Hamsters on the U.S. Shale Oil Hamster Wheel of Debt are Running Faster to Get Less Production

[Tom Kirkman + 8,860]

My version of "treadmill" is "hamster wheel of debt".  More accurate visual image, in my opinion.

As WTI slows down overproducing, the rest of the oil producing world will likely recover toward a more stable $65 to $70 Brent price.

OPEC has not been driving down WTI prices and widening the gap between WTI and Brent.  The independent U.S. Shale Oil producers have done that all by themselves.

So as WTI prices seem unlikely to rise too high due to WTI overproduction, and CapEx gets scaled back, the niggling nuisance of past debt rears its head.  Running faster on that hamster wheel of debt, but not making much progress.

Warning Signs Flash For U.S. Shale

The shale tidal wave may finally be starting to ebb.

The largest oilfield services company in the world says that shale drilling activity is slowing, creating an uncertain outlook for 2019.

... But this dynamic appears to be a growing problem, one that could soon catch up with the industry. “It is also worth noting that with the continued growth in U.S. shale production, an increasing percentage of the new wells drilled are being consumed to offset the steep decline from the existing production base,” Kibsgaard told shareholders and analysts on Schlumberger’s earnings call. “The third party analysis shows that in 2018, this number was 54% of total CapEx and is expected to increase to 75% in 2021, clearly demonstrating the unavoidable treadmill effect of shale oil production.”

[Black Blade + 16]

It's like in mining for precious metals. When prices fall the productions shifts to the "sweet spots" with higher low cost recovery. The problem is that as they "mine" out the heart of a deposit the costs rise for getting marginal production as prices rebound. I have worked in these situations in the Gold exploration-mining side and in the Shale Oil production side (Bakken, Niobrara, Powder River, Eagle Ford and Permian). As prices fall these companies work faster and leave many wells for later completions. As prices rise they feed off new fracks or live off extended hedges and eventually another boom follows. It's a never-ending boom-bust cycle.

Another problem with this is many skilled workers and staff leave for other careers during the bad times never to return and the following boom cycle leaves companies pursuing inexperienced workers to fill the gap which leads to other problems. A good sign that things are slowing down is when companies start to consolidate and buy out competitors rather than grow through exploration (green fields) then the end of the boom cycle is probably near.

I've been through at least 4 boom-busts in my time and am just hoping to stretch it out for at least a couple more years before hanging up my rock hammer and riding off into the sunset. 🙂

[Rasmus Jorgensen + 1,169]

49 minutes ago, mthebold said:

The pipelines alone are a big deal.  My understanding is that they could add $5/bbl to the wellhead price, and that $5/bbl could be the difference between continued growth and the currently observed slump. 

 

And the pipelines are likely are guarantee for a certain flow. I expect that some agreements have likely been signed and I remember reading that Exxon and trafigura are investors in one of the pipeline systems

[Mike Shellman + 548]

This Mark Anthony article was written 7 years ago, when the price of WTI averaged $94. The economic limit of most shale oil wells in all shale oil basins is now 15-18 BOPD at a current price range of $45-65. GOR is increasing dramatically in a lot of shale oil basins (an indication of depletion) and most, way too much, of that associated gas is now being flared for lack of market. Water production is increasing and becoming more costly to dispose of, thus increasing lift costs and raising economic limits on a BOPD basis.

Tens of thousands of shale oil wells drilled prior to 2014 now make less than 30 BOPD of rod lift and the number of all wells (2009-2018) that produce less than 50 BOPD on rod lift is alarming (shaleprofile.com, IHS). "Terminal" decline rates range from 10% annually to even 15% or higher in the Permian (EIA). There are excellent comments of shaleprofile.com, Bakken, that suggest increased productivity is not resulting in higher EUR's or greater recovery factors of OOIP. The Eagle Ford is over the hump and on the down hill slide. 

