Economist Foresees “Quick Decline” in US Oil Production

Guest gainsaying by David Middleton


U.S. Oil Production Is Headed For A Quick Decline

By Philip Verleger – Mar 11, 2019

The most recent forecasts published by the US Energy Information Administration show US oil production increasing steadily. The February Short-Term Energy Outlook sees the output from US wells rising from 11.9 million barrels per day at the end of 2018 to 13.5 million barrels per day by the end of 2020. Most other forecasters agree.


Thus, it may come as a surprise to learn that production at the end of 2020 may have actually decreased from December’s 11.9 million barrels per day level to between 11.3 and 11.5 million barrels per day. This lower figure represents the production level that should be expected given the financial activity of the independent firms behind the shale output surge.
The coming decline will occur mostly in the areas that have produced the most growth over the last five years: the Bakken, Eagle Ford, Haynesville, Julesburg, and Permian basins. The production drop will occur because the firms operating there have been forced by monetary constraints to cut back on drilling. The recent reduction in debt and equity issuance by these firms assure the output decline.

[…]

These firms will also enter into hedges as soon as the size of their new discoveries is delineated. The futures sales will likely occur when wells are completed and before they are fracked to ensure the company can cover costs and perhaps profit, even if prices fall.

[…]

Oil Price Dot Com

Maybe I’m just being picky…


The coming decline will occur mostly in the areas that have produced the most growth over the last five years: the Bakken, Eagle Ford, Haynesville, Julesburg, and Permian basins.

The Bakken, Eagle Ford and Haynesville aren’t basins. They are located in basins. The Haynesville is primarily a gas play. The “Julesburg” is generally referred to as the D-J or Denver-Julesburg Basin.


These firms will also enter into hedges as soon as the size of their new discoveries is delineated.

Shale players generally don’t make discoveries. They’re called resource plays for a reason.


The futures sales will likely occur when wells are completed and before they are fracked…

What happens if you frac a well that’s already been completed? You frack up the completion. Frac’ing is part of the completion procedure. So-called “DUC” wells, the wells that have been drilled, but not yet frac’ed haven’t been completed. DUC stands for “drilled uncompleted.”

Am I being picky? Or are those points pertinent to Dr. Verlenger’s prediction? It is possible that he was just simplifying the language. And he wasn’t necessarily calling the Bakken, Eagle Ford and Haynesville basins. But the Haynesville is a gas play, a fairly dry gas play, with only about 0.25 bbl of condensate yield per million cubic feet of natural gas produced.

Dr. Verleger appears to be a brilliant, highly educated person. He has a PhD from MIT, served on President Ford’s Council of Economic Advisers and ran the Office of Energy Policy at the US Treasury during the Carter administration… But, does he know anything about oil?

I don’t have time to check every prediction he has ever made, but this was the first one I found on the Internet…


September 28, 2009

Oil market “teetering on the edge,” warns Verleger


Are oil prices about to take a dive? Analyst Philip Verleger thinks so. “The oil market is teetering on the edge,” Verleger said in a report. “Prices will fall sharply absent immediate and dramatic action.”
Citing poor refinery margins, Verleger argued that producers need to cut crude production. “Some country or combination of countries needs to reduce output two million barrels per day,” he said. “The cuts should take effect October 1, 2009.”


Because margins are so poor, demand for crude will sink, and prices will not hold in the $65-75/barrel range cited by technicians.

[…]

Platts, The Barrel Blog

Dr. Verleger was sort of correct. Prices did “not hold in the $65-75/barrel range cited by technicians.” They rose above that range for the next five years, fell below it for four years, traded in the range for about a year, fell below it again and appear to be rising back to it. The average price for WTI (West Texas Intermediate) since September 28, 2009 has been $73.84/bbl.

Cushing, OK WTI Spot Price FOB (Dollars per Barrel) since September 28, 2009. US EIA

Dr. Verlenger’s current prediction is based on hedging activity…


The decrease in open interest anticipated the future drop in production. In our view, drilling firms that were forced to curtail activity also curtailed sales of future production, understanding that they would produce less.


These declines were mirrored by a drop in the short position of swap dealers—the financial institutions that write bespoke hedging instruments to producers. The reduction in hedging in 2014 and 2015 led to the later decrease in production.


The same phenomenon is occurring today. Total open interest has fallen by twenty percent, as can be seen from the figure. Swap dealer short positions have also contracted. The message is clear: producers are hedging less, and they are hedging less because they expect to produce less.


Oil Price Dot Com

Hedging is price-driven. Oil companies layer-on hedges while prices are rising, not based on anticipated production increases. When prices drop, oil companies spend less money, drill less wells and production declines. The puropse of hedging is to protect the bottom line from falling prices


What Is Hedging?


The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn’t prevent a negative event from happening, but if it does happen and you’re properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday. For example, if you buy homeowner’s insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters.

Investopedia

Layering-on hedges when prices are falling is kind of like trying to buy homeowners insurance while the fire department is hosing down your house.

The greatest risk with hedging is that you can miss out on some upside. A lot of oil companies missed out on $70 oil last year because they layered-on hedges too quickly when prices were rising.


Devon Energy Corp shares were down 2.7 percent at $43.78, Chesapeake Energy Corp was down 6.6 percent at $4.41 and Anadarko Petroleum Corp was down 5.2 percent at $69.34 on Wednesday afternoon after they reported earnings per share below analyst expectations.

U.S. shale production has surged in the last two years, buoying overall U.S. oil output to a record of about 11 million barrels per day.

Oil producers use hedges as an insurance contract to lock in a future selling price for production.

Many shale producers hedged second-quarter production at about $55 a barrel, which backfired as U.S. crude climbed to more than $70 a barrel last quarter, the highest level since 2014.

Reuters

Certainly if prices drop below $50/bbl for a prolonged period of time, Dr. Verlenger’s prediction of a decline in US crude oil production will very likely be correct. If prices rise into the $60-80/bbl range, his prediction will very likely be wrong. It all boils down to predicting oil prices and most oil price predictions are wrong the moment they’re made.

As Jude Clemente wrote:


I have learned a very simple truth during my 15-year career in the energy business: one of two things usually happens when you make seriously bold predictions, especially for the longer term.

