The Shale Oil Party Is Ending, Phibro's Andy Hall Warns

Tyler Durden's picture

Phibro's (currently Astenback Capital Management) Andy Hall knows a thing or two about the oil market - and even if he doesn't (and it was all luck), his views are sufficiently respected to influence the industrial groupthink. Which is why for anyone interested in where one of the foremost oil market movers sees oil supply over the next decade, here are his full thoughts from his latest letter to Astenback investors. Of particular note: Hall's warning to all the shale oil optimists: "According to the DOE data, for Bakken and Eagle Ford the legacy well decline rate has been running at either side of 6.5 per cent per month... Production from new wells has been running at about 90,000 bpd per month per field meaning net growth in production is 25,000 bpd per month. It will become smaller as output grows and that’s why ceteris paribus growth in output for both fields will continue to slow over the coming years. When all the easily drillable sites are exhausted – at the latest sometime shortly after 2020 – production from these two fields will decline."

From Astenback Capital Management

Oil Supply

The speed with which an interim agreement was reached with Iran was unexpected. Equally unexpected was the immediate relaxation of sanctions relating to access to banking and insurance coverage. This will potentially result in an increase in Iranian exports of perhaps 400,000 bpd. Beyond that it is hard to predict what might happen. The next set of negotiations will certainly be much more difficult. The fundamental differences of view that were papered over in the recent talks need to be fully resolved and that will be extremely difficult to do. Also, Iran's physical capacity to export much more additional oil is in doubt because its aging oil fields have been starved of investment.

As to Libya, it seems unlikely that things will get better there anytime soon. The unrest and political discontent seems to be worsening. Whilst some oil exports are likely to resume – particularly from the western part of the country (Tripolitania), overall levels of oil exports from Libya in 2014 will be well below those of 2013.

Iraqi exports should rise by about 300,000 bpd in 2014 as new export facilities come into operation. But there is a meaningful risk of interruptions due to the sectarian strife in Iraq that increasingly borders on civil war. Saudi Arabia's displeasure at the West's quasi rapprochement with Iran is likely to add fuel to the fire in the Sunni-Shia fight for supremacy throughout the region.

If gains in 2014 of exports from Iran are assumed to offset losses from Libya, potential net additional exports from OPEC would amount to whatever increment materializes from Iraq. Saudi Arabia has been pumping oil at close to its practical (if not hypothetical) maximum capacity of 10.5 million bpd for much of 2013. It could therefore easily accommodate any additional output from Iraq in order to maintain a Brent price of $100 – assuming it wants to do so and that it becomes necessary to do so. Still, $100 is meaningfully lower than $110+ which is where the benchmark grade has on average been trading for the past three years.

So much for OPEC, what about non-OPEC supply? Most forecasters predict this to grow by about 1.4 million bpd with the largest contribution – about 1.1 million bpd – coming from the U.S. and Canada and the balance primarily from Brazil and Kazakhstan. Brazil's oil production has been forecast to grow every year for the past four or five years and each time it has disappointed. Indeed Petrobras has struggled to prevent output declining. Perhaps 2014 is the year they finally turn things around but also, perhaps not. The Kashagan field in Kazakhstan briefly came on stream last September – almost a decade behind schedule. It was shut down again almost immediately because of technical problems. The assumption is that the consortium of companies operating the field will finally achieve full production in 2014.

Canada's contribution to supply growth is perhaps the most predictable as it comes from additions to tar sands capacity whose technology is tried and tested. Provided planned production additions come on stream according to schedule in 2014, these should amount to about 200,000 bpd.

Most forecasters expect the U.S. to add 900,000 bpd to oil supplies in 2014, largely driven by the continuing boom in shale oil. That would be lower than the increment seen this year or in 2012 but market sentiment seems to be discounting a surprise to the upside. As mentioned above, many companies have been creating a stir with talk of exciting new prospects beyond Bakken and Eagle Ford which so far have accounted for nearly all the growth in shale oil production. Indeed at first blush there seem to be so many potential prospects it is hard to keep track of them all. Even within the Bakken and Eagle Ford, talk of down-spacing, faster well completions through pad drilling and "super wells" with very high initial rates of production resulting from the use of new completion techniques have created an impression of a cornucopia of unending growth and that impression weighs on forward WTI prices.

