Shale Oil Fiasco

[James Gautreau + 86]

I am calling it here November/December 2018 was peak oil production for the world. at a little over 100 mbpd. 

[Rob Kramer + 696]

1 hour ago, James Gautreau said:

Papa is the most negative at 400,000 bpd growth for next year. I'm saying 1 mbpd decline 2020, from 13 down to 12 mbpd. 

I see that growth happening then a fall. But if oil stays near 60 WTI its gonna slow the fall. Another 5 oil rigs down. That's a duc drop of 15 by my math. We will see I think the 16th is when eia reports it but it'll be the last months trailing average of rigs not the week to week number. 

Edited December 6, 2019 by Rob Kramer

[Rob Kramer + 696]

Some new math for those interested. In the sept 2018 report the July to Aug. DUC increased 238 the oil rigs averaged 863 across those months. Now rigs average 720 and eia Nov 19 report Sept to Oct DUC count Negative 225. So 463÷143=3.23 . Oct - Nov looks like 690 rigs so 30 rig difference x 3.23 =97 more DUC used on 225. So Negative 322 if my eyeballed average is close and fracking/completion and drilling speeds are the same . Admittedly a big if but still my best guess. 

[jjj + 26]

20 hours ago, Douglas Buckland said:

People do not seem to realize that the root cause of the production problems associated with shale oil is the extremely low permeability or the ability for the rock to flow. There is only so much that you can do to mitigate this issue.

Let’s take a simplistic historical view. First a well is drilled vertically through a tight shale formation. This yields a certain surface area for hydrocarbons to enter the wellbore, which in turn gives a certain production rate for that surface area and permeability. The rate is uneconomical. How do we increase the permeability of the reservoir rock matrix? We can’t, so we must adjust the surface area. We now drill a lateral through the reservoir. Surface area of the wellbore increases and production goes up - for awhile. The near wellbore oil is recovered ‘easily’, but as the oil further from the wellbore is being recovered, the tortuous path between the shale grains becomes longer, friction becomes greater and it becomes more difficult for the oil to reach the wellbore. Eventually the production rate becomes uneconomical. We need even more surface area, so we hydraulically fracture the formation. Once again, more surface area yields higher production - until it doesn’t for exactly the same reasons described above. At some point the money runs out and you can neither increase the length of the laterals OR increase the number of stages in the frac program.

Okay, let’s just drill and frac a multitude of wells in the same area. This will yield a huge increase in the wellbore surface area (remember, you can’t really change the permeability of the actual reservoir rock) and production should skyrocket, and it does, right up to the point that it doesn’t and the parent/sibling well issue raises it’s ugly head.

At the end of the day, the shale oil boom will bust simply because you can not alter the deep reservoir permeability AND you’ve run out of money trying to do so.

That’s it in a nutshell.

Over to you Jabbar...

I agree with the facts you presented but I am not sure they support the fact that the shale boom will implode. It doesn't matter if a well only lasts 5 years, or even 1 month, as long as the well pays for itself with enough profit to handle opportunity costs it was a successful project. We still have undeveloped land to drill and we continue to find ways to economically get more oil out of already drilled holes. So while the cost of a well will eventually go up because the best locations are drying up the technology advances keep driving the costs down. And when the lack of profitable fields starts increasing costs more than the technological advances can offset, the price of oil will go up making the fields profitable again. It will not be a cliff but a gradual slide down a hill. About the only way I can picture a step function down in the USA would be if a different country came onto the market with significantly cheaper oil in enough volume to matter. Similar to what shale did to the Canada oil sands. 

Jay  

[Douglas Buckland + 6,308]

Again, what SPECIFIC technological advances are you referring to?

If everything is as you say, where did the mountain of debt come from?

[Boat + 1,324]

On 12/5/2019 at 4:59 PM, James Gautreau said:

Duc's are like regular wells. Not all of them come in gushers. By my math you need to drill 4 or 5 wells to find that 600,000 barrel EUR well. That's why frackers can't make money. At the beginning of the year they were completing 0 Duc's. Last month they did 225 and it's going up fast. My guess is next month they'll do 300 and 500 a month by spring. 20% of 7500 is somewhere around 1850 Tier 1 wells. By the summer they're gone. 