When the time comes to answer for being wrong, either you are not around to have to respond, or the critics will have forgotten that you ever made the prediction in the first place.


Real Clear Energy

Or as more elegantly stated by Lawrence “Yogi” Berra and possibly some obscure physicist…


“It’s tough to make predictions, especially about the future.” 

Source: First Coast Advisers
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118 thoughts on “Economist Foresees “Quick Decline” in US Oil Production

    • Everybody should know that expert predictions are no better than those generated by a dart-throwing monkey. In spite of that, there seems to be an infinite demand for talking heads on TV. It seems that we are desperate for people to tell us stuff that we know is wrong.

      • The monkeys that I have seen throw something much smellier and messier than darts and that goes for most experts in certain fields also.

        • Forget about the talking monkeys and look at the owners of the circus. They are pulling the levers and are the real conspirators.

      • Since long before the Greeks marched to Delphi to hear the Oracle, people have sought knowledge of the future. A hundred years from now, when the climate is still comfortable for most, oracles will still be in demand, and doom-saying Cassandras in demand most of all, people being largely silly.

    • If you understand the past history of the issue you are predicting about, and make many predictions, 50% may be correct. Then select all the correct predictions and emphasize how astute you have been in the past. You can then sell your knowledge to all the fools for a good price.

      • There once was ploy involved sending 128 potential investors a free prediction that stock x would be down after one month, and sending 128 people the prediction that it would be up.

        The next month, the 64 people of the 128 sent the correct prediction were sent the recommendation that stock y would go down, the other 64 were told stock y would go up.

        After the next month, 32 of the 64 given the correct prediction were told stock z would go down, the other 32, up.

        The next month, the 32 who were sent the correct recommendation were offered a fouth stock pick – for $500.

        Again the respondents would be split into two halves, each given opposite predictions on a stock. Then those getting the correct prediction were offered a fifth prediction – for $1000.

        There are predictions, and there are scams. Look twice befor spending money for a prediction.

    • Sounds a bit like New Year resolutions most people can’t remember what it was let alone keep it for more than a few days, I made one years ago and have managed to keep it and have never gone back on it… What was it you ask?
      Never to make a New Year resolution again and I haven’t.

      James Bull

  1. “It’s tough to make predictions, especially about the future.”

    Not for a clear majority of “climate scientists”. No matter how consistently wrong they are they lose nothing and are still considered “experts”.

    As for oil prices and US production? What is this economists track record?

    • Climate science has changed the forecast game entirely. It makes Yogi’s comment not a joke anymore. At the Senate hearing on climate science data and forecasts a cou0le of years ago, Mark Steyn noted to the effect as to how can climate scientists be so sure of what the temperature will be like in 2100 when we have no idea what it WILL BE on 1950.

      This temperature trace is a living snake like creature with just as much variability day to day in the tail as in the head end. Algorithms continually change temperatures over a century ago, depending on what today’s readings are. How did they sell such an idea to so many hundreds of millions if people. In a world like this with the past in constant flux, one may not know what taxes they may still owe on money earned in 1980 or earlier.

      • Passing thought provoked by your comment Gary. Not just temperature. The past is almost as much of a mystery as the future. Ok, certain well known things happened and can be dated (though not much more) but the rest of it is a mess of interpretations and missing information.

        Joyce’s Ulysses takes a thousand pages to cover a day in the life of Leopold Bloom – not a real person obviously, but the point is clear enough, because the account isn’t overly stuffed. We read it and realise that yes, it’s a reasonable (though very witty) tale of a day – in quieter times.

        In other words, if we had total understanding of the past and present we would be able to predict the future very accurately (though wouldn’t that kick some of the mystery and magic out of this life!) – assuming that the laws of cause and effect never break down, because everything that will happen tomorrow has antecendent causes working through the present out of the past, in a non linear, multiply coupled way, funnily enough. . . .Thought I’d just throw that in for your snake to wrestle with.

        • In other words, if we had total understanding of the past and present we would be able to predict the future very accurately…

          Only if the Universe is deterministic.

      • It’s an industry secret. The formula for frac’ing is locked up in a vault in Midland. Only US oil companies with secret decoder rings can access it.

        Did I need a sarc tag? 😉

        • It may not be all sarcasm. At least according to friend of mine, who makes a very good living as a directional drilling consultant, both that and fraccing is still to some degree an art and not an exact science. Some people and companies are much better at it than others, and what works best in one play might not work at all well in another.

          • The talent is definitely not equally distributed across the industry, much less the world.

          • Doesn’t matter. The other countries that want to frac will just hire American consultants, like they already do in the oil/NG drilling industry.

          • It is very much an Art. According to Peter Zehan in his book the Absent Superpower, where he spends 1/4 of the book explaining oil development and fracking, what works at one point may not work 10 miles away. It takes people ready to try different things and innovate on the fly. The serious problem with other nations is that ALL of the subsurface resources are owned by the government, and small nimble companies are not allowed, only big companies. Thus the US currently has the corner on the talent necessary to exploit Shale oil and gas. The fact that subsurface resources belong to the government in the rest of the world allows the “greens” to strangle the development of shale oil & gas.

        • There is a secret and that is cost.

          The US drills and completes for a small fraction of the cost of the rest of the world.
          That is the the cornerstone of US Oil and gas production,

          There are others out there that could do it, the Chinese and the Russians but the technology is quite complex and it depends on scale and repeatability.
          The UK’s shale opportunity is massive but you would have to be negative about its future.

      • Apparently it can only be financed and performed in the US and perhaps a few spots elsewhere.

        If it could be exported so easily, why since it is an old technique, and successfully mass deployed in the US for over a decade, has it not been replicated elsewhere? We can only conclude that the rest of the world does not desire energy independence. Alternatively it cannot be done economically unlike conventional, deep sea or low gravity oil that is successfully extracted all over the world.

