U.S. Shale Output may Start Dropping Next Year

(edited)

Several scenarios for US tight oil output.  The low scenario has a relatively low well completion rate and the high scenario assumes the well completion rate continues to increase (along with oil prices), the medium scenario is just the average of low and high scenarios.  Also assumed is that the EIA's AEO 2018 reference oil price is followed, nominal discount rate is 10%, royalties and taxes are 33%, and in the Permian basin LOE is $2.3/b plus $15000 per month, average Permian Basin tight oil well EUR is 390 kb per well from 2017 to 2023 (with a decrease in average EUR after that that depends on the rate of completion),  USGS mean TRR is assumed, but economically recoverable resource is smaller as number of wells completed depends on completed wells having discounted net revenue that is greater than the cost of the completed well under the assumptions above, well cost is $9.5 million in 2018$ in the Permian Basin.  Separate models for Permian, Bakken, Eagle Ford, Niobrara, and other US LTO basins are combined to get these scenarios.

I agree with Mike Shellman that US LTO is likely to peak in 5 to 8 years, though this comment is not meant to imply he agrees with any of my analysis, in most cases he disagrees with most anything I say.

uslto1902c.png

Edited by D Coyne

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13 hours ago, ronwagn said:

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

 

And always claiming to be poor - its a universal issue with Farmers.

There is a British folk comedy song called - (Ive never seen) a Farmer on a bike

http://www.the-snorings.co.uk/media/videos/farmer.html

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9 hours ago, NickW said:

And always claiming to be poor - its a universal issue with Farmers.

There is a British folk comedy song called - (Ive never seen) a Farmer on a bike

http://www.the-snorings.co.uk/media/videos/farmer.html

Thanks for that! We do have some farmers who ride bikes or carts. They are Amish though!

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David Jones:

The 'status quo' is fine as long as you are the ones benefitting from keeping things the same. An outrageous trade deficit was not healthy for the US.

When you throw in the US effectively subsidizing NATO and the UN, you can understand why American voters / tax payers expressed their dissatisfaction with the status quo.

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@GeoSciGuy

You seem to have forgotten that one of the tools that these small, independent LTO companies used to appear profitable was by hammering the service companies to lower their rates until they were on their knees.

As LTO appears to be getting 'profitable', these service companies will raise their rates with a vengeance.

What goes around, comes around!

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7 hours ago, ronwagn said:

Thanks for that! We do have some farmers who ride bikes or carts. They are Amish though!

Here they all drive Land Rover Defenders as a base car. 

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(edited)

21 hours ago, D Coyne said:

Several scenarios for US tight oil output.  The low scenario has a relatively low well completion rate and the high scenario assumes the well completion rate continues to increase (along with oil prices), the medium scenario is just the average of low and high scenarios.  Also assumed is that the EIA's AEO 2018 reference oil price is followed, nominal discount rate is 10%, royalties and taxes are 33%, and in the Permian basin LOE is $2.3/b plus $15000 per month, average Permian Basin tight oil well EUR is 390 kb per well from 2017 to 2023 (with a decrease in average EUR after that that depends on the rate of completion),  USGS mean TRR is assumed, but economically recoverable resource is smaller as number of wells completed depends on completed wells having discounted net revenue that is greater than the cost of the completed well under the assumptions above, well cost is $9.5 million in 2018$ in the Permian Basin.  Separate models for Permian, Bakken, Eagle Ford, Niobrara, and other US LTO basins are combined to get these scenarios.

I agree with Mike Shellman that US LTO is likely to peak in 5 to 8 years, though this comment is not meant to imply he agrees with any of my analysis, in most cases he disagrees with most anything I say.

uslto1902c.png

Seems about right. Given the number of ducs and pipeline infra to come in end-2019, does not look like shale is going out without a fight. Saw an interesting exhibit - sorry dont have the report. Sheds some light on the whole debt situation - unless interest rates/ credit spreads go crazy. Although dont have the report itself - someone plz post if you have link. What I didnt understand was why rystad (smart people) is building such steep hike in cash flows way beyond 2025. I mean shale oil has to peak, given the production profiles, at some point in time. Already growth in old shale (bakken) is crawling at 70$ wti last year.

