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Houston, We Have A "Fracking" Problem
Submitted by Lance Roberts of STA Wealth Management,
Last week, I touched on the issue of oil prices and demand stating:
"First, the development of the “shale oil” production over the last five years has caused oil inventories to surge at a time when demand for petroleum products is on the decline as shown below."
"The obvious ramification of this is a “supply glut” which leads to a collapse in oil prices. The collapse in prices leads to production “shut ins,” loss of revenue, employee reductions, and many other negative economic consequences for a city dependent on the production of oil.
Secondly, I have also discussed that the “fracking miracle” may not be all that it is believed to be due to fast production decline rates and massive amounts of leverage. Just recently Yves Smith posted an article discussing this very issue stating:"
“The oil and gas sector is capital intensive. Drillers have borrowed phenomenal amounts of money, which was nearly free and grew on trees, to acquire leases and drill wells and install processing equipment and infrastructure. Even as debt was piling up, the terrific decline rates of fracked wells forced drillers to drill new wells just keep up with dropping production from old wells, and drill even more wells to show some kind of growth. One heck of a treadmill. Funded in part by junk debt.
Junk bond issuance has been soaring as the Fed repressed interest rates and caused yield-hungry investors to close their eyes and take on risks, any risks, just to get a teeny-weeny bit of extra yield. Demand for junk debt soared and pushed down yields further. And even within this rip-roaring market for junk bonds, according to Bloomberg, the proportion issued by oil and gas companies jumped from 9.7% at the end of 2007 to 15% now, an all-time record.”
I received many emails on those comments that deserved a response and/or further clarification.
As with all things, the question of oil prices is nothing more than a supply/demand issue. As shown above, the sharp increase in production brought on by "fracking" has certainly been quite remarkable. However, this remarkable resurgence in oil production currently faces two extremely strong headwinds. The total amount of available refining capacity and the level of end demand are both declining.
While the "fracking miracle" has boosted the production of raw crude in recent years, such production is only useful if you can convert the base commodity into a useful byproduct. The problem, as shown in the two charts below, is that the the number of operating refineries has continued to fall, as the regulatory environment has stifled the ability to build new plants, and operating plants are already running near full capacity.
With very little spare capacity available domestically, the "hope" is that the U.S. can start exporting the excess to foreign countries. However, as discussed in the first chart above, global demand for oil is dropping as the Eurozone and Japan struggle with extremely weak economic growth. Furthermore, since oil is priced in U.S. dollars, the surging U.S. dollar as of late only makes oil more expensive to foreign customers while will likely crimp demand further.
There is more at issue with the "demand" side of the equation than just refinery capacity and short-term economic variables. The longer term demand shift is a function of technology continuing to create efficiencies within the global economy along with decreases in vehicle fuel consumption.
For example, my friend Doug Short just recently posted the following discussing the number of vehicle miles driven, to wit:
"There are profound behavioral issues apart from gasoline prices that are influencing miles traveled. These would include the demographics of an aging population in which older people drive less, continuing high unemployment, the ever-growing ability to work remote in the era of the Internet and the use of ever-growing communication technologies as a partial substitute for face-to-face interaction."
The problem with dropping demand, of course, is the potential for the creation of a "supply glut" that leads to rapidly falling prices. When prices fall rapidly more production is "shut-in" and the pendulum swings from over to under production. This is the nature of all cycles and with those cycles come "booms and busts."
However, there are a couple of other points to make about the "fracking miracle" that will likely exacerbate the "supply/demand" imbalance noted above.
"Even in their best-case scenario—of a high and climbing oil prices—America’s shale producers will be pushed to maintain the high level of output they have achieved in recent years. This is because a shale well has a limited lifespan of around seven or eight years. Its output plummets after the first three years, then deteriorates steadily thereafter. By contrast, a conventional oil field produces crude at a level that wanes slowly over the course of decades. Saudi’s massive Ghawar field, for example, began production in 1951 and is still pumping out around 5 million barrels a day.
The IEA points out that the U.S. shale industry will need to bring 2,500 wells into service every year to sustain the output—of 1 million barrels a day—of one of its main oil reserves, in North Dakota.
Some of these wells may require more investment than their predecessors,“a rising percentage of supplies…require a higher breakeven price,” as the IEA put it.
Observers like Berman and Hughes believe the U.S. needs to prepare for a time when the shale tide starts to ebb. Perhaps hundreds of thousands of jobs would be lost and the U.S. economy would again be highly vulnerable to oil price spikes and dependent on Middle Eastern exporters who can guarantee long-term, plentiful supplies."
Jim Quinn detailed the problem with the sharp decline rates a bit further.
- To maintain production of 1 million barrels of oil a day from Iraq one needs to drill just 60 new wells a year. Extracting the same amount from the Bakken would require 2,500 new wells.