          • Your arguments might not be wrong. Almost all of the recent growth in global oil production has been from the US. Most of the currently identified resources are in North America. And… we are a lot better at this than anyone else… 😉

          • Pls confirm or correct the following:
            1) China’s unconventional resources are the biggest in the world, by far, and China is developing new fracking technologies. N. American technology is useless or of limited use in China. The reason is China’s resources are much deeper than the rocks being tapped in N. America.
            2) UK unconventional resources have been upgraded recently because tests of drill holes match the best Marcellus wells. Some now think the UK could be self sufficient for 100+ years & export natural gas.

            New subject: Wonder if Dr. Verlenger took into consideration XTO / Exxon plans to slash towards $15 / barrel total production costs for fracked wells in the Permian Basin. The PB is one of the WORLD’s largest hydrocarbon deposits. Just a few years ago, the consensus was fracked wells had breakeven costs around $50-60.

          • And… we are a lot better at this than anyone else…

            That is sort of irrelevant. Arab oil was not extracted by the Arabs. Most countries let large IOCs do the extraction. If there is economically extractable oil and will to produce it, it will be done even in the most backward country of the world.

          • Pls confirm or correct the following

            I apply to climate and oil the same degree of skepticism. I just follow oil production, oil price and the global economy and to me that’s all there is. There is a continuous decline in the percentage of oil that we get from conventional sources and depletion never rests. You are welcomed to believe in the magic properties of CO2 or in unlimited oil reserves. I don’t.

          • Javier,

            Conventional oil & gas deposits are today’s equivalent of the vein deposits relied on for copper, gold and other metals before Daniel Jackling revolutionized mining by developing a massive, low grade copper, lead, zinc & precious metals deposit. The Bingham Canyon mine was so successful it repaid in short order the investment, and it has since been copied all over the world. Thanks to Jackling’s mining concept, copper, gold, and other metal production costs in constant dollar terms are a fraction of what they were before Bingham Canyon went into production. And, quantities are a large multiple.

            In the oil patch, oil & natural gas contained in “tight” formations are large relative to those in conventional reservoirs. Hydrate deposits are even larger. Furthermore, production costs for fracked wells have fallen significantly to date, and costs will fall further in the future. That will overlap efforts to extract more oil & gas from conventional plays long in production. Thus, one can reasonably expect that for at least several more years crude & natural gas prices to fall while supplies rise.

        • What apppears to get forgotten are the resources in N America outside the US, namely Canada.

          Officially the oil sands reserves are pegged at 178 billion barrels but the folks in the oil patch will tell you there is far, far more there than that.
          Then bear in mind that Canada – principally due to the actions of the eco warrior riddled Trudeau government, killing off one pipeline after the other – has not even started in earnest to access its very significant non-conventional reserves – the Bakken Formation for instance, stretches well into Saskatchewan and northern British Columbia has so far remained untouched.
          Both Trudeau and his BC water Mellon/socialist counterparts will get turfed sooner than later and those assets will come into play.

      • Hydraulic fracturing can be carried out anywhere, but the US has unique combinations of geology, infrastructure, legal structure, and personnel, and this confluence isn’t seen elsewhere. This is the reason why it’s successful in the US and it’s evolving slow elsewhere.

        The author of that article is right, and the nitpicking over nomenclature is appropriate although in the end it fails to identify what we see happening: the shale plays can react very fast to price signals, so when the price goes up they get hyperactive and production increases fast, which drives prices down and slows down activity.

        To fix this problem the Texas Railroad Commission can tighten up on flaring rules. This will slow down the response and make the system less chaotic. It will also increase state and royalty owner revenue. And it’s disgraceful to flare gas the way they do it.

    • Javier, did you know that even Romania has oil shales from border to border to border. There is so much of this stuff around the world. Its just that the US (and Canada) are decades ahead of evereryone else on this tech and those outside of N. Am. are governed by marxbrothers clowns. China has huge shale resources but they were unable to produce from them and didn’t show the persistence of the free enterprise folk. They sort of gave up when the tech was still being honed in US. Ultimately they will get there with a bit of help. Basically every oil producing region has shales or tight formations to exploit.

      • “governed by marxbrothers clowns” Ah, yea, that is yayviers point, they want America ruled by the same clowns.

      • It takes more than “it’s an oil shale”. The rock has to be a mixture with enough carbonate to make it brittle (this promotes fractures). It has to be overpressured, the fluids have to be gas, gas-condensate or a light crude (we need energy and low viscosity), it has to be a fairly flat area with little faulting to allow us to drill a fairly long well along the bedding plane, and it shouldn’t be close to a water bearing porous rock (because the water will encroach into the fractures and the well performs poorly). This is a simple overview, but I think it will let you see why most of the drilling for oil is in Texas and North Dakota, but the really good gas zones are in the north east and towards Ohio.

    • Peak oil has been proven to be BS. Oil produced is dependent on 1) economics (price/bbl), and 2) technology. To predict peak oil you need a crytal ball to predict these 2 variables. I previously worked with an engineer from MIT with the same idea that he could predict these variables. We kindly referred to him as a MIT PhD ICK.

    • Give it up dude.
      The present land locked pipeline scarce Alberta oil sands contain 1.7 trillion barrels equivalent reserves, about equal to all other proven reserves on the planet.
      That is until the theory of abiotic oil proves true, then there are an infinity of proven reserves.
      Have you never found it odd that all the predictions of peak oil not only become disproved, but also are disproved by increasing orders of magnitude in the direction of increasing reserves.

      • Doomcryers never give up their prophesies of death&destruction. History is replete with examples of them taking actions to bring about the very results they claim are inevitable.

    • Another, Malthusian dystopian social scientist perhaps. Put it on your bookshelf next to Ehrlich’s “Population Bomb” from 50 yrs ago.

    • The Collapse of Complex Societies is caused by an excess of Tainters in advanced societies. Too many talkers and not enough doers. example Obama vs Trump.

  2. US does not count resources in their inventory – only reserves which may be producing or likely to produce. This has the effect of giving an impression that there is only a few years of production left. The important factor is the resource to reserve conversion factor. Good operators in the various shale plays enjoy a constant conversion rate. Discovery has been made – sustained production is now the key.

    • We’re actually required by law to do it this way.

