Shale Revolution Changes Everything
How the Shale Revolution Has Reduced Geopolitical and Price Risk
Opec was on the verge of claiming victory over its North American rivals last night after its strategy of squeezing out the shale industry by flooding the markets with oil appeared to be vindicated. The oil producers’ cartel said that falling prices would force lower production from its rivals by the end of this year, with American and Canadian producers particularly affected. –Marcus Leroux, The Times, 19 January 2016
When oil prices tick up, thousands of profit-seeking investors make individual decisions to turn each shale factory’s switch to “on.” That’s how the U.S. so rapidly achieved, from 2009 to 2015, the record-breaking rise in production of four million barrels a day. Shale 2.0, when it comes, will be even better. The technology is advancing at a speed usually associated with Silicon Valley. Just as a new Internet ecosystem rose from the ashes of the dot-com crash, Shale 2.0 will emerge—and for the same structural reasons. –Mark P Mills, The Wall Street Journal, 19 January 2016
Even as the U.S. rig count has retreated like Napoleon from Russia, shale remains the key to understanding the global oil landscape. Consider that despite all of the turmoil in key oil-producing regions, namely the Middle East, oil prices have not spiked. Nothing — not Russian intervention in Syria, not ISIS attacks on Libyan oil infrastructure, not the torching of the Saudi Embassy in Tehran — has been able to stop the oil price collapse. What is going on here? Does turmoil in the Middle East suddenly no longer matter? The American shale oil model has changed the world oil marketplace for the foreseeable future. Shale producers’ ability to quickly throttle down or ramp up upstream investment spending, drilling and production, as oil prices change, is viewed as an effective shock absorber against any potential oil price spikes. Mark J Perry, Investor’s Business Daily, 15 January 2016
The full measure of the shale oil model’s impact will be tested when the current crude glut clears and geopolitical risk returns, which is a near certainty. As oil prices eventually rise, will production from America’s shale oil fields rise in tandem and absorb the shock? The next president is likely to find out, and the answer will almost certainly be “yes.” And maybe that president will do something President Obama has never done — acknowledge the game-changing shale revolution as the most extraordinary energy success story in U.S. history. Mark J Perry, Investor’s Business Daily, 15 January 2016
h/t to Dr. Benny Peiser of the GWPF
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peak oil….and the world is freaking out because Iran can start pumping
Peak oil is at least 100 years away. Assuming no major improvements in drilling technology in the mean time.
Nope. Conventional peaked in 2007 according to IEA and the decline rate in existing fields is on the order of 5.1% /year –needing replacement from new conventional (e.g. Deepwater, Arctic) or unconventional sources. Both creaming curves and probit transforms say anout 75% of all the conventional petroleum that will ever be discovered already has been. You do those estimates basin by basin. See USGS fact sheet 2012-3024.
Including unconventional (API < 10, reservoir porosity <5%, reservoir permeability < 10 Darcies), oil production peaks sometime around 2025 on current demand projections (slowing China). This excludes NGLs, which are generallly not substitues for transportation fuels.There are signicant misunderstandings about shale oil TRR and recovery geophysics. Explained and Illustrated in essays Reserve Reservations, This Rock could NOT Power the World, and Matryoshka Reserves. For example, the total TRR for all US oil shale is estimated by USGS and EIA at about 15-18Bbbl. The REMAINING TRR (all economic even at $30/bbl) for the Ghawar field alone in Saudi Arabia was about 65Bbbl in 2010, per Saudi Aramco after reworking yhe southernmost Harrahd section for water flood EOR. Watercut is now 50%. if you don't understand the terms used here, then you have no ability to judge oil production. Don't let a short term price war fool you about long term geophysical realities.
Your statement is, however, probably true for natural gas thanks to horizontal drilling and fracking. First, TRR runs 13-15% not 1.5%, of resource in place. Second, there is more gas shale both in thickness and in areal extent. Compare, for example, US Bakken oil to US Marcellus gas. Most of the China shales are beyond the oil window, so will produce gas if not folded and faulted like parts of the Sichuan basin. Second largest shale gas resource in place after North America.
“needing replacement from new conventional (e.g. Deepwater, Arctic) or unconventional sources”
And that is precisely why we have not reached peak oil, and won’t for a long time.
The peakers keep insisting that we only look at proven and developed sites, and yes, these sites do run down after awhile, however they are being replaced by new sites at a consistent click and new technologies are allowing us to extract oil from places that weren’t possible in the past.
MarkW, no. What part of basin creaming curves or probit transforms on all of discovery history have you not understood?
Or, you think the USGS is wrong? Then please show your geological math homework.
Thanks for the info ristvan. That is some interesting stuff. I’m googling the terms and seeing your point a lot more clearly.
