U.S. Shale Output may Start Dropping Next Year

[Jan van Eck + 7,558]

2 hours ago, Illurion said:

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........

 

Oil and gas financing is complex enough, and as I am only a peripheral dabbler, I can give you only a skim overview.  It is not necessary to actually "make money" in the classical sense, as Tom Kirkman describes (and calls cliff financing). The whole finance works on and around the US Tax Code.  Without the intervention of various tax benefits, then it becomes a house of cards.  But with tax considerations, you can make money as an investor when your well is running at a loss.

Let's start by looking at oil production from the investor viewpoint.  The well is being put together by a "General Partner," who supplies his expertise and organizes the actual drilling and in return picks up some shares in the syndicate without any of his own cash.  Basically, he is taking "promoter's shares", figure on 20%.  That is just for showing up at the fundraisers, smiling, and pitching his wells.  Now the investor let's say is running some hedge fund, his Fund has investments in hydro dams in Maine  (profitable, with tax exposures on the earnings), an auto-parts factory in Indiana  (also profitable and more tax exposure), a bunch of other things, and this oil drilling and production syndicate.  He has this big tax bill confronting him, and in order to pay it, he may have to sell off some assets, who knows.  But he has to pay.  

So, our hedge funder invests in the syndicate.  He buys some share or shares, let us say as a limited partner.  Now the syndicate spends the capital on drilling the well, buying the lease, bringing in pipe, all kinds of things.  The syndicate, organized as an LLC or partnership so that everything is on a pass-though basis, same as say a REMIC Trust in real estate investments, has an 85% investment tax credit as a tax deduction, all in the first year.  On the remaining 15%, the syndicate gets a 100% tax credit.  If not as an actual tax credit, then as a tax deduction.  OK, so when the dust settles, all these one-year deductions and credits let the syndicate punch that hole and the investors, or shareholders in the LLC or Trust, get all their cash back as credits against that tax bill on other income.  So in effect the US Govt  (that is you, the taxpayers) are footing the true bill for the drilling exercise.  

Now the oil starts flowing.  The syndicate gets a 15% "depletion allowance," yet another tax credit, on the pumped oil, on the theory that the reserve of oil is being depleted. Maybe it is and maybe it isn't, for all you know that hole has punched into the Great Granddaddy of all plays, and has 50 billion barrels down there, who knows.   But the certainty to the investors is that they are picking up more deduction from other income.  Eventually, the syndicate puts the investors in the same position as General Electric:  $65 Billion in income, and zero taxes. 

As long as you have enough tax credits, tax deductions, royalty offsets, and depletion allowances floating about, [there are nine different tax angles created by legislatures in the USA for drillers and producers], you can go drill and make money even when you do not hit oil.  And if you hit oil, you get more deductions and credits and you get to sell the oil to boot.  A nice racket, if you can get in on the insider part of the scheme.  Of course, outsiders get hosed, but they are viewed as suckers so who cares about them. But they get hosed even when that hole is a gigantic gusher.  The system is set up to reward insiders and transfer all financial risks onto the taxpayers.  And that is why you can run at a loss and make money, and that is why you have so many Texas oil millionaires.  It is all a game. 

[wrs + 893]

On 3/15/2019 at 7:10 PM, Mike Shellman said:

 

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. 

 

The assets that secure the loans on the stripper well aren't anymore certain than the assets securing a shale well.  The consumers and business people that use a lot of petroleum products love LTO because it's providing cheap gasoline and oil.  If it weren't for shale development, gasoline would be $5/gallon and oil would still be $100/bbl.  So while shale royalty owners may appreciate their royalties, that doesn't have any bearing on the overall profitability of the operators nor does it when you run stripper wells and pay the pittances your wells produce.  Most people given the choice would rather have shale royalties than stripper royalties, the checks are a lot larger with shale than strippers.  So please explain to me how old dying oil wells are doing anything useful for the mineral owners or society at large.  