The completions of wells have remained relatively steady for over 6 months. I don’t buy the tier 1, tier 2, tier 3 narritive and have no clue who dreamed it up. Why? Production keeps going up, not down. More Russian fake news I assume.
If you want to boost global oil prices cut imports from the world to foreign refineries in the US. We’re energy independent without them polluting our air. At minimum, those foreign refineries can refigure their process for US home drilled oil. Sept was the first month that the US became a net oil exporter according to the EIA. Heavy, sulfur oil in Canada can be refined there. Same with Mexico. This is a no Brainer considering the trade imbalance with both countries.

Edited December 7, 2019 by Boat

[Boat + 1,324]

So if the ultimate recovery is much higher and you drill more wells in a smaller area to “drain” the area/block how does that become less economical. Either they are finding more tier 1 wells or tech has become so efficient that they now get more oil from tier 2 wells than the exhausted tier 1 wells. I am talking Permian stats from the EIA Drilling Productivity Report. Look at the DUCT Excel spreadsheet. Completions numbers are a much better baseline. 
I am not an oil guy but can read a chart. There are no financial numbers associated with these numbers. But these numbers go back to 2013 and a plethora of misinformation has been written that does not match the incredible tech that changed US oil production.

Edited December 7, 2019 by Boat

[ceo_energemsier + 1,818]

Shale Has Delinked US Oil and Gas Prices

 

 

The relationship between crude oil (WTI) and natural gas (Henry Hub) prices has long been an essential one. These two sources of energy are intrinsically linked, and together supply over 60 percent of U.S. and global energy. Especially over the past decade, oil and gas are being produced by the same companies. Even the oil majors like Shell and ExxonMobil are increasingly positioning themselves as gas giants. They realize, of course, that gas is the centerpiece strategy around the world to cut greenhouse gas emissions, backup wind and solar, and provide reliable and affordable energy.

As for the fundamentals, where oil is found natural gas is also found, and vice versa. “Associated gas” comes along as basically a “free” byproduct of crude extraction, with “associated oil” coming along with gas. For consumption, while oil no longer competes in the main demand sector for gas, power generation, lower cost natural gas liquids such as ethane are coming to displace naphtha from crude utilized in industrial and manufacturing processes.

Seen in the graphic below, the diversion between oil and gas prices came in 2008-2009. This is right when the U.S. shale oil and gas revolution took off, when the deployment of hydraulic fracturing and horizontal drilling technologies became widespread. So just looking over this century, there have really been two distinct periods for oil and gas: the “pre-shale era” (2000-2008) and the “shale era” (2009-present).  

 

 

We can measure the oil and gas price disconnect over the past 20 years. Before 2009, for instance, the price of oil was nine times higher than natural gas. This is about normal because there is almost six times more energy in a barrel of oil than an MMBtu of gas. In the shale era since, however, oil has been nearly 25 times more expensive than gas. While not exactly a cause-and-effect indicator, the correlation coefficient (R) calculates the strength of the relationship between the movements of two variables (measured from -1 to +1). In the shale era since 2009, the R between oil and gas prices has been +0.45, well below the +0.75 R seen pre-shale. Thus, although it has stayed a positive one, the relationship between oil and gas pricing has weakened over the past decade.

This is all noteworthy because both U.S. oil and gas production have boomed since 2009. Domestic crude output has risen 150 percent, with gas up 60 percent. The vital difference between these two commodities, however, is that oil is easily transportable and therefore sold on an immense international market with linked prices. For oil consuming nations, outside forces and decisions reverberate around the world. The U.S. shale oil boom is simply not able to shelter the domestic market like shale gas has. Gas remains a regional product with distinct markets: over 70 percent of the world’s oil usage is internationally traded, versus just 30 percent for gas.