- A typical fracked well poked in the ground in Oklahoma in 2009 debuted with an output of about 1,200 barrels of oil per day. Just four years later, however, output from the same well has fallen to just 100 barrels of oil per day.
- To double that output from the Bakken, for instance, would require 5,200 new wells a year, and tripling it would require 7,800 and so on. Then, to the horror of all, less than a decade after all that was done, that additional million barrels of oil a day in production would be reduced to just 100,000, no matter what the oil companies do, because of the nature of the formation where the well was drilled.
- California’s Monterey Shale, which the U.S. Energy Information Agency thought contained 13.7 billion barrels of oil in 2011, came up a little light in the loafers. Closer examination revealed the formation to be much more broken up underground than previously thought — so much so that only around 600 million barrels may ultimately be recovered with current technology. That’s a 97 percent downgrade, and there is no guarantee that other rosy predictions of shale oil riches both in the U.S. and elsewhere won’t have similar outcomes.
With oil prices and demand falling at a time when production is strongly rising, the risk of a supply/demand imbalance has significantly increased. This puts the prices and valuations of energy companies, particularly drillers and service suppliers, at risk as well. As shown in the chart below, the advent of QE3 has pushed the prices of energy stocks well outside of their long-term correlation with oil prices. The risk is clearly prevalent.
The problem for a city like Houston, which deep ties to the production and oil, is a "shock" from a supply/demand reversion could bring the economic "boom" quickly to an end.
I am certainly not saying that the "wheels are about to come off of the cart." However, I do suggest that there is a potential for a very negative shock in the energy space given the extreme complacency that current exists. History suggests that true "miracles" are few and far between as most tend to just "illusions of hope."
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I'd say we're fracked.
I wouldnt trust any analyst that misspells "Idle" on their chart
In Louisiana there are more than $160 billion in industrial plant expansions and new plants (LNG, CNG). Looks like Texas and Louisiana are about to get royally fucked.
i'd say calgary as well
I'd think Venezuela is the first to get royally fucked... if this trend continues for a longer period.
I wouldn't trust any analyst that isn't on my payroll, because they are only trying to improve the P&L of the company for which they work.
I don't think that the chart he is referring to actually shows dropping demand, although it is a bit difficult to detemine what, exactly, it does show. I think it shows that Population Adjusted Growth of Estimated Vehicle Miles is slowing...to 50%?
What the fuck kind of metric is that?
Here is petroleum supplied, which I believe closely approximates demand in the USA. You can decide if you think it is dropping.
http://www.eia.gov/dnav/pet/pet_cons_psup_dc_nus_mbbl_m.htm
Doug Short's metric only shows the change in crude oil supply going towards gasoline fueled transportation.
Follow the link, check the boxes, and click the "Graph" button at the top of the column.
Let's be clear..
Tyranny causes low oil prices more than anything else combined...
You don't need a fucking chart to see that.
US Exports alot of refined products. Mexico relies heavily of US refining.
Consider:
1. there are fewer Americans and Europeans in the labor force (http://data.bls.gov/timeseries/LNS11300000). The Unemployeed are certainly consuming less oil then when they were employeed
2. Global air travel is down. There are fewer airlines and fewer flights. Avation is a big consumer of Oil.
3. Asia has been the only region that has seen significant demand increases. Although sooner or later it going to crash.
Fracked!
Frelled!
my neighbor's half-sister makes $63 /hour on the internet . She has been out of work for 10 months but last month her pay was $16551 just working on the internet for a few hours. More Info... www.job-reports.com
Seriously? This article seems to be trying to bring sympathy to oil companies. There is nothing anyone could ever say or do that would make me feel sorry for a any oil company.
Wouldn't Ebola'ed people drive the least?
Correct. They fly, from Monrovia to Europe and US.
It's more that commodity prices detach from underlaying energy prices.
We're already exporting a million barrels per day of products. Without that, utilization and margins would be in the shitter for refiners.
astoriajoe: You are right on! We export over 3 million bbl/day of refined products. The largest export product from California last year was diesel and jet fuel.
don't let the temporary glut due to speculative hoarding and inevitable fiat induced recession, in a constant flux fossil fuel world, distract your from the fundamental energy constraint : we are limited by peak cheap energy and by peak fiat pump n dump to requiring that energy price DECREaSE for fiat debt to disappear.
It won't happen and the combined effect of increasing fiat "non real economy" dissemination; aka all funneled to bubble-o-nomics; and resultant distortion of real economy's recessionary throttling due to lack of cheap, abundant energy AND monetary liquidity, will lead us to the dystopian asymptote.
Fracking is the last resort of fossil dinosaurs trying to get at the "cheap" resources that Mother Nature has bestowed to the homo sapien world. Having destroyed that largesse, we are now faced with the inevitable perspective of ending up like the dinosaurs into a decaying species.
Fortunately, there is still some wine left to drink and some cheese left to be nibbled.