Secondly, you paint with a broad brush.  I have explained to you that my independent operator isn't in debt and has a positive cash flow but you continue to paint all shale operators as losers just sucking off the easy credit tit.  Frankly, you spiel is stale and it's applicable to the housing market, the car market, the financial market and the operation of the US govt itself.  Low interest rates have facilitated a number of bubbles in our society.  So please, answer my question, do you use credit now or have you ever used it in your own life or business?  

Finally, what is all this nonsense about conserving our precious resources you speak while at the same time excoriating anyone who produces shale as some kind of irresponsible fool intent on raping the land under some kind of ponzi scheme.  What I think about most shale haters is that they are either Peak Oilers proven wrong who can't accept they were wrong or alternative energy proponents who are angry for the same reason.  Shale has mooted both arguments.  Live with it.

Edited March 17, 2019 by wrs

[wrs + 893]

8 hours ago, Jan van Eck said:

  Of course, outsiders get hosed, but they are viewed as suckers so who cares about them. But they get hosed even when that hole is a gigantic gusher.  The system is set up to reward insiders and transfer all financial risks onto the taxpayers.  And that is why you can run at a loss and make money, and that is why you have so many Texas oil millionaires.  It is all a game. 

So low gasoline prices means outsiders got hosed?  The system you describe is what produced the "conventional" oil and it's what produces offshore oil.  Not sure how I would be considered an "insider" as a land owner.  I simply made the best deal I could when the operators came knocking at my door and yes, I am a Texas oil millionaire but it's not a game, it's a serious and important business.  We are providing the world with abundant, low cost fossil fuels.  So tell me how that's a bad thing?  You sound like someone that enjoys sausage talking about the process of making sausage not being as enjoyable as the consumption thereof.

Edited March 17, 2019 by wrs

[Jan van Eck + 7,558]

2 minutes ago, wrs said:

So low gasoline prices means outsiders got hosed?  The system you describe is what produced the "conventional" oil and it's what produces offshore oil.  Not sure how I would be considered an "insider" as a land owner.  I simply made the best deal I could when the operators came knocking at my door and yes, I am a Texas oil millionaire but it's not a game.  We are providing the world with abundant, low cost fossil fuels.  So tell me how that's a bad thing?  You sound like someone that enjoys sausage talking about the process of making sausage not being as enjoyable as the consumption thereof.

I think you have misunderstood the tax-consideration financing that I was attempting to describe.  I will have to conclude that I have done an inadequate job. My regrets for that.

[wrs + 893]

6 minutes ago, Jan van Eck said:

I think you have misunderstood the tax-consideration financing that I was attempting to describe.  I will have to conclude that I have done an inadequate job. My regrets for that.

I understood all that, what I am responding to is the gratuitous insider/outsider spin you concluded with in the last paragraph. Your description was unbiased and accurate until you threw that out.

[Jeff_Calgary + 68]

On 3/15/2019 at 6:10 PM, Mike Shellman said:

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. 

I would love to have seen some sort of agreement between Canada, US and Mexico that puts our North American needs and longevity first. In Canada, we import oil on our East Coast. I think all of that oil should come up by tanker from the Gulf of Mexico and cut some of the not too friendly places in the world out of the picture. Then if we can get Keystone and Enbridge lines built we can supply more from Alberta. I don't see why we need to support Saudi dictators etc.or the environmental disasters in Nigeria type places.

I think when you add in all the flared methane in the Permian -our oilsands work out about the same CO2 or may even be better - either way, the oil sands do not have a decline curve to worry about -so they will keep on going for years to come.

Edited March 17, 2019 by Jeff_Calgary

[Jan van Eck + 7,558]

2 minutes ago, wrs said:

I understood all that, what I am responding to is the gratuitous insider/outsider spin you concluded with in the last paragraph. Your description was unbiased and accurate until you threw that out.