So the recoverable heavy oil sands in Alberta (approx 178 billion barrels)and the Orinoco belt (approx 235 billion barrels) won’t help? I can see it taking a long time to bring on line and huge investments required.
Just looking for your thoughts on it because I’m just a curious amateur.
Thanks again.
World is consuming some 35,000 million barrels a year. The combined Orinoco and Alberta reserves are 178,000 + 235,000 = 413,000 … which divided by PRESENT demand is what… 12 years supply for world?
Not that the world would be dependent on this resource entirely.
But the picture is similar for the combined resources. We throw around “billions” of barrels, we must also consider the billions-per-year we consume as a species.
Look at the very useful Wikipedia page: https://en.wikipedia.org/wiki/Oil_reserves on this. Midway down are countries lined up by proven reserves, and the span-of-time that those reserves would last at an UNaccelerated consumption rate. 65 years for the world. Unaccelerated. Probably closer to 40 years, if we consider the acceleration of economies.
But it could be WAY longer – if we make the transform, worldwide, to electric-powered vehicles and stepped up non-fossil-fuel power production. More nuclear, wind, sunlight. Geothermal too. (It is oddly enough not really ‘renewable’. Steam fields become depleted over time. They’re kind of like coal mines that way.)
There’s PLENTY of power if we just buck up and get serious about using it. Leave the oil – especially when the neck comes around – for petrochemicals, which are way more valuable than burning the stuff.
GoatGuy
i do not know how much oil is left but i do know how much has been used .
About 220 cubic kms, that’s a cube 6 x 6 x 6 kms. that’s all.
there are references for this and you can work it out yourself.
Istvan, the distinction between “conventional” and “non-conventional” oil is much more blurred than some people would like. Ad absurdum, all oil that doesn’t just gush out of the earth by itself is non-conventional.
I recall reading that shale has a break point at about $50 (might have been $40?) a barrel of oil. Meaning if oil is below $50/barrel, shale is no longer cost effective to produce?
It depends on the shale play. They are all different. Even if a play becomes non-economic, any activities that make money on a “cost-forward” basis will continue.
The problem with Mr. Peiser’s analysis is that the Napoleonic retreat of drilling rigs will lead to a sharp drop in US production so long as prices remain below $50-75/bbl. Shale or any other type of oil producers don’t have the “ability to quickly throttle down or ramp up upstream investment spending, drilling and production, as oil prices change.” I rarely disagree with Mark Perry; but he is dead wrong on this. It will take a sustained rise in prices to bring the capital back in.
Your point is well-taken – exploration will dry up (pun intended). However, wells already brought in can continue to pump oil without a drilling rig, and at a much lower cost than exploration cost. Probably not economic at ~$US30/bbl. however.
Add the fact that fracked well decline curves are on the order of 85% after three years! Saudis know this. And except in the Permian, the break even on new shale wells is more likely between $60-70/bbl. For deepwater and Russian Arctic, over $100. So US shale will come back before more GoM and Brazil subsalt deepwater, and before Russia can put its 5 giant Yamal discoveries into production. This will likely become clearer by yearend, despite what the Iranians might try to do.
Can’t wait for the Gas prices to drop. I heard it reported that Oil prices were so low that you have to go back to 2002 to find lower prices and 2002 had gas at below $1.50 per US Gallon
I would expect that this is exactly what the Saudis want and that they have calculated this move to put the fear of god into North American shale e & p companies and those who finance them in order to introduce longer term financial risk into the shale production business. When there is sufficient blood in the streets and the U.S. shale industry has destroyed a great deal of investor money, the Saudis will adjust their production to promote a price increase while constantly reminding the world that they can do it all again any time they like. Their hope is that this will keep investment out of shale sufficiently to restrict production and allow them to pump at a high rate at higher prices. Pump softly and carry a big stick.
Paying attention to politics, john harmsworth, the Sunni’s (Saudi Arabia) have no love for the Shia (Iran); witness the recent beheadings in SA …
_Jim: Listened to an analyst today discussing the thawing of relations between Iran and the US. The Saudi’s are Sunni minority fiefdoms with a population that has no experience in democracy and have demonstrated an anti-western bias. The Iranians have a very old Shia leader who will be gone in the near future; but the population is familiar with western ways and democracy and generally pro-western outside of the religious doctrine. Generally a well educated, industrialized society being courted by the US as they can be an ally in the region. A very quiet courting but a courting nevertheless. WIth Syria/Iraq/ISIS we have the Saudis, Russia, the “Western Allies” and Iran all lining up in different ways along with nearby neighbours Pakistan, India and China watching carefully. There is a big poker game going on and it isn’t all about oil and gas but geopolitics. I imagine oil is just one of the poker chips being used.