Thank God or Nature for small mercies. Sisyphus we stay.
More QE to 'kill the dollar' and make oil affordable for the rest of the world. But the dollar is dead already. Like stocks: who's buying? A sea of water, but not a drop to drink.
Buy solar panels, eat your peas, inflate your tires.
<<< Frack off
<<< Frack on
oh, the Fracker. What a wonderful invention.
* for Farscapers that's Frellers
Boom over. Bust just beginning.
Here in Weatern PA, we're going to reap what we've sown, and it isn't gonna be pretty. Or, in the case of the water we've polluted, tasty.
Bullshit. Your water will continue to taste the same as it always has. Turn off the Matt Damon movies.
In the name of anything on this planet anyone has ever considered to be holy, stop with the hollywood anti-frac crap.
Time to "DRILL-BABY-D R I L L" off the coast ..we have plenty of oil if the libs stop exporting oil drilling to "NOT IN MY BACKYARD" locations..
I would like to see a mash up of the videos of all the libtards who have said for years that drilling more wells will not affect the oil prices. Of course, if they were allowed to stop drilling and fracking, they could make it seem that they were correct. However, we can see prices are now down by about 40% from the $140 bbl highs of several years ago.
Drill Baby, Drill.
Most of the young people around here can't afford a car, never mind insure and maintain it. They have crap jobs or are in debt from college....and no jobs of any worth are around.
Fracking can certainly frack up one's water supply.
Who is making the profit? Oil prices have come way down but gas prices have not!
This whole oil thing is just so depressing because it lays bare one of the base instincts and that is greed! No one ever does the right thing!
I watched a Top Gear episode from like 10 years ago and they drove a GM car powered by water! It was a hydrogen fuel cell!
Humans NEVER make any changes until it is almost too late.
I'm fucking tired of paying over $3.00 per gallon!
I really wish someone would just should me in the head to end it!
Excuse the typos, as I can't fucking read what I type because the poor design of this site. Fuck it!
$2.68 in Houston last week
Operating vs Idel Refineries?
God damn, we don't proof our charts now do we? Do I have a reason to question the numbers if they can't spell Idle?
Imagine the amount of poison pumped into the ground for future generations to bear. What an incredibly criminal regime of unparalleled proportions.
Probably less than 300 years after establishment of the plutocrats' and freemason's dream-regime it will have ruined a whole and incredibly resource rich continent.
Either mankind will get rid of the satanic western regime, or this regime will destroy the whole planet.
The stuff pumped into the ground is water and sand. Less toxic than what children are exposed to at the beach when playing in the surf.
Not to worry, fracking has been exempted from the Clean Water Act and frackers aren't required to tell anyone what they are putting into the ground. Crony capitalism at its best (bested only by the pharmacutical industry). Morals? Not over money. Sorry.
LOL, we have all kinds of local, state, and federal oversight.
Really?
There is no regulatopry oversigh over hazardous chemicals employed in frackingt, you are either a moron or a troll; kindly fuck off.
Oh I know what you mean, that dihyodrogen monoxide is some real dangerous stuff.
Right....
You are absolutely right, Imminent.
Oil goes up, oil goes down. Always has, always will.
Come on now Zerohedge!...
You got it all wrong!!!
Just to prove it, here is the next 49er Gold Rush by the same folks that brought you Michael Lewis and Brad Katsuyama!!!
No worries on the shale oil -got lots of it and that yellow stuff too! Remember this is America you're talkin about!!!
Oh by the way "Trick or Treat" replacing /sarc
Tis the Season!!!
So the Saudis are succeeding?
You can't buy gasoline with an EBT card...
The decline is partially due to wells that need maintence from workover rigs and swab rigs that are in high demand. Lets look at it this way, if we drill a frac well at 12 million to use a round number and we get 20 million out of it before the decline and then contiunes for the next 5-10 years at 100 barrels a day, where is the loss? I am not in the gas frac business that is a whole other deal. Oh, 4 billion for a new plastics plant that will use the gas most wells simply flare off.
Oh no panic end of the world fracking is the problem blah blah blah
1) this "detachment" would easily fit a scatterplot so it's not detached at all, just got a different constant in the equation, or a different power more likely
2) the joke part of the commentary
BUY BUY BUY SELL SELL SELL BYE BYE BYE!!
The wheels ARE about to come off the cart if oil stays in its current price range. Looking at tables from the Bakken leads to no other conclusion.
https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf (Reasonable assumption of $6M per well)
Im not sure how those tables lead to no other conclusion but that the wheels come off, can you elaborate? What I see is that output in the bakken is up over 10x daily on a per well basis since 10 years ago.
What I have to wonder about is why the US would start yip yapping about selling oil from the SPR right now? Seems mighty suspicious in the timing, kind of like selling your gold at $250/oz.
One drill for every citizen. Still lots of room for more.....
Will also reduce when population reduction occurs