The Tax Code is designed to reward insiders.  Those are the folks that retain lobbyists and convince congressmen to provide special exemptions, depletion allowances, tax credits, and single-year depreciation benefits.  Now you are blaming me because insiders rig the system with their financial benefits, compliments of the IRS?   That is hardly reasonable.  I am not a participant in the design of the tax code.

[wrs + 893]

9 minutes ago, Jan van Eck said:

The Tax Code is designed to reward insiders.  Those are the folks that retain lobbyists and convince congressmen to provide special exemptions, depletion allowances, tax credits, and single-year depreciation benefits.  Now you are blaming me because insiders rig the system with their financial benefits, compliments of the IRS?   That is hardly reasonable.  I am not a participant in the design of the tax code.

I understand how the process of tax legislation works.  The depletion allowance has been in the tax code for a long time and applies to a wide variety of minerals and natural resources, not just oil and gas.  It's not insiders rigging the system at all.  It's a reasonable allowance in the tax code to offset the loss of the non-renewable resource because technically, you are making a capital gain and not regular income by depleting the reservoir.  I am in the natural resource business and I am also allowed depletion on my timber holdings as well.  Does that make me an insider?  I had nothing to do with the legislation or tax treatment of the resource but I understand the reasoning.

So how are outsiders being hosed?  Are low prices at the pump hosing outsiders?  How did outsiders feel with $5/gallon gasoline before shale started producing large quantities of new oil and gas?  Were they not being hosed even worse then?

[Dan Warnick + 6,100]

16 minutes ago, mthebold said:

d)  Slow decline as small companies invest in newer, disruptive technologies.
IIRC, conventional oil went through this in the 1800's, culminating in the Standard Oil monopoly.  Trains and automobiles did too.  Same as it ever was.

That point made me remember a graphic I saw recently.  I wanted to post it at that time and ask questions about it, but it got lost in the shuffle that day.  Anyway, here is the graphic, and I'd still like to know more about it.  In fact, if anyone can recommend a good book about it (one that's interesting reading; not just a history lesson to slog through) I'd sure appreciate it.

P.S. You can click on the graphic and it will expand to full size on your screen.

Edited March 17, 2019 by Dan Warnick

[footeab@yahoo.com + 2,192]

5 hours ago, Jeff_Calgary said:

I would love to have seen some sort of agreement between Canada,

I think when you add in all the flared methane in the Permian -our oilsands work out about the same CO2 or may even be better - either way, the oil sands do not have a decline curve to worry about -so they will keep on going for years to come.

Alberta tar sands: https://srsroccoreport.com/wp-content/uploads/2018/11/Alberta-Tar-Sands-Natural-Gas-Consumption-768x536.png

2.4Bcf/d producing ~3Mb/d

Bakken flares 0.2BCF and production: https://www.eia.gov/petroleum/drilling/pdf/bakken.pdf

Flares approx 10% of its gas

Permian Tripled its flare to ~0.3BCF/d because a NG pipeline was converted to Oil.  https://www.eia.gov/petroleum/drilling/pdf/permian.pdf

Percentage flared is less than 5%

Both combined produce twice as much oil and flare a tiny fraction of the NG used by the Alberta tar sands. 

Why Tar Sand were proposed to use Nuclear energy...2.4BCF/d...

Edited March 17, 2019 by Wastral
Unit screw up/confusion for clarity

[Tom Kirkman + 8,860]

On 3/16/2019 at 3:03 AM, eivindrj said:

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

I just can't see WTI going above $50 and staying above $50 in the long term.

Obviously, I could be wrong.

[Tom Kirkman + 8,860]

3 hours ago, Dan Warnick said:

That point made me remember a graphic I saw recently.  I wanted to post it at that time and ask questions about it, but it got lost in the shuffle that day.  Anyway, here is the graphic, and I'd still like to know more about it.  In fact, if anyone can recommend a good book about it (one that's interesting reading; not just a history lesson to slog through) I'd sure appreciate it.