Looking at the crude oil futures, I see the Feb 2016 contract is selling below $28 today. The contract will expire at the end of day and roll over to Mar 2016. What is interesting is that fills an open gap in the chart from 2002. It could signal that it is near a bottom in price.
Barack Obama’s war on coal, supported enthusiastically by Big Oil, is important too, at least in a US context. By forcing coal-fired power stations to close, Big Oil can sell their gas to the gas-fired power stations that replace them. All this hoo-ha about renewables is just hogwash – the main game is gas vs coal. That’s why Big Oil funds the climate warmists; the exact opposite of what the warmists claim.
And some of us have been saying that for years, Mike, but no-one was listening.
And the greenies are too obsessed and too stupid to understand they’re being fooled all along the line.
They also love being handed carbon dioxide from the new IGCC coal plants (carbon capture) which are built next to oil fields. Free gas to inject and use for enhanced oil recovery..
that is the break even price for a new well. however a well that has already been drilled and completed and put on production likely still generates cash ($ received greater than opex + taxes) but won’t recoup the capital very quickly). so it still makes sense to produce that well but not to drill a new one.
Seems to me, best I can recall, the shale fracking produced a lot of NG. NG and oil are not significant marketplace competitors because they are not easily interchanged.
Oil is used to make gasoline/diesel/jet fuel for transportation, NG is not. NG is used primarily for power generation, oil is not, and space and water heating. Oil is not used for power generation.
All Btus are not equal. Energy sources are not simply interchangeable.
Most gas wells produce some liquids and most oil wells produce some gas. While the commodities are not interchangeable, the are not mutually exclusive.
That all depends on where. The oil window for catagenesis is crucial. So for example, the westernmost portion of the Utica shale produces mostly oil. The eastern 2/3 will only produce gas. A transition zone in sw New York would produce both, except New York put a moratorium on fracking.
So, we profit by ‘drilling’ New York and pumping out dollars by selling them gas from out of state …
Win.
Nicholas Schroeder:
Natural Gas is used to make lots of the products you use every day, not just heat your house or run a nearby power plant. (Along with other petroleum distillates.)
http://www.chemicals-technology.com/projects/joffre-ethylene-polyethylene-plants/
This article misses the elephant in the room. Wall Street packaged boatloads of cash for the drillers just as they did for the housing boom. Not a single small to medium shale company drilled on its cash flow. They drilled on cheap money. That money is going to written down, some 250 billion of it.
The idea that there is a supply of new dumb money is deluded. The forward strip will have to exist to lock in the entire production cost, otherwise the money will not be there. Then there will be delays as crews have gone home, equipment scrapped and cannibalized.
Thus OPEC still controls the game. They will pick a price that allows a very slow growth of shale, in the sweetest spots, but no more. That might be $60 a BBL. The $80 oil sands and $100 deep ocean is dead. OPEC will be able to grow at $60, so will Russia and Canada, with their devalued currencies. The USA will not see a repeat boom in shale. Say good by to that Wall Street bubble, like for housing, unleashed when Clinton go rid of Glass Steagall Act at the last minute of his term in office.
Yep.
…and they will figure out a way for us to pay for it again
Good points, ECB, about the easy money flowing to the frackers in recent years. From what I understand, the OPEC Saudis’ oil extraction costs are at around $9/bbl. So any price above that $9 is still profitable to them. Now, their national expenses to keep the citizenry satisfied under the Saudi dictatorship likely depends on world oil prices considerably above $9/bbl and likely well above the roughly $29/bbl we see today. So don’t be surprised at the financial and political capital flowing from OPEC to anti-fracking NGOs to help flatten OPEC’s competition.
PauH – I believe Saudi (and Iran) need $80/bbl to balance their budgets due to all the citizen subsidies and need for armaments. Saudi has a war chest but it will run down in a few years so they will have to allow the price to gradually increase. The break even point for oil production is irrelevant if your financial needs depend on a much higher oil revenue. Saudi, unlike Iran, has no manufacturing base so they will need the price of oil to rise in the next five years. The Saudis are rapidly depleting their reserve funds at today’s oil prices. This looks like a game of chicken on a global scale.
Not sure how good these references are as it seems all recent forecasts on just about everything miss the mark:
http://www.platts.com/latest-news/oil/dubai/saudi-arabia-needs-85b-brent-to-balance-budget-21992779
http://www.reuters.com/article/imf-saudi-budget-idUSL6N0RP47K20140924
Dumb money never peaks. Greed makes investors stupid. It’s human nature.
Yep
I’ve read an analysis that says Russia’s break even is at $100, not $60. Today’s prices are going to hurt Russia deeply – things are going to get ugly there.
