U.S. Shale Output may Start Dropping Next Year

Whoopsie.  Looks like The U.S. Shale Oil Hamster Wheel of Debt © might start rolling closer to a cliff by 2020 or so.

Maybe I need to rephrase my pet name for the debt trap to ...

The U.S. Shale Oil Lemming Wheel of Debt ©, now with improved cliff action.

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Copyright the improved cliff action, please. It's brilliant!

I found the analogy with farming very helpful. Makes it clear without requiring specific knowledge of the oil industry.

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3 minutes ago, Marina Schwarz said:

Copyright the improved cliff action, please. It's brilliant!

I found the analogy with farming very helpful. Makes it clear without requiring specific knowledge of the oil industry.

Thanks Marina : )

And yes, the farm analogy is great  (I grew up on a farm).

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@Tom Kirkman I have to ask, have you worked in oil industry before?  I am inquiring as from my view you are rooting for its demise, specifically U.S. shale so am curious what your driver is to hope for unsuccess in all your posts.

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(edited)

Verleger case is based on "Open Interest" .  His thesis on gasoline prices in the 1970's was good work.  His recent article is way off base.

The small operators that borrowed from banks and issued bonds  are screwed and will basically go down.  Large independents and Big Oil will make up for the weak sisters .

Soon to be 10,000 Drilled but Uncompleted wells (DUCs) that will be brought online later this year. When the new pipelines and export terminals are constructed by Q4 thru  Q1 2020 the Permian oil will flow .  The bottlenecked supply will be shipped to world markets. .  

The small and midsize operators have very strict covenants that they need to live within.  They are barely hanging on with $55 oil.  They will have to recapitalize at lower valuations or go out of business.  

The shale industry is in transition.  Size now matters. Need size to capitalize (and afford) new technology and capital efficiencies.

The transition will accelerate as we proceed thru 2019 and be in full swing in 2020.  

When you read shale oil news always consider the source.  Many have an agenda.

Edited by JJCar
typo
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OPEC (aka Saudi Arabia) can cut production and exports all day long.  Over the coming months and into 2020 and beyond  new Permian pipelines and export terminals will unleash the US oil on the world market.  

Ten or fifteen years ago if Iran threatened to close the Straights oil would jump $20.  Now the oil traders just yawn. 

The only way Saudi Arabia could get prices up to their Budget Breakeven of $85 is to start a war in the Mideast.  

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(edited)

Let's keep in mind that oil companies make more money when they stop drilling.  All the money they don't direct to drilling goes to pay down debt.  Right now production is very high and probably not sustainable because of takeaway limitations and marginal pricing not being any good.  The LTO oil does not sell for WTI price, it gets a discount because it's lighter but that used to be a premium because the lighter oils were in short supply, not anymore though and so LTO is sold at a discount.  

The royalty checks for December and Jauary showed $39/bbl for oil.  In November they showed $46 but in the summer when WTI was over $60 all summer, we never saw over $55 for oil.  It was way back a year ago that we got some checks for $60 oil while WTI was over $60.  After that we got killed on pipeline discounts as well as LTO discounts.  What we see on our checks is what the oil company gets paid for the oil and that is consistently less than WTI by at least 10%.  

So when you hear that they make money at $55, that's for the oil they sell, not WTI pricing.  Hence, probably not many are making much money right now and they won't be drilling or completing as much because why increase production of a product whose profitability is declining?

Edited by wrs
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(edited)

The large oil companies are creating more FREE CASH FLOW today then they were years ago.  

COSTS ARE COMMING DOWN.

Chevron CEO stated " their shale portfolio provides BEST return on capital of all.  

Technology is just starting to get implemented in Shale Country.

The Shale business makes good returns in the $50's.  

Those that hold old notions need to open their minds.  

US shale would love $70 oil but ultimately "Free Markets" will prevail and OPEC price fixing will collapse.

OPEC should enjoy high oil prices this year because won't last beyond this year.  

Small public shale companies will have difficulty surviving.  

Edited by JJCar
typo
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Costs are not coming down enough to support $40 oil and that is what we had during December and January.  Oil might be up to $50 by now but that's a stretch, more likely they are getting $45/bbl which isn't making anyone much profit.

