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Inflation Watch: The Fed-Driven Spike In Shale Oil Costs, In 2 Simple Numbers
Wondering where the inflationary impact of The Fed's massive monetary policy experiment is leaking out (aside from stock prices)... Look no further...
What happens when too much cheap money chases a limited asset? Just like housing, 'cost' of Shale Oil wells have become about the monthly nut, not the all-in as The Fed-fueled pump focuses everyone on the short-term gains (ignorant of long-term pains). As the following chart shows, this credit-fueled exuberance has inflated basic costs for US oil producers dramatically...
...and with their costs of funding exploding higher, the vicious circle of higher costs and lower revenues for these levered firms is spinning faster and faster.
h/t @RudyHavenstein
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Well well well, in 2014 you drill 1 mile down, then turn 90 degrees, and go another 2 miles out. Sounds like a bargain.
How many barrels at $70 do you need to pump to hit $12,500? Sounds manageable to me.
Why don't they go 2 miles out and then drill 1 mile down?
Unless you're doing F&D on Titan, the hydrocarbons are obtained from the lateral portion, below the surface.
Where's all this commodity inflation at???
A lot of added cost in the well permitting process. The EPA and other agencies hate oil.
Shale play is basically squeezing oil from rocks. So surface area is what's important. The 2 miles is really 2 miles of surface area that's being tapped, so to speak.
PUTTING SHALE OIL INTO PERSPECTIVE:
We must remember the GOLDEN EROI RULE OF THUMB....
EROI - Energy Returned On Invested.
Shale Oil up there in sunny-warm North Dakota comes in at a whopping 5/1. Thus, we have 5 barrels of energy profits for each barrel consumed in the process. The USA was producing oil in the 1930's at an EROI of 100/1.
Now, Oil Shale (not to be confused with Shale Oil) in Colorado and the west, which we have supposedly 1 trillion barrels has an EROI of less than 2/1. If Bakken shale oil at 5/1 is now for the most part, unprofitable... why in their right mind would anyone try to exploit OIL SHALE at 2/1??
Also, we must also remember, a modern society such as ours, needs roughly 10/1+ EROI to be sustainable. Shale Oil at 5/1 is filling the gap, but it doesn't even pay the minimum EROI requirement for U.S. citizens to continue driving SUV's to STARBUCKS.
Lastly... we need about a 3/1 EROI just to have roads and a transportation industry. As we can see... the 1 trillion barrels of supposed OIL SHALE in the West will more than likely STAY where it LAYS.
SRSrocco: You are 100% correct, thank you.
Drew
Bingo. EROEI is the entire problem. And not just in terms of petrochemicals either. The EROEI of almost everything in our society is expanding to the point that we're nearing the seize-up point. People wonder why their incomes no longer generate the same standard of living, But then "experts" (read, "apologists for the Elites") point to inflation-adjusted figures that show fuel and other necessities to be cheap, and luxury trinkets like iPhones to be cheap. They never include the EROEI, or the financial carrying costs. My household energy rates are, indeed, cheap in historical terms. But I pay more in "fees" some months than I do in energy to some utilities. I have to carry huge amounts of insurance. Every transaction includes a skim for Finance, even cash transactions, as it's all priced in.
The flaw, perhaps intentional, in the way "Peak Oil" has been presented is that of course we'll never run out of oil. It's just that when it takes a barrel's worth of energy to recover a barrel of oil, there's no point. As our energy picture goes, wait until the selected insiders of the Elites own solar, geothermal, wind, tidal and other sustainable energy technologies. Then all of a sudden all the intransigent opposition will go away. I'm guessing two election cycles will be all it takes. First the incoming majority will strip the subsidies and tax credits from renewables. Then a lot of patents will go on the market. Once they're in the "right" hands, back will come all the government support and much much more; just this time it won't be for the consumers. Just another set of insider crony pockets we'll divert public wealth into.
Good Threat. Good Post.
Cover the Overhead and the business can press on if revenues are low... I think this is roughly what I heard in Business School.
If I flipped a coin on which way this will go, either additional federal support & funding or a pull back... the coin toss would be correct more often. This is not my area at all and I have lost money to prove it.
But, the Federal Government is like a rich uncle and often is wary of Energy Problems (or at lest since 70s oil crisis). I could see our government supporting extraction at 1:1 EROEI... simply since 2001 we have seen so many Historical Firsts. Reagan, Bush I, Bush II, Cheney, Halliburton, Big Oil all Cronies.
Just look at the Federal Budget, FED Balance Sheet, US Total Debt... It is breath Taking.
