Permian already crested the productivity bell curve - downward now to Tier 2 geological locations

So many good observations in this article yesterday from Nick Cunningham. It's wonderful to see that some people understand what is actually going on in the U.S. Shale Oil industry.  The frantic hamster wheel of debt I keep mentioning sort of gets an oblique mention (see the "treadmill" remark).

Recommend you read the whole article, it's not long; here's a couple of notables:

The Productivity Problem In The Permian

But it’s also a reflection of the fact that drillers are being forced into less desirable locations with the field so crowded.

“We believe that the short-cycle nature of shale exploitation and the intensity of activity in the Permian means that production from Tier 1 geological locations (e.g., those with the best pay, the optimum pressure) is starting to move to Tier 2, which is unable to achieve the same rates of productivity,” Standard Chartered wrote in a note. 

... But there is a bit of treadmill aspect to drilling – you have to drill more to keep output flat. The sheer size of the Permian means that the drilling needs to continue at a high rate to maintain overall output. So, the unfolding slowdown in drilling, largely because of pipeline constraints, could threaten output levels.

... In other words, much of the industry’s frenzied effort these days is simply to keep production from falling. “The EIA put the number of completions in June at 434, i.e., 95% of completions were needed to combat declines, and net growth came from just 5% of completions,” Standard Chartered concluded.

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Tom, sounds interesting... the link doesn't go to an outside article?

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1 hour ago, BillKidd said:

Tom, sounds interesting... the link doesn't go to an outside article?

The link loops back to the above.

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2 hours ago, BillKidd said:

Tom, sounds interesting... the link doesn't go to an outside article?

Whoops, fixed it.  I had too many tabs open on my phone when posting this.

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14 minutes ago, Tom Kirkman said:

Whoops, fixed it.  I had too many tabs open on my phone when posting this.

Thanks, Tom.  That Nick Cunningham seems to be a good journalist.  Well researched, presented in a relatively easy to understand manner and with little apparent bias.  On top of that, he seems to focus on very interesting topics that are relevant now and into the near future.  Information that, usually, is not readily available in the MSM.  Thanks again!

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Aw, just when IHS Markit forecast the Permian's output will boom to over 5 million bpd in five years. Don't you just hate when this happens?

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1 hour ago, Marina Schwarz said:

Aw, just when IHS Markit forecast the Permian's output will boom to over 5 million bpd in five years. Don't you just hate when this happens?

Heh heh, the Permian's Varsity Team of Tier 1 geological locations is getting depleted, and the Junior Varsity Team of Tier 2 geological locations is getting sent into the game instead.

An increase in frantic drilling, but not so much an increase in corresponding new output.

Perhaps IHS Markit doesn't understand what a Bell Curve is.

The best "sweet spots" in the Permian were already drilled years ago, and already depleted by 80% or so.

So now the U.S. Shale Oil biz seems trying to distract investors, like in the Miller Lite beer commercials of old:

"Tastes Great .... Less Filling"

But it's just a distraction away from the fact that lite beer is just watered down beer at the same damn price.  (Apologies to Miller.  Great ad campaign.  But I'm no fan of lite beer.)

The Permian is now moving away from Pale Ale beer territory into Light Beer territory.  You have to drink more light beer to get a buzz than with regular beer, but the light beer costs the same as the regular beer. 

Why anyone in their right mind would prefer to choose light beer over regular beer is probably better for a separate discussion, but I think I've made my point about the Permian:

"Drill More ... Less Productive"

tastes-great-less-filling.jpg

A1C0gK-HZmL._SL1500_.thumb.jpg.4bbb30daf872e568e9c8b8bd3470ff01.jpg

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"Everything you always wanted in a beer. And less." Seriously? That was a real, actual, factual slogan? Well, at least they are being kind of honest.

As for the Permian, the acreage rush is still ongoing, billions changing hands, which makes me wonder how things will look in five years.

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23 minutes ago, Marina Schwarz said:

"Everything you always wanted in a beer. And less." Seriously? That was a real, actual, factual slogan? Well, at least they are being kind of honest.

Yep.  Actual, very famous slogan.  Advertising Age magazine ranked it as the eighth best campaign in advertising history.

27 minutes ago, Marina Schwarz said:

As for the Permian, the acreage rush is still ongoing, billions changing hands, which makes me wonder how things will look in five years.

Mostly depleted, would be my guess.

The Tier 1 locations are already mostly depleted, and Tier 2 locations are stepping up in the game.  In 5 years, much of the Tier 2 locations will likely be depleted.  (Average of 80% decline rate in 2 years.)

And in 5 years, the Tier 3 locations will probably need one heckuva ad campaign to convince investors to keep throwing money at drilling the leftover locations.

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5 minutes ago, Tom Kirkman said:

Yep.  Actual, very famous slogan.  Advertising Age magazine ranked it as the eighth best campaign in advertising history.

Mostly depleted, would be my guess.

The Tier 1 locations are already mostly depleted, and Tier 2 locations are stepping up in the game.  In 5 years, much of the Tier 2 locations will likely be depleted.  (Average of 80% decline rate in 2 years.)