      In the US. “proved reserves” are the 1P number. This is the minimum volume of oil expected to be produced from a reservoir (>90% probability). Proved reserves go up all of the time without additional drilling because well performance converts 2P (50% probability) and some 3P (>10% probability) into 1P. Changing economic conditions can also move contingent resources into the 1P category.

      As long as proved reserves and undiscovered resource potential remain steady or rise, each barrel of oil produced pushes Peak Oil further off into the future.

      Most reserve additions don’t come from new discoveries. They come from reservoir management and field development operations.

      Reserve Growth

      New discoveries are the brown curve at the bottom of the chart.

      Recently Bloomberg put out a bar chart showing how the size of new oil discoveries has steadily shrunk over the past 70 years. Here’s that bar chart at the same scale as global crude oil production and reserve growth.

      There’s an old saying in the oil patch: “Big fields get bigger.” The biggest field in the world, Saudi Arabia’s Ghawar oil field was discovered in 1948. When first discovered, the estimated ultimate recovery (EUR) was in the neighborhood of 60 Bbbl. It has produced over 65 Bbbl and it is estimated to have about 70 Bbbl remaining (EUR ~130 Bbbl). Half of Ghawar’s EUR was recognized at its discovery. Half of it, or more, will be the result of field development and reservoir management.

      Oil production of Saudi Arabia (total) and the Ghawar field and the percentage of water cut in Ghawar 1993-2003. Ghawar production accounts for over half of annual Saudi crude. Water cut is the ratio of water to total liquids production from an oil field; in water-driven mature reservoirs water cut can reach up to 80-90 %. (Modified after A.M. Afifi, 2004 AAPG Distinguished Lecture; total oil production from BP Statistical Review of World Energy)

      https://www.geoexpro.com/articles/2010/04/the-king-of-giant-fields.

      Saudi Aramco recently allowed an independent audit of their proved reserves. D&M increased them.

      People will often babble about conventional vs unconventional oil… This simply demonstrates an ignorance of the use of the word unconventional. Oil produced from shale is conventional oil. The boom in US oil production is due to oil produced from shale and other low permeability rocks. The oil is conventional. The extraction process and reservoirs (massive frac jobs on horizontal wells in shale formations) are what’s unconventional.

      • And “shale” is a simplification. In principle it can be any low permeability rock. For example the main productive layer in Bakken is dolomite.

      • Hydrocarbon “reserves” is more an economic concept than a physical quantity.

        In many respects, it is price that creates reserves.

    • Ian, this is true for copper and all other metals as well. It costs more money than necessary to measure more reserves out of a resource beyond a planning horizon – say ten years.

      The Luddites of the Club of Rome showed their hubris and ignorance of this principle by adding up all reported reserves of zinc, for example and dividing by a 20yrs or so and decreeing that the world will run out in the 1990s! Moreover, zinc’s main uses were for corrosion coating of sheet steel for culverts and barn roofs (Ive had “rooves” corrected here! It is archaic but I’m in my 80s) and drycell batteries, now only found in a museum, ditto zinked barn roofs. Hint to CoR if they wish to upgrade and close shop, demand is not for zinc anyway, its for rust-proofing and batteries, both of which don’t care much for zinc anymore, although it remains abundant.

  3. If the drilling activity is decreasing, you would expect it to show up strongly in the number of active drill rigs and seismic crews. It doesn’t:

    https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=E_ERTRRO_XR0_NUS_C&f=M

    https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=E_ERTCES_XS0_R48O_C&f=M

    Also note that considarably more tight oil is now produced with 800 active rigs than was done by 1500 rigs five years ago. Drilling for tight oil has become much more efficient these last few years.

  4. David,

    Some years ago (15 at least) I watched a presentation by some oil industry honcho, you probably know who he was, who was predicting the immediate and very rapid decline of Saudi fields. Of course this meant all manner of calamities would follow afterward. He based this on the fact that the Saudi’s were water flooding their fields–they were already using secondary recovery methods. I waited and waited for the decline of those fields, but I must have missed it.

    I have a book from the 1930s filled with citations of predictions about the impending decline of oil reservoirs, and the need for immediate conservation measures. The oil industry defies every prediction people make.

  5. A friend of mine who is a directional drilling consultant has done a number of jobs in Azerbaijan and according to him there are lots of oil left in the old fields around Baku. Soviet oil recovery methods were apparently very primitive and left most of the oil in the ground. I suppose it is the same all over the ex-USSR.

      • I hope you are aware of Vagit Alekperov’s valiant efforts to correct that failing. His assembly and management of LUKoil was and is extraordinary and quite commendable.

  6. I’m sticking with Yogi on this one. Turmoil in Russia or the Middle East, government intervention, etc. can cause prices to go up. New fields, new technologies for oil recovery, economic recessions, compact fusion (optimist here), battery technology and lots of other stuff can cause prices to go down. If the people who contribute to this site (including me) could reliably predict the futures markets, we’d be stinking rich.

    • Radically improved battery technology can safely be dismissed, since it requires overturning basic laws of nature, which compact fusion doesn’t.

  7. Had a good call on crude’s price in May 2014.
    https://www.macleans.ca/economy/economicanalysis/why-the-price-of-oil-may-be-about-to-tank/
    The magazine left out the comparison to the technical revolution in the production of low-grade copper deposits beginning with Bingham Canyon in Utah in 1910.
    The next revolution was the ability to mine lower-grade gold systems beginning with Carlin Nevada.
    As to what’s next for oil prices?
    The biggest financial bubble in history seems to have completed in 2018.
    In which case, the real price, as deflated by the CPI, of industrial commodities could record a long decline.
    Data based upon the contractions following the bubbles of 1825, 1873 and 1929.

  8. When I was working in Amoco Production’s Denver Region’s Northern Division office (in Denver, 1980-83), I had the priviledge (not) of doing the Division’s production forecast (NGL) for the Plant and Mechanical Group (yes, I was a plant engineer). Trying to pry the expected gas produciton rates out of the production engineers for wells that weren’t on production yet was way fun. I finally, partly in jest but primarily in frustration, made a gasrateometer nomograph; i.e., a semi-log graph paper with a slip card sloped at a 10% decline per year. Give me an initial rate and I’d give you the production rate through 10 years out and I could calculate the corresponding NGL production. Remember, this was before desktop PC’s were in wide spread use and programmable handheld calculators were just coning into their own (oh, did we have a pile of TI programs on magnetic strips). I think I still have that nomograph around somewhere. Hell, it would be as useful today as it was back then if I know anything at all about production engineers.