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you cannot trust person who doesn't know how to spell "frac"...

Article is light on facts; $22B borrowing and equity seems insufficient to maintain level of activity we've seen and pay ever-increasing debt - I doubt accuracy of this number. 

Correlation oil price with open interest is far-fetching.

This is not to say output won't fail - heck, it falls by ~250Kbbl/month is no new wells completed. And oil price slump in Q4 slowed down drilling activity. I don't have hard numbers for number of completed wells (perhaps @shaleprofile could help here) but some evidence it slowed as well.

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Could be a good thing from my POV since I work in the industry and lower inventories and falling production means higher prices and more work in the oil patch. I can also raise my rates as another eventual drilling frenzy drives prices higher and more competition for skilled oil and gas professionals.

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11 hours ago, Tom Kirkman said:

Thanks Marina : )

And yes, the farm analogy is great  (I grew up on a farm).

Funny Farm me thinks hehehe

I really don't put a lot of attention to 2 year out forecasts as no reliable by any stretch. Please consider 6 months at most as the industry is still suckering the financials out of money and as long as someone is handing out the cash, they'll keep rolling. In all honesty I thought the lenders would've been calling in the notes. I do think some politics is in play now for sure to keep up production. How do you keep the Steeeeep decline from happening? You can't, you just drill more holes to keep the production up. @Tom Kirkman, we used to call it funny money. Today they call it investment!!

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10 hours ago, cbrasher1 said:

@Tom Kirkman I have to ask, have you worked in oil industry before?  I am inquiring as from my view you are rooting for its demise, specifically U.S. shale so am curious what your driver is to hope for unsuccess in all your posts.

 

8 hours ago, Rodent said:

I hardly think @Tom Kirkman is rooting for its demise. He is merely stating what he believes to be true.  I am constantly telling my teenagers that if they don't study they will get lousy grades. Sometimes I tell them that their study habits are insufficient to get the grade that they want...that they are making bad choices.

I do not tell them this because I'm wishing for their demise. I am telling them this because it is a fact and because I want them to change their behavior. 

Thanks @Rodent for your astute observations.

@cbrasher1 fair enough question if you are new here.

Note that over the years I have written literally over 10,000 comments about international O&G, and getting close to 15k comments these days.

I have over 15 years in international Oil & Gas, and have dealt with O&G companies and EPCs in 30 countries.

I am strongly pro - oil & gas and darn proud of it.

My beef with the U.S. Shale Oil industry as a whole is it strikes me as debt trap.  Up through last year, the U.S. Shale Oil industry as a whole has LOST MONEY.  It has SPENT more than it EARNED.  It was financed by easy credit.  Google it.

While OPEC is trying to pull back production to push prices to around $70-ish range, the coffee-guzzling frantic herd of untamed cats known as U.S. Independent Shale Oil producers are maxing out their credit to go ever deeper into debt, while flooding the world with oil.

It causes havoc to global oil & gas.

It's not the havoc created that I mind so much (heck, I adore Trump's 'bull in a china shop' upending of the Status Quo) but the endless cycle of debt that U.S. Shale industry as a whole keeps digging itself deeper into.

It's not sustainable.

Why the heck is U.S. Shale Oil industry continuing to overproduce and sell oil & gas (LNG) overseas at cut rate prices, the oil & gas that would be far better suited for DOMESTIC use.

When U.S. Shale Oil production starts declining in a few years (less than 5 years from now) .... then what?

Short-sightedness, fueled by easy credit and my old analogy of U.S. Shale Oil industry using new credit cards to make payments on maxxed-out old credit cards is a slow-moving train wreck.

From a GLOBAL OIL & GAS perspective, my view is $70 oil [Brent] is currently around the optimum sustainable balance between global oil producers and global oil consumers.

U.S. Shale Oil industry has shot itself in the foot by overproducing, and actively driving the price difference between WTI and Brent.

Don't blame OPEC if you consider WTI prices to be too low.  OPEC had been trying to fix this, and the herd of cats in the U.S. are merrily overproducing with joyful abandon, oblivious to their own self-inflicted foot bullets of OVERPRODUCING  USING  CREDIT.