Read "The Prize" by Daniel Yergin.

It was a #1 National Best-Seller in the U.S. back in the 90's.

Full title is "The Prize - the Epic Quest for Oil, Money & Power"

It won the Pulitzer Prize for General Nonfiction.  It's a massive book, almost 1,000 pages.

An amazing read.

https://en.m.wikipedia.org/wiki/The_Prize:_The_Epic_Quest_for_Oil,_Money,_and_Power

[NWMan + 89]

2 hours ago, Wastral said:

the oil sands do not have a decline curve to worry about

How could any finite resource not have a decline curve?

[Dan Warnick + 6,100]

36 minutes ago, Tom Kirkman said:

Read "The Prize" by Daniel Yergin.

It was a #1 National Best-Seller in the U.S. back in the 90's.

Full title is "The Prize - the Epic Quest for Oil, Money & Power"

It won the Pulitzer Prize for General Nonfiction.  It's a massive book, almost 1,000 pages.

An amazing read.

https://en.m.wikipedia.org/wiki/The_Prize:_The_Epic_Quest_for_Oil,_Money,_and_Power

Er, I was just looking for the Standard Oil part of the story.  That book covers everything, and goes beyond the scope of what this reader wants to commit to.     

Any other suggestions?

[TXPower + 643]

2 hours ago, Tom Kirkman said:

I just can't see WTI going above $50 and staying above $50 in the long term.

Obviously, I could be wrong.

Tom, I agree with you and think that rather the best argument for Shale.  If nothing else it has placed in check much of Opec’s power and the resulting funding of terrorists and state sponsors of terrorism, succinctly pointed out above by one of our resident thinkers @mthebold.  

[footeab@yahoo.com + 2,192]

2 hours ago, NWMan said:

How could any finite resource not have a decline curve?

I never said that. I only have one post in this topic and I said nothing about decline. 

[Rasmus Jorgensen + 1,169]

12 hours ago, mthebold said:

6)  Gas flaring is wasteful.  It's also temporary and necessary.  We don't build massive infrastructure on the hope that demand will emerge.  We let market signals indicate that infrastructure is necessary and then we build.  Gas flaring is a market signal, and pipelines are being built.  This situation is normal and efficient.  The market is working. 

I agree with everything in your post save above. Flaring could be avoided. 

[David Jones + 84]

17 hours ago, mthebold said:

1) Human beings have a tendency to see a handful of facts, interpret the world through those facts alone, and attempt to predict the future based on their interpretation.  There are problems with this approach:

a)  None of us knows everything.
b)  The situation unfolds rapidly as creative actors compete with each other. 
Basically, the future is unknowable.  As we collect more data, we can come to a progressively surer estimation of the future - but we'll never know the true probability of our predictions.  Rumsfeld captured this idea with his known knowns, known unknowns, and unknown unknowns.  Julius Caesar put it more succinctly: the die is cast.  Rather than analyzing a situation as static reality as we do in physics, we should analyze it as many creative agents competing with each other. 

This is generally correct, however I'd like to add a few things to this.

It is not actually necessary to know everything in order to produce a useful interpretation of likely future developments, this is a fundamental property of our universe and why scientific progress has been so successful. If it was required to know everything in order to make useful predictions, we would never have arrived at where we are today technologically.

As a specific example, not knowing everything and yet attaining useful information for predictions that can result in functional technology is why quantum mechanics has been so successful as far as I'm aware. The world is complex but in some regards it is possible to predict the future with useful certainty levels if you distil factors into elements that remain true regardless of unknowns. This is also why anthropogenic climate change predictions of rising temperatures assuming business as usual are likely to be correct regardless of the specifics of the amount of warming and how this unfolds within a specific and short time. In short, the general outcome is true regardless of remaining unknowns.