 

image.png

Edited by AcK

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On 3/13/2019 at 4:59 AM, David Jones said:

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.

David, no need to work up a sweat of worries over Tom Kirkman's ideological rants.  First up, Tom is incorrect (OK, "wrong") in his assessments as to the business model of the independent shale producers; it is quite possible to make investors money by losing money in operations.  Tom does not understand that.  Second, the restrictions on OPEC heavy will encourage heavy tar-sands oils out of Idaho and Alberta.  Third, restrictions on pipeline capacity are easily enough overcome by laying RR track.  The railroads have gigantic machines that can continuously lay new track, including putting down the ties and the continuous rail.  If you don't want to spend the money on the machinery, then old-style jointed rail works fine, has for over a century, and rail segments fully assembled can be built in a factory, stacked on a flatcar, and driven to the jobsite for crane laying onto the prepared ballast.  Permitting a temporary track on (removable!) ballast is a lot faster and cheaper than installing a permanent pipeline. Lay the rail out to the collection point, fill 'er up, and off you go to whatever refinery wants to pay you. 

As to Alberta building an oil rail to Port Churchill, that is not going to happen.  The shipping season is too short, and crude oil will never be allowed over Hudson's Bay and the Baffin Straight, that is far too sensitive an area ecologically. But twinning the CP line into Montreal is entirely plausible, the ground across the Canadian Shield is solid rock, dumping ballast stone on it is easy enough to do.  Just toss money at it, goes fast enough. 

As to "destabilization," no real worries, the USA has survived worse, it is a resilient nation with lots of very clever people that have migrated there  (including me, of course!).  America works, not because of Washington, but in spite of it.  Have faith in Americans.  Cheers.

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Exxon Aims for $15-a-Barrel Costs in Giant Permian Operation

1b5dc050-ffe6-11e8-b9af-62cc4e6b832e
Kevin Crowley
BloombergMarch 14, 2019

 

(Bloomberg) -- Exxon Mobil Corp. plans to reduce the cost of pumping oil in the Permian to about $15 a barrel, a level only seen in the giant oil fields of the Middle East.

The scale of Exxon’s drilling means that it can spread its costs over such a big operation that the basin will become competitive with almost anywhere in the world, Staale Gjervik, president of XTO Energy, the supermajor’s shale division, said in an interview.

Development, operating and land acquisition costs will be “in and around $15 a barrel,” he said on the sidelines of the CERAWeek Conference by IHS Markit in Houston. West Texas Intermediate futures traded at almost $59 on Thursday. “The way we are approaching it is very unique compared to most, if not really everybody out there, as far as the scale," he said.

The shale revolution has made the Permian into the world’s largest shale field, with production topping 4 million barrels a day, almost as much as Iraq, OPEC’s second-biggest member. But the rapid growth has often meant that producers burn cash flow to reinvest in the expansion, prompting investors to call on them to focus more on returns in 2019.

Exxon plans to deploy 55 rigs in the Permian this year, by far the most of any driller, as it aims to increase output in the region fivefold to about 1 million barrels a day by 2024. Its strategy also includes building its own takeaway infrastructure from separation tanks to pipelines, and it’s even joining a giant conduit project to make sure its oil doesn’t get stuck in bottlenecks that have depressed prices in West Texas.

Some analysts raised their eyebrows over Exxon’s ambitious plan for the Permian, but Gjervik -- a Norwegian who joined Exxon in 1998 and has worked in Angola, Nigeria and the North Sea -- argues that it’s exactly that kind of massive scale that will help the company generate $5 billion of cash flow from the region by 2023.

“Part of this is to get sufficient scale to get capital efficiency out of this,” said Gjervik, who took over from Sara Ortwein this month.

Exxon’s Permian expansion pits it against U.S. rival Chevron Corp., which is also aiming for strong growth there. The San Ramon, California-based company announced plans last week for 900,000 barrels a day by 2023. Royal Dutch Shell Plc is “actively looking” for deals to bulk up its Permian operations, Wael Sawan, the company’s upstream director-in-waiting said this week. Even so, its production will increase about 30 percent a year.