Clearly, I have a minority opinion, many others do not share my opinion.

But hopefully I just gave you some views that you can poke around and perhaps reconsider your own opinion.

Time to trot out my oil trusty tag line before I piss off too many gung-ho truuuu believers of the U.S. Energy Independence pipe dream pitched by MSM....

Just my opinion; as always, you are free to disagree.

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I share your opinion, Tom, and I have 50 years of experience writing checks to be IN the oil and natural gas business. I understand well economics. Does THIS...

https://www.bloomberg.com/news/articles/2019-03-12/in-private-talks-opec-is-said-to-warn-wall-street-on-nopec

sound like America is a swing oil producer in the world, that shale oil can "dominate" the rest of the world with cheap oil exports? This is proof positive that if it were not for OPEC + production cuts the US shale oil industry would be facing $80B of debt maturities in the next 20 months with $40 oil prices. It would not survive that. OPEC knows it is helping the United States shale oil industry by propping up oil prices. Why, do you suppose, it is willing to do that? Because it is afraid of Trump, or US repercussions? Phfttttttttt. It can out produce America in a heartbeat, and make 300 times the money the shale oil industry can. IT IS GIVING AMERICA JUST ENOUGH ROPE TO DEPLETE ITSELF INTO OBLIVION, AS FAST AS IT CAN, so that in another 5=8 years it will be back in the driver seat selling oil to America for whatever it wants. Does the Bloomberg article above sound the US has control over world oil markets? That we are about to become energy independent?  If American shale oil is so tough, why isn't Trump asking IT to raise production and lower oil prices?

America's energy policies are leading us all down a bad road. We are being led by the stupid.

 

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(edited)

14 hours ago, Tom Kirkman said:

Thanks Marina : )

And yes, the farm analogy is great  (I grew up on a farm).

When I first moved to Illinois I learned that the farmers complain no matter what happens. Ideal precipitation and temperatures bring bumper crops but often no increase in profit. It seems like the oil business shares an analogous problem. 

I think that the big companies will be able to turn healthy products for a few years though. They have great holdings to develop and all the resources, plus they can profit on natural gas liquids and natural gas pipelines newly completed. 

Now is the time to switch to natural gas trucking  http://www.ngvglobal.com/blog/westport-fuel-systems-supports-europes-proposed-co2-emission-reduction-standards-for-trucks-0304#more-110213

http://www.ngvglobal.com/blog/new-near-zero-emissions-natural-gas-trucks-funding-for-southern-california-fleets-0309

 

Edited by ronwagn
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@cbrasher1

I do not think that Tom is in favor of a crash in The American LTO industry, what he is doing is pointing out the nonsense that drives this industry. 

Keep in mind that the 'news' surrounding this industry has a knock-on effect for the international oil & gas arena, which effects those of us who have been out of work for years and praying for the drilling to resume.

I am constantly amazed that people keep mentioning that the US is now the largest oil exporting nation, but they never seem to get around to the fact that it is also one of the largest oil IMPORTING countries. Ask yourself how that works?

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5 minutes ago, Douglas Buckland said:

@cbrasher1

I do not think that Tom is in favor of a crash in The American LTO industry, what he is doing is pointing out the nonsense that drives this industry. 

Keep in mind that the 'news' surrounding this industry has a knock-on effect for the international oil & gas arena, which effects those of us who have been out of work for years and praying for the drilling to resume.

I am constantly amazed that people keep mentioning that the US is now the largest oil exporting nation, but they never seem to get around to the fact that it is also one of the largest oil IMPORTING countries. Ask yourself how that works?

Thanks Douglas, you nailed it.

The analogy that I keep using is getting new credit cards to make monthly payments on maxxed-out old credit cards.

Anyone that tries to convince me that this ^ is a good idea for a business model will be met with skepticism by me.

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1 hour ago, Tom Kirkman said:

Anyone that tries to convince me that this ^ is a good idea for a business model will be met with skepticism by me.

it worked for the world so far - $250T of debt amassed and getting ready to take it to new level with MMT and GND. Buckle up for the ride!