Looking forward, higher oil prices will generally mean lower U.S. gas prices. That is because of the Permian basin in West Texas, the largest oil field in the world. Higher prices will lead to more oil drilling and more associated gas supply. To illustrate, despite not having a single gas-directed rig in 16 months, the Permian now accounts for almost 20 percent of U.S. gas output. In the reverse, lower oil prices can lift gas prices by lowering gas production. The reality is that gas remains a secondary resource to oil, and its market is just too small to have a material impact on oil prices.

More U.S. LNG, however, will continue to gradually change oil and gas price dynamics. Although it now accounts for just 15 percent of global gas use, the expanding LNG trade is evolving gas into a global commodity like oil. Now in third place, the U.S. is expected to become the largest LNG seller within five years. Especially since our spot sales are highly attractive, this will give outside events greater influence on domestic gas prices. With isolation for the U.S. natural gas market slowly fading, there is good news in keeping prices low for consumers. The U.S. Department of Energy expects another 20-25 Bcf/d of domestic shale gas production through 2040 and even more beyond.

[Douglas Buckland + 6,308]

the incredible tech that changed US oil production.

What incredible ‘tech’!!!! That is my point! Every shale ‘cheerleader’ talks about this new, incredible technology that is making shale oil so fantastic and yet not one ‘cheerleader’ seems to be able to identify, let alone explain, how this is either new technology or how it will allow the shale play to continue at it’s present rate of production!

[Douglas Buckland + 6,308]

17 hours ago, Jabbar said:

Typical response 

LOL

Doug, if you want to learn something, sit down with Conoco Reservoir Engineer Kevin Raterman for a day.

Your head will be spinning after a half hour.

 

Younger individuals (and many older) absorb more learning because they have open minds and are independent thinkers .  

Can't learn much with a closed mind.

This isn't your grandfather's oil industry anymore.  

I rest my case.

LOL

Don't change , we love ya. (My gratuitous typical response)

 

 

You haven’t made a case.

I know many reservoir engineers, handpicking one who agrees with you is immaterial.

You have once again refused to address the situation regarding the lack of fluid mobility in the shale lithology as I detailed earlier. I am led to believe that you do not understand reservoir permeability.

Perhaps you can forward my previous comments to Mr. Raterman and have him address my concerns.

[markslawson + 1,058]

22 hours ago, Douglas Buckland said:

Well, Halliburton just laid off 800 people...It will be difficult to bring back this experience if the shale oil conditions improve. The repeated lay-offs drive the experienced personnel into other jobs/industries. It is not simply equipment you need to drill and complete wells. The same applies to rig crews.

Douglas - of course, but I don't see what the problem is.. the shale oil industry, and its employees,  should be use to cycles by now .. the mobile oil rigs the industry uses are always being mothballed then brought back depending on conditions. If conditions improve then workers will be found from somewhere. You will find that the most easily replaceable have been let go .. again its what happens in the shale industry, the rest of us should soldier on.. leave it with you..  

[markslawson + 1,058]

17 hours ago, James Gautreau said:

Good nutshell. Over time and at those depths and pressures the opening closes and you're done. Production is almost entirely front loaded. When this thing peaks and starts declining watch out. People will be astounded by how fast the oil just goes away. Just like when $25 was cheap and $50 was expensive back when I was younger, and now when 50 is cheap and $100 is expensive, the new normal will be $100 is cheap and $200 is expensive. This after the 4 X post embargo when oil went from $3 to $12. That took us into the modern oil age i.e. dirt, dirt, dirt cheap to moderately expensive. Now we are headed into expensive. We're not very expensive yet. 

James - you're confusing real and nominal prices.. note this graph remember to untick the log scale (at the top) but keep it inflation adjusted.. note that prices were re-rated in the 1970s - the OPEC crisis - but, although there has been considerable volatility since, oil prices in real terms are now about where they were in the 1970s (run the mouse pointer over the graph). if you untick the inflation box you'll see the effect you're talking about. If you look closely at the real-price graph you can see there was a general upward trend in real prices before the shale oil boom. Now whether that was due to any natural production plateau or due to OPEC simply not bothering to explore for more as some economists have alleged is another question.. the sale oil boom happened at about the same time as the major started exploiting very deep ocean oil so a production plateau is probably not relevant. Also note that Venezuvla, a huge oil producer, is having major problems and the US has imposed oil sanctions on Iran.. 