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https://businessjournaldaily.com/utica-shale-production-continues-rise/

 

https://www.abqjournal.com/1290986/nm-oil-production-hit-new-record-in-2018.html

(Bloomberg) -- Cowboy boots and turquoise belt buckles are giving way to smart suits and silk ties as the world’s biggest shale oil field prepares for mergers.

As oil executives from across the world gather in Houston for the annual CERAWeek by IHS Markit conference, the Permian Basin in the U.S. Southwest is on the cusp of a radical transformation with one simple premise: bigger is better. The energy industry appears primed for deals at a time when Big Oil is flexing its muscle in the region.

Just last week, Exxon Mobil Corp. and Chevron Corp. unveiled audacious growth plans for the Permian Basin, hitherto the domain of smaller rivals. Royal Dutch Shell Plc is said to be on the prowl for deals while BP Plc bought in last year. Meanwhile, independents are under increasing investor pressure to merge or sell out in an effort to end relentless production growth that has burned through some $200 billion over the past eight years.

“The ability of the larger companies to do an accretive acquisition is probably at its highest level since the beginning of the shale revolution,” said Michael Roomberg, a fund manager at Miller/Howard Investments Inc. which manages $5 billion. “M&A interest is at its highest in nearly a decade.”

But the century-old oilfield cycle of big players swallowing up smaller ones may not happen quickly or follow the conventional path.

The supermajors, facing investor pressures of their own, are unwilling to throw cash around like they did in the heady days of $100-a-barrel oil. All-stock deals could be dilutive because many U.S. independents trade at higher price-to-earnings multiples than integrated oil companies, according to data compiled by Bloomberg.

Diamondback Energy Inc. and Concho Resources Inc. pulled off all-stock deals that together were worth almost $20 billion last year, showing a willingness to merge their way to gain scale.

Pressure has mounted on Permian-only and smaller companies in recent weeks. Pioneer Natural Resources Co. and Halcon Resources Corp. replaced their CEOs while names such as Alta Mesa Resources Inc., Centennial Resource Development Inc., and Laredo Petroleum Inc. have seen their market values decimated.

There are 112 operators in the Permian Basin and that means an excessive number of management teams operating similar assets, said Ben Dell, founder of activist investor Kimmeridge Energy Management Co. Economies of scale are needed and about 20 companies, or any valued under $3 billion, should be combined in a “merger of equals,” he said.

Independents were once the innovators that worked out how to pump oil from previously impermeable shale formations. That turned the U.S. from a petroleum importer dependent on the Middle East into a global energy superpower. America’s record production has prompted OPEC to take measures intended to forestall a glut. Saudi Arabia plans to extend deeper-than-agreed supply curbs into April, a Saudi official familiar with the policy said yesterday.

For North American oil companies, the shale revolution came at a cost. Excluding the integrated majors, explorers spent $200 billion over the last eight years, according to data compiled by Bloomberg. Investors have signaled they’ve had enough. They want a manufacturing-style production mode, which favors the biggest, most efficient operators.

Exxon Chief Executive Officer Darren Woods was blunt in his assessment of how the supermajor will meet its Permian target of 1 million barrels a day by 2024 - more than OPEC member Libya’s entire output. “We’re changing how the game gets played,” he said.

Exxon and Chevron both emphasized their focus on existing Permian holdings, favoring small land swaps rather than big corporate deals.

But the European supermajors, playing catch-up, appear to be willing to play the acquisition game. BP Plc entered the fray last year with its $10.5 billion purchase of BHP Billiton Ltd.’s onshore assets and Shell is said to be interested in buying Endeavor Energy Resources LP, one of the Permian Basin’s largest private operators, for as much as $8 billion.

The arrival of Big Oil may change the region’s Wild West image. Until now, the barrier of entry has been low, with dozens of private equity-backed wildcatters, many of whom are in their early 30s, flipping leases and drilling exploratory wells with the aim of selling them to the highest bidder.

 

It’s a far cry from Exxon’s systematic approach, perhaps a sign that the days of the rags-to-riches wildcatters may be ending.

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On 3/12/2019 at 6:08 PM, 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.

I am in full agreement with your cliff analogy Tom. When I look at the shale decline curves and how they add up year on year -I see a big problem coming. You basically have to replace 1/3 of your production each year and that is growing. But being retired these days I want the oil price to go both up and down. Preferably up at the moment.