After Dot.Com Crash, Fraud of 9-11, Enron Scandal, Maddoff Scandal, Corzine Scandal, Knight Scandal, Peregrine Scandal, Standford Scandal, Sandy Weil Scandal, Robert Rubin Scandal, NAFTA Scandal, Graham-Blighbly Scandal, Dodd-Frank Scandal, Ratings Companies Scandal, Sub-Prime Scandal, Ninja Foreclosure Scandal, Rehypothication Scandal, Global Financial Scandal caused by Wall Street, JP Morgan Whale Scandal, Pallets of Money falling off trucks or Electrons in Pentagon, Torture, Rendition to Secret Prisons and Foreign Prisons, 12 Year war in Afghanistan, US Soldiers Guarding Poppys, $10 Trillion in Defense Spending in 12 years, WMDs in Iraq...
I've lost my Perspective on what is possible.
Thanks for this! What is your source for the EROI break-even numbers? I'd love to be able to cite to these. . .
Good post. You are right, there is a minimum EROI that can feed the SUV driving American bubble in transportation. 5-1 is hardly something that can sustain the mad oil wasting US transport system. Remember Canada has pinned the nation's prosperity and economic growth model onto TAR SANDS, where you mine sand, boilit down and extract the tar with hot water and then add chemicals to make the tar flow. This has worse EOI than fracking, in fact, the worst EROI of any energy source in mass production.
I am not sure if you intended it, but that is a beautiful comment. You see, it is precisely the difference between conventional oil and "shale" or "frak" oil.
If the well was conventional, that is a big, liquid pool of oil, all you need is a straw and you can pump it out. So, your comment is spot on; move the well over and drill less.
But, with frak/shale wells, the oil isn't liquid at all. It seeps from the well bore (i.e. the walls of the hole in the ground). They drill sideways to make the well bore as long as possible to increase its surface area so there is more leaking.
Fraking takes the round hole, puts shape chages in it, and then detonates (there are other methods - this is illustrative) so the rock fractures. They driller then pressurizes the well with sand and water (mostly) so that all that sand gets in the cracks and props them open when the pressure is removed. That further increases the surface area.
Back to the article, I never considered how much moolah the fed printed up actually got sucked into energy production. I guess it hinges on wether it was an intentional investment or not. After all, it is pretty much the only sector to really make money for the little guy and it is kind of savy, in a "lets really kick the can" kind of way. That also means they new pulling the QE plug meant pulling the shale/frak oil plug. And then they crash oil prices.
Must be time for the fireworks ...
Regards,
Cooter
I'm not an Oil Guy or a Finance Guy. But isn't Fraking like Neil Bush Loans from Silverado except in this case they figured out how to take the responsibility out of the 1 year Companies set up for each Drilling. Probably I am over Generalizing by saying the whole industry is made up of Sub-contractors who drill for a year with short term Financing... but that is my thinking.
You guys are smarter than me. Didn't we have an article here last year or so about how there are hundreds, like 600-1400 Franking Well Sites that have not been properly "Capped" or if they were the remaining 1400 sites are not cleaned up and properly closed out.
Maybe 2 Questions there, plus we know Fraking depends on LIRP or ZIRP Financing.
I signed in just to give you a thunbs up on your brilliance.Four people have no sense of humor!
NIMBY!!!
:)
How many barrels at $70 do you need to pump to hit $12,500?
Another good question is how many $70 barrels does it take to recoup the $8.9 million dollar cost to drill the well?
Roughly 128,000?
You forgot to take that $12,500/month servicing cost into account.
If you can't pump the oil fast enough, the servicing costs bankrupt you...
We're losing $30 per barrel, so we MUST pump even more! (must run faster to stay in place)
Burns Slant-Drilling Co.
This actually makes some sense. So a decrease in rig count will make it cheaper to drill new wells in six months and then the profit levels will go back up and the whole process will start all over. The service companies have definitely been acting like predators and will be to a degree a victim of their own greed.
The operator that drilled my well brought on a couple of stacked rigs from Bison and made them work at his expense. So the wells he drilled with them in the first half of last year cost him more money but once he was done, the rigs were working great. What did Bison do? They raised his rate by $3000/day and told him he had to sign a year contract or lose the rigs.
WRS: I really enjoy your very informative comments on the oil patch.
Isn't it the case that here the post conflates drilling and lifting costs, fixed costs (like acreage leases) and finance costs?
For sure, drilling rig rates will come down a little. Labor costs will come down some. Land lease costs will likely come down too. So it's not fair to say that the producers will get squeezed completely without any respite from higher costs.
Perhaps they have taken on too much high-cost debt to finance expansion of drilling programs. These costs won't come down and will likely go up at the margin, as borrowing bases contract with lower reserve valuations. But actual operating costs will come down for sure, right?
This is a better place to park an idea that did not occur to me until just upthread where I was posting on a different angle.
What if the only "QE transmission mechanism" that actually worked (if we can allow that notion given the stupidty of the idea in general) was the oil patch, specicfically shale fracking?