[Jabbar + 465]

On 12/6/2019 at 2:42 AM, Douglas Buckland said:

Well, Halliburton just laid off 800 people...It will be difficult to bring back this experience if the shale oil conditions improve. The repeated lay-offs drive the experienced personnel into other jobs/industries. It is not simply equipment you need to drill and complete wells. The same applies to rig crews.

Halliburton closed an Oklahoma Office that employed 800 people.  They didn't lay off  800.  Many were moved to another location in Oklahoma.

Oklahoma Anadarko/Stack was supposed to be "The Next Big Play" .  Halliburton geared up for all the new business to come this year.

But .  .  .  it turned out to be a big dud. 

Just the way it is.  Everyone benefits from your expertise , but please get ALL the facts straight . 

This isn't your grandfather's oil industry. 

[James Gautreau + 86]

I grew up in Metairie, a suburb of New Orleans. We drove down Metairie Road nearly every day. There was a little gas station on that road that had a sign up that never changed. It read $29.99 cents a gallon my entire life. It was as certain as the sunrise. Then one day in 1973 I think we were riding down that road and it said $1.29 a gallon. In one day. Anyone who thinks we're paying the same for oil today as we did back then is delusional. 

[James Gautreau + 86]

You're right this isn't my grandfather's oil industry. My grandfather's oil industry was profitable. Highly profitable. The most profitable industry in the world, if memory serves. 

[James Gautreau + 86]

There is no tech it's all brute force. 100 railroad cars of sand per well. Some hi tech. 

[footeab@yahoo.com + 2,190]

8 minutes ago, James Gautreau said:

I grew up in Metairie, a suburb of New Orleans. We drove down Metairie Road nearly every day. There was a little gas station on that road that had a sign up that never changed. It read $29.99 cents a gallon my entire life. It was as certain as the sunrise. Then one day in 1973 I think we were riding down that road and it said $1.29 a gallon. In one day. Anyone who thinks we're paying the same for oil today as we did back then is delusional. 

Today a House is ~$300,000.  In 1973, same house was ~$30,000 .   Inflation due to PRINTING "money" after stealing everyones gold and finally going off gold reserve is 10X in ~40 years.

Average price of Gasoline ~$3.  Take your $0.3 times inflation...  SAME DAMNED PRICE

Car: Today: $30,000 .  Car yesterday $3000 brand new.  10X inflation

All REAL goods requiring ENERGY/LABOR have all inflated by 10X.  Energy has not gotten any more efficient and neither has labor since the late 1970s. 

Food on the other hand has only inflated by ~5X as production yields have increased massively and imports from foreign CHEAP countries have increased massively to the point that the USA is almost a net IMPORTER by $$$, not calories. 

[footeab@yahoo.com + 2,190]

6 minutes ago, James Gautreau said:

You're right this isn't my grandfather's oil industry. My grandfather's oil industry was profitable. Highly profitable. The most profitable industry in the world, if memory serves. 

Yea, rest of world caught up around 1960 and profitability went into the toilet by 1970 with the easy cheap oil depleting.  1973 was just the nail in the coffin which allowed the sour crudes to be workable.  Might want to check your memory crystals. 

[James Gautreau + 86]

Funny you should say that. My parents bought their first and only house for $28,000. That house today is worth $150,000. The other day I was at Cracker Barrel and a Valomilk with 2 cups was $2.29. When I was a kid I could buy a single Valomilk for $.05 cents, 2 for a dime. Lay off the caps. They  make you look like Trump. 

[D Coyne + 305]

On 12/6/2019 at 8:18 AM, Jabbar said:

I say avg b/e around $50.  But let's not split hairs.  Two types of shale producers those that produce oil below $30 and those that avg approx $50.  