    But best memory I have of the production forecasts were the crude oil price forcasts. The forecasts were always increasing and always at a rate that had prices for the 1990’s well into the $100/bbl. We all were skeptical of these but had to use them for economic analysis. The only way to insure that a project was viable was to show that it had a great PI and DROI, i.e. it paid out early (in a couple of years), so that the investment could take product price swings later on. Luckily, I soon escape the Denver Office to a field location to be closer to the wellhead; always a good place to be when layoffs started.

  9. Dr. Verlenger is emblematic of that old saying, “When all you have is a hammer, everything looks like a nail.”

  10. Onshore FSU is surely a good candidate for futue shale production. Onshore Venezuela is swimming in mature source rocks. I know of quite a large area of the North Sea which has thick mature oil producing source rock. Is it economic at the moment? Could be.

  11. I have evaluated lead-lag relationships between measures of hedging, oil & gas prices, and rig counts using vector autoregressions. Hedging variables have no power to predict future drilling activity or prices. Zero. Zip. Nada.

  12. A cynical person would say that these “projections” are incorrect on purpose. That IF you really know that production will decrease, you would use that information to buy now at high leverage, and reap the profit as decreased production led to higher prices.
    But if you are currently in that position, and prices are not moving up, and you are concerned they are going to go down, you would pay someone with “credentials that would impress” the masses, to make the argument that future production will decline. Then you can unwind your long position into a buying market at a profit.
    I have found free advice is worth less than you paid for it.

  13. But what you’re not considering is that the good doctor has been to the future and seen it…

    “Thus, it may come as a surprise to learn that production at the end of 2020 may have actually decreased from December’s 11.9 million barrels per day level to between 11.3 and 11.5 million barrels per day”

    • Yes, indeed! He talks as if his prediction is actually a statement of historical fact, that ambiguity only remains concerning the amount of the reduction.

      I wondered If I was the only one thinking he has too much confidence in himself.

      SR

    • @ Robert W Turner. Not really. “may have actually decreased” is a future conditional. Just like saying “it comes as a surprise to discover that by 2020 my lazy son-in-law actually may have a job.” The statement is saying that the author feels that it is surprising that the possibility exists that crude oil production may decrease.”

  14. “Citing poor refinery margins, Verleger argued that producers need to cut crude production.”
    Correct me if I am wrong but don’t refinery margins depend on higher product prices and lower oil prices. How would cutting crude production be an advantage to refiners. Of course it is a moot point for the larger integrated companies who lose in one instance and gain in the other.

  15. No need to worry about production in the Denver-Julesburg Basin as it will dry up as soon as the Democrat Party passes HB19-181 that will effectively shut down drilling in Colorado.

  16. I guess they didn’t get the memo that the majors are moving into these onshore basins with big money and enthusiasm. They were noticeably slow on the innovation uptake but they are on board now with good projects starting off shore too. It’s a nice blend for them going forward for the next 40 years. That may be enough time for other countries to get their heads on straight for the basic concepts of risk and reward that is sometimes called capitalism.

  17. An oil glut could easily occur in the near future – there is just too many new sources being found and exploited, while demand could easily drop due to advent of more efficient cars, homes, and appliances, while different sources of energy are exploited. The U.S. is no different from any other supplier – if the price is too low then the profits disappear and production will decrease.

    New sources of oil (actually many are old but not producing at capacity) include Brazil, Mexico, Venezuela, Iran, and probably others. There are many other place in the world where fracking for tight oil should work. Tar sands are exploitable if prices remain high.

    Meanwhile, cars continue to become more efficient. The advent of electric cars with gas-engine electric generators will increase efficiency by 30% to 50% more. Homes are being built that are far more energy efficient. Appliances are becoming more energy efficient. If you have a pure electric car, it can be charged by electricity from a nuclear power plant (or green energy) just as easily as from a fossil fuel based power plant.

    Third world development will drive oil pricing upwards, but they will move through their own fossil fuel age much quicker than the western world did.

    So it will be a balancing act between too much production, third world need, and a world that is shifting in its energy use spectrum. Quick decline in the U.S., maybe from time to time, followed by a quick turn-around.

    Wars, bad government/policy, and dictators will be throwing this balance back and forth as well. It will remain a risky business for quite some time.

    • A glut won’t happen again unless the Saudi’s and OPEC try to again to kill the US frackers, as they tried in 2014.
      OPECs 2014 attempt then only made the US frackers leaner and meaner on the recovery, and it weeded-out the inefficient players. And that only drove the frackers to continue to innovate to keep their costs down (cheaper prop sands, shortened supply-logic tails, more pipelines to move gas, oil, CO2), strong pressures on contractors delivering those frack materials to the dill sites more efficiently.
      If the market is left to work without interference from the EPA and taxes, the competition, price and production will roughly continue to match demand. And as the recoveries become technically more challenging as the easiest tight oil and gas diminishes, the prices will slowly rise.

  18. The fracking revolution to tight oil and gas means there is more than enough oil and gas for the US domestic consumption through the end of the century, if it were all just for US and North American (Canadian, Caribbean consumption). Of course, with the US exporting crude and LNG now, that’s not true by any means. The question then becomes the export markets, since the price of oil and natural gas is set as it is a global commodity.

    IF the rest of the world doesn’t get seriously into fracking, then prices will skyrocket as global supply will shrink as the Middle East either blows up in a regional war, or simply a longer term trends of Saudi and other Gulf nations’ outputs decrease as fields become depleted.

    Of course there are so many unknowns. At some point Venezuela will likely get a new government and outside capital will return. Within 15 years of that its production and large delivery to the world market will begin to recover, maybe quicker if China can be kept out of the equation. The question will be if China somehow “owns” that Venezuelan production for a decade or more at a “hedged” price as an “investor” or will it be free markets and open capitalism?