The EIA and others suggest that annualized decline in American shale oil basins is 3MM BOPD and it is currently taking 75% of wells drilled in the US (10,000 +/-) to simply offset this decline each year. To do this the shale oil industry has, and will continue to have to outspend revenue by relying heavily on credit/debt.

Productivity is not the same as profitability and shale oil extraction is a business. For the business to succeed and be sustainable, it must be profitable. The shale oil industry has NEVER been profitable. It must pay down its massive long term debt. The weighted price of WTI (Cushing) for 2018 was $69 and change; if you can't grow production, deleverage debt, show profit and pay dividends to shareholders at those kind of prices, you don't belong in the oil business. SEC K's will be out soon; we'll see.

 

[Tom Kirkman + 8,860]

13 minutes ago, Mike Shellman said:

This Mark Anthony article was written 7 years ago, when the price of WTI averaged $94. The economic limit of most shale oil wells in all shale oil basins is now 15-18 BOPD at a current price range of $45-65. GOR is increasing dramatically in a lot of shale oil basins (an indication of depletion) and most, way too much, of that associated gas is now being flared for lack of market. Water production is increasing and becoming more costly to dispose of, thus increasing lift costs and raising economic limits on a BOPD basis.

Tens of thousands of shale oil wells drilled prior to 2014 now make less than 30 BOPD of rod lift and the number of all wells (2009-2018) that produce less than 50 BOPD on rod lift is alarming (shaleprofile.com, IHS). "Terminal" decline rates range from 10% annually to even 15% or higher in the Permian (EIA). There are excellent comments of shaleprofile.com, Bakken, that suggest increased productivity is not resulting in higher EUR's or greater recovery factors of OOIP. The Eagle Ford is over the hump and on the down hill slide. 

The EIA and others suggest that annualized decline in American shale oil basins is 3MM BOPD and it is currently taking 75% of wells drilled in the US (10,000 +/-) to simply offset this decline each year. To do this the shale oil industry has, and will continue to have to outspend revenue by relying heavily on credit/debt.

Productivity is not the same as profitability and shale oil extraction is a business. For the business to succeed and be sustainable, it must be profitable. The shale oil industry has NEVER been profitable. It must pay down its massive long term debt. The weighted price of WTI (Cushing) for 2018 was $69 and change; if you can't grow production, deleverage debt, show profit and pay dividends to shareholders at those kind of prices, you don't belong in the oil business. SEC K's will be out soon; we'll see.

^ this.  Well written, factual, and level-headed.  No hyperbole.  A clear business (profit & loss) look at the Shale Oil industry as a whole.  A great antidote to the MSM hype and disinformation.

Thanks Mike, you are far better at explaining the nuts and bolts of the U.S. Shale Oil industry than me.

 

[Mike Shellman + 548]

As always, thanks, Tom. Again, I invite you to look in on comments on shaleprofile.com. Jim Brooker is a sharp PE and nobody has a better handle on the state of the Bakken than our old friend, Rune.

 

You are doing a great job of keeping people on planet earth about this shale oil stuff. As hard as it is, please; carry on, sir.

[Doyle Johnson + 14]

Well written Mike, I am increasingly relying on certain contributors of this discussion group for additional, knowledgeable, insight into the global oil & gas industry.  Thank you & keep up the good work. 

[Rasmus Jorgensen + 1,169]

16 hours ago, Mike Shellman said:

This Mark Anthony article was written 7 years ago, when the price of WTI averaged $94. The economic limit of most shale oil wells in all shale oil basins is now 15-18 BOPD at a current price range of $45-65. GOR is increasing dramatically in a lot of shale oil basins (an indication of depletion) and most, way too much, of that associated gas is now being flared for lack of market. Water production is increasing and becoming more costly to dispose of, thus increasing lift costs and raising economic limits on a BOPD basis.