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On 3/12/2019 at 9:47 AM, wrs said:

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?

Are you figuring in the value of flared natural gas, natural gas liquids, etc? The large corporations will, hopefully, use or market it. I am hoping the pipelines will be ready. 

When do you think the needed infrastructure will be in place and the oil majors will be accelerating development?

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15 hours ago, NickW said:

Here they all drive Land Rover Defenders as a base car. 

NickW,

Sounds like you must live in Kensington and Chelsea.

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On 3/13/2019 at 3:42 AM, 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?

Douglas Buckland,

Do you have anymore detail on why the large imports of crude and exports of tight oil ? Is it just to do with the low API or something else ?

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14 hours ago, ronwagn said:

Are you figuring in the value of flared natural gas, natural gas liquids, etc? The large corporations will, hopefully, use or market it. I am hoping the pipelines will be ready. 

When do you think the needed infrastructure will be in place and the oil majors will be accelerating development?

We have a good lease with our independent.  He is required to pay us the Henry Hub price for any gas he flares and mark it up according to it's BTU rating which is about 1.3 normally.  He also pays us for all the liquid products which are produced.  He has 120mmcf/day gas processing facilities on his leases which process his gas for liquids products and we get paid for all of that.  It increases the per mcf value of the gas over market substantially.

XTO also pays us for liquids but they don't pay for flared gas because we have a very old lease.  

There are three new gas processing plants being built around Orla and I think it's Epic Ygrade that has built a NGL product line from there to Houston.  We sold them a ROW last year which they wasted no time filling with a 36 inch product pipe.  I think late this year most of that stuff will be connected along with the new oil lines.   

Royalties are paid on oil and gas separately and the state has two different ad-valorem tax rates.  Gas is taxed at 7.5% and oil at 4.5%.

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On 3/14/2019 at 8:39 AM, AcK said:

I agree with Mike Shellman that US LTO is likely to peak in 5 to 8 years, though this comment is not meant to imply he agrees with any of my analysis, in most cases he disagrees with most anything I say.

@Dennis Coyne

AcK, thanks.

Dennis, we most definitely agree on the high probability of this particular model being close to reality, on the low end of the spectrum. Its actually good work.

I do NOT believe, however, that any of these scenarios can occur entirely from self generated cash flow. We are already thru the threshold of declining productivity in all four basins and in the next few years that will become very obvious. The EF is history and Bakken will be sliding down hill, big time, in two.  All of our oil eggs are now in the Permian basket. The LTO industry will still have to outspend revenue and if capital is drying up, its going to be very difficult to reach any level of production and maintain it; the higher LTO production levels become, the more high dollar wells required to offset annualized decline. I don't know where the money is going to come from and I fear the oil industry is going to have its boat rocked in 2020. 

When I look at your model there are several glaring repercussions of it possibly coming to fruition. One, America has no business exporting its last remaining oil resources, extracted through credit/debt. Mexico is no longer a net oil exporter and many of the world's exporters are not far behind Mexico. It is not America's responsibility to print money to fund the shale oil industry so that it can sell LTO to other countries and stimulate their respective economies. You might argue that LTO extraction in America is stimulating our economy but I would disagree because it is thru debt. The America shale oil industry will have to produce two times the LTO it has already produced, just to get out of debt. 

Two, this stupid NOPEC legislation is dangerous and poor long term energy policy. America should be now conserving every drop of oil is has left, and making peace with the rest of the world's oil producing countries, not enemies. The transition away from fossil fuels will take longer than folks think and we are going to need the stuff, badly. I am baffled how few people in America have the ability to think past next week, other than believing in the miracle of technology. And the USGS, who seems to always find more $150 TRR, like the stuff grows on trees.   

 

 

 

 

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43 minutes ago, Mike Shellman said:

@Dennis Coyne

AcK, thanks.

Dennis, we most definitely agree on the high probability of this particular model being close to reality, on the low end of the spectrum. Its actually good work.