    The other question is to what degree can fracking take hold in other regions of the world? Will Russian with its vast Siberian reserves get involved? Would the the rest of the world even help finance such a risky venture due to geopolitical concerns?

    For Europe the only way forward without becoming vassals to Russia is to nuclearize to the French Swedish electrical grid model. US LNG deliveries can keep that from happening, but the climate fever within the population is strong (government brainwashing on Climate Change has been effective as it always has been with Germans-Austrians).

    Does this mean sub-Sahara Africa is to remain poor, disease-wracked, and a total mess? Will it be able to afford its own energy development as the Nigerian oil fields become depleted and political instability ramps up? Will South Africa descend into economic oblivion that Zimbabwe did with land seizures?

    Will Brazil be able to control its corruption to develop its substantial offshore oil and gas reserves?

    And in all of this, China and its growing geopolitcal aspirations (Imperialism) on all of SE Asia and potentially Australia and its vast mineral and energy resources remains as a huge unknown.

    • China won’t own Venezuelan production. Right now the country is partially controlled by a small clique of communists and narcos, backed up by thousands of military and agents sent by the Castro brothers over the years. That bunch has support from motorcycle gangs enabled by Maduro, the secret police, and small groups of police and national guardsmen. So either the upper caste flees or Venezuelans in exile will arm themselves and take out the regime. The key is for other nations to impose harsh sanctions on the Castro dictatorship to force it to remove its forces. And I’m afraid the US is in danger of falling in the hand of communists who are eating the Democratic Party from the inside.

  19. It’s difficult or impossible to predict short-term oil trends due to geopolitical events, for example:

    https://oilprice.com/Geopolitics/International/OPEC-Threatens-To-Kill-US-Shale.html

    But I don’t think it’s especially difficult to predict long-term oil trends. Here are uses for oil in the U.S. in 2017:

    Transportation—14.02 million barrels per day (b/d)—71%
    Industrial—4.76 million b/d—24%
    Residential—0.52 million b/d—3%
    Commercial—0.47 million b/d—2%
    Electric power—0.10 million b/d—1%

    https://www.eia.gov/energyexplained/index.php?page=oil_use

    Starting in the next 5-10 years, and completing likely by the 2040s:
    1) Autonomous cars, buses, and trucks will be introduced, and by the 2040s be virtually 100% of vehicle miles traveled.
    2) Autonomous cars promote transportation-as-a-service, since the principal barrier to transportation-as-a-service is the cost of a driver (and it’s fiscally foolish to own a car that sits parked 20+ hours per day),
    3) Items #1 and #2 promote electric vehicles for many reasons, including: a) The operational cost per mile is less for electrics, b) fleet owners eliminate “range anxiety” (since the vehicle that comes to you will be known to have enough electricity to get you where you’re going), and c) fleet owners have power with utilities (where individual car owners do not) since fleet owners can discharge batteries to the electrical grid when the grid needs supply, and take electricity from the grid to charge batteries when the grid needs demand.

    All this indicates that demand for oil in the U.S. should be significantly reduced by the 2040s compared with today. A 30-40 percent reduction in demand for oil in the U.S. by 2050 seems about right.

    • 2) “It is fiscally foolish to own a car that sits parked 20+ hours a day” ??
      Is is fiscally smart to put many more miles on a car, because it is not where I want it, when I want to use it? If I want to run to the store, where is my car? It is somewhere else and I have to arrange to get one sent to where I am, so I can use it, wasting the ride to my house to get me.
      Multiply that extra trip by billions of users causing billions of excess trips every day, and time sharing cars looks fiscally foolish!
      3) Fleet owners will be large net users of electrical power. When the grid needs supply they will be the largest part of the problem, not a contributor to the solution. They will need supply during peak hours, because that is when people will be needing transportation. You can’t both be a supplier of rides and a supplier of electricity at the same time, unless you are investing in idle capacity, which is “fiscally foolish”.

      • “If I want to run to the store, where is my car?”

        You won’t want to run to the store, because there won’t be any stores. Autonomous delivery vehicles are going to obliterate brick-and-mortar retail stores. Look at the number of Walmart, Target, Kroger, Publix, Lowe’s, Home Depot, Walgreens and CVS stores in the U.S. in 2019. By 2050, more than 80 percent of them will be shuttered (with maybe10 percent of them converted to local warehouses almost entirely staffed by robots).

        But you also won’t own your car…unless saving $300-500 a month means nothing to you. The cars will be owned by fleet owners. If you want to somewhere, you’ll tell your watch where you want to go, and it will give you a list of options with arrival times and prices, like airlines do today. (At least until it learns what you like, then it will just tell you the arrival time and price it thinks you’ll like, unless you object.)

        “Multiply that extra trip by billions of users causing billions of excess trips every day, and time sharing cars looks fiscally foolish!”

        No, it will be much fewer vehicle-miles. Here’s an example. In the 1980s, I lived in Farmington Hills, MI. There was a Pistons-Hawks game in the Silverdome (back when that was the Pistons’ home court). I drove my Cutlass Supreme (it was a beaut!) through the snow and ice to Pontiac, parking in the parking lot maybe a couple hundred yards from the nearest gate. At the end of game, I sat for maybe 45 minutes in the parking lot waiting for it to clear out.

        With autonomous vehicles it looks like this: 1) When I step out the door of my apartment building, there’s a heated single-occupant car waiting for me, 2) It takes me to a bus or mini-bus at the entrance to I-696 East, 3) the bus or mini-bus either takes me all the way to the Silverdome, or there’s one more stop. Then, coming home, 1) It’s *all* buses waiting at the gates of the Silverdome, 2) the buses take me to other buses or minibuses that take me to the exit at I-696, and I get a different heated, waiting single-seat car for the ride home.

        The key is that fleet owners know where everyone is coming from and where everyone is going to, and exactly when everyone wants to be picked up. So filling and emptying stadiums becomes much, much more efficient. The savings in time and energy are tremendous.

        “3) Fleet owners will be large net users of electrical power.”