Perhaps to run their government with a surplus but most Russian fields in production are okay at $40. The new discoveries in the Yamal are expensive and close to $80. Not developed yet and won’t be (they’ll just keep that one lonely tree company for a while yet).
PS. Iran’s cost is less than $9 and still profitable for quite some drops.
to: ECB
Meanwhile, progress continues on *other* energy fronts, such as detailed here:
https://youtu.be/IQ3S3YMH96s Nota Bena: 1 hr plus video (and ignore the refs to GW)
The 1 year test on a Rossi E-Cat plant finishes up this coming February.
.
A quick addenda and errata:
Mats Lewan • 3 days ago
Thanks everyone for your interest in my presentation. Unfortunately I had not prepared enough and forgot two thing that I would have liked to mention, so let me add them here:
1. When scientists say cold fusion is impossible according to known laws of physics, since you need millions of degrees to overcome the Coulomb barrier (electrostatic repulsion between the positively charged nuclei), this ‘fact’ refers only to fusion between two nuclei moving freely in vacuum. However, ‘Cold Fusion’ (we don’t even know if it’s fusion, just that it must be a nuclear phenomenon) or LENR, occur in solid or possibly liquid matter, meaning that the conditions are significantly different.
2. The experiment by Rossi that convinced me most (one of the four where I made the measurements) was on October 6, 2011, when the E-Cat, after a few hours of start-up, was put in ‘self-sustained mode’ meaning that all electric input, except for the control system, was detached, and the water inside the E-Cat continued to boil for almost four hours, even though fresh water was continuously added by a pump. You could feel the boiling inside, output temp was 114 degrees centigrade, and the temperature on the surface of the well insulated E-Cat remain around 60 to 85 degrees centigrade. Try to repeat that without adding heat! Only possible if you had heat stored in melted salt inside, but Rossi opened the E-Cat after the test and there was no such thing inside. See also: http://www.nyteknik.se/nyheter…
Another detail: Energy released per atom through fission is larger than from fusion, contrary to what I said. The reason is that the diagram I showed illustrates energy per nucleon, and large nuclei (releasing energy through fission) contain a high number of nucleons whereas small nuclei (releasing energy through fusion) contain few nucleons.
Thanks everyone for your attention.
http://www.e-catworld.com/2016/01/16/video-of-mats-lewan-lenr-webinar-jan-16-2016-richard-b-fox/#comment-2463569057
“The 1 year test on a Rossi E-Cat plant finishes up this coming February.”
Yeah. Uh huh. And I’m sure it will all be verifiable and the technology available to anyone. 5 KW E-cats were supposed to be demonstrated and available for sale 2 years ago. Rossi is selling unicorn oil.
I was just talking with a Wall St guy tonight about this very subject – all the debt that fueled the shale boom (which was fueled by the low interest rates post the housing crash & the fed’s QE programs) is largely collateralized just as housing loans were. If you are wondering why the stock markets are slavishly following the oil market, look no further – the financing bubble for shale is bursting …. and taking the stock market with it …. and unlikely to repeat ; just as the housing bubble is unlikely to repeat anytime soon, the shale bubble will not return either … and with out continued WallSt support, shale 2.0 will not happen.
Fortunately, the US oil industry is atomistc and quite nimble. The Permian basin in Texas is profitable down to $20. We have been to $20 before and recovered quite nicely. Mills is right.
Permian basin is, however, a ‘drop in the bucket’ of global oil production. You have to also consider the US Eagle Ford, Niobrara, and Bakken. I excluded Barnett because horizontal drilling dropped there starting 2008. Production peaked in 2011. Just playing out.
We will figure out ways to stay in business. Costs have already dropped rapidly. Rig rates in some cases have dropped so far that they barely cover insurance.
However, two things will happen:
1) Production will drop
2) Proved reserves will drop.
With shale production especially the technologies don’t stand still. We don’t know the breakeven for various shale plays with today’s array of technologies, though we know more of breakevens with technologies in use for four or five years.
Consider a couple examples. Rob Bradley of Master Resource writes on “refracking” in this August 2015 post: https://www.masterresource.org/resourceship/re-frack-resourceship/ He quotes for a Houston Chronical article “Oil tech firms see shale resurrection with re-fracking”
Other articles look at deep-earth microbes to boost fracking yields (and other microbes to help clean up the various messes from drilling).
For Canada’s oil sands, advancing technologies have taken over 50% of Alberta production underground (in-situ bitumen production), reducing open pit mines. Plus 80% of oil sand resources are too deep for surface mines. Other cost reduction is discussed here: http://www.albertaoilmagazine.com/2015/09/the-future-of-the-alberta-oil-sands/
Again through, these are just a couple new technologies from a couple years ago. Who knows what dozens or hundreds of innovations are being tried today across U.S. shale oil and Canadian oil sands deposits. And who knows what newer innovations are “in the pipeline.”
