Even a broken clock gets it right a few times

(edited)

On ‎6‎/‎4‎/‎2018 at 10:47 AM, Mike Shellman said:

Thank you, Dennis; I am no expert, however. I simply try to offer the "unique" observation of oil well economics 101 from the inside of a check book; in other words money out vs. money in. The shale oil industry is afraid to do that for fear of people finding out the truth; folks that analyze the shale oil industry don't know how.

Well costs are much higher than you think in the Permian (and actually higher than what you think in the other two shale basins also) but the "$80 at the wellhead," thing is not mine. Some of those guys can make a little money at $65.

What is "mine," however, is that LTO prices, not WTI prices, must reach $90 per barrel and STAY there for a long, sustained period of time in order for the shale oil industry to grow, appease angry lenders and shareholders and pay back what Thompson Reuters recently said is somewhere between $400 and $800 billion dollars, with a big 'ol 'B.' That is a lot of money and unless American's are willing to forgive all that debt, and give the mighty US shale oil industry a do-over, it must be paid back. I am astounded at how few analysts and shale oil cheerleaders actually grasp that.

 

Hi Mike,

I have increased my average well cost estimate in the Permian and Bakken to $9.5 million and for the Eagle Ford I use $7.5 million (full cost including land for all three cases and this is a basinwide average for an LTO well.)  The $85.5b at the wellhead is what is needed for an average Permian well to pay out in 36 months at a $9.5 million well cost assuming 32% royalty and taxes, G&A of $2.75/b, interest and other costs of $3.65/b, and lifting costs of $7/b, and a NG price at the wellhead of zero (gas flared when possible, or shipped with no net revenue).

I thought I got these numbers from an example you gave at POB, but may not remember correctly.

At $85.5/b over the life of an average 2016 Permian basin LTO well, the ROI for the well is 82%, cumulative C+C at 36 months is 212,275 bo and EUR over 266 months is 383 kbo.

I absolutely agree higher oil prices are needed for the shale oil producers to have a shot at paying back debt.  Wall St Journal said about 265 B in debt for LTO industry back in January.  The higher debt number may be shale oil and shale gas, I focus less on the Natural Gas producers.

https://www.forbes.com/sites/daneberhart/2018/01/26/challenges-of-funding-shale-boom-2-0/#2c9d97ad49b5

Article linked above claims 265 billion in debt from 2010 to the end of 2017.

A Jan 2018 analysis of top 33 US shale oil producers by Rystad at link below

https://www.rystadenergy.com/newsevents/news/newsletters/UsArchive/shale-newsletter-january-2018/

Edited by Dennis Coyne
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On ‎6‎/‎1‎/‎2018 at 5:54 PM, DanilKa said:

Average body temperature of hospital’s patients is a poor indicator... 

Increasing spread of debt to GDP as seen on page 4 (left) is not visible on BIS graph. China racked up massive debt during same period and its crude consumption grew by ~3M bopd. 

Another point of view - we never really recovered from 2008 crisis, just paper it over with money - chart 3 here

It also puzzles me. I don’t have the answer, I’m just a fracer. 

DanilKa,

There are many that think that any debt is bad.  GDP is like income, typically Debt to income ratios of up to 3 are the standard for mortgages.  As more nations become developed and have better access to financial markets total debt increases.  As long as the debt can be serviced, it is not a problem. At the World level as long as there is no interplanetary lending, every debt is balanced with an asset, debt is only a problem if it is over done.  Japan has had debt to GDP above 300% since 1998, real GDP growth per capita has been slow at 0.72% per year from 1998 to 2016.  By contrast Germany (lower Debt to GDP of 180%) grew GDP per capita at 1.3% per year from 1998 to 2016. US real GDP per capita grew at about 1% per year from 1998-2016 (debt to GDP about 190 to 250% over this period).  World GDP per capita has grown pretty consistently from 1970 at about 1.4% per year, not negatively affected by increasing debt.

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3 hours ago, Dennis Coyne said:

DanilKa,

There are many that think that any debt is bad.  GDP is like income, typically Debt to income ratios of up to 3 are the standard for mortgages.  As more nations become developed and have better access to financial markets total debt increases.  As long as the debt can be serviced, it is not a problem. At the World level as long as there is no interplanetary lending, every debt is balanced with an asset, debt is only a problem if it is over done.  Japan has had debt to GDP above 300% since 1998, real GDP growth per capita has been slow at 0.72% per year from 1998 to 2016.  By contrast Germany (lower Debt to GDP of 180%) grew GDP per capita at 1.3% per year from 1998 to 2016. US real GDP per capita grew at about 1% per year from 1998-2016 (debt to GDP about 190 to 250% over this period).  World GDP per capita has grown pretty consistently from 1970 at about 1.4% per year, not negatively affected by increasing debt.

