything about the amount that shale is producing - because they don't want to accept that shale is ever partly to blame for any of the problems.  Until shale realises that while free market is an ideal it is not ideal and that it needs to find a way to control its production and behave responsibly with relation to keeping the oil price in a certain range then the Saudis and Russians are just going to keep kicking the oil price all over the shop until...

[0R0 + 6,251]

1 hour ago, James Regan said:

Venezuela - 10 x the oil reserves of USA and very low lift cost - meddling by Foreign Gov sanctions- President is a drug dealer...

 

That is a useless number, use the geological resource number for an apples to apples comparison.

Their lifting costs are higher because their remaining crude is too heavy. Needs dilution with LTO.

Sanctions are not the main problem VZ has. Just one of them.  

 

[0R0 + 6,251]

41 minutes ago, James Regan said:

These active drilling rigs included 438 oil rigs operating in the US oil fields, down by 66 from the previous week; 89 gas drilling rigs, down by seven; and two miscellaneous rigs, unchanged from last week.

 

Looks more dramatic on a chart.

 

[0R0 + 6,251]

Visible already on the long term chart. 

 

[Bob_W + 37]

2 hours ago, wrs said:

James, I think your title is a little to narrow.  I am beginning to think that this CV-19 is oil's death blow.

Not forever, and not all oil.

High-cost oil financed by debt, extracted inefficiently by marginally-profitable small companies, probably yes.

[wrs + 893]

7 minutes ago, Bob_W said:

Not forever, and not all oil.

High-cost oil financed by debt, extracted inefficiently by marginally-profitable small companies, probably yes.

As I pointed out earlier, about 80% of the oil produced right now is in that position.  XOM and CVX are no longer profitable.  Those sovereign NOCs are not profitable at $20, including Russia and KSA.

[martin.rylance@bp.com + 23]

Sorry but Aramco and the myriad of Companies that make up the Russian production are profitable at $ 20 /bbl, the lifting cost(s) in KSA run at about $ 5 - 10 /bbl and about $ 10 - 15 in Russia.  You seem (for some reason) to be equating profitability with Government Budget balancing, if you want to do that I have no problem, so what is the current USA Budget Deficit running at (about $ 1 trillion P.A. although likely to be at least 2 or 3 times that this year).  You are being selective in your data reference, which is pretty much how Unconventionals got itself where it is.

[Bob_W + 37]

51 minutes ago, Bob_W said:

Not forever, and not all oil.

High-cost oil financed by debt, extracted inefficiently by marginally-profitable small companies, probably yes.

 

42 minutes ago, wrs said:

As I pointed out earlier, about 80% of the oil produced right now is in that position.  XOM and CVX are no longer profitable.  Those sovereign NOCs are not profitable at $20, including Russia and KSA.

Even when the price recovers to $30 (where it may sit for some time) the small shale producers still aren't profitable.

https://oilprice.com/Latest-Energy-News/World-News/Only-5-Shale-Drillers-Are-Still-Profitable-At-31-Oil.html

Edited April 19, 2020 by Bob_W

[Gerry Maddoux + 3,627]

I've read all the above articles. At current prices, no one can remain standing for long. The Saudi prince had his own brother--the true heir apparent to the throne--put under house arrest just before he put his wild price scheme to work. Putin is making a buck a barrel. In Saudi Arabia, there must surely be palace coups being put together, because when you figure in their welfare state requirements, they're currently losing a massive sum of money each day. Iran is dying on the vine--and extremely desperate and dangerous. Venezuela is kaput for many reasons, as is Brazil. Mexico is well on its way. The Vaca Meurto in Argentina can't really get going. Shale is pretty much closing up shop. Canadian oil sands is almost gone. 

When a situation looks this dire, it is either going to be pronounced dead, or something big is about to happen. If you read OP.com, this is the death of shale, Tesla is the car of the future, renewables are taking over, and gee aren't the cities clean and shiny now that the Covid-19 has forced us all out of our gas-guzzlers and into our caves.

Yet the Saudis are pulling some very ballsy gambits: price war, pedal to the metal production, buying almost $2B of Total, BP, ENI, Equinor. They're obviously expecting much higher prices. What do those clever fellows know?

Damned if I know, but it's something. And I also am fairly sure that there are a bunch of guys who are going to want to drill out the shale, once the price comes up above starvation wages. This is not the end of oil. Not unless vast numbers of people die. There for a while I thought maybe this was actually the Big One--the flu of 1918 come back to collect a quarter of the world population. But it doesn't appear to be--it's taking mostly the feeble and obese and the drinkers and hypertensives, not to mention a couple of my favorite song-writers. That's not for nothing but the oil-consuming crowd is going to want to kick some serious ass once this virus is vanquished. They're going shopping, big time, and they're going to fly and drive and party like it's 1955. 