Tens of thousands of shale oil wells drilled prior to 2014 now make less than 30 BOPD of rod lift and the number of all wells (2009-2018) that produce less than 50 BOPD on rod lift is alarming (shaleprofile.com, IHS). "Terminal" decline rates range from 10% annually to even 15% or higher in the Permian (EIA). There are excellent comments of shaleprofile.com, Bakken, that suggest increased productivity is not resulting in higher EUR's or greater recovery factors of OOIP. The Eagle Ford is over the hump and on the down hill slide. 

The EIA and others suggest that annualized decline in American shale oil basins is 3MM BOPD and it is currently taking 75% of wells drilled in the US (10,000 +/-) to simply offset this decline each year. To do this the shale oil industry has, and will continue to have to outspend revenue by relying heavily on credit/debt.

Productivity is not the same as profitability and shale oil extraction is a business. For the business to succeed and be sustainable, it must be profitable. The shale oil industry has NEVER been profitable. It must pay down its massive long term debt. The weighted price of WTI (Cushing) for 2018 was $69 and change; if you can't grow production, deleverage debt, show profit and pay dividends to shareholders at those kind of prices, you don't belong in the oil business. SEC K's will be out soon; we'll see.

 

Mike,

What impact do you see these pipelines having? 

thanks in advance. 

[Mike Shellman + 548]

Mr. Jorgensen, the shale oil industry always has a solution for its dismal financial performance and one of its current ones in the Permian is more takeaway. Gas takeaway is badly needed but where it will go, I don't know. Mexico's market is developing but, like Mexico, at a snails pace. LNG? I don't see the US being able to compete with existing LNG for awhile. Associated gas flaring is a long term problem with no quick fix. They are wanting now to store it, underground, in the North Dakota.

 

There is 5MM more BOPD of liquids takeaway from the Permian on the books by 2021. The number of wells required to fill that new takeaway is staggering and I have no idea where the money will come from to drill those wells if prices stay in a below $60 range. I think that is midstream overkill, given decline rates in the Permian, and in the end folks will lose money on more pipe. LTO has its limitations so most of that will have to be exported (a big pisser for me!) and there are port issues, etc. etc. More LTO on the market, right now, means lower prices. I cannot believe that OPEC+ is willing to keep cutting its production, so America can grow its. There is a long term reason for that.

Short answer: more pipe enhances the America greed factor and increases the rate in which we will drain our remaining resources. I have no earthly idea where all the money is going to come from, however. We'll have to cut down a lot more trees for the paper to print a lot more money.

 

 

 

[JR EWING + 123]

On ‎1‎/‎24‎/‎2019 at 7:42 PM, Rasmus Jorgensen said:

And the pipelines are likely are guarantee for a certain flow. I expect that some agreements have likely been signed and I remember reading that Exxon and trafigura are investors in one of the pipeline systems

yea, but just because Exxon involved doesn't make it a good deal. they have the worst IIR for a major over past several years and one wonders if its connected to shale foot print

[wrs + 893]

My oldest shale well is from July 2014. It is on gas lift and still produces 150bbl/day.  It has total production of 308k bbl oil and 1,950 mmcf gas.  It initially produced 800bbl/day.  It's free money to the operator at this point.  He has plenty of others like this and invested $50m in new infrastructure last year off free cash-flow.  Last year was really good for the operators that have been out there a while.  Hopefully we will have a repeat this year with prices in the 70s by mid summer.

The operator figures this well will continue to produce another 10-15 years.

Edited January 27, 2019 by wrs

[Curtis Stewart + 32]

When one wants to talk of the great intelligence of Double Cross (Exxon/Mobil) may I remind them who once owned then gave away to Parsley, Sprayberry. Much money was spent and reams of paper printed with many petroleum engineers input used. It was perfectly clear the Permian was a declining oilfield and DC should look for opportunities elsewhere. And they sold their pipelines because, well there would not be any oil to move from the PB. 

So when one wants to discuss how the Super Majors have some better intelligence or knowledge than the common bear, I beg to differ.

