Raymond James - Why the EIA DUC Count is More Daffy than Donald

[Rasmus Jorgensen + 1,169]

4 hours ago, Mike Shellman said:

May I suggest you first start by determining the truth about the 70% collapse in world oil prices in 2014-2015. It was not OPEC that caused that. Price volatility, not necessarily low prices, is the death of all drilling budgets and the short investment cycle of shale oil has caused extreme price volatility worldwide. Look then at ensuing international rig counts, offshore and on, since 2014. The number of unemployed oil workers worldwide is, I've read, still around 500,000 (but improving). Then look at GDP for oil producing countries since 2014. Look at GDP to debt. Ask @Tom Kirkmanor @Ian Austinif their respective countries oil industries have not been set back, severely, since 2014. Massive layoffs always, I repeat always, lead to a permanent exodus of qualified people from  my industry. Look at all the floaters and jacks up cold stacked around the world and ask yourself if they are not rusting away. The lack of exploration investment because of low volatile oil prices is wrecking the worldwide oil industry and its ability to keep up with demand. When this shale oil "miracle" runs out of gas, literally, and money, or a different political persuasion assumes command in 2020, with an anti-oil agenda, the price of oil is going thru the roof. The world will not be able to afford $100 oil and demand will tank. 

Low, volatile oil prices has led to a disruption in renewable research and development. This current US president, under the false pretense of shale oil abundance has removed mileage standards from vehicles and recent told the American public that cheap shale oil is "limitless and America no longer need to conserve oil." Cheap? What happens in the largest oil consuming nation in the world affects the entire world. https://oilprice.com/Energy/Crude-Oil/How-Shale-Oil-will-Change-the-World.html  there are countless articles like this floating around. 

Ask the people of Venezuela. Google shale oil as a foreign policy tool by this US administration and how it has altered politics and the balance of power in the middle east, the relationship between Iran and Russia, Russia and Venezuela, etc. etc., all of which in my opinion has been changed by the American shale oil phenomena.   

Mike, I understand all this. And agree with the analysis with the possible exception that I don't believe the shale growth was 100 % driven by washington although I agree that it has influenced it. Where I think we disagree is that I believe that price volatillty and competetion is good. It's capitalism. The offshore industry is suffering, indeed, but it will emerge stronger eventually. And that is good. 

[D Coyne + 305]

1 hour ago, Rasmus Jorgensen said:

Mike, I understand all this. And agree with the analysis with the possible exception that I don't believe the shale growth was 100 % driven by washington although I agree that it has influenced it. Where I think we disagree is that I believe that price volatillty and competetion is good. It's capitalism. The offshore industry is suffering, indeed, but it will emerge stronger eventually. And that is good. 

Ah the myth that markets are self regulating and will lead to optimal outcomes, this myth was put to bed in 1936.

[Rasmus Jorgensen + 1,169]

10 hours ago, D Coyne said:

Ah the myth that markets are self regulating and will lead to optimal outcomes, this myth was put to bed in 1936.

I am not naive. But try to analyze what has happening in the offshore services and support sector 2009 - 2014. Credit was practically free and the industry was headed for a crash with or without the "help" of shale. There are plenty of economical / psychological theories that can explain this without resorting to pure-play capitalism rheotoric. I just used that term as it reasonates positively with most Americans.

Edited April 5, 2019 by Rasmus Jorgensen

[Rasmus Jorgensen + 1,169]

14 hours ago, D Coyne said:

Mike Shellman,

It is not clear how to fix the problem, would making the permits for flaring more expensive be an option?  They could set some limit on flaring allowed (this may exist already, I don't know the rules like you would) and then auction off the permits each month to the highest bidder (perhaps this is already done, again I have no idea).  Over time the flaring allowed could gradually be reduced if practical with the ultimate goal of little to no flaring of natural gas, (maybe some would be needed when waiting for pipeline hookups or if a pipeline goes down for maintenence etc, no doubt it can easily be figured out.)  The RRC could also limit output as was done up to 1970.

No doubt you as an industry person would have better ideas.

I have seen in Africa that the authorities simply ban flaring in some areas for new developments and give a transition period for producing fields. And in Europe the relevant authorities need to approve any design plans before oil companies are given permission to move ahead with build plans. Similar systems are place many places across the world.

The fix is simple. This is actually where I agree with @Mike Shellman that there is a political priority probably for many reasons to maximize output at the expense of resource waste. 

[D Coyne + 305]

8 hours ago, Rasmus Jorgensen said:

I am not naive. But try to analyze what has happening in the offshore services and support sector 2009 - 2014. Credit was practically free and the industry was headed for a crash with or without the "help" of shale. There are plenty of economical / psychological theories that can explain this without resorting to pure-play capitalism rheotoric. I just used that term as it reasonates positively with most Americans.