        Yes, they will be large net users over a 24-hour period. But they can time their usage. For example, by 2050, in the Southwest (e.g., Arizona, Nevada, New Mexico) the net load on the grid on a sunny day at noon will be negative because photovoltaics will be pumping out so much power. So fleet owners in the Southwest will likely actually be charging their cars at noon, and then pumping electricity back into the grid when the sun goes down. In contrast, in places where wind is king (e.g., Iowa, Kansas, Oklahoma) the fleet owners will want to charge at night.

        So battery-electric vehicles serve both as a low-cost method of transportation, and as an electric grid load-leveler. The capital cost of the battery is used much more efficiently than the present system where the battery-electric vehicle spends long periods of time neither charging nor discharging, and where electric grid operators cannot pull electricity from batteries into the grid when the grid needs supply.

        • The Ubber driver picks me up. He goes where I am, no fare. He takes me where I want to go. Fare. He drives to the the next pickup. No Fare. There is no difference if the driver is autonomous or not. There will always be an extra trip, using extra energy, and causing extra wear on the vehicle. All the wishing is the world will not remove that, unless it is my car waiting for only for me. And if it is my car, I don’t have to ride in a car that is a Petri dish for people sneezing and coughing in it 24/7.
          People will still want to go to a store, a restaurant, or to a bar. Or even just visit friends and relatives. And a car is not a just a commodity item that is only to fulfill our transportation needs. It is an extension of how we see ourselves.
          I don’t want to ride in a “public vehicle”. And if you go into any major city you are going to see streets lined with cars. Those people can take public transit and save money. They don’t. They choose to own a car, and that is not going to change.
          Wind and solar eat up valuable resources and valuable land. They are never going to produce a significant amount of our current electricity needs. They have no chance of putting a dent in a significantly larger electricity demand, if electricity has to provide transportation energy as well. Which it won’t because ICE is an existing system that is working. Your new system would have to be built from the ground up, and provide enough benefit to scrap an existing working system, that we have invested $Trillions of dollars developing.
          Your dream world is not practical in a economic sense, or in a energy efficiency sense. Not to mention the limited known sources of Lithium for batteries. We would need 1000x what we are currently using, and that may not be possible at a cost that is competitive with ICE proven technology.
          You are making the common mistake of thinking that everything can be significantly improved the way electronics has been. Most of the advancements of science, engineering and productivity gains are due to the revolution in digital electronics. Those advancements do not change the basics of chemistry, physics and economics. Only our ability to understand them better. And sometimes that understanding creates valuable breakthroughs. Most the time it does not.
          Low cost cleaner fission or low cost fusion, is the only realistic way this would happen. And even with those technological advancements, that are both still non-functional, and hence non-economic, there are a host of obstacles in the path of your dream world that may be blockers.
          You need to take your crystal ball into the repair shop. It is showing you fantasy land, when you want it set for realistic likely scenarios.

          • “There will always be an extra trip, using extra energy, and causing extra wear on the vehicle. All the wishing is the world will not remove that, unless it is my car waiting for only for me.”

            No, you’re missing the possibilities of an autonomous vehicle network. One example…an Uber driver drops you off at your home. He knows your next-door neighbor wants to go somewhere 15 minutes later. But he can’t afford to wait that 15 minutes. The autonomous vehicle can. The Uber driver also does not take you to the entrance ramp of a highway for you to join 3-4 other people who happen to be getting on that highway at the same spot at the same time and traveling to the same exit. He doesn’t want to coordinate with all the other Uber drivers. Instead, you all drive in 4-5 separate cars from the same entrance ramp to the same exit ramp at essentially the same time. Further, and perhaps most importantly, your vehicle is a compromise. I drive a 4-door Camry because when I bought it I thought I might occasionally have 2 or 3 passengers, and because I wanted the fold-down seat if I hauled home-improvement stuff. In an autonomous network, I have a single-occupant vehicle when I’m the only occupant. (Single-occupant vehicles aren’t even mass-produced in the U.S.; in an autonomous network, they will likely be the most common vehicle.) The home-improvement stuff is delivered to me by an autonomous home-delivery truck built specially to haul home-improvement materials.

            “And if it is my car, I don’t have to ride in a car that is a Petri dish for people sneezing and coughing in it 24/7.”–>If you want to spend $300-500 more per month on your own personal autonomous car, that will be possible. Most people will opt to save the money.

            “People will still want to go to a store, a restaurant, or to a bar.”–>Yes, people will still want to go to restaurants or to bars. And among the beauties of an autonomous fleet is that, no matter how busy the restaurant or bar, there’s no problem parking…even though there are no parking lots! But what would people want to go to stores for? Why go to a store if that same thing–or more likely better–could be home-delivered at far less cost?

            “Which it won’t because ICE is an existing system that is working. Your new system would have to be built from the ground up, and provide enough benefit to scrap an existing working system, that we have invested $Trillions of dollars developing.”–>That’s your opinion. It is widely shared among people who have not studied the matter. And it’s almost universally rejected by people who have studied the matter. People such as Bob Lutz, former head of Product Development at GM:
            https://www.autonews.com/article/20171105/INDUSTRY_REDESIGNED/171109944/bob-lutz-kiss-the-good-times-goodbye

            I could literally easily provide four individuals or organizations with far more expertise on the matter of the future of transportation in the U.S. that support my view of the future of transportation for every one you can find that supports your view.

            https://www.mckinsey.com/business-functions/sustainability/our-insights/urban-commercial-transport-and-the-future-of-mobility

            From the McKinsey and Bloomberg New Energy Finance report:

            Last year, McKinsey and Bloomberg New Energy Finance published “An integrated perspective on the future of mobility” which outlined four trends that are rapidly changing passenger transport: electrification, autonomy, connectivity, and sharing.

          • “outlined four trends that are rapidly changing passenger transport: electrification, autonomy, connectivity, and sharing.” All of which means diddly squat well into the foreseeable future. Automation is at the point it can, barely, run a fast food cook line, as long as there are people there to keep it going. Every thing I have read about self driving cars/trucks always ends with the sentence, way at the bottom of the article, “An operator is needed for safety of the public.” As for electric vehicles, sure, show me one with a gasoline of propane fired motor to spin the generator to produce the electricity and can replace a 3/4 truck/van and I am interested. Till then take a hike.

