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Shale Liquidations Begin? Sub-$50 Oil Appears In North Dakota
When ISIS dared to steal and sell oil at below market rates, they were dire pirates that needed to be destroyed (and anyone who dared to buy it was pariah). So when, as Bloomberg reports, crude sold at the wellhead in the Bakken shale region in North Dakota fell to $49.69 a barrel on Nov. 28 (according to the marketing arm of Plains All American Pipeline), you know there is an issue in the US Shale industry. As one analyst notes, "to a producer in Wyoming, if Brent’s $70 then I’m at $50, then I have to start asking does it economically make sense to keep drilling, they might start reallocating capital, you might see projects slowed or shut down."
Oil market analysts are debating if oil will fall to $50. In North Dakota, prices are already there.
...
The cheaper price for North Dakota crude underscores how geographic and logistical hurdles can amplify the stress that plunging futures prices have put on drillers in new shale plays that have helped push U.S. oil production to the highest level in 31 years. Other booming areas such as the Niobrara in Colorado and the Permian in Texas have also seen large discounts to Brent and U.S. benchmark West Texas Intermediate.
“You have gathering fees, trucking, terminaling, pipeline and rail fees,” Andy Lipow, president of Lipow Oil Associates LLC in Houston, said Dec. 2. “If you’re selling at the wellhead, you’re getting a very low number relative to WTI.”
Discounts are not that unusual due to location or quality...
Discounts for all crudes are based on two things, location and quality, according to John Auers, executive vice president at Dallas-based energy consulting firm Turner Mason & Co.
Most U.S. refiners are along the coasts, which gives them a choice between oil pumped from wells in the middle of the country or foreign crude that can be delivered to the plant on a tanker.
That means the producer has to charge less, to make up for whatever it costs to transport it to the plant. In the Eagle Ford, that just means a few dollars to get to a pipeline that can cheaply push it 100 miles or so to Corpus Christi, Texas.
It’s more complicated in places like North Dakota, Colorado or Wyoming, where there is limited pipeline capacity. Producers have to fill rail cars with crude and pay $10 to $15 a barrel for them to be pulled a thousand miles or more to the coasts.
But this massive discount signals something different as cash liquidity becomes crucial and every shale oil driller is pumping like crazy to get their revenues...
“To a producer in Wyoming, if Brent’s $70 then I’m at $50, then I have to start asking does it economically make sense to keep drilling,” Auers said yesterday. “They might start reallocating capital, you might see projects slowed or shut down.”
...
“Places that are just starting to build up are going to be hit the worst,” Larry said by phone yesterday. “They’re going to get hit the hardest because it’s harder to get the oil out. Not out of ground, but out of the area.”
* * *
So with every expert in financial media clinging to some hope that oil prices can't go down any more surely right? The answer is yes... and have already broken below $50... something that may indicate not just transportation issues, but desparation for crucial liquidity needs.
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been this way all along, nothing new here, price at the wellead is always lower than the benchmark quote.............
yeah, but its sort of like the difference between a rope and a bungee cord. both will keep you from hitting the ground, but...
It's really expensive to get that from the wellhead to refnery. No pipeline.
So this is what they mean by...
Peak Oil? /s
i smell bailout.
Hopefully the nice oil drillers get bailed out.
I hope we get to bailout Wal-Mart and Sears too.
Everyone deserves a no-risk investment platform.
Don't forget the poor ethanol producers.
I know your sarc, but poor ethanol my foot. Here in the Midwest the only fucking reason it's cheaper than regular without (water) ethyl is .gov.
The security blankey hiding all the largesse for these guys is that it's a clean fuel. I don't give a shit if it's 50 cents cheaper a gallon, I still burn the non corn blended shit. Better milage and I'm not supporting the thieves to the extent I would be otherwise.
Bailout in the form of the SPR?
Any precedent for that? Far as I know, only banks get bailed out.
And The D.
And General Motors.
Is there any sense in building a refinery near where the shale is extracted?
The owner of a railroad can block permits for a refinery as easily as he can block approval for a pipeline.
Especially when your name is Warren Buffet. Owner of Obama.
ding ding ding
Does it make economic sense for the nation as a whole?
It is risky to spend hundreds of millions of dollars and several years to design and build a refinery near the shale oil unless you are certain it will operate long enough to pay itself off. Meanwhile, you would have a refinery in Texas or Louisianna sitting there idle. Keep in mind different refineries are used for different oil mixes.
I hear that refinery capacity down in the refining belt have much excess capacity. This is why the demand for Tar Sands pipelines. I asked why Canada does not build refinery capacity right next to the Tar Mines. Answer, "cheaper to send it to LA or TX, due to existing low cost refining capacity sitting idle. That is what I was told anyways.