Rasmus,

One cannot really point to any one type of output as the reason for excess supply, but Mike's point that tight oil output increased strongly from 2011-2014 along with the fact that most tight oil producers were borrowing a lot of capital to accomplish this suggests that tight oil may have been the primary reason for oversupply, no doubt that almost everyone was losing money once prices dropped to under $40/b, the thing to realize is that on average the tight oil producers were barely operating from cash flow even in 2014 (before oil price dropped in the second half of the year), this was likely not the case for most offshore projects as the majors typically have better capital discipline, perhaps a few independents were less disciplined, I don't follow the offshore producers closely enough to know.

[D Coyne + 305]

8 hours ago, Rasmus Jorgensen said:

I have seen in Africa that the authorities simply ban flaring in some areas for new developments and give a transition period for producing fields. And in Europe the relevant authorities need to approve any design plans before oil companies are given permission to move ahead with build plans. Similar systems are place many places across the world.

The fix is simple. This is actually where I agree with @Mike Shellman that there is a political priority probably for many reasons to maximize output at the expense of resource waste. 

In the US, the fix may not be simple from a political perspective, it will probably take leadership from Texas, maybe Mike can run for Governor.    He would get my vote, but I live in a different state so not a lot of help.

Edited April 5, 2019 by D Coyne

[Mike Shellman + 548]

On 4/4/2019 at 11:55 AM, D Coyne said:

It is not clear how to fix the problem,

Dennis, my issues are not simply about flaring but about exporting America's last remaining oil resources... using credit, or government subsidizing by way of fiscal stimulus and heavy handed FOMC "manipulation." On this we disagree 180 degrees; exporting is bad for America...period. It might be good for your renewables agenda but not from my perspective. We are going to need America's oil for another 25 years. 

You know exactly how I would fix this; we have talked about it before. It would involve, gasp, regulating shale oil growth that is commensurate with world oil markets, within an (oil) globalization policy for the US, and one that would FORCE the US shale oil industry to reduce debt, maintain production levels within cash flow, and conserve our nations energy resources. There are applicable LAWS that are in place, statutory laws, in Texas anyway, that are currently being broken regarding conservation.  Put the shale oil industry back on proper spacing per well and density of wells per acre of land rules...the ones that existed for 70 years but were then changed with the onslaught of the shale revolution. 

You've read the BS about infill drilling (parent/child relationships is just a bunch of hooey  about the shale oil industry drilling wells too close together)...it's failed economically. Miserably. Over drilling sweet spots is causing GOR to rise and likely leaving liquids stranded, forever. These guys can't control themselves. Its like East Texas Field all over again. Lenders are in charge now and they want their money back; mineral owners won't let up on drilling commitments to earn acreage. The interest meter is spinning. The whole shebang is out of control. 

Put the TRRC back in charge, one with backbone; make the shale oil industry follow Texas law! Problem solved. 

 

 

 

Edited April 7, 2019 by Mike Shellman

[Rasmus Jorgensen + 1,169]

On 4/5/2019 at 5:39 PM, D Coyne said:

Rasmus,

One cannot really point to any one type of output as the reason for excess supply, but Mike's point that tight oil output increased strongly from 2011-2014 along with the fact that most tight oil producers were borrowing a lot of capital to accomplish this suggests that tight oil may have been the primary reason for oversupply, no doubt that almost everyone was losing money once prices dropped to under $40/b, the thing to realize is that on average the tight oil producers were barely operating from cash flow even in 2014 (before oil price dropped in the second half of the year), this was likely not the case for most offshore projects as the majors typically have better capital discipline, perhaps a few independents were less disciplined, I don't follow the offshore producers closely enough to know.

Dennis, 

I understand this. The point I am trying to make is that the investment boom into shale has to be viewed in the right context. Back in 2011 the offshore industry was considering Arctic oil. Can you imagine the upfront and overhead cost of developing deepwater offshore fields in hostile virgin areas like the Arctic? compared to that shale must have looked real attractive to investors. 

Or look at the kosmos energy jubilee story. They explored and expanded on debt too for the first 10 years. First with private equity (blackstone and somebody else) and then an IPO.

The entire oil industry is run on debt. You also have to look at the service companies. 

I do disagree that there is a political element too. But is not the only one. 

[D Coyne + 305]

On ‎4‎/‎6‎/‎2019 at 9:46 PM, Mike Shellman said:

Dennis, my issues are not simply about flaring but about exporting America's last remaining oil resources... using credit, or government subsidizing by way of fiscal stimulus and heavy handed FOMC "manipulation." On this we disagree 180 degrees; exporting is bad for America...period. It might be good for your renewables agenda but not from my perspective. We are going to need America's oil for another 25 years. 