I do NOT believe, however, that any of these scenarios can occur entirely from self generated cash flow. We are already thru the threshold of declining productivity in all four basins and in the next few years that will become very obvious. The EF is history and Bakken will be sliding down hill, big time, in two.  All of our oil eggs are now in the Permian basket. The LTO industry will still have to outspend revenue and if capital is drying up, its going to be very difficult to reach any level of production and maintain it; the higher LTO production levels become, the more high dollar wells required to offset annualized decline. I don't know where the money is going to come from and I fear the oil industry is going to have its boat rocked in 2020. 

When I look at your model there are several glaring repercussions of it possibly coming to fruition. One, America has no business exporting its last remaining oil resources, extracted through credit/debt. Mexico is no longer a net oil exporter and many of the world's exporters are not far behind Mexico. It is not America's responsibility to print money to fund the shale oil industry so that it can sell LTO to other countries and stimulate their respective economies. You might argue that LTO extraction in America is stimulating our economy but I would disagree because it is thru debt. The America shale oil industry will have to produce two times the LTO it has already produced, just to get out of debt. 

Two, this stupid NOPEC legislation is dangerous and poor long term energy policy. America should be now conserving every drop of oil is has left, and making peace with the rest of the world's oil producing countries, not enemies. The transition away from fossil fuels will take longer than folks think and we are going to need the stuff, badly. I am baffled how few people in America have the ability to think past next week, other than believing in the miracle of technology. And the USGS, who seems to always find more $150 TRR, like the stuff grows on trees.   

 

 

 

 

We have lots to keep you going Mike -provided we can get a few more pipelines past the US and Canadian court hold ups.

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On 3/13/2019 at 10:22 PM, Douglas Buckland said:

@GeoSciGuy

You seem to have forgotten that one of the tools that these small, independent LTO companies used to appear profitable was by hammering the service companies to lower their rates until they were on their knees.

As LTO appears to be getting 'profitable', these service companies will raise their rates with a vengeance.

What goes around, comes around!

No operator can hammer the service companies to reduce prices unless operations in the area are low.  Like all industries, you have to have jobs.  When oil prices are high the vendors nail the operators, when oil prices are low they give them a deal.  It's how active the area is that rules the service company's costs and whether there is demand when numerous wells are drilled and completed and lack of demand when wells aren't being drilled.  It's all in the price of oil for the operators when they need drilling rigs and crews, completion rigs and crews, pipe, completion service companies (i.e. Halliburton), and on and on.  An operator may need to drill a well to maintain the lease and will pay whatever they have to, but in most cases its activity that drives prices and availability.

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(edited)

1 hour ago, Mike Shellman said:

@Dennis Coyne

AcK, thanks.

One, America has no business exporting its last remaining oil resources, extracted through credit/debt.

Mexico is no longer a net oil exporter and many of the world's exporters are not far behind Mexico. It is not America's responsibility to print money to fund the shale oil industry so that it can sell LTO to other countries and stimulate their respective economies. You might argue that LTO extraction in America is stimulating our economy but I would disagree because it is thru debt. The America shale oil industry will have to produce two times the LTO it has already produced, just to get out of debt. 

Two, this stupid NOPEC legislation is dangerous and poor long term energy policy. America should be now conserving every drop of oil is has left, and making peace with the rest of the world's oil producing countries, not enemies. The transition away from fossil fuels will take longer than folks think and we are going to need the stuff, badly. I am baffled how few people in America have the ability to think past next week, other than believing in the miracle of technology. And the USGS, who seems to always find more $150 TRR, like the stuff grows on trees.   

 

 

 

 

So you are a communist.  The govt and you don't own my resources, why should you tell me what to do with them?  This may be something you can argue for federal lands but not for the privately held land in Texas where most of the oil is coming from.  I am perfectly happy to sell some of my oil in my lifetime thank you and I don't need you or your sense of priorities making that decision for me.  I think most landowners and mineral owners would agree with me.  

Secondly, you never used debt to finance anything you did?  I kind of doubt that but maybe you are the rare exception because most people in the country who "own" a house only can do so with a mortgage which is, wait for it, debt.

I know for certain the stripper operators on my lands used debt because I saw the liens filed against their leases in the courthouse.  

Edited by wrs
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@Tom Kirkman What do you think will happen to WTI oilprice if your 2020 prediction is correct? 