It is a malinvestment, but it was a malinvestment that produced pretty much the only job growth seen in the last 6 years or so and it produced oil to boot.
Now that they are killing off QE (have to) they crash the price of oil ... and it is time to scoop up assets on the cheap! And this will wreck the oil sector job market, particularly the fracking stuff.
This might be the start of a new phase of greater depression ...
Regards,
Cooter
I think it was a big part of the QE transmission mechanism but I don't think it's particulary malinvestment if we need and use the oil that is produced.
And if we count all those Employed in Oil & Gas, Drilling, Pipelines, storage, transportation... My Guesstimate is only 1.2 or 1.3 Million Workers in USA.
Those that actually Drill, Oil and Gas, is .22 Million people.
I could have missed a lot of workers somewhere, but doubt we can say Oil and Gas Drilling provides a lot of Jobs.
Yeah, the operating costs are what I was referring to. I am not aware of what the typical debt arrangements are. One of the larger operators out in the Wolfcamp is XEC and they have very little debt. They are also very cash-flow positive and have some really good wells that I know are paid for so they have some good free money spigots working for them.
The service companies will give better deals as equipment starts piling up and workers are lined up waiting for a job. Right now it's the opposite situation. Some kind of slowdown would be in order. I also have mentioned that infrastructure is an issue as well. So there should be a natural limit to the increase in production which by now has been reached. This over-reaction in pricing may be short lived. Looks to me like the big drop on Thu and Fri last week was more a speculative flush than anything to do with real market conditions.
I would like to see the price get back to $80 and see what comes next. That seems a fair price to me albeit probably too low for most of OPEC.
Sitting on the dock of the bay watching those shale oil plays go away...
"All is not well. I doubt some foul play." Hamlet
All's Well That Ends Well
All's Well That Ends Well
By the end of Hamlet; everybody is dead,... except Horatio...
And Young Fortinbras, the Swedish holder of the junk Danish financing. He marches in at the end amidst the carnage to restructure Denmark.
"All's Well That Ends Well"
The question is does the oil well end well?
France - 1790s
During the revolution the government sold large numbers of assignat bonds to pay its debts, but excessive borrowing and food shortages drove up prices. In 196 inflation reached 1,153pc
UK - 1921 to 1933
The end of war finance and return to the gold standard in 1925 put downward pressure on prices. Prices fell in almost every year in this period, and by 1933 they had fallen 38pc
Germany - 1923
In December 1923 wholsesale prices were more than 85,000,000,000pc higher than a year earlier. The highest denomination bank notes had a face value of more than 1 trillion marks. By October, more than 99pc of bank notes had been in circulation for less than 30 daysRussia - 1923
In the years after the Russian revolution, the country experienced social and economic turmoil. Some economic historians believe that the government created inflation to impoverish the better off. In 1923 inflation reached 60,804,000pc
Greece - 1944
By October 1944, 99pc of government spending was financed by printing new bank notes, rather than from taxes. Inflation peaked at 130,000pc in this month
Hungary - 1946
Hungary experienced the highest inflation ever recorded. In the peak month of July 1946, prices were doubling in little more than 12 hours. The largest denomination bank note in circulation was worth 100,000,000,000,000,000,000 pengo
China - 1945 to 1949
Civil war began in 1945 and military spending was high, accounting for up to 80pc of the Nationalist government's budget. Prices, measured in Chinese Nationalist Currency, rose by 2,372pc in the year to March 1948
Argentina - 1980s
During the 1980s inflation averaged 750pc a year, reaching a peak of 4,924pc in December 1989. The main cause was a persistent government budget deficit. This was financed by the country's central bank, which led to high inflation
Federal Republic of Yugoslavia - 1993 to 1994
The inflation rate peaked at 331,000,000pc in January 1994. The largest bank note in circulation had a face value of 500bn dinars
Japan - 1998 to 2005
The 1990s were known as the "Lost Decade", and the country' difficulties were linked to the large amount of debt in the economy. Prices began to fall in 1998, a process that continued for several years. By 2005, consumer prices had fallen by more than 4pc from their peak in 2005
Zimbabwe - 2006 to 2008
Inflation reached 66,212pc in December 2007, the highest in the world at that time. The highest denomination bank note had a face value of 10 trillion Zimbabwe dollars
USA Dollar NEXT
All these years on ZH and I am finally turning the corner and joining the "OMG this deflation is going to a fucking nightmare".
Maybe one day, but not for several years at least and likely much longer.
Regards,
Cooter
couple minor points:
UK and Japan examples are deflation not inflation.
Zimbabwe had a 100 trillion dollar note, i have one of each of the trillion dollar notes pinned up in my study at home, 10, 20, 50 & 100
180 trillion dollars worth nothing.
I have 100 trillion dollar Zimbawe notes.
USA 1973 & 1979 Oil Shocks, Inflation. Systemic Inflation.