In shale we're going to have a bad year or so. But then it's going to come back--only now there are going to be responsible spacings (4-6 wells per pad) in most areas, gas-lifting is going to become a standard of utilization, as are refracks in certain areas. LNG is set to soar. Unless we have another Great Depression, oil is going to find a level where producers all over the world (read the Saudis) can make a reasonable sum. That level is roughly $80 Brent and $70 WTI. At that level, everyone gets to eat. So if you've got some nice royalties, I wouldn't exactly go off half-cocked and sell them on one of those little internet auctions if I were you. Who knows? There may be life after death. 

[El Nikko + 2,145]

56 minutes ago, Gerry Maddoux said:

I've read all the above articles. At current prices, no one can remain standing for long. The Saudi prince had his own brother--the true heir apparent to the throne--put under house arrest just before he put his wild price scheme to work. Putin is making a buck a barrel. In Saudi Arabia, there must surely be palace coups being put together, because when you figure in their welfare state requirements, they're currently losing a massive sum of money each day. Iran is dying on the vine--and extremely desperate and dangerous. Venezuela is kaput for many reasons, as is Brazil. Mexico is well on its way. The Vaca Meurto in Argentina can't really get going. Shale is pretty much closing up shop. Canadian oil sands is almost gone. 

When a situation looks this dire, it is either going to be pronounced dead, or something big is about to happen. If you read OP.com, this is the death of shale, Tesla is the car of the future, renewables are taking over, and gee aren't the cities clean and shiny now that the Covid-19 has forced us all out of our gas-guzzlers and into our caves.

Yet the Saudis are pulling some very ballsy gambits: price war, pedal to the metal production, buying almost $2B of Total, BP, ENI, Equinor. They're obviously expecting much higher prices. What do those clever fellows know?

Damned if I know, but it's something. And I also am fairly sure that there are a bunch of guys who are going to want to drill out the shale, once the price comes up above starvation wages. This is not the end of oil. Not unless vast numbers of people die. There for a while I thought maybe this was actually the Big One--the flu of 1918 come back to collect a quarter of the world population. But it doesn't appear to be--it's taking mostly the feeble and obese and the drinkers and hypertensives, not to mention a couple of my favorite song-writers. That's not for nothing but the oil-consuming crowd is going to want to kick some serious ass once this virus is vanquished. They're going shopping, big time, and they're going to fly and drive and party like it's 1955. 

In shale we're going to have a bad year or so. But then it's going to come back--only now there are going to be responsible spacings (4-6 wells per pad) in most areas, gas-lifting is going to become a standard of utilization, as are refracks in certain areas. LNG is set to soar. Unless we have another Great Depression, oil is going to find a level where producers all over the world (read the Saudis) can make a reasonable sum. That level is roughly $80 Brent and $70 WTI. At that level, everyone gets to eat. So if you've got some nice royalties, I wouldn't exactly go off half-cocked and sell them on one of those little internet auctions if I were you. Who knows? There may be life after death. 

The destruction of jobs and businesses could lead to the worst recession we've ever seen, then there won't be any demand, maybe their clever gambit turned out to be shooting themselves in the head?

I still think we've really over reacted to the virus by shutting down our economies and I'm not sure we can just flick a switch and fire it back up close to where it was before. A few weeks ago I was hoping some common sense could prevail but I just cannot see how we aren't going to see mass defaults on damn near everything within a month or two.

I think the world will see huge domestic unrest in developing countries, also probably in some European countries as well, civil war likely in the former not in the latter. I also think (and pretty sure we've already seen the last few years) an increase in conflicts as well.

I've been thinking about making a 'prediction' thread so we can see what everyone thinks becasue there's a lot of people on here that follow economics and markets etc. I'm a layman that always pays attention becasue I've always believed it helps me weather the storm with the ups and downs of the oil industry and which in turn pays (or doesn't pay) my bills.

I really underestimated how everyone else has reacted to the virus and was and am still really shocked that most normal people fear the virus more than a serious depression/recession...they are oblivious of what I think could come next and that really does scare the bejesus out of me.

Hope I am wrong!

P.s If the conflicts and civil unrest continues to get out of hand in oil producing countries and combined with the massive cut back on investment for future oil projects we could probably see oil rocketing in a year or two. Just my opinion.

Edited April 19, 2020 by El Nikko

[Ron Ron + 18]

5 hours ago, wrs said:

Here is the problem with your OP, it's facile.  LTO is a solid money maker above $55 and the Saudis need $80 oil.  As long as they cut production to get $80 oil, there will be LTO.  As long as oil is selling for more than $60 there will be LTO and it will be profitable.

I am so tired of this bad business model that is constantly attributed to shale with no consideration for how every other business in the US is run that it's tiresome to refute this vacuous line of argument.  If all the other businesses in the US weren't being run the same way then there would be no need for PPP to float companies that can't even stand one month of interrupted income.

Everyone is swimming naked.

With WTI stuck around $20, nearly every producer is a long way from being able to cover costs let alone develop again.