Plus the far-left President of Argentina was recently replaced with a pro-market President. Argentine shale-oil development will ramp up. Dow invested $500 million in December, 2015 to drill 19 Argentine wells. Development will be much slower at much lower oil prices.
Investors know (or hope) the demand side will return with further market reforms in China and India. Two billions more drivers will be taking to the roads over the next couple decades.
Refracking is more hype than geophysical reality. At least so far.
Besides Iran coming into play, Paris may have changed OPEC’s strategy. At one time, the idea of conserving the oil until the price was high was a good one, but now the idea might be to sell as much of what’s in the ground before no-one wants it.
Or another way to look at it is from a traditional government pension plan with a 50 or more years investment horizon. Two to four years of head butting is not so long in that context.
The companies that drilled the holes in the ground may go bankrupt, but the holes are still there.
As soon as prices start rising again, production from those holes will resume. If prices rise by enough, new holes will be drilled.
OPECs strategy is self-defeating. They are losing lots of money, for no long term gain.
Those holes are still being pumped and depleted. Some leases held by that production have adjacent units that have not yet been drilled. Maybe the fracking costs can come down a bit, so somewhere between 35-45 in some fields. Production outstripped demand, pure and simple. Cushing, OK is filling almost every week, even with rig count sinking.
http://marketrealist.com/2015/12/cushing-crude-oil-inventory-hits-90-storage-capacity/
The point is, a lot of money bet on leases and drilling came in too fast to react to the onrushing glut in USA.
Saudis, and soon Iran, apply more instant pressure for the rest of the world. Price recovery may happen, but investors wary lessons learned.
The Saudis have no choice but to turn down the taps. Their economy needs 80 dollar oil.
They may need $80 oil, but they still have no control over what the rest of the world is doing.
At $80 there are just too many people who are willing and able to increase production.
It’s my understanding that the production curve on a fracked well drops off rather steeply after the initial burst. Worked for a couple of “new rich” people from the Austin Chalk play around Giddings Texas–wasn’t too many years before they were wishing they hadn’t spent so much of their new found wealth on obscenely large houses out in the middle of their pastures.
So yes, the holes are still there, but I believe the frack oil boom depended on an ever growing supply of new holes–which is what is not happening now.
I think it’s worse than that. In a lot of fields, the oil pays back the drilling cost in two or three years, but natural gas is almost a by-product, and depletes even faster (dollar value) than the oil. Not too many fields where fracking for natural gas can ever pay the costs. This means the gas supply, a growing component of our electric production, may fall off quickly, now that the rigs are idle. Even if natural gas goes to 15 (6x), I doubt if you can frack it profitably, especially if there is no place to put the oil.
One way to look at that decline curve is quick pay-out. The wells come on very strong and you get your money back fast. This allows the whole thing to ramp back up quickly if prices rebound. We used to drill anything with a three year payout, but many of the shale wells paid out in one year.
After the initial flush production they decline to a low rate of production, but the end curve is very flat. Many of the production forecasts assume a steady 10% decline to zero but actually these wells will hang around a long time, and refracks and the desire to hold the lease will produce a more robust base than anticipated.
It doesn’t work that way… Not even close.
Wells won’t be shut in unless they can’t cover operating costs. However, without new drilling, production will decline. All wells decline.
In the Federal waters of the Gulf of Mexico, once the Fed’s deem a well to be uneconomic, they force us to P&A it.
Thank you Dave.. a common misconception is that you can just shut a well in and wait for prices to rise. Once you stop producing, you lose the lease.
Dave and Doug – Shut ins – That may be true for some wells and for the US. I live in an area where there is an oil or gas well in just about every quarter section. My old farm land has a well on it that was drilled in 1952. A service rig comes in every couple of years. The pump jack is huge so I assume it is a good producer. There is another small pump jack about 400 metres up the road from me that gets serviced twice a year, and has been producing for about the same period of time. There are three wells to the south west of me and another two to the north. An oil company cleared two large leases 18 months ago, one about 600 metres to the south of me and the other 2000 metres north that were drilled with one well with 5 to 7 more planned on each sites fanning out with horizontal drilling. There is another one 1600 metres to the west that they have had trouble controlling for the last 3 years but has valuable condensates. They stopped developing the sites due to the drop in oil price. I am surrounded by “Crown” land (public) on three sides and I can ride a horse a hundred miles out my back door. There are lots of SHUT IN wells due to lack of pipeline capacity and they are not lost to the owners as there are many abeyances to the “rules”. There are also a lot of pump jacks that have stopped pumping. I assume that they just aren’t worth the cost of running or they are using pipeline capacity for the better quality wells.