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(edited)

18 hours ago, wrs said:

So you are a communist.

No, I am not a communist. Nor do I have the manners of a goat. I am actually a conservative Republican, knowledgeable enough about oil and gas decline and depletion to genuinely be concerned for the long term hydrocarbon health of my country.  I am not guilty of  "sour grapes, nor feelings of rain on my parade, nor pessimism nor cynicism...not closed minded nor stuck in the past," whatever names and labels people use these days to attack those they don't agree with. I am just  worried about my country's future.  BTW, I have forgotten more about the oil business than you will ever know, lowly "stripper well" operator or not, wrs, whatever your name is. I am, at least, willing to stand by my convictions using my own name. 

The shale oil industry is a decade old and about $300B in debt. It borrowed that money and collateralized  those loans with questionable "assets" that decline in value at the rate of 85% the first three years of production life. It essentially hasn't paid for wells it drilled 5-6 years ago, yet. Its burning through our remaining oil resources in America at an unprecedented rate and exporting over half of it to Asia. The revenue from those exports are not being used to grow, or sustain LTO production in America;  it barely covers the estimated $15B per year of interest payments the shale oil industry has to make. Does that sound like a winner to you? Its a financial disaster. Shareholders and other investors have had a belly full of all of it. Royalty owners, of course; they love the stuff. 

There  are a great deal of analyses  and opinions now being written about problems in the shale biz; financial and otherwise. As painful as it may be I suggest you seek them out and read them. Our kids and grandkids deserve the same chances in life we've have, including the use of reliable, secure sources of American crude oil. The do not deserve to be straddled with the massive amount of debt we are going to leave them. 

 

 

 

 

 

Edited by Mike Shellman
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On ‎3‎/‎15‎/‎2019 at 10:37 AM, Mike Shellman said:

@Dennis Coyne

AcK, thanks.

Dennis, we most definitely agree on the high probability of this particular model being close to reality, on the low end of the spectrum. Its actually good work.

I do NOT believe, however, that any of these scenarios can occur entirely from self generated cash flow. We are already thru the threshold of declining productivity in all four basins and in the next few years that will become very obvious. The EF is history and Bakken will be sliding down hill, big time, in two.  All of our oil eggs are now in the Permian basket. The LTO industry will still have to outspend revenue and if capital is drying up, its going to be very difficult to reach any level of production and maintain it; the higher LTO production levels become, the more high dollar wells required to offset annualized decline. I don't know where the money is going to come from and I fear the oil industry is going to have its boat rocked in 2020. 

When I look at your model there are several glaring repercussions of it possibly coming to fruition. One, America has no business exporting its last remaining oil resources, extracted through credit/debt. Mexico is no longer a net oil exporter and many of the world's exporters are not far behind Mexico. It is not America's responsibility to print money to fund the shale oil industry so that it can sell LTO to other countries and stimulate their respective economies. You might argue that LTO extraction in America is stimulating our economy but I would disagree because it is thru debt. The America shale oil industry will have to produce two times the LTO it has already produced, just to get out of debt. 

Two, this stupid NOPEC legislation is dangerous and poor long term energy policy. America should be now conserving every drop of oil is has left, and making peace with the rest of the world's oil producing countries, not enemies. The transition away from fossil fuels will take longer than folks think and we are going to need the stuff, badly. I am baffled how few people in America have the ability to think past next week, other than believing in the miracle of technology. And the USGS, who seems to always find more $150 TRR, like the stuff grows on trees.   

 

 

 

 

Thanks Mike.  As you may have forgotten more about the oil industry than I am ever likely to learn, I appreciate learning from a professionals like you.

Chris Martensen asked if I had ever done a scenario where I assume tight oil companies operate using cash flow and no new debt.

I did such a scenario for the Permian basin assuming an average well cost of $10 million, discount rate of 10%, and interest rate of 7.4%, completion rates are reduced by about half from Jan 2019 to Oct 2019 and then completion rates increase in line with cash flow.  USGS mean TRR is assumed (75 Gb) and the economic assumptions result in lower economically recoverable resources (58 Gb), the EIA's AEO 2018 reference oil price scenario is assumed ($113/b in 2017$ in 2050).  Scenario below.

permian1903c.png

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On 3/15/2019 at 1:12 AM, Auson said:

NickW,

Sounds like you must live in Kensington and Chelsea.