But part of what is going on here is the industry's desire to maintain a level of buzz consistent with rising equity valuations and capital inflows to the sector.

The hot play now is one of the oldest in America; the Permian basin. A handful of companies with large acreage in the region are making very optimistic assessments of their prospects there. These are based on making long term projections based on a few months’ production data from a handful of wells. We wonder whether data gets cherry picked for investor presentations. We hear about the great wells but not about the disappointing ones. Furthermore, many companies are pointing to higher initial rates of production without taking into account the higher depletion rates which go hand in hand with these higher start-up rates. EOG, the biggest and the best of the shale oil players recently asserted that the Permian – a play in which it is actively investing – will be much more difficult to develop than were either the Bakken or Eagle Ford. EOG figures horizontal oil wells in the Permian have productivity little more than a third of those in Eagle Ford. EOG has further stated on various occasions that the rapid growth in shale oil production is already behind us.

In part this is simple math. The DOE recently started publishing short term production forecasts for each of the major shale plays. They project monthly production increments based on rig counts and observed rig productivity (new wells per rig per month multiplied by production per rig) and subtracting from it the decline in production from legacy wells. According to the DOE data, for Bakken and Eagle Ford the legacy well decline rate has been running at either side of 6.5 per cent per month. When these fields were each producing 500,000 bpd that legacy decline therefore amounted to 33,000 bpd per month per field. With both fields now producing 1 million bpd the legacy decline is 65,000 bpd per month. Production from new wells has been running at about 90,000 bpd per month per field meaning net growth in production is 25,000 bpd per month. It will become smaller as output grows and that’s why ceteris paribus growth in output for both fields will continue to slow over the coming years. When all the easily drillable sites are exhausted – at the latest sometime shortly after 2020 – production from these two fields will decline.

Others have made the same analysis. A couple of weeks ago the IEA expressed concern that shale oil euphoria was discouraging investment in longer term projects elsewhere in the world that will be needed to sustain supply when U.S. shale oil production starts to decline.

Decelerating shale oil production growth is also reflected in the forecasts of independent analysts ITG. They have undertaken the most thorough analysis of U.S. shale plays and use a rigorous and granular approach in forecasting future shale and non-shale oil production in the U.S. Of course their forecast like any other is dependent on the underlying assumptions. But ITG can hardly be branded shale oil skeptics – to the contrary. Yet their forecast for U.S. production growth also calls for a dramatic slowing in the rate of growth. Their most recent forecast is for U.S. production excluding Alaska to grow by about 700,000 bpd in 2014. With Alaskan production continuing to decline, that implies growth of under 700,000 bpd in overall U.S. oil production, or 200,000 bpd less than consensus.

The final element of supply is represented by the change in inventory levels. The major OECD countries will end 2013 with oil inventories some 100 million barrels lower than they were at the beginning of the year. That stock drawdown is equivalent to nearly 300,000 bpd of supply that will not be available in 2014. Data outside the OECD countries is notoriously sparse but the evidence strongly suggests there was also massive destocking in China during 2013.

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LetThemEatRand's picture

There's plenty of oil left.  Just not cheap oil.  A guy who owns a 12 cylinder Bentley doesn't much care if it costs $300 to fill his tank.   Especially when he's long oil futures and MIC contractors.

CrashisOptimistic's picture

Rand dood, there is a lot of leaning on that phrase now.  It's correct, but not in the way the leaners want.

"There is plenty of oil left, but not cheap oil."

Well, there will always be oil left.  A $15 million well can be drilled for a bubble of oil the size of your fist, but it likely won't be.  Thus, that fist sized bubble will always be left.

And that is the point.  "but not cheap oil".  The leaners on the phrase want to think in terms of "well, we'll add $10 to the price and suddenly have a 50% increase in available oil." 

No.  It doesn't have to work that way and likely won't.  It may take a price increase of 5000% to get a 50% increase in oil, with that 50% increase lasting 1 year.  There is no law of the universe that says things have to be gentle.  They likely won't be.