This has happened before, and it will happen again. It wasn’t so long ago that NG was $8+ (2005 – 2008) and oil was $10 (1998).
My last propane bill was almost a quarter of what it was two winters ago. Even my power bill has gone down with the slowing economy and more Natural Gas generating capacity on line for the “expected” growth in Alberta that has turned into a fast shrinking economy.
Hold on to your hats, the ride is getting bumpy.
Low gas prices are probably the main reason that the USA economy is better. Instead of having to pay $50+ to fill up your tank you can use that extra $25 to buy other things – like food and other consumer goods. For every 1 person who is loosing money because of low oil prices, there are probably 1000 people gaining financially (able to spend that hard earned money on things other than gas).
losing
Check price elasticity of demand. When supply exceeds demand, prices go down. When supply equals demand, prices stabilize. When supply is less than demand, prices go up.
Reports are that Venezuela has the largest oil reserves and, apparently, one of the worst governments. Nicolas Maduro just declared a 60-day economic state of emergency. Other countries that also use oil to finance the government need the price closer to $100 than to $50 or so. I’m guessing about the numbers because I don’t believe anyone really knows what goes on is some places – think of the scandal at Brazil-owned energy corporation Petrobras. I wonder at what cost and how much such countries could produce if the national oil companies were run with the efficiency and transparency of, say, Costco or Amazon?
JH, you are right but there are two problems. Most of those reserves are the Orinoco belt tar sands (<API 10, not to be confused with Canada's Athabascan bitumen sands). Very costly to produce using steam flood or SAGD. Very sour, complicating matters via corrosion.
And they have to blend in light oil to dilute it and reach a salable product.
There are reports that many shale oil producers sold forward output at up to $90 a barrel and are currently living off artificially high prices.
This will not last forever (in fact not much longer). Prepare for significant additional loan defaults in the shale sector over the next few months.
Once production stops it is not quickly brought back on stream as the process is complex – involving equipment, infrastructure, refining, transport, people etc.
With the probable reluctance of banks to refinance an enterprise which has already proven its capacity for default through dependance on uncontrollable world market conditions, restarting the industry, once stopped, will be the work of years not months.
$90 hedges are way back in the rear view mirror. Companies are lucky if they have $60 hedges over 2016… very lucky.
I’m one of those guys and am sold forward at 45. No, it won’t last forever, but at least I don’t owe the bank anything. Barron’s had an interesting article over the weekend claiming the JNK ETF has become a proxy for the health of Independent Operators. It’s at an all time low. Also, because bonds are a thin market, they tend to become mispriced, so the portfolio could really be in deeper trouble than the JNK daily quotes suggest. Time will tell, but I think it will be a few years before Fracking 2 starts.
I find it a bit amusing that the pundits continue to characterize what is happening as Saudi Arabia and Co trying to squeeze out shale and oil sand plays in NA. There is a nasty proxy war being waged by Saudi Arabia against Iran, and one of the indirect methods for Saudis to hurt Iran is by making sure they get he least possible benefit from the lifting of sanctions.
The Saudi oil minister(?) stated when Saudi Arabia started flooding the market that the targets were Iran and Russia. I have no reason to doubt him. [Sorry no link but it should be easy to find]
The U.S. is an important ally of the Saudis. He’s going to be careful what he says. These guys never just throw off comments. It’s all carefully calculated.
john harmsworth January 19, 2016 at 11:53 am
The U.S. is an important ally of the Saudis.
The Saudis no longer believe that. They were as furious over the Iran nuclear deal as Israel, they just weren’t as public about it. They feel completely abandoned by the US, and this shows in everything they are doing right now. They even reached out to Pakistan, who has quietly (or not so quietly if you happen to be paying attention) announced that their nuclear umbrella now extends to Saudi Arabia and Iran had d@mn bloody well take not of it.
davidmhoffer: Considering SA have been subsidizing the spread of radical Islam for decades, they deserve to be abandoned.
Correct, it fits the US government policy versus the BRICS, it’s geopolitical battle thru economic means.
I have the memory of several very sincere people in the 1970’s preaching that shortages and ever rising prices were inevitable.
Shortages and gluts are just as inevitable as cyclically rising and falling prices.
In the late ’90’s oil was $10 a bbl. Within a decade it was $140. Both could easily happen again. As always, timing is the hard part.
Then there are the not sincere ones that preached shortage and one direction resource depletion as a means to an end in selling high cost alternatives. They did the same in court and public utility commissions with uranium shortage as the tool around the time uranium discoveries in Canada and Australia shut down must other producers with over supply. Chalk those times up as more meaningless win-the-day courtroom battles. Such ploys work in a general environment of resource sector ignorance.