[Tom Kirkman + 8,860]

2 hours ago, Curtis Stewart said:

When one wants to talk of the great intelligence of Double Cross (Exxon/Mobil) may I remind them who once owned then gave away to Parsley, Sprayberry. Much money was spent and reams of paper printed with many petroleum engineers input used. It was perfectly clear the Permian was a declining oilfield and DC should look for opportunities elsewhere. And they sold their pipelines because, well there would not be any oil to move from the PB. 

So when one wants to discuss how the Super Majors have some better intelligence or knowledge than the common bear, I beg to differ.

Hiya Curtis, thanks for dropping by... how's it going these days?  

[Rasmus Jorgensen + 1,169]

On 1/27/2019 at 12:53 PM, JR EWING said:

yea, but just because Exxon involved doesn't make it a good deal. they have the worst IIR for a major over past several years and one wonders if its connected to shale foot print

Never said that it did. Just said that it is likely a guarantee for a certain flow. Trafigura, a trading house, being investor in another pipeline system is an even bigger confirmation of this. 

[buckskinner + 19]

Doesn't make any difference if any of it is profitable, there are twelve thousand Bakken wells.  Oil is what counts.

The money is merely a means to get it all, if it isn't enough, too bad.

http://www.searchanddiscovery.com/documents/2018/42189roth/ndx_roth.pdf

http://www.undeerc.org/News-Publications/Leigh-Price-Paper/pdf/TextVersion.pdf

 

 

[Tom Kirkman + 8,860]

1 hour ago, buckskinner said:

Doesn't make any difference if any of it is profitable, there are twelve thousand Bakken wells.  Oil is what counts.

The money is merely a means to get it all, if it isn't enough, too bad.

That's a distinctly non-capitalist idea.  

It seems that you are fairly adamant that it doesn't matter if U.S. Shale Oil keeps losing money. 

Are you asking taxpayers to bail out bankrupt shale oil companies?

[buckskinner + 19]

9 hours ago, Tom Kirkman said:

That's a distinctly non-capitalist idea.  

It seems that you are fairly adamant that it doesn't matter if U.S. Shale Oil keeps losing money. 

Are you asking taxpayers to bail out bankrupt shale oil companies?

The US gov is 22 trillion in debt and the cost to have the debt is 400 billion per year, interest paid.  In ten years, 4 trillion will be paid in interest cost accrued.  You can buy some hefty real estate with that money.  The US gov ain't broke, it's still there today.

I have invested in oil companies, some oil companies aren't worth squat.  Just the nature of the beast.  Texas has 187,139 wells that produce an average of 15 bpd.  All are stripper wells.  They're not going to quit pumping oil, not gonna happen.

https://www.rrc.state.tx.us/oil-gas/research-and-statistics/production-data/historical-production-data/crude-oil-production-and-well-counts-since-1935/

Everything is capitalist, capitalism.  Socialism is state capitalism.  Doesn't matter the current version, if you don't benefit, somebody will.  Good, bad, or indifferent, it is the human way, you will not change human nature.  Socialism is capitalism for the state.  A lot of people have died, but more died before socialism came along.  If you own enough slaves, you are a successful capitalist.  Doesn't have to be moral.

Besides, all exploration and production of oil in any formation inside the borders of the US are all strategic.  They need to be developed to the production state for future military use.  It is not too difficult to see what is really going on with what is going to be necessary.

Any military is a liability, a negative cost, a cost that increases when war erupts.  It is human nature gone wild.

The Bakken is ringed by several US air force bases, when the time comes, the oil will be there.

It does not have to make money, all that is necessary is to have the oil.  It is not rocket surgery.

The total cost for twelve thousand wells at six million per well fracked to completion is 72 billion dollars, include future production and maintenance costs, another twelve billion.  A 25 year production time frame is acceptable.  There are wells that do pump for more than fifty years, I know it.