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1 hour ago, DanilKa said:

it worked for the world so far - $250T of debt amassed and getting ready to take it to new level with MMT and GND. Buckle up for the ride!

< sigh >

Don't mind me then, I'll just be over here in the corner, banging my head against a brick wall.

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(edited)

@Mike Shellman  

While you're right in agreeing with Tom about independent U.S. producers having a bankruptcy-prone business model, you are overly pessimistic and cynical about the extent of our reserves and the role America is playing in the industry.  

These independent producers took large risks to actually develop shale reserves when all the majors spent time developing deep-sea offshore reserves.  Crude oil prices above $100 per barrel allowed these independents to be creative and gave them plenty of room to experiment with new techniques.  On the other hand, the crash in crude oil prices forced them to maximize efficiency, spurring more innovation.  While many of these companies remained unprofitable through both the boom and the bust, you can't say that they all operated irresponsive to price.  Even if you disapprove of every fiscal decision made by every independent, you have to applaud their engineering prowess and technological contributions to the industry.  

With oil prices significantly up from February 2016 lows, Chevron and Exxon are increasingly focused on developing upstream shale oil, especially in the Permian Basin.  The Permian was the only shale oil basin that continued to thrive throughout the oil price crash, as the previously favored Bakken and Eagle Ford shales became too expensive to operate.  Today, the Bakken and Eagle Ford are making a comeback, as well as other the other many basins in Texas and Oklahoma.  I'm personally optimistic about East Texas and Louisiana, as the Haynesville and Austin Chalk are relatively untapped.  Acreage in the Permian is now at a premium, and we are starting to see independents cash out on their Permian assets in favor of other plays with much cheaper acreage.  Chevron and Exxon have the benefit of being capable of operating at a much larger scale than any independent, which further cuts down on costs per barrel.  If our shale resources are truly going to run out in 5 to 8 years, would the acreage in the Permian remain to be so expensive?  Would we really be building pipelines from the Permian to Texas's gulf coast if our shale resources were going to run dry in 5 to 8 years?  Of course not!  Those pipelines will be in use for decades once they're built.  Everyone needs to realize just how heavily stacked are the Delaware and Midland sub-basins (The Wolfcamp A is just one layer), not to mention the thickness of each layer.  

If anything, the insolvency of many U.S. independents will allow for consolidation through M&A, if not only land swaps.  The town of Pecos, Texas was luckily considered an opportunity zone under the new tax bill, and it's located in the heart of the Permian Basin.  You'll be damn sure money will continue pouring in to reduce and defer the capital gains earnings of many.  

With today's investor sentiment, people are fearful of the prospect of another oil glut, getting fatigued by the money-losing independents, and, in some cases, divesting their shares in oil for the sake of being green.  With money so tight and investors demanding returns, oil companies are under a lot of pressure to reduce capital expenditures.  To further cut costs by scaling upwards, what if Chevron and Exxon did what Barrick Gold and Newmont Mining are doing in Nevada?  A Permian Joint Venture would allow for both longer laterals and shared infrastructure across the entire region.  Other companies could be allowed to pool in their assets for a stake.  Maybe base the headquarters of this joint venture in Pecos and trade it publicly?

As for Donald Trump, his cutting of taxes & regulations, opening up of federal lands & waters for lease-sale, and sanctions on Venezuela & Iran has helped America's oil industry greatly.  There are many factors contributing to why WTI is nearly $10 less than Brent, and one of those reasons is pipeline bottlenecks.  If we had all the necessary infrastructure to send all of our Permian and Eagle Ford shale oil to the Texas coast for refining and/or exporting, we wouldn't have to discount it as much to make up for trucking and rail transportation costs.  Global supply plays an important role as well, and OPEC is using leverage where they can.  OPEC knows that they can't compete with us on drilling for light oil but can compete with us on drilling for heavy oil.  Much of the production OPEC cut was heavy oil, giving them higher margins on heavy oil while suppressing our margins on light oil.  We should be getting our heavy oil from Canada, but the Keystone XL, TransMountain, and Line 3 pipelines are all being held up by communist lawyers on both sides of the 49th parallel.  (Maybe Alberta can build a pipeline through Saskatchewan and Manitoba to the Hudson Bay, potentially the town of Churchill?)  