I'm one of the many.

Not sure if I agree on your assertion of GDP-Income equivalency; a lot of unproductive activity (proverbial digging holes and filling them back in) will be reflected in GDP while doing little to the wealth creation. At a same time, it is difficult to capture things such as inventions, technological advances which may be deflationary in nature.

In my optimistic view, level of debt is far beyond sustainable and it will all end in tears and blood rather soon. There are critics saying Rogoff and Reinhart miscalculated something in their suggestion that anything above 90% debt to GDP is detrimental to growth but only way Japan survived that long with debt burden is by manipulating interest rate - will be interesting to see unraveling. There is no shortage of graphs showing diminishing effect of borrowing on GDP.

US is quickly reaching a limit of interest rate it still can pretend to service - they will be out of ammo to control inflation if and when it happens (deflationary collapse is arguably worse outcome). Judging by record low unemployment rate (and low labor participation - go figure) and shortage of track drivers in Permian, wages have to go up and this would be a key to rise in prices  of everything (which are rising OK, just creative accounting ignores it). Expensive oil is another sure thing to elevate prices of goods.

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(edited)

14 hours ago, DanilKa said:

I'm one of the many.

Not sure if I agree on your assertion of GDP-Income equivalency; a lot of unproductive activity (proverbial digging holes and filling them back in) will be reflected in GDP while doing little to the wealth creation. At a same time, it is difficult to capture things such as inventions, technological advances which may be deflationary in nature.

In my optimistic view, level of debt is far beyond sustainable and it will all end in tears and blood rather soon. There are critics saying Rogoff and Reinhart miscalculated something in their suggestion that anything above 90% debt to GDP is detrimental to growth but only way Japan survived that long with debt burden is by manipulating interest rate - will be interesting to see unraveling. There is no shortage of graphs showing diminishing effect of borrowing on GDP.

US is quickly reaching a limit of interest rate it still can pretend to service - they will be out of ammo to control inflation if and when it happens (deflationary collapse is arguably worse outcome). Judging by record low unemployment rate (and low labor participation - go figure) and shortage of track drivers in Permian, wages have to go up and this would be a key to rise in prices  of everything (which are rising OK, just creative accounting ignores it). Expensive oil is another sure thing to elevate prices of goods.

DanilKa,

When there is inflation that suggests a growing economy, the inflation is easily controlled by a modest rise in interest rates.  Japan has been at over 300% debt to GDP for almost 20 years.

I think they are probably at the limit of what is feasible.  For the G20, Debt to GDP in 2017 was about 245%, in general probably the range of 200 to 250% is fine.

Usually income equal to GDP is a simplification made in national income accounting see

https://en.wikipedia.org/wiki/Measures_of_national_income_and_output

I am not suggesting that borrowing necessarily increases GDP, simply that debt doesn't necessarily decrease GDP.  So what level of Debt to GDP is a problem (note that the levels mentioned here are total private and public debt to the non-financial sector).

As far as the Rogoff paper see

https://en.wikipedia.org/wiki/Growth_in_a_Time_of_Debt

The 90% number for Rogoff is for public debt, the numbers I gave are for total public and private debt.

A single number cannot be given for the "right" number for public debt as it depends upon the state of the economy.  A severe recession is a poor time to reduce public debt as the evidence from the Great Depression clearly shows.  The austerity measures in Europe which were followed in response to the paper were the reason recovery was so much slower in Europe compare to the US, the paper was also not peer reviewed.  The proper response to a lack of aggregate demand (as in a recession) is not to reduce Aggregate demand further by reducing government spending,  that's the Hoover approach.

Edited by Dennis Coyne
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On ‎6‎/‎7‎/‎2018 at 2:26 AM, Dennis Coyne said:

I think they are probably at the limit of what is feasible.  For the G20, Debt to GDP in 2017 was about 245%, in general probably the range of 200 to 250% is fine.

arrived to my mailbox over weekends - couldn't resist sharing the attached; it may worth your attention. All I can say from height of my optimism - it will end badly. "Greater financial crisis" would be sure way to reduce oil demand - can't see it happening other way.

TFTF_Jun_08_2018.pd.pdf

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