The Bakken has produced 2.5 billion barrels, 4 billion to go.

That times 40 is 160 billion shekels.  

I remember reading a maximum production of 300,000 bpd for the Bakken.  It has reached 1.2 million per day and more.

[Mike Shellman + 548]

On ‎1‎/‎27‎/‎2019 at 1:26 PM, wrs said:

The operator figures this well will continue to produce another 10-15 years

I've read your comments about flaring and conservation, sir; we are on the same page about that and I am an oil producer of over 40 years. Comments about associated gas being a bi-product, and worthless, ignore the ramifications of gas, pressure maintenance and rising GOR on depletion driven shale "containers." Your observations as a mineral owner are very helpful., thank you.

I am not a fan of BOE in economics, not at 6:1, and particularly if it is flared. Take home pay per BO in the Delaware the past 4 years has been anywhere from $14-20 bucks and those are $9MM wells +. This particular 2014 well you've referenced, however, I do not believe has reached payout  and that is not "free" money. If its still making 150 on gas lift it might get to payout someday and might limp out to 15 years of rod lift, if it does not reach its economic limit at what I believe is about 18 BOPD, depending on water production. Your operator, whoever it is, is racked with debt of some level and good wells must pay for aaaaaallllllll those bad wells, must pay for interest on that debt, and pay that debt down. Nothing is free in the oil business.

There are some really good wells out there, and a lot of not so good wells. For any American wanting to know about his or her oil future, and if all the ridiculous stuff being said about growth is actually true, we have to stick to what SEC filings say, not what the shale oil industry says about itself. Then we have to ask ourselves where is all the money going to come from to keep this party going.

You are a very lucky man, sir, to have those kinds of wells. Thank you again.

 

 

 

 

 

 

[wrs + 893]

1 hour ago, Mike Shellman said:

I've read your comments about flaring and conservation, sir; we are on the same page about that and I am an oil producer of over 40 years. Comments about associated gas being a bi-product, and worthless, ignore the ramifications of gas, pressure maintenance and rising GOR on depletion driven shale "containers." Your observations as a mineral owner are very helpful., thank you.

I am not a fan of BOE in economics, not at 6:1, and particularly if it is flared. Take home pay per BO in the Delaware the past 4 years has been anywhere from $14-20 bucks and those are $9MM wells +. This particular 2014 well you've referenced, however, I do not believe has reached payout  and that is not "free" money. If its still making 150 on gas lift it might get to payout someday and might limp out to 15 years of rod lift, if it does not reach its economic limit at what I believe is about 18 BOPD, depending on water production. Your operator, whoever it is, is racked with debt of some level and good wells must pay for aaaaaallllllll those bad wells, must pay for interest on that debt, and pay that debt down. Nothing is free in the oil business.

There are some really good wells out there, and a lot of not so good wells. For any American wanting to know about his or her oil future, and if all the ridiculous stuff being said about growth is actually true, we have to stick to what SEC filings say, not what the shale oil industry says about itself. Then we have to ask ourselves where is all the money going to come from to keep this party going.

You are a very lucky man, sir, to have those kinds of wells. Thank you again.

 

 

 

 

 

 

Yes, we are lucky but I know what the well cost and it is paid for.  We have done a good job with the resources we got to work with that haven't been tied up by previous generations just giving carte blanche to the operators.  Completion costs on a 4500 foot lateral are running $3-5m and drilling costs were less than $1m earlier in 2018 based on what I know from the XTO company man on site there.  I know about the drilling and completion costs for the wells in Culberson because we get daily well reports as part of our agreement.  We also know what the operator is making because we get full breakdowns of all prices for all sales as part of our lease agreements.  