For instance, it would likely be very hard or even next to impossible to predict the fluctuations that resulted in the temperature averages that were considered a "pause" between 2000 and 2014. However, it was more or less certain that this range would be broken on the upside as it was during the past few years. It is also more or less certain that temperatures will continue to rise and will not go back to that range for any meaningful time period from now on assuming business as usual.

In addition, the above is quite relevant to the future of oil production and consumption. In light of the relative certainty that average global temperatures will continue to increase and the fact that fluids (the global climate system is simply a collection of fluids reacting to energy being applied to them and subject to the relevant and inescapable physics laws) with different energy quantities will "move" differently, rapidly unfolding anthropogenic climate change will likely be highly disruptive to human societies across the world and critically disruptive to fossil fuel use in the next 30 years as people come to the unavoidable conclusion that enough is enough.

It's worth mentioning that due to the lag in reaction of such a massive system as the Earth climate, related damages already factored into the current state are a serious form of debt that will have to be dealt with in the coming decades in addition to any standard financial debts and this form of debt is not going to be countered by additional borrowing. Maybe more developed countries can do this with normal debt defined by people but nature does not distinguish human social standings.

Edited March 18, 2019 by David Jones

[NWMan + 89]

8 hours ago, Wastral said:

I never said that. I only have one post in this topic and I said nothing about decline

No you did not.  It was in a quote you used by Jeff_Calgary

[Mike Shellman + 548]

15 hours ago, mthebold said:

At the very least, shale will serve its most important purpose: setting an upper limit on world oil prices.  That alone is worth throwing money at. 

I find this an incredible statement and one the Oilprice community appears to agree with. It begs the question as to whether a lot of the American public feels the same way about "throwing" money at the shale phenomena. Jobs and low gasoline prices have indeed been a great stimulus to our economy; shale oil and shale gas has helped our trade deficit and is currently being used to advance Trumps' foreign policies. The implication that our government should continue to fund the shale phenomena, or that we as a nation should ignore its massive debt, is very enlightening. And terrific news for the shale industry !! 

 

 

 

[D Coyne + 305]

Mike Shellman,

I don't think the US tight oil can continue to increase beyond 2025, if it continues to be developed at current rates of completion, if things slow down a bit (as far as average completion rates in new wells completed per year) then the peak in US tight oil might be a bit later, perhaps as late as 2030 (as forecast by the EIA in AEO 2019), decline rates are likely to be quite a bit higher than the EIA guesses from 2030-2050 as their forecast has US cumulative tight oil out put at 120 Gb from 2000-2050, about 20% higher than the USGS mean TRR, my guess is that US tight oil output will be about 86 Gb from 2000-2050, if the USGS mean TRR estimate is correct, the EIA's AEO 2018 reference oil price scenario is correct, and current completion rates continue until lower well productivity reduces profits and cause lower investment rates (this varies from play to play, but I use current well costs, LOE, taxes, royalties, transport costs, a 10% discount rate, and 7.4% interest rates to model this, along with a guess at future average well EUR decrease as sweet spots get drilled up.   If well completion rates slow down in Permian basin, it is possible that the oil industry will be able to pay off their debt by 2028 and have cumulative net revenue of $600 billion from 2028 to 2040.

I also agree that our resources should be conserved and not wasted.

Note the oil price scenario in chart below (right axis) has Brent oil prices in 2017$ rising from $55/b in March 2019 to $80/b in May 2022, an average annual increase in oil price of about $8/b each year over the next 3 years, current Brent price is about $67/b so if it increased from here it would only be about a $4/b annual increase in price over the next 3 years, of course we do not know the future price of oil.

[D Coyne + 305]

14 hours ago, Tom Kirkman said:

I just can't see WTI going above $50 and staying above $50 in the long term.

Obviously, I could be wrong.