SRSrocco's picture

Croesus... My newest article explains in detail why the price of silver is tied to Oil.  According to my analysis, if we just go by the Silver-Oil Ratio in the 1960 decade, Silver should be north of $92 an ounce:

Silver To Hit New Highs As The Quality Of Analysis Sinks To New Lows

http://srsroccoreport.com/silver-to-hit-new-highs-as-the-quality-of-anal...

PrecipiceWatching's picture

Fascinating and compelling analysis, and I haven't even completed reading the entire piece.

Regarding silver acquistion: What is your preferred form, if you please?

 

Thanks. 

quasimodo's picture

I can tell you what my preferred form is. The form you can hold in your hand that comes from the earth, not the form that you see as digits on a screen.

PrecipiceWatching's picture

Of course.

Real tangible silver is what I am asking about.

All things considered, the Canadian Maple Leafs look to be high on the pricing/recognizability/purity metric.

 

LetThemEatRand's picture

I understand your point, but I don't think we're anywhere near that tipping point yet.  We're just starting to tap into expensive oil.  That will run out in a few decades and then people will wonder why our generations didn't see it coming and develop reasonable alternatives before it became a crisis.  There will be vigorous debate about whether Gen X'rs and Y'rs enjoyed cheap oil prosperity at the expense of later generations.  

Jack Burton's picture

Rand, do you know of any large cheap oil finds lately? I don't, why do people refuse to understand expensive oil finds are not the same economically as expensive oil finds. Tar Sands and Fracking are not West Texas shallow wells drilled into large fields. It is a cheap trick to drill a shallow hole and attach the production rig. Cheap and simple. Christ, I have seen what it takes just to get the sand frackers use from our farmers fields, under which it lies, to be processed, loaded on trains and sent to ND. Cost a fortune, just to get the sand. Water is a whole other question, and the thing I think will cut short the fracking boom in many areas.

I wonder where all that fresh water will come from.

LetThemEatRand's picture

"I wonder where all that fresh water will come from."

Neste.  They will be happy to sell the water rights they bought before people understood the value of it.

Jack Burton's picture

Sitting here with Lake Superior outside my living room window, I know the many corporations who lust for access to it's fresh clean cold waters. One tanker filled with this quality of fresh water is worth a fortune to anyone who can bribe access to it from our corrupt political system. One company tried to load a tanker in Lake Superior and sail for Saudi Arabia. Canada put a stop to it using the international law that governs the Great Lakes. But you gotta credit this company for trying. It may even have been Nestle!

Harbanger's picture

When the fuck did the socialists make fresh water a limited substance.  What happens when the lakes run dry?  Great lakes?  The run-off from your land is surely contaminating this resource.

Harbanger's picture

Cheney is on your team and you're too stupid to know it, suck it bitch.

Harbanger's picture

You're projecting your emotion bitch,  I'm cold clean logic.

holdbuysell's picture

Sadly, Tesla was derailed for a reason.

SRSrocco's picture

Rand,

We are screwed.  According to the Hirsch Report commissioned by the U.S. Govt back in 2005, if the world waited until Peak Oil hit, it would be too late.  We have run out the clock.  The U.S. Govt read the report and promptly shelved it out of the public eye.

Furthermore, we have two addtional NAIL IN THE COFFINS besides Peak Oil.

1) the Falling EROI - Energy Returned on Invested

2) Decline Net Oil Exports

Also, it looks like a former BP Geologist announced in public presentation that PEAK OIL IS HERE & It means it will BREAK OF ECONOMIES:

http://www.theguardian.com/environment/earth-insight/2013/dec/23/british...

Things unfortuately get very ugly from here on out.

malikai's picture

EROEI is the killer, IMO.

When it hits 1, the only economical reason to produce oil will be for plastics and other non-energy uses.

The only thing I can think of to offset that would be a non-fossil input to the production processes. Such as nuclear for heat/steam in Aberta or something like that.

Also, it's functionally pointless to consider any energy resource in fiat "cost" terms. The proper way to consider any energy source is by EROEI, as that's what defines your net energy gain/loss.