A considerable number of wells not profitable at the moment have already been drilled and fracked. Just waiting for the spigot to be turned again.
Wrong.
Agreed !
It’s not that easy. All sorts of bad things happen to wells that aren’t flowing.
Actually they are drilled but not yet completed. Which means they haven’t been fracked yet. It would take 2-3 months to complete the well and get it flowing.
I worry that the low prices will reduce supply to such an extent that the markets will totally over react when supply < demand. The market is setting up the mother of all rallies for when supply < demand. In the meantime we are seeing destruction of what used to be solid oil companies. It's not as if fossil fuels are fungible, they are essential for heating, transport fuels, fertilisers, plastics and electricity generation. The over riding takeaway for me as an investor and a human is that even after all the decades of R&D wind, solar and wave/tidal power are just crap alternatives. The low oil price is a tragedy in waiting.
It’s just a commodity. That’s what commodity prices do.
Irony. One of the drivers of the shale play has been restrictions on coal mining here in the US.
LOLOL!
Now let’s talk about the coal play. Both from the perspective of sane use of coal and from the perspective of complimentary deposits of gas and oil.
I would love to see coal totally unleashed. Then we might actually get electric cars and there would be further downward pressure on oil. And stop squandering the natgas bonanza on electricity. In any event, let the market decide as it used to do. BTW, bring back mountaintop removal. WV and KY are unglaciated and need all the level land they can get.
Wishful thinking by OPEC if they think they have ‘defeated’ fracking. The genie is out of the bottle, fracking and horizontal drilling technology cannot be un-invented. As soon as the price of oil goes back up, it will kick back in again. Bottom line is that the effective OPEC global monopoly has been broken forever.
The Saudis can’t defeat fracking… But they can and are doing a lot of damage to US oil companies.
BL, not sure. There is significant misunderstanding about technically recoverable reserves, compounded by MSM ignorance about the geophysical issues involved.. For example, it is true that the Bahzenov shale in Russia is the worlds largest by areal extent. But it also true that it is yhe source rock for western Siberia’s massive conventional fields, so naturally fully depleted in a swath about 80km widee and almost 1000 km long. Confirmed by drilling. Its detailed stratigraphic geology is much less favorable than Bakken. EIA erroneously estimated TRR at over 80Bbbl. More realistically calculated, Bahzenov does not have the potential of the US Bakken. I was able to find Russian geology reports with English translations to help document the details in esssay Matryoshka Reserves. My own view is that there is a lot less potential shale oil than people think. Even at prices above $100. Oil window versus gas, source rock natural depletion into overlying conventional reservoirs, folding and faulting, frack target zone thickness,….
Ristvan,
You might be right about ‘easy access’ shale oil reserves being over-estimated. However, the technology is constantly improving so the pressure on OPEC is not going to ease any time soon.
Ironically, the think most likely to save OPEC is a collapse of the CAGW movement causing an explosion in demand for oil once all the false reasons to reduce consumption go away!
The Saudi’s may be able to produce oil very cheaply but the cost to run their country is over $100 a barrel. They are bleeding money keeping the price down so it will be interesting to see how long they can keep the price down before having to cut production to bring the price back up. Also factor in their war costs on top of just running the country. As Iran ramps up they may stick it to the Saudis if the Saudis try to cut production.
The Saudis started out with a LOT of money to burn.
They are out to reestablish market share.
Money earned is volume multiplied by price.
Yes, when Saudis restrict prices they get more per barrel, but at the same time they are selling fewer barrels.
Volume times (price-marginal cost).
The Saudis will bankrupt Venezuela and Brazil long before the shale plays are shut down. And they will send Russia into a prolonged recession beyond what is in the books for 2015. Meanwhile the activist lines about Peak Oil are wrong again. They never had the education in the first place to see the risks in their pronouncements, i.e. the problem of uncertain and open ended resource potential. Neither did they stop to think that government or international energy agencies don’t have all the answers and are reliant on industry data and other risk takers to revamp the knowledge base.
They won’t shut the shale plays down. But they will drastically slow down the exploitation of them.
The other point is the restart and reinvestment times in the shale plays is almost instantaneous compared to offshore, Siberia, and other difficult logistics cases.
http://www.wsj.com/articles/after-the-carnage-shale-will-rise-again-1453162664
Resourceguy:
Do you really think Putin will stand by and allow that? His jets are in Syria. How long before an accident happens – and I don’t mean a bomb, something much more subtle. This is geopolitical as always but I believe we may be on a bit of a knife edge balance. Obama is looking for his “legacy” but so in Putin. I don’t think Putin will not allow Russia to go into a prolonged recession based on comments from people who know him. We are in a dangerous game at the moment.
my opinion is that oil is made by the earth 24/7……wells thought to be dry decades ago have refilled all around the globe.