As someone who follows news on WorldOil and Hart Energy, I have faith that technology in geophysics, data science, and sub-sea/onshore engineering will continue to make oil exploration and production more cost effective and efficient.
 

Edited by GeoSciGuy
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@Tom Kirkman I do see your point, and was not attempting to be an a$$ in my question, I was simply attempting to get an idea of your views.  I am out in the patch daily, months at a time hitches, and may not dive into the fundamentals as yourself.  I just hope to keep working, and that some things you point out regarding the business side of things find a way to reverse course.

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8 hours ago, Tom Kirkman said:

 

Thanks @Rodent for your astute observations.

@cbrasher1 fair enough question if you are new here.

Note that over the years I have written literally over 10,000 comments about international O&G, and getting close to 15k comments these days.

I have over 15 years in international Oil & Gas, and have dealt with O&G companies and EPCs in 30 countries.

I am strongly pro - oil & gas and darn proud of it.

My beef with the U.S. Shale Oil industry as a whole is it strikes me as debt trap.  Up through last year, the U.S. Shale Oil industry as a whole has LOST MONEY.  It has SPENT more than it EARNED.  It was financed by easy credit.  Google it.

While OPEC is trying to pull back production to push prices to around $70-ish range, the coffee-guzzling frantic herd of untamed cats known as U.S. Independent Shale Oil producers are maxing out their credit to go ever deeper into debt, while flooding the world with oil.

It causes havoc to global oil & gas.

It's not the havoc created that I mind so much (heck, I adore Trump's 'bull in a china shop' upending of the Status Quo) but the endless cycle of debt that U.S. Shale industry as a whole keeps digging itself deeper into.

It's not sustainable.

Why the heck is U.S. Shale Oil industry continuing to overproduce and sell oil & gas (LNG) overseas at cut rate prices, the oil & gas that would be far better suited for DOMESTIC use.

When U.S. Shale Oil production starts declining in a few years (less than 5 years from now) .... then what?

Short-sightedness, fueled by easy credit and my old analogy of U.S. Shale Oil industry using new credit cards to make payments on maxxed-out old credit cards is a slow-moving train wreck.

From a GLOBAL OIL & GAS perspective, my view is $70 oil [Brent] is currently around the optimum sustainable balance between global oil producers and global oil consumers.

U.S. Shale Oil industry has shot itself in the foot by overproducing, and actively driving the price difference between WTI and Brent.

Don't blame OPEC if you consider WTI prices to be too low.  OPEC had been trying to fix this, and the herd of cats in the U.S. are merrily overproducing with joyful abandon, oblivious to their own self-inflicted foot bullets of OVERPRODUCING  USING  CREDIT.

Clearly, I have a minority opinion, many others do not share my opinion.

But hopefully I just gave you some views that you can poke around and perhaps reconsider your own opinion.

Time to trot out my oil trusty tag line before I piss off too many gung-ho truuuu believers of the U.S. Energy Independence pipe dream pitched by MSM....

Just my opinion; as always, you are free to disagree.

While I agree with your opinion on Shale, I think your opinion on the current president and his actions is reckless much like he is. The trouble with a "bull in a china shop" attitude is that this will destroy global stability (that btw is one of the major aspects of the "status quo" relative to previous centuries, at least in Europe and it's colonies). Destabilization is obviously already happening and the actions over the past 2 years will increase this on a long term basis. An unstable world is not a good place to live or do business regardless of your place of residence and it is unlikely to MAGA. That will be his legacy and the presidents that come after him will spend a good deal of time trying to fix what he's broken if it's even possible to do that at this point.

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2 hours ago, cbrasher1 said:

@Tom Kirkman I do see your point, and was not attempting to be an a$$ in my question, I was simply attempting to get an idea of your views.  I am out in the patch daily, months at a time hitches, and may not dive into the fundamentals as yourself.  I just hope to keep working, and that some things you point out regarding the business side of things find a way to reverse course.

No worries.  You gave me an excuse to break into a rant : )

Keep on working, hope the oil patch keeps you busy with decent pay.

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