DaveyJones's picture

pretty much

It remind me of Cheney's line" the American way of life is non negotiable." 

the biggest threat to the American way of life, is the American way of life

Nothing can stop the math now

AGuy's picture

"I don't think we're anywhere near that tipping point yet. We're just starting to tap into expensive oil. "

That would be incorrect. The US has been drilling for expensive oil for about 3 decades. We tapped Oil in Alaska, In the Gulf of Mexico. Consider that cheep Oil is the oil that costs less then $10 bbl, which consists of on-shore oil located in areas where its easy to transport it markets. We are nearly tapped out of expensive oil and now drilling for the very expensive oil which consist of deep and ultra deep off-shore and Tight Oil. The problem with the very expensive oil is not only is it difficult to extract. the volume that can be extracted is considerable less.

The world production still consists of relatively cheap on-shore oil. We managed to stabilize production declines be using expensive and very expensive oil, but at some oil depletions losses from the cheap on-shore fields will exceed the ability to develop production from expensive oil projects. This will be a tipping point that the world will never recover from as it will have major economic impact. Gov'ts will like tax energy companies heavily in order to meet political promises. Many nations will likely nationalize oil companies in a vane attempt to funnel as much cash to sustain the gov't (ie Venezuela). When this happens Gov't Bureaucrats take over  which takes a serious toll of future production and oild production tumbles.

"That will run out in a few decades"

Less than a decade away from the tipping point.

 

"There will be vigorous debate about whether Gen X'rs and Y'rs enjoyed cheap oil"

Not really since it was largely the boomer generation that took full advantage of cheap oil, with super-highways replacing rail, jet setting everywhere. Pleasure boats, etc. The Gen X's and Y's did not have the same opportunities. Most were just carried along for the ride. As far as debate, I think it will be much more of a wave of violence and riots as the economy erodes. Only a tiny fraction of the population took action to prepare. Most are hopeless dependent on a broken system and when the wheels come off it, there will be hell to pay. We already see this happening in most of the Middle East which still have the largest amount of cheap oil available.

The odds favor a major Global war and a massive population dieoff as the global population can not possibly be sustained without sufficient oil. Sooner or later some nation is going to war to secure foriegn oil for thier people. The other nations won't be too happy about an oil grab and will join in leading to a large scale nuclear war.

Where does your next meal come from? Odds are it comes from a supermarket, that use fossil fuels to run the freezers, using diesel to transport the food from the processing plants that also uses fossil fuels to clean and process it, which needs diesel to transport the raw material from farms. The farms need fossil fuels to run the machinery to plow the fields, harvest the crops, and uses petro-chemical for fertializer and pesticides. This is pretty much true everywhere in the global.

its also possible that a war between Iran and Israel will result in a global oil crisis that causes the next global war. Both Israel and Iran already have nuclear weapons (Iran has stolen Russia Nukes purchased on the black market during the early 1990's when the Soviet union Collapsed). If Isreal or Iran start a war it will disrupt oil production and likely cause other nations in the region to retaliate. Saudi Arabia  which is between Iran and Israel has purchased Nukes and will like strike back when it infrastructure is damaged or destroyed. Pakistan may also become embroiled in the war and Pakistan also has nukes. Once a single nuke starts flying oil exports from the Gulf will completely stop. Its hard to believe that the world will continue to limp along with 25% less oil available.

 

 

 

 

mkkby's picture

Eventually world population will return to that 1.5 billion sustainable population, or what ever the real number is.  As always the poor will suffer most and die off.  Right now it's easy to envision who that will be. 

Approximately 80% of the world population lives on $10 a day or less -- 5 billion -- africa, india, china, etc...  Westerners are the rich, even if only a few drive bentleys.  Even a person on welfare is rich on this scale. 

The poor will die off quietly as they always have.  Not much to worry about if you were lucky enough to be born in the US, canada, W europe, aussie/nz.  Don't worry about having a bunker.  Just stay away from inner city norwegiens and the crime spree they are already having.

Tasty Sandwich's picture

I doubt the system could handle much more than $10/gallon (and I think that's a high estimate) without just completely collapsing into supply shortages and rioting masses.

LetThemEatRand's picture

Thus the billions of hollow points.  If you want to know who the Department of Homeland Security works for, go rent a DVD.  There is a DHS warning at the outset, along with a new federal agency that appears in a second warning screen.  They work for large corporations and their CEOs.  The Bentleys will roam free on DHS/TSA guarded toll ways long after we're all in FEMA camps.  For our safety.