People tend to think of oil wells as being a big underground chamber that is filled with oil waiting to be pumped out.
In reality is hundreds or thousands of cubic miles of rock with small pockets of oil throughout it. When a well is drilled and oil is pumped out, the oil in the rocks begins to flow towards the well. It takes time for that oil to reach the well. Just because they stop drilling does not mean the rocks are empty of oil, nor does it mean that the oil will stop flowing around inside the rocks seeking a new equilibrium.
Of course wells that are “tapped out” will still continue to accumulate oil, but that’s not evidence that the “earth is producing oil”.
And when all the oil is pumped out, the bearings of the Earth will seize up, and the Earth will stop rotating. Then we’ll be really doomed.
BT, the abiogenic oil hypothesis has been disproven multiple times. Mind, abiogenic natural gas has also been proven under unusual geological circumstances, the largest being methane clathrates at the bottom of the Fram Strait. Study up these hints, and learn.
I wouldn’t characterize it as “disproven.” There is just no evidence of any significant accumulations of abiogenic oil on Earth.
DM, our technical vocabulary might differ. I’d just say that with respect to abiogenic oil, nothing has ever yet been truly found. And there are good geophysical reasons nothing ever will be either.
And Titan will be revealed as a dry hole.
Oh, wait …
Not if “that president” is either Hitlery or Comrade Sanders. With Obozo 2.0 embodied in one of those National Socialists, Shale 2.0 can (and will) be murdered a-borning.
re: “Not if “that president” is either Hitlery or Comrade Sanders. With Obozo 2.0 embodied in one of those National Socialists, Shale 2.0 can (and will) be murdered a-borning.” Tucci78
Do not expect that the “things will continue as is.” A great reckoning is approaching. The Liberal/Socialist experiment since 1789 in France is running out of steam. The USA is not 20 Trillion in Debt but more like 200 Trillion if accrual accounting is applied rather than cash accounting. The rest of the 1st world is nearly as bad or worse. The quality of our “leaders” is abysmal, we have achieved Democracy (Aristotle’s rule by fools) and the teeming masses of the third world are arriving in the millions to get their “free lunch.”
Dan Kurt
1. The market seems to work. The price seems to close at what the marginal demand purchaser is willing to pay and the marginal consumer is willing to buy. There is a lot of oil at higher and lower prices moving around on contracts with other risks and costs hedged.
2. Even mothballed, US frack fields, and mothballed coal, allow us to know that we are capable of energy independence with very short lead times. Our “energy blackmailabilty” is much reduced.
3. Europe has a bigger problem with cheap hydorcarbons to the degree they have actually committed to renewables: The cost equation is worse and will impact standards of living.
4. The winners from lower energy prices are quietly banking profits and rebuilding balance sheets — the losers are screaming. At Higher prices, the roles are reversed. At high prices politicians scream about vampire oil companies. Their sympathy for the current price pressures is noticably absent.
5. Coal is still pretty useful; absent carbon foolishness it can be burned pretty cleanly. A powerplant, a mine, and a unit train are awfully reliable, low cost, long term energy providers. What comes out of the stack is steam and co2. Absent co2 stupidity, 300 years of application engineering is behind coal as a pretty useful fuel. There is an example in Apollo beach Florida. The biggest public nuisance in having to wait for the train —
110 cars take a while.
6. Solar and wind apologists still have to decide what to use for dispatchable backup – . grid maintenance plants. I predict economics will eventually trump politics. Promising people higher electric rates and unreliable power is probably not a great long term career move, except in California;<}
Richard I., re your bullet 6:
Solar and wind have no real practicality to utilities as they require so much area to produce such a small amount of power on a part-time basis. The only practical applications are at the consumer end to reduce consumption from the grid when conditions permit. The expansion of the grid and erection of DC main lines to facilitate remote and non-continuous generation in piddly amounts is a foray into the ridiculous.
I think that if the USgov wants to subsidize these avenues, it should be at the consumer end, so that J.Q.P. can also invest and reduce his reliance on the grid whenever possible.
I worked in the Bakken and Eagle Ford formations for almost 5 years. Friends of mine still there see signs of increasing activity regards frac crews. One company in the Bakken is putting 4 new frac crews together right now.
Why the new activity with oil now under $30/bbl? That’s the $64,000 question. All my friends, including an ex banker, can figure is the old “maybe someone knows something ” cliche. Or they’re betting on the situation in the ME to get worse and curtail supply.
Either way, interesting times.