:cough:Warren Buffet:cough:
Per link posted below, the too big to jails are in some $3.9trillion on comm derivs: http://investmentwatchblog.com/plummeting-oil-prices-could-destroy-the-b...
Good point, we'll see. If there isn't any money for the necessary investment in shale and ultra deepwater oil, that production will stop, and we will see a defined top to oil production, aka Peak oil.
So this is what they mean by...
Peak Oil? /s
I cannot care less if there are 50 Billion Barrels of Oil that are locked up in a Shale play. If it becomes uneconomical to recover them, if it costs more than what it is worth, if it takes more Energy, if it takes more WORK, as Energy and work are synonyms, then that Energy will not be produced.
It is about Energy Return Over Energy Invested, EROEI.
When ER/EI < 0 then nobody can use any of it.
The World has less Oil now than it did 15 Years ago. Furthermore it costs more Energy to extract, and bring to market, that Oil which is left.
As the Energy Invested (EI) increases then the fraction ER/EI approaches ZERO.
The easy energy has already been extracted and consumed.
You must realize that any "Bell Curve" is an EXPONENTIAL FUNCTION. You must also understand that the Peak is where the Derivative is equal to ZERO. That is a MAXIMA. In any adiabatic system Exponential Growth always, and without fail, leads to EXPONENTIAL COLLAPSE.
The major problem is that most people cannot fathom the Exponential Function. They do not understand the most basic definition of a Logarithm.
(It is a two Word answer...What is a Logarithm? Ans. AN EXPONENT.)
Because of that we are doomed.
You can downarrow this all that you want but it will not change it.
Your "sarcasm" is the truth.
Why is it so certain that the decline will mirror the rise, in a Bell Curve fashion? Might a Seneca Cliff occur instead, since the second half of the reserves will have much lower EROEI and credit will be exhausted?
Very good point. The up curve was easy, sipping straw, oil, what's left is hard to get oil. The downside should be quick and painful, prices should flash higher at some break point, when the market makers realize Cheap Oil is over.
If the price drops below the break-even point, leave it in the ground... It's like money in the bank because prices will go back up... It always does...
A good lease won't allow that.
Indeed. Besides, how does a well driller/oil pumper stay in business when they are not drilling/pumping oil? Let's ask the last unsustainable bubble - How does a home builder stay in business by not building houses?
Answer: They don't.
We are going to see a shakeout in the drillers, just like in the 1980's... Back in the 80's, there were O&G folks walking away from their homes and mortgages in Houston due to the bust in O&G... We're headed that way again...
These drillers are heavily INDEBTED. Furthermore there are other stakeholders whom own shares in these speculative plays.
These drillers will be bought out, for pennies on the dollar, by the likes of Goldman Sachs and Chase Manhattan. (I am not one of them...a driller or an investor, I understood that it was a poor investment from the beginning. Fuck Stansberry and Associates for pushing this.)
Maybe, just maybe, those large Banks have a reason to conspire with their counterparties in Saudi Arabia to crush the Oil Price???
These large Multinational Corporations are not working in the Nation's, yours, mine, and many others' best interests.
I understand the facts. I report facts which also piss me off. But it does not change the facts.
So...Do you support that action by the Multinational Banksters?
It's going to depend on who is holding the paper. There are ways of dealing with it But I wouldn't bet on GS coming because they would become legally liable and the landsharks will line up to drill deep pockets of money.
Tell that to the silver and gold producers.
Yep. A bag of shit in one hand and a bag of small miners in the other. Guess which is worth more......
astoriajoe -- lol and an up arrow to you for the great analogy : )
gulf coast refiners have been buying saudi and oil tar sands for West Texas Intermediate minus $25 for a few years now
is this another shale oil thread where everyone pretends to know more about the subject than wrs1? cool, I'll grab some popcorn...
Pretty good Seeking Alpha article looking at EOG completion improvements and changes in well economics. The producers with good acreage and good well engineering will keep drilling.
Bakken Update: EOG Antelope Well Has One-Year Payback At $50/Bbl WTI
http://seekingalpha.com/article/2729005-bakken-update-eog-antelope-well-has-one-year-payback-at-50-bbl-wti
Indeed! And Well-Head price is going to be low when it takes trucks to drive the oil out, to trains to haul the oil from there. Thus North Dakota Well-Head was going to be well below benchmark. My problem with this is people come on ZH and debate Fracking Profitability Minus two things. #1 cost of debt service costs and this well-head price. They keep pointing to Benchmark and saying how Fracking can withstand a 50 dollar benchmark! Ouch, imagine Well-Head if Benchmark is $50! And they never mention how leverage drillers are, the wellhead price is not profit, it often can barley cover costs to drill and leverage service.