That statement applies to about 80% of the oil produced in the WORLD.  The bad business model you guys hate is the one that Wall Street pushes on the companies that it backs.  So maybe the problem is that shale was a story packaged to sell for Wall Street.  However, most of the businesses today are run the same way, growth by leverage and that means DEBT!  It also means revenue and sales growth at the expense of  profit.

JC Penney is an example of a company that has been debt fueled and near bankruptcy for 20 years almost.  Why take your ire out on shale? The number of bankruptcies filed as a result of CV-19 is going to shock everyone and I am sure it will include plenty of oil companies around the world and particularly the oil sands.  We can see that Venezuela is bankrupt, PDVSA for example.  How about Iran?  How about Nigeria?  Libya?  Iraq? all bankrupt or headed there in a hurry.

Anyway, I do agree with the conclusion and in fact, that model is how my independent is operating but I am afraid he is going to lose everything in spite of him being conservative.

 

Given the current situation increasing production to lower prices in an effort to force shale producers out of the market is sound business strategy. If it works the Saudis’ larger market share means they will earn more income regardless of the price. 

[wrs + 893]

7 minutes ago, Ron Ron said:

Given the current situation increasing production to lower prices in an effort to force shale producers out of the market is sound business strategy. If it works the Saudis’ larger market share means they will earn more income regardless of the price. 

How does it make sense if it doesn't force them out unless you can't make any money?  Once the price is back where KSA wants it, shale will be right back in.  Furthermore, they will be back as soon as it's over $40.  It's not a business strategy at all, it's stupid.

[Gerry Maddoux + 3,627]

43 minutes ago, El Nikko said:

I really underestimated how everyone else has reacted to the virus and was and am still really shocked that most normal people fear the virus more than a serious depression/recession...they are oblivious of what I think could come next and that really does scare the bejesus out of me.

You're right, it's going to be hard to avoid a depression, but from depression comes opportunity. 

22 minutes ago, Ron Ron said:

Given the current situation increasing production to lower prices in an effort to force shale producers out of the market is sound business strategy. If it works the Saudis’ larger market share means they will earn more income regardless of the price. 

Nothing sound about it. Awful business decision. But more than that, an existential gamble re' the kingdom. 

[Bob_W + 37]

14 minutes ago, wrs said:

How does it make sense if it doesn't force them out unless you can't make any money?  Once the price is back where KSA wants it, shale will be right back in.  Furthermore, they will be back as soon as it's over $40.  It's not a business strategy at all, it's stupid.

Will banks be willing to finance another era of rampant drilling boom?

But maybe the Saudi's were telling truth, they aren't interested in targeting shale oil producers or even American producers?  Maybe their target truly is the Russians, who are taking control of the Middle East region as fast as the Americans surrender their influence. 

[wrs + 893]

8 minutes ago, Bob_W said:

Will banks be willing to finance another era of rampant drilling boom?

But maybe the Saudi's were telling truth, they aren't interested in targeting shale oil producers or even American producers?  Maybe their target truly is the Russians, who are taking control of the Middle East region as fast as the Americans surrender their influence. 

Why not?  Banks have backed every oil boom so far.

Edited April 19, 2020 by wrs

[Gerry Maddoux + 3,627]

6 minutes ago, Bob_W said:

Will banks be willing to finance another era of rampant drilling boom?

No, but they won't have to; there's plenty of money in the oil patch to finance a sound drilling and production company. And besides, this wasn't the total cowboy outfit that everyone seems determined to paint it. 

 

7 minutes ago, Bob_W said:

But maybe the Saudi's were telling truth, they aren't interested in targeting shale oil producers or even American producers?  Maybe their target truly is the Russians, who are taking control of the Middle East region as fast as the Americans surrender their influence. 

That's just plain naive. The Saudis have never told the truth in their lives. So the shale actually displaced Saudi Arabia as #1 oil producer and kept the price of oil down, yet somehow they Saudis weren't interested in that? Come on! The Russians can barely wipe their own ass, how are they taking control of anything?

[Bob_W + 37]

Russia in Syrian oil:

https://oilprice.com/Geopolitics/Middle-East/Russia-Strengthens-Its-Grip-On-Syrian-Oil.html

Russia in Iranian oil:

https://oilprice.com/Energy/Crude-Oil/The-Two-Global-Powers-Controlling-Irans-Oil-Sector.html

Russia in Iraqi oil:

https://www.reuters.com/article/us-rosneft-iraq-insight/the-great-russian-oil-game-in-iraqi-kurdistan-idUSKBN1HQ1R3

 

[Bob_W + 37]

2 hours ago, Gerry Maddoux said:

No, but they won't have to; there's plenty of money in the oil patch to finance a sound drilling and production company. And besides, this wasn't the total cowboy outfit that everyone seems determined to paint it.

The drilling boom was self-funded by the drillers?

"But the boom in shale drilling has been driven by smaller, independent operators. These companies have pushed the limits of drilling technology and taken big risks on unproven oil fields."

https://www.npr.org/2019/11/20/780879474/as-oil-prices-drop-and-money-dries-up-is-the-u-s-shale-boom-going-bust