Tom Kirkman,

 

Has your view of prices changed lately?  You at one time suggested about $60/b was a price that balanced the market, I had thought you were talking about WTI, perhaps you meant Brent?  In any case the EIA, in their AEO 2019 reference oil price case seems to see things differently, my guess is that they are too conservative, I think oil prices are likely to be 20% higher than they have guessed.  I of course am also likely to be wrong about future oil prices, but +/-20% of the EIA's reference oil price scenario seems reasonable.  For 2019-2022 the average is about $70/b for WTI for AEO 2019 reference case scenario and +/-20% suggests $58/b to $84/b over that period.

Edited March 18, 2019 by D Coyne

[butasha + 123]

I am more of a lurker than a poster on numerous forums that I frequent. With that said I feel the need to point out that as a land owner here in the US the minerals below my property belong to me and my family are do not yours to conserve. 

If you want to conserve the oil and gas below my property then buy my minerals at a negotiable price and conserve all that you want. Until then I will quite happily invest the royalty payments that we receive and provide for future generations of my family. 

[David Jones + 84]

1 hour ago, D Coyne said:

Tom Kirkman,

 

Has your view of prices changed lately?  You at one time suggested about $60/b was a price that balanced the market, I had thought you were talking about WTI, perhaps you meant Brent?  In any case the EIA, in their AEO 2019 reference oil price case seems to see things differently, my guess is that they are too conservative, I think oil prices are likely to be 20% higher than they have guessed.  I of course am also likely to be wrong about future oil prices, but +/-20% of the EIA's reference oil price scenario seems reasonable.  For 2019-2022 the average is about $70/b for WTI for AEO 2019 reference case scenario and +/-20% suggests $58/b to $84/b over that period.

These prices seem unlikely since alternative technology is already almost as cheap as fossil fuels. I don't see how the oil industry will be able to ask for anything above $80 a barrel for a prolonged time. As soon as prices go this high, alternatives will start gaining ground so quickly that the industry will be forced to lower them again. The only way prices are going this high is if a carbon tax is implemented globally and even then it'll be even harder for the industry since they will have to work to lower production costs further since the above alternative energy source price reduction over time still applies.

The likelihood of >$100 per barrel at any point in the future for a prolonged time seems quite marginal. My guess is that the range of 60-80 will be maintained for a while and this range will start slowly shifting down over the next decades until everyone just gives up on oil as it looses it's financial viability.

[Jeff_Calgary + 68]

17 hours ago, Wastral said:

Alberta tar sands: https://srsroccoreport.com/wp-content/uploads/2018/11/Alberta-Tar-Sands-Natural-Gas-Consumption-768x536.png

2.4Bcf/d producing ~3Mb/d

Bakken flares 0.2BCF and production: https://www.eia.gov/petroleum/drilling/pdf/bakken.pdf

Flares approx 10% of its gas

Permian Tripled its flare to ~0.3BCF/d because a NG pipeline was converted to Oil.  https://www.eia.gov/petroleum/drilling/pdf/permian.pdf

Percentage flared is less than 5%

Both combined produce twice as much oil and flare a tiny fraction of the NG used by the Alberta tar sands. 

Why Tar Sand were proposed to use Nuclear energy...2.4BCF/d...

That is comical! Try going to your Carnegie index for climate change if you want real numbers rather than cartoons. The first give away is when they are called TAR sands. If you see that -you know the source is tainted.

You will find that the oil sands are on par with the California Oils and not that much off Permian numbers when you look at flaring that coincides with continuous frac situations. Plus there are issues with unreported flaring. Also, note that the best flaring data that Carnegie is using is way back from 2014 -a lot has changed since then.

Also, remember that when you flare gas -it is only 65% efficient -so that the other 35% is basically straight methane venting which is multiple times worse than CO2. Oil sands facilities only have emergency flares-no continuous flares like in the Permian.

https://oci.carnegieendowment.org/#map

Spend some time on real numbers then I am game to reply.

Edited March 18, 2019 by Jeff_Calgary