I think, if this oil price decline has legs, Frackers will be the first to go under.
Just was in Dickinson ND last week, and gas was still $3 a gallon. At $50 a barrel crude, shouldn't gas be about $1.75 a gallon? Someones making some money yet.
"shouldn't gas be about $1.75 a gallon?"
Nope. You forgot about all the taxes.
Even if oil fell to ZERO, here in California, gas would still be $0.72/gallon. That's the current tax on a gallon of gas...
[P.S: Diesel is $0.74/gallon...]
Since there is surplus oil...
Can we make corn from oil?
I realize there are taxes on gas, the wholesale cost of gas on the NY Mercantile Exchange is $1.80 a gallon. There isn't $1.20 in taxes on a gallon of gas in ND. When crude hit $150 a barrel in 2007, gas hit an all time high of $4.29 in MN. Gas is still $2.59 here even though crude is over 50% lower. And if we can buy ND oil at $50 a barrel, thats a 66% reduction in crude price yet gas is still only 40% lower.
Haul it outa there and refine it and bring it back and sell it to you.
You have just lost your discount. To many fingers in the soup.
I agree. Gas is way more expensive now than the numbers say it should be. Somebody is still making some money on that divergence.
$2.59 in ND? I am paying that in hi-cost California. Somebody is making a profit in ND.
Where at?
It is $2.98 in San Diego.
That wold be uncle Warren "Suck It" Buffet. Seems like he's makeing $15 - $20 per barrel as he transports all that oil on his BNSF rolling pipe line. Wonder if Barry got a slice of the money for his blockage of Keystone. LOL
Yes, if you count fertilizer.
We can make ethanol from corn. Talk about more energy input than output, an environmentalist placebo if I have ever seen one.
Ethanol never had anything to do with the environment. It's an ADM handout, or should I say stickup for US. Shortened engine life and storage life for the fuel, too.
Every time some faux do-gooder says "green", they've got their fingers in my wallet.
It's a handout to ADM, certainly, and also to the entire Great Plains corporate agriculture complex, in return for votes. As midwest farmers plant more corn to turn into ethanol, and deplete their soil and degrade the overall environment, they have to apply more fertilizer, herbiciide and pesticide than ever before. That costs money; maybe as much as the corn can be sold for. So the whole ag-lending complex comes into play, and takes its place in the gravy line. Meanwhile, due to various free-trade agreements, farmers in other countries can't sell corn for even the price of seed, and drink herbicide and so on like they do in India to kill themselves.
But hey, the lobbyists get a lot of money to give to politicians for 10,000% ROI, so it's all good, right?
i've always thought that the fact iowa caucuses first in any given presidential election pretty much guarantees ethanol subsidies till the wheels fall off
We already do. Try and keep up.
And those taxes are about to rise now that Saudi Arabia left the door open to allow it. No .guv will want to waste the opportunity to leech the difference.
Beat me to it. Increase "excise" taxes etc. etc.
already started in Michigan - need it for roads...
There are not enougn refineries in the area. some are under construction because of the high demand vs local supply.
Although it appears that someone is making money, it really is just a lot of real transport costs piled on. I believe there is only one small refinery in that region. Remember that there was only a very small population in the Dakotas and Montana and only fuel demand was for farming. Now all of the drilling and oil transport requires a lot more fuel, along with a large increase in worker population.
There is a 60K barrel per day refinery in Mandan, and 2 of them in Billings Montana. I didn't notice any gas stations that were out of fuel so supply is fine. And a 20k bpd is opening in Dickinson this month. Mandan is about an hour and a half from Dickinson, so transport costs should only be about a nickel a gallon.
That's the key right there. I haven't seen a gas station that didn't have gas since I was a little kid in 1973. So bullshit on supply/demand having anything to do with the price of gasoline. It's all the middleman transaction fees, on top of speculation.
The demand is about three times the capaciy of those refineries.
Just because there was gas at the pump does not mean that the area is not short of local refinig capacity. Transportion and inventory managemet are pretty well advanced today.
Just because people can purchase lettuce in NYC does not mean that there is ample local supply.
if only the relationship were linear...
What's this transportation nonsense? I thought well-heads were spitting out $100 bills!...
They are but just not as fast now.
Destroyed a lot of S&Ls and Texas banks back in the 80s. Course that was the real plan, like I said, Saudi's are owned by snakes in suits.
This is why I read the comments section on Zerohedge. Very informative. Yeah, what about all the money the banks will lose as the oil thingy goes south?
This will be interesting.
Saudi Arabia is our bestest friends. They have our backs and are always looking out for our best interest. Now, if only they would pull that knife out.
If they pull the knife, we'll bleed out.
The economic wars are escalating.