The 1973 oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries (OAPEC, consisting of the Arab members of the OPEC, plus Egypt, Syria and Tunisia) proclaimed an oil embargo. By the end of the embargo in March 1974,[1] the price of oil had risen from $3 per barrel to nearly $12. The oil crisis, or "shock", had many short-term and long-term effects on global politics and the global economy.[2] It was later called the first oil shock, with the 1979 oil crisis being the "second oil shock."
https://en.wikipedia.org/wiki/1973_oil_crisis#mediaviewer/File:Oil_Price... (300% Increase in 1973 & looks like a little more than that in 1979)
For what its worth, the lateral driling lengths are also significantly longer in 2014 than 2008, which drives costs but increases recovery/well.
You can bet there will be some fire sales of wells that are over levered...the 10 cents on the dollar trade...coming soon to an oil field close to you...
Paper games. Too much paper wealth or in this age, digitial wealth based on ficticious book valuations and derivatives.
This fake wealth is destorting prices and a handful of players are driving prices up and down like a yoyo. Has no relations to the real economy. The real economy is trying to chase whatever ficticious price the players are setting.
It's painful to watch, it's hurting real people in the real world.
Death to the money changers!
As I sit here unemployed in Lafayette La I have been thinking about leasing a new crew cab diesel and a 40 ft flat trailer and do hot shot since here is a energy hub and all I see is these mini floats running around
I can go get a cdl , fuck got nothing but time since I lost my job as a collision painter .
Tried Texas and Mexicans doing that so cheap that why should I trash my skills of 27 years for dirt cheap..
Figure what $$$ I have I could get the truck,trailer,insurance and lease on but with all this shit going on my luck I'd lose it if it all goes bust...
Tell ya ...if I didn't have a wonderful daughter I'd move to the fucking Keys ,build a cheap house boat , go anchor it in the mangroves get a job as a boatyard hand , a bicycle and as long as the end of the day I can take a shower and eat I'd be golden.....
Check out South East Alaska.
In SE most places there isn't a road in/out and the communities are several thousand up to thirty thousand depending on where you hang your hat. Boats are obviously a big part of the economy. Tourism. Go north and there is a lot of oil work, but it gets colder fast.
Cost of living is high though, so be sure to do your dilligence before putting chips down.
Best of luck!
Regards,
Cooter
That makes sense, the cost of oil dropping $50 but the cost of drilling for it increase by 50%. Does anyone else see a major logic fail in here somewhere????
Costs to drill oil rose long before QE started--like 2000. Geology's a heck of a concept.
Those costs to drill are not really correct for comparison purposes.
The well plans are quite a bit different.
What is happening is that the latterals are much longer, maybe twice the length. Then the frack jobs have maybe half a long a zone, meaning more stages per job.
The longer latteral gives more recoverable reserves per vertical hole = lower costs. Several wells are drilled from the same pad = lower costs.
Shorter stages for the frack job is done to increase initial recovery rate as well as total recovery. Faster payback and much greater EUR.
Not mentioned in the item is the possibility of higher costs being incurred because of the use of more complicated technology. There may be a medium-term benefit to the environment from lower petroleum prices as high cost frackers are forced to close down. In the longer term, the US will be better off if it is not now engaged in squeezing every drop of eil out of every shale basin, rather saving some for a future petroleum-starved economy. That assumes, of course, that there is a possibiity of future regulation and/or cooperation on priorities in the use of diminishing supplies. For now, both the public and the industry have shown no interest whatsoever in such cooperation.
http://www.cbc.ca/player/News/Business/ID/2623085441/
The Exchange with Amanda Lang | Dec 1, 2014 | 7:30
Crude and currency
Economist Jim Rickards weighs in on the impact of low oil prices on currencies
Very important figure that is! Now I understand why and how wells are drilled in the Fracking Zones, where a college girl can drive a water truck to well sites and make well north of 50K for it. It is too much money chasing a limited number of leased drill sites. Indeed, the Fed printing and zero interest rates have driven costs of drilling higher, and at the same time fueled the boom with unlimited zirp availabe for leverage. This crazy, non-market, driven fracking is gonna blow up, outward, or downward, but it will blow.
inflation!?!?!?!?!?!?!?!
even doctors can't afford obamacare.
that's significant, not only can the general public afford obamacare, doctors can't afford it either. it's putting us all out of business.
half the people who have health insurance aren't even using it because they can't afford it!
Can someone please tell me where the image showing costs was sourced from?
An image with some information and no source or reference is pretty meaningless IMHO.
Eagle ford ~ 6mil per well. (and this is probably the most expensive they have done and they have been in many shale plays)
i think costs were on their way down with the 6 wells off one pad going on recently. tho havent seen the quartely
this was a recent company i got out of, now down half its value from 4 months ago most of that in the last week.