Jack Burton's picture

The Federal government has equipped local police to the standards of Navy SEAL teams. What for, to bust dope smoking high school kids? Or to brutally crush any civilian who protests the new government laws and corporate controlled congress and judicial system. The Law Firms of corporations are now sending huge sums to the campaigns of Judges. Imagine the corrpution!!!

LetThemEatRand's picture

You cannot become a Federal judge unless you're part of the machine.  Period, end of story.  Doesn't matter which flavor nominates you.

The militarized police cannot be an accident.  They are planning for something.

Harbanger's picture

It's not by accident, our loss of liberty and increase in misery is proportional to the the rise of socialism.

LetThemEatRand's picture

So the people own more of the means of production, then?   There is less private property owned by a few?

Harbanger's picture

"the people own" Collectively, they don't own anything except the right to hang all you socialist fuckers who sold us out before we're done.

TheReplacement's picture

The problem with pointing at socialism is that there really is no such thing as socialism as it is commonly defined.  Socialism is no different from corporatism/fascism, communism, banksterism, statism, military dictatorshipism, king and queenism...  they are all a means for a small elite to rule over everyone else.  They are all evil.  They all end in lots of death but usually it is the little people who bleed the most.  As such, it can only be concluded that anyone who supports any of these systems is mindbogglingly naive or insanely bloodthirsty and a disciple of satan. 

With that said, they all deserve a land of their own to do as they please.  Of course the only suitable land for such an experiment is at the bottom of the Pacific ocean. 

Kirk2NCC1701's picture

Not 'Socialism'. FEUDALISM!

People are regurgitating words, w/o fully understanding their word choices.

TheReplacement's picture

It doesn't matter which ism.  They are all vile and the only purpose is to give a few the power of life and death over the many.  Dictatorship is really the term that fits best.  You are all just quibbling over the brand name. 

Harbanger's picture

How do we separate this fascist marriage between Corps and Goverment? Better Govt regulation?

Harbanger's picture

To whomever gives a +1, Please don't upvote me, I love to fight from the bottom.

TheReplacement's picture

Yeah because that is exactly how corporations gain power over the government to begin with (government becomes dependent on the corporations to the point that the corporations get to write the laws directly, aka Obamacare). 

Yeah, I saw your sarc but there are probably a lot of idiots who don't or just don't understand.

Money Squid's picture

those be some really fat SEALs

TheReplacement's picture

+1 for funny.

Sadly, funny isn't much true.  There are a lot of scary looking cops out there.  It's like Mr. Universe in blue packing 17+1 and an AR in the trunk.

Tasty Sandwich's picture

People with Bentleys will be evacuated via Lear Jet to private islands or go to their luxury underground bunkers to wait while the unwashed starve.

The planet's carrying capacity without petrochemicals is ~1.5 billion.

The government would collapse and cease to function in such a scenario, regardless of their plans.

LetThemEatRand's picture

That is their plan.  And they will jet back in from their private islands and save the day.

Tasty Sandwich's picture

No one is going to be saving the day when that day comes.

Harbanger's picture

"No one is going to be saving the day when that day comes."

Unfortunately, that's not seen as being a defeatist or bitch talk today.  It's the norm.  More chicks and me.

Harbanger's picture

Or, you will be ignored like a bad ex-girlfriend and you will wish they never left.

AGuy's picture

"The Bentleys will roam free on DHS/TSA guarded toll ways long after we're all in FEMA camps."

Unlikely. The DHS/TSA is made of largely third rate personal. The only effective security forces the US has is the US miltary which is being gutted and most of the manpower is stationed overseas. The people riding in Bentleys will be strung up, unless they are wise enough to act poor and maintain a low profile.

 

 

dick cheneys ghost's picture

$10 per barrel oil would be the best thing to happen to this country.........blow up the freeways while ur at it........get back to localism

~~~

RafterManFMJ's picture

I concur.

We are shipping frozen chickens to China to be cut up and shipped back. WHAT THE FUCK?

Oil at 300 per barrel, or 1/10 oz. Gold. Bring it.

mjk0259's picture

Gas prices went up by a higher percent than that in a few days twice - during each embargo.

Didn't collapse and now petrochemical use is less percent of gdp - our gdp consisting primarily of paper shuffling now.