You know exactly how I would fix this; we have talked about it before. It would involve, gasp, regulating shale oil growth that is commensurate with world oil markets, within an (oil) globalization policy for the US, and one that would FORCE the US shale oil industry to reduce debt, maintain production levels within cash flow, and conserve our nations energy resources. There are applicable LAWS that are in place, statutory laws, in Texas anyway, that are currently being broken regarding conservation.  Put the shale oil industry back on proper spacing per well and density of wells per acre of land rules...the ones that existed for 70 years but were then changed with the onslaught of the shale revolution. 

You've read the BS about infill drilling (parent/child relationships is just a bunch of hooey  about the shale oil industry drilling wells too close together)...it's failed economically. Miserably. Over drilling sweet spots is causing GOR to rise and likely leaving liquids stranded, forever. These guys can't control themselves. Its like East Texas Field all over again. Lenders are in charge now and they want their money back; mineral owners won't let up on drilling commitments to earn acreage. The interest meter is spinning. The whole shebang is out of control. 

Put the TRRC back in charge, one with backbone; make the shale oil industry follow Texas law! Problem solved. 

 

 

 

Hi Mike,

Generally I think free trade is a good thing.  See

https://en.wikipedia.org/wiki/Comparative_advantage

From article linked above:

"Widely regarded as one of the most powerful^[7] yet counter-intuitive^[8] insights in economics, Ricardo's theory implies that comparative advantage rather than absolute advantage is responsible for much of international trade." 

I agree resources should be conserved and proper spacing rules should be enforced by the RRC and I also think it would make sense for the RRC to regulate output levels in Texas as it once did.

Politically this seems unlikely in Texas, but as you know I don't know Texas very well.  My agenda is simply to prepare the World for the coming peak in World oil output in 2025 and then peak coal (probably by 2030) and then peak natural gas (perhaps around 2035), we will need energy wind and solar are probably the best replacement, perhaps a bit of nuclear if necessary.

Forcing companies to reduce debt seems a bad idea, it seems individual companies should be free to make their own decisions from my perspective.

[Ian Austin + 131]

On 4/4/2019 at 9:12 AM, Mike Shellman said:

May I suggest you first start by determining the truth about the 70% collapse in world oil prices in 2014-2015. It was not OPEC that caused that. Price volatility, not necessarily low prices, is the death of all drilling budgets and the short investment cycle of shale oil has caused extreme price volatility worldwide. Look then at ensuing international rig counts, offshore and on, since 2014. The number of unemployed oil workers worldwide is, I've read, still around 500,000 (but improving). Then look at GDP for oil producing countries since 2014. Look at GDP to debt. Ask @Tom Kirkmanor @Ian Austinif their respective countries oil industries have not been set back, severely, since 2014. Massive layoffs always, I repeat always, lead to a permanent exodus of qualified people from  my industry. Look at all the floaters and jacks up cold stacked around the world and ask yourself if they are not rusting away. The lack of exploration investment because of low volatile oil prices is wrecking the worldwide oil industry and its ability to keep up with demand. When this shale oil "miracle" runs out of gas, literally, and money, or a different political persuasion assumes command in 2020, with an anti-oil agenda, the price of oil is going thru the roof. The world will not be able to afford $100 oil and demand will tank. 

Low, volatile oil prices has led to a disruption in renewable research and development. This current US president, under the false pretense of shale oil abundance has removed mileage standards from vehicles and recent told the American public that cheap shale oil is "limitless and America no longer need to conserve oil." Cheap? What happens in the largest oil consuming nation in the world affects the entire world. https://oilprice.com/Energy/Crude-Oil/How-Shale-Oil-will-Change-the-World.html  there are countless articles like this floating around. 

Ask the people of Venezuela. Google shale oil as a foreign policy tool by this US administration and how it has altered politics and the balance of power in the middle east, the relationship between Iran and Russia, Russia and Venezuela, etc. etc., all of which in my opinion has been changed by the American shale oil phenomena.   

Mike,

Nevermind the permanent loss of qualified/talented people due to the downturn. I’m not sure how many understand the pure apathy that this downturn has produced towards the O&G industry. 

Those “old heads” heading towards retirement - there’s going to be nobody who even wants to replace them. 

I know it won’t be Mike, but others can spare me the BS about “entitlement” and “allergic to work”. If I was 20-22, I’d run as far away from this s$$tshow as I could too...

[Mike Shellman + 548]

8 hours ago, Ian Austin said:

Nevermind the permanent loss of qualified/talented people due to the downturn

Hi, Ian!  I hope things are thawing out by now and you are doing well. Americans tend to always believe the world revolves around America and they don't see, or could care less about what's happening in the rest of the world. It is for the reasons I've mentioned, and you've confirmed, the American shale oil revolution has changed the entire world oil order and I don't think for the better. I don't see that US shale oil extracted essentially on borrowed money is going to improve competition and increase efficiency worldwide; in fact, probably the opposite. 

I see there are layoffs occurring in the Permian; PXD is offering severance packages, Laredo, Surge, etc. etc. so the miracle of forever abundance (what in the history of our industry has EVER been forever?) is already starting to wane.