The low cost shale will not compete with the $50 producers.  They want $70 oil as much as they do. 

The pricing pressure will come from oil those other conventional producers and demand plateauing .  

Shale adapts or be gone.

Also, one needs to consider what type of "cashflow" you're using. Operating cashflow ? Financial cashflow? 

Just my opinion.

Operating cashflow.

Basically refinery gate revenue minus transport cost minus royalties and taxes minus LOE gives the net revenue which is discounted monthly over a 25 year well life.  Well profile based on average well profile data from shaleprofile.com, Arps hyperbolic fit to data over first 18 to 24 months (for newer wells where that is all the data we have), when hyperbolic reaches and annual decline rate of 12.5%, exponential decline at a 12.5% annual rate of decline is assumed over the tail of output, wells are shut in at about 7 bo/d.

I realize there are better mathods than simple Arps hyperbolic, but with limited data this gives the best estimate with fewest variables and is appropriate for small data sets (18 to 24 data points).

Eventually prices might fall after 2035, but from 2021 to 2030, we are likely to see oil scarcity and high oil prices.

[D Coyne + 305]

On 12/6/2019 at 8:36 AM, wrs said:

Your well cost is too high.  Drilling costs are about $2m and completion costs are $3-5m, those are up to date numbers based on three new wells drilled this summer.  So a fair number would be $5-7m not $10m.

wrs,

Full cycle cost includes land, facilities, drilling and completion, and is based on input from an oil professional (Mike Shellman).

You have forgotten both land cost and facilities cost (gathering lines, staorage tanks, pad cost), also I include plugging cost at end of well life.  What is the TVD for the well that is 6 million in cost?

His guess is that average Delaware basin wells are about $10 million.  He may also factor in the fact that not every well goes as planned, perhaps some come in at 6 million and others (when there are problems) run far more.  Three wells is quite a small sample.  Any better evidence on well cost than a 3 well sample?

 

See

https://www.rystadenergy.com/newsevents/news/newsletters/UsArchive/shale-newsletter-april-2019/

where they estimate about $950/ foot of lateral in Permian.  For a 10,000 foot lateral that is $9.5 million just for D+C cost, add land, facilities, abandonment and easily we get to $10.5 million.

I assume 10,000 feet will become standard lateral length in the Permian basin, this has been the standard horizontal lateral length in the Bakken since 2008.  

In fact, productivity increased in the Permian in large part due to the move to longer laterals from 2013 to 2018, though higher proppant intensity also was part of the story and other technical improvements.

When we normalize for lateral length in the Permian basin, average producivity has not increased since 2016.

Edited December 7, 2019 by D Coyne

[wrs + 893]

38 minutes ago, D Coyne said:

wrs,

Full cycle cost includes land, facilities, drilling and completion, and is based on input from an oil professional (Mike Shellman).

You have forgotten both land cost and facilities cost (gathering lines, staorage tanks, pad cost), also I include plugging cost at end of well life.  What is the TVD for the well that is 6 million in cost?

His guess is that average Delaware basin wells are about $10 million.  He may also factor in the fact that not every well goes as planned, perhaps some come in at 6 million and others (when there are problems) run far more.  Three wells is quite a small sample.  Any better evidence on well cost than a 3 well sample?

 

See

https://www.rystadenergy.com/newsevents/news/newsletters/UsArchive/shale-newsletter-april-2019/

where they estimate about $950/ foot of lateral in Permian.  For a 10,000 foot lateral that is $9.5 million just for D+C cost, add land, facilities, abandonment and easily we get to $10.5 million.

I assume 10,000 feet will become standard lateral length in the Permian basin, this has been the standard horizontal lateral length in the Bakken since 2008.  

In fact, productivity increased in the Permian in large part due to the move to longer laterals from 2013 to 2018, though higher proppant intensity also was part of the story and other technical improvements.

When we normalize for lateral length in the Permian basin, average producivity has not increased since 2016.