And in 5 years, the Tier 3 locations will probably need one heckuva ad campaign to convince investors to keep throwing money at drilling the leftover locations.

If the price of oil keeps going down, which looks likely, and the markets settle in for a deep correction, which also looks likely, then this discussion will be moot for some years due to the fact that investment money won't be there.  IMHO.

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And the hype around Wolfcamp with its billions of barrels? Just hype?

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1 minute ago, Marina Schwarz said:

And the hype around Wolfcamp with its billions of barrels? Just hype?

Someone else should probably answer that instead of me.

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This is one helluva caveat...

" One caveat to note is the rising backlog of drilled but uncompleted wells (DUCs), which could also help explain the drop in new-well productivity. The DUC list continues to rise, with the backlog in the Permian expected to have jumped by 167 wells in July compared to June, rising to a total of 3,470. There is little to no space left on the region’s pipelines, plus a growing number of bottlenecks are cropping up for other services like completion services, rigs, labor, sand, water, etc. That means that companies may drill a well but leave it uncompleted for the time being. As a result, the rig count reflects the drilling, but there is no actual oil production that shows up in the data, which may give off the appearance of low productivity."

Well, heck, what is the denominator, wells drilled or wells completed? That makes one helluva difference! A DUC doesn't produce one drop of oil.

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So in short the shale oil boom is just another debt secured on the kids /grandkids kidneys?

I say this because I assume when this debt bomb unravels it will be the tax payer who picks up the tab?

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I'm still trying to figure out how the Wolfcamp, Bone Springs and Spraberry are "shales".

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With regard to the bottle neck of getting recovered oil out of the Permian because of lack of pipeline capacity, forgive my ignorance and educate me please.  Is it unprofitable to move it in tanker trucks to the Cushing Oil Hub, or is this already going on?

 

TXPower

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It's what we call the Red Queen Effect

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The Permian just isnt shale , it has various formations that are conventional oil and gas plays

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USA has not been releasing its oil reserve data recently. I suspect that oil reserves in USA is getting quite critical and there are no excuses left like economic unfeasibility etc as the oil price of $70 is good enough for making every oil field economically feasible

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22 hours ago, TXPower said:

With regard to the bottle neck of getting recovered oil out of the Permian because of lack of pipeline capacity, forgive my ignorance and educate me please.  Is it unprofitable to move it in tanker trucks to the Cushing Oil Hub, or is this already going on?

 

TXPower

A tanker truck would carry 8,000 gallons , it would need a lot of tanker trucks driving all the way across the Permian into Cushing, think of the traffic on local, State and Interstate Highways. Oil field traffic is bad enough in the oil boom areas. Besides, it makes more sense economically and physically to move the Permian hydrocarbons to Corpus Christi, Houston for exports. Rail tanker cars make more sense, but pipelines are safer and more economical to move crude and other hydrocarbons from the Permian to the Gulf Coast. Major integrated companies and midstream companies are making massive investments for pipeline take away capacities. Once there is a clear position on the Chinese trade tariff issues (China has left out US crude oil for now) from the increased 25% tariff, the exports to China will pick up even more so than the volumes they were buying pre June 2018, the rush to expand tale away capacity will be full steam. I dont think the companies investing in the Permian are deterred by the tariff issue, but when China starts buying US crude in larger volumes, there will be pressure to expedite things.

Look @ what happened in the Bakken , pre-pipeline(s), lots and lots of rail tanker cars moving Bakken crude, now with pipelines in operations that pressure has eased.

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2 hours ago, ceo_energemsier said:

A tanker truck would carry 8,000 gallons , it would need a lot of tanker trucks driving all the way across the Permian into Cushing, think of the traffic on local, State and Interstate Highways. Oil field traffic is bad enough in the oil boom areas. Besides, it makes more sense economically and physically to move the Permian hydrocarbons to Corpus Christi, Houston for exports. Rail tanker cars make more sense, but pipelines are safer and more economical to move crude and other hydrocarbons from the Permian to the Gulf Coast. Major integrated companies and midstream companies are making massive investments for pipeline take away capacities. Once there is a clear position on the Chinese trade tariff issues (China has left out US crude oil for now) from the increased 25% tariff, the exports to China will pick up even more so than the volumes they were buying pre June 2018, the rush to expand tale away capacity will be full steam. I dont think the companies investing in the Permian are deterred by the tariff issue, but when China starts buying US crude in larger volumes, there will be pressure to expedite things.

Look @ what happened in the Bakken , pre-pipeline(s), lots and lots of rail tanker cars moving Bakken crude, now with pipelines in operations that pressure has eased.

Thanks for the response.  I was curious if the dollars and cents of using tanker trucks, 8,000 gallons at a time as you say, could be used and maintain any profitability.

I understand that ground has been broken and plans are on the table but pipelines take years to build.  I also understand that the railroads are loathe to increase purchases of bulk oil hauling rail cars for fear of another downturn in world economy and/or oil demand leaving them with lots of unused assets that won’t pay for themselves.

But, could tanker trucking from the Permian to the Texas Gulf Coast as you suggest, help with the bottleneck while maintaning profitability?

TXPower

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