You are confusing defenders with the Evoque.

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(edited)

On 3/14/2019 at 10:19 AM, Jan van Eck said:

 it is quite possible to make investors money by losing money in operations. 

As to "destabilization," no real worries, the USA has survived worse, it is a resilient nation with lots of very clever people that have migrated there  (including me, of course!).  America works, not because of Washington, but in spite of it.  Have faith in Americans.  Cheers.

I am an ex-finance guy who worked in a number of industries,  though mostly for national banks, and such...

One of those exception companies i once worked for was Exxon.....

Despite my time with Exxon,   unlike normal banking,  i never developed a clear understanding of the whole financing undercarriage of the oil industry........

The Oil Industry stood alone from me........   Everything was extremely convoluted,  and often contradictory...........

In the end,    ONE THING I DID LEARN ABOUT THE OIL INDUSTRY IS THAT IT IS VERY MUCH LIKE THE CREDIT CARD INDUSTRY.........

ie:    it runs in up and down cycles............  a continuing cycle of booms followed by busts followed by booms,   etc............

 

And in the oil industry,  BUSTS ARE GREAT OPPORTUNITIES TO PICK UP ASSETS CHEAPLY..........

 

EXAMPLE:     So Producer number 1 takes out loans to buy the land, build the infrastructure, drill the wells,  and sell the oil until he cannot pay his loans for whatever reason..............

Then Producer number 1 goes belly up,  and is replaced by Producer number 2,  who bought the assets of Producer number 1 for pennies on the dollar...........

Then Producer number 2,  owning the same assets as Producer number 1,  but OWING MUCH LESS ON THEM,   CAN PRODUCE THE SAME PRODUCTION LEVEL AS Producer number 1,   BUT HAS A MUCH SMALLER COST OF GOODS SOLD,   AND BREAK-EVEN POINT....

.......................................

As far as shale is concerned on the forum,  we have two groups with different views of the future over the next 48 to 72 months or so...

Group one says:    that everything is fine,  and that new technologies and economies of scale,  added to the overseas disarray of OPEC mean that the break-even on shale WILL EITHER REMAIN STABLE,  OR CONTINUE TO DROP,  AND THAT WE ARE NOT APPROACHING A PRICE COLLAPSE......    This group points to the recent announcements of two well-financed Oil Giants moving big-time into shale supports their view......

 

Group two says:     that the amount of shale oil that can be actually produced will peak in the next 48 to 72 months,  and that the resulting drop in production WILL CAUSE A COLLAPSE OF FINANCING FOR THE INDUSTRY,  THAT WILL LEAD TO AN IMMINENT BANKRUPTCY FOR MANY,  IF NOT MOST OF THE DRILLERS.....   

.........................................

 

In conclusion,     just my view,   and no doubt many of you will disagree,    is that  EITHER ONE MAY HAPPEN SEPARATELY..............   

 

But i believe it will be A LITTLE BIT OF BOTH.........   

 

I believe that GROUP ONE IS CORRECT THAT ADEQUATE SHALE OIL WILL CONTINUE TO BE AVAILABLE...

 

But i believe that GROUP TWO IS CORRECT THAT THE MARKET WILL COLLAPSE DUE TO THE FINANCING IMBALANCE...

 

BUT,    IF THE COLLAPSE DOES HAPPEN...............   THAT IS NOT A BAD THING,   AS SOMEONE ELSE WILL STEP IN TO CHEAPLY BUY UP THE ASSETS OF THOSE THAT GO UNDER,   AND WILL RESUME FULL PRODUCTION WITH A MUCH SMALLER PRODUCTION COST AND BREAK-EVEN POINT......

 

ps:      i believe that the two well financed OIL GIANTS that just announced their expansion plans into shale agree with me,   and are setting themselves up as the ones that will be purchasing all of those assets on the cheap when the collapse happens.......   They believe they are so well financed,  that the collapse will not affect them........    So it is kind of like them playing poker,  and BUYING THE POT.........

 

but then what do i know...........

Edited by Illurion
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