        • You must be from a major city and/or don’t own your house. I’d like to see automated cars let me pick up cement or plywood or fencing from Home Depot. I’d also like to see how they handle my camping trips. For a rural resident waiting an hour or more for the ride to show up just won’t cut it. The control freaks in the government just love this idea. They will know where and when all of us peons are going all the time, and they can make sure we only go where they want us to go.

          • It won’t work in most big cities either. New York City is atypical of major US cities.

            About 160,000 people work in downtown Houston. They live anywhere from the downtown area to 50 miles or farther away. If half of them take mass transit, you’d have 80,000 people calling Uber’s at 0700 and 1700… Then the computers matching up 3-4 people per vehicle based on pick-up and drop-off locations… The people who currently drive because they don’t like mass transit, are not likely to embrace a random car pool with autonomous drivers. They would lose the flexibility to make stops or run errands on the way to or from work. Flexibility and not being on someone else’s schedule, is the reason most people choose to drive their own vehicles… That and not having to ride with strangers.

          • Atlanta built a new stadium for the Olympics in 1996, which was converted into a beautiful new baseball field afterwards to replace a dowdy 30+ year-old facility. City residents were shocked and dismayed when team owners announced they were moving to yet another new facility for 2017. The angst was largely quieted when the team trotted out the fact that the people who actually attended games were clustered almost precisely about the new location, not the 1960s location to the south of city center. While computer-controlled auto-cars would have an advantage for controlling and adapting to traffic on the 80+ game-days each year, these events also make clear that both the old and new locations would create usage issues which require lots of “excess capacity” at certain times. Folks like to decry all of those autos sitting many hours each day scattered about the city exactly where their users also happen to be. And then the many “exceptions” come into play. Game day (think college tailgating on small ex-urban campuses), camping, boating, vacation travel. All could be accommodated in other ways, but probably not with the flexibility and ease of a personal “travel module”. This is why cars became so popular.

            That said, some exceptions may be planned for. Home Depot already has a small supply of rental trucks which could be expanded with electric vehicles. Of course the additional cost may seem prohibitive to the guy who wants one piece of sheetrock. Maybe some stores will give instant delivery for “free” to stimulate folks to start a project. Its a numbers game.

  20. More commentary related to Verleger story on Yahoo Finance:

    https://finance.yahoo.com/news/opec-threatens-kill-u-shale-000000880.html

    A totally different take. The science is irrelevant – it is a business & there is too much debt. Full story.
    When you look at it from the outside , it looks a bit like a bubble unless prices increase significantly – the enterprise of shale production is largely being done with debt & in aggregate, there is very little free cash flow. Not a sustainable business model & highly vulnerable to outside forces. And it is worth noting that despite the significant gains in productivity over recent years, there still isn’t much free cash flow … productivity gains need to make additional leaps forward to get the industry net cash flow positive … and the increase in efficiency will of course will lead to more production , reducing prices further … and requiring even more efficiency gains to be cash flow positive.

    In short, the shale revolution has been great for consumers…. but not so much for investors.

    • This is the “revolution”…

      Shale is not a panacea. It’s not easy to make money in this business. It never has been and it never will be, however…

      Continental Resources, the leading Bakken player, has had positive operating cash flow every year since 2014 and three straight years of positive free cash flow 2016-2018.

      EOG Resources, the leading shale player nationwide, has had positive operating cash flow every year since 2014 and positive free cash flow in 2014 and 2017-2018.

      Chevron, the top US oil producer and major Permian Basin player has had positive operating cash flow every year since 2014 and positive free cash flow 2017-2018.

      Very few oil companies of any kind were generating free cash flow in 2014-2016. $100+ oil made it difficult to reduce spending. The drop from $100-$30/bbl made it worse. However, the drop in prices created leverage to reduce costs, particularly rig rates and service company expenses. Everyone, conventional and unconventional players, ratcheted down spending from 2015-2017. Breakeven prices for the shale plays plummeted over this period.

      Over the last couple of years, E&P companies have become more efficient, forced to create investor returns at $40 – $50/barrel oil. Well productivity has improved as companies drilled longer laterals and used less proppant. After the crash in oil prices, oilfield services companies lowered their prices to compete for limited work. As oil prices recovered, the price of oilfield services was slow to catch up. Additionally, companies have more capital discipline than they ever did at $100/barrel oil prices.

      Even as oil prices have started to recover, companies are showing lower breakeven costs than ever before. As shown in the chart below, breakeven prices in the Midland Basin fell by 50% from $87 in January 2014 to $44 in September 2018.

      https://mercercapital.com/energyvaluationinsights/how-to-interpret-breakeven-prices/

      The vast majority of major shale plays are economic at $80/bbl. The median breakeven price is $40-50/bbl.

      https://www.rystadenergy.com/newsevents/news/newsletters/EandP/eandp-newsletter-september-2018/

      • Thank you, David.

        An outsider such as myself need only see fig. 3 and understand the price ME producers must have to pay their social bills to understand why US producers have the world over the barrel-price. Falling prices due to oversupply will cause even cash-rich oil producing nations lots of pain before shuttering enough US supplies to whip-saw the markets as we saw in the 1970s-80s

  21. “I believe that economists put decimal points in their forecasts to show they have a sense of humor.” – William Gilmore Simms

  22. No other nation can emulate the US shale revolution and ramp production by million(s) of barrels per day per year. The US has a unique set of attributes, which include a huge resource base, access to refiners (world’s largest refiner and most inter connected infrastructure), free market financing (world’s richest economy) with 100’s of private and public O&G companies, technology (world leader in oil and gas development and services for 100 years). Canada has 3 out of 4, but lack of market access due to anti-pipeline
    “frackers” like Obama are stifling Canadian production. China has the market and probably the resource but it doesn’t have free market to support independent drillers/producers and its drilling technology lags behind by 10 years. Lots of other countries have the resource but don’t have access to refiners or lack free market financing due to government controlled national oil companies (OPEC, Mexico, Russia) or lack technology due to not having a conventional oil industry (fearful European countries that ban fracking). Eventually US production will hit another peak and prices will rise, the cycle of commodities.

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