 I am giving you the real reported cost for the wells drilled and completed on my property this year.  The lease bonus cost isn't that much on a per well basis.  I can tell you that we got $6000/acre but they will put in  16-30 wells on that acreage, you need to get over that land cost stuff.  Mike Shellman doesn't know shit about the Permian.  My data is up to date based on real daily numbers that I get each day.  These wells are 9200-9500 feet deep with 4500 foot laterals.

[D Coyne + 305]

21 minutes ago, wrs said:

 I am giving you the real reported cost for the wells drilled and completed on my property this year.  The lease bonus cost isn't that much on a per well basis.  I can tell you that we got $6000/acre but they will put in  16-30 wells on that acreage, you need to get over that land cost stuff.  Mike Shellman doesn't know shit about the Permian.  My data is up to date based on real daily numbers that I get each day.  These wells are 9200-9500 feet deep with 4500 foot laterals.

Thank you for the data.

The average lateral length in the Permian basin is about 7500 feet. Much of the cost is in the lateral (where the fracturing occurs etc).  My guess is that Mike Shellman knows plenty,  Rystad says 950 per foot of lateral, so your 4500 foot well would be about $4.3 million, an average 7500 foot lateral would be 7.1 million and a well with a 10,000 foot lateral would be 9.5 million for D+C only.  For your 4500 foot well at 1000 foot spacing it would be 0.6 million for the land bonus, for a longer 10,000 foot well the land bonus would be 1.3 million, and you still don't have facilities and abandonment, let's say 0.5 million per well so for the 10,000 foot well we have 9.5+1.3+.5=11.3 million.  For the 7500 average length lateral we would have 7.1+1.5=8.6 million, so for full cycle wells which I expect will average between 7500 and 10000 feet in 2019 we have 8.6 to 11.3 million for full cycle well cost, the average is 9.95 million, I round to 10 million as I expect well costs are likely to rise as completion rates increase as oil prices rise.

I stand by the $10 million full cycle well cost estimate for the average Permian basin well in 2019.

Would be interesting to hear oil industry perspectives.

I use the real data provided by shaleprofile.com each month, rather than basing my analysis on 20 wells, I use data on about 24,000 wells completed in the Permian basin.

https://shaleprofile.com/2019/11/21/permian-update-through-august-2019/

Edited December 7, 2019 by D Coyne

[wrs + 893]

For a situation like we have with our Orla section where the lease is old, the operator has no land costs or lease costs.  Chevron and XOM both have a lot of old leases out there.  Texaco got all of the TPLT minerals a long time ago and that is a lot of productive acreage in the Permian.  I imagine the fact that XTO had no land costs for our Orla section made it easier to put more into drilling which is good for the landowner too.  I am not commenting on anything other than the cost to drill and complete the well because that is the main cost of the well.  

I don't beileve lease bonus money is amortized, I think it's a direct expense, i.e. a rent expense.  I think you are incorrectly attributing rent to the cost of the well.  The rent is paid once, the drilling and completion costs are paid on every well.

Edited December 7, 2019 by wrs

[Boat + 1,324]

22 hours ago, Douglas Buckland said:

the incredible tech that changed US oil production.

What incredible ‘tech’!!!! That is my point! Every shale ‘cheerleader’ talks about this new, incredible technology that is making shale oil so fantastic and yet not one ‘cheerleader’ seems to be able to identify, let alone explain, how this is either new technology or how it will allow the shale play to continue at it’s present rate of production!

The production of new wells in the Permian jumped by a multiple of 8 between 2013 and 2019. Hundreds of billions of dollars now stay in the US that used to go to importers. The US is now energy independent. All this with 700 odd less rigs. Let’s throw in the matching nat gas story. The US is now a net nat gas exporter instead of a fairly large importer in 2013.

To call fracking and its results for billions of humans getting cheaper energy might be a climate change travesty but a victory for the best widget winning. It has also been a huge geopolitical US winner as it stopped nefarious countries stacking their piggy bank and draining the world’s economies. You Russian? Then I would understand.

Edited December 8, 2019 by Boat