This operator has no debt.  He started leasing out there in about 2005 and got lot's of acreage at low rates, like $125/acre bonus with long term leases.  His operation is cash-flow positive and he put $50m into his setup from free cash flow last year.  He has his own water supplies and sells water to other operators.  He has his own disposal facilities and also takes water from other operators from which he also extracts oil and sand before sending it down the disposal wells which he also owns.  He is very integrated but he has been out there for 40 years.  He drilled wells in the Delaware that produced 15-30bbl/day back in the early 80s so he is intimate with the area.  His interest was gas back when he stared the leasing in 2005.

There are plenty of operators without his knowledge that may be in the situation you describe but the ones that have been out there the longest are not like that.  Cimarex for example is one that started real early and they know what they are doing.  They were out there buying up leases at low rates.  

I will say this.  We wrote a good lease with our operator because we have a lot of provisions that others do not.  We have acreage in East Texas in the Eaglebine and the Eagleford and so we have lot's of experience with leasing and dealing with liars er I mean landmen.  You do not have good access to data at the SEC level.  It's gross and misleading.  Sure there are operators that don't know what they are doing and end up landing in a weak pay zone.  That kind of well is going to lose money.  Doesn't mean the business in general is failing just because some operators are still on the learning curve or are overpaying for leases and services.

As to XTO, I don't know what their plan is for this $60m they invested last year.  I guess they believe they can make these 7 wells pay for themselves and if their costs are $60m they shouldn't take too long to recoup them.  They have a 1/8 lease with us thanks to stripper operators holding the section in production well past it's lifetime.  I am pretty sure XTO was paying the stripper guys to keep this section going because it's the only section they have in Reeves.  

In any case, I think that the people who aren't in shale and attempt to extrapolate the old vertical rules to this business are making a lot of mistakes in their assumptions.  For one thing, the decline rates have confounded the "experts".  There are a lot of hydrocarbons in these strata and they are coming up easier and easier as the frac knowledge grows.  This is why production is growing so massively and that is a serious problem but the basic costs and recovery are not nearly as dire as people keep trying to convince themselves of in the media.

Look at the size of this tank battery for the 7 new wells compared to the first one they drilled back in 2016.  I don't think XTO has gotten payback on the original well yet but they liked it enough that they chose to invest in this kind of infrastructure on one section.  They plan to eventually have 21 wells on this one section in several different payzones.  There are two included in the seven new wells, Bone Springs and Wolfcamp A.  We only get 1/8 royalty, we don't have a cost free royalty so they add in charges for compression on the gas.  They make way more money off these kinds of leases than my operator in Culberson does with our modern lease but he is making profits, you don't think XTO won't?  Don't kid yourself.  They know what they are doing.

[Mike Shellman + 548]

I have interest in shale oil wells also. If SEC filings for public companies are "gross and misleading" then America is in big trouble. I never met a royalty owner who did not love the shale oil business; they all believe its the greatest thing since sliced white bread and don't like to be bothered by working interest economics or corporate finances.

[wrs + 893]

23 minutes ago, Mike Shellman said:

I have interest in shale oil wells also. If SEC filings for public companies are "gross and misleading" then America is in big trouble. I never met a royalty owner who did not love the shale oil business; they all believe its the greatest thing since sliced white bread and don't like to be bothered by working interest economics or corporate finances.

The operator is making money and currently has 15,000bbl/day of production, not BOE.  I asked him if he thought it was a Ponzi out there and he said no and certainly not for him.  I have been out there probably 15 times in the last 6 years and I keep up with what's going on.  Do you actually have any business interactions with operators that are producing in the Wolfcamp?  

This guy spent $50m from free cash flow last year on his operations and he just paid us 7 figures for a 5 year lease on our deep horizons.  He doesn't have debt.  Lot's of private money operating out there that you know nothing about.  Like I said, what you see in the SEC filings is misleading.

I am also guessing that you are surprised at the numbers on that well I referenced.  He has more like it.  

There is also a tremendous amount of acreage trapped in old 1/8 leases, you think that isn't a bonanza for whoever holds the deeps on them?

Edited January 29, 2019 by wrs