"to a producer in Wyoming, if Brent’s $70 then I’m at $50, then I have to start asking does it economically make sense to keep drilling, they might start reallocating capital, you might see projects slowed or shut down."
All is going according to plan, I see.
'House of Bush, House of Saud'... a very interesting book.
Great book. One which I own.
Obama and his people are trying to punish Russia. Guess others besides Russia are getting punished as well.
I've been punished for 6 years down rite abusive. I am an insurance man and been doing this 30 years now wtf do they get by killing the tax base????
I remeber my dad losing his job with a trucking company in 1974 because of high fuel prices. Lost it all; good union pay, his boat, the house, etc. Just pawns in a big game.
That would be the boomerang mentioned by Putin.
No, what it is going to destroy is the regular residents of North Dakota. One look a a random pick Drilling company, Say Cheasepeake Energy(dont know if they are bakeen driller, just an example of a balance sheet that is fubared), Levered to the hilt to drill more and more wells. When the bottom falls out there are going to be the normal 600,000 residents
to foot the tax bill for all the cleanup and lost revenue all while their cities turn into ghost towns replete will plywook boarded windows and tumbleweeds. West Texas- early 80s all over again. I survived it. It sucked.
When the margin call comes, the big oil companies ride of into the sunset back to their cigars and offices in Houston and Tulsa with the profits leaving half the equipment and the population in collapsed local economy, Save for a few state and city officials that will majically show up buying brand new Suburbans on their 30k salary,, the rest are stuck 1000 miles from the nearest job.. The 4% ND unemployment will seem like a distant dream.
Hey we all moved to OKC, Tulsa is a ghost town now, get your facts straight.
I think many real ND have remained cautious thru this...
and tucked away maximum amount in real..
Very conservative people.
I am wonder how and what Bank of North Dakota is doing in this boom...?
CHK has tried to pivot towards oil and NGL's, they were somewhat successful, but as far as i know they are still primarily a dry gas producer and not present in the bakken at all. they've also recently announced a $5bn sale of marcellus assets which will make a big dent in their debt, which is already down considerably from a few years ago. still, NG is weather driven right now and it's been getting beat up pretty good as well. even with rigs getting laid down in the oil patch, so long as NG prices stay north of $3.50, i think they'll make it. anyway just thought i'd share.
Hey Tyler not a peep about the fighting in grozny?
not a peep about explosion in chemical plant in German or Iran jets in Iraq - i think you should be fair to him=)
Grozny is a city name, it's should be with high letter
Yes I understand, I was in haste
Here is some in English:
Hhttp://vineyardsaker.blogspot.com/2014/12/what-fallout-of-recent-combats-in.html
Nice. Drive a trailer out there and pick-up stuff on the cheap.
"desparation"
is that similar to depandant?
I know a "depandant" is a procedure to remove a Panda, but I'm not sure what "desparation" is.
if Obama is trying to punish Russia, Iran and/or Isis, he's doing it in a way that is so typical of his administration, for in this incredibly short sighted process he will blow up the US and Canadian shale oil and frac sand business and put 1 million people out of work. Bloody fools.
Whatever is spent as costs for a shale well is spent wthin the US. It all generates wages to be taxed. Profits and royalties are also taxed. It should be a gusher for governments on all levels.
Exactly why I don't buy the punish Russia story. This is snakes in suits controling their puppets in SA.
This is the families consolidating wealth. That is what they do and is their MO. Always to consolidate wealth into their own pockets.
Then how come they have spent tens of billions on gassification plants in Texas & Louisiana? They started building them right after Russia played games with Europes gas supply several years back.
One of 4 new plants at a cost of 15 to 21 billion each: http://www.ibtimes.com/feds-approve-fourth-lng-export-terminal-amid-grow...
and conversly: http://www.economist.com/blogs/charlemagne/2014/04/netherlands-lng-termi...(working only at 10% capacity currently.
No, they have had this in mind for years.
NG is a different commodity from Oil. So far, oil is the transportation fuel and NG is the heating and process input. NG at $4 equates to about $28 oil on an energy equiv basis. Look at the Pickens' plan for converting transport to NG fuel.
The LNG plants are supposed to allow export of cheap NG to higher priced areas of Asia and Europe. Conversion and transport estimates are about $5 in round numbers.
perhaps that is the plan, sacrafice some pawns for the greater goal (or so their thinking would go). "We laid off some folks"
Step back from the picture a bit further.
haha, the Plan is to put people out of work.
you need read up on marxism...
We should start cutting our expensive ethanol with cheap gasoline.
LOL, gawd I fuckin' hate ethanol.
Why? Because is ruins many of the cars still on the road because people (wisely) refuse to replace them right now.
The cars handle it better than the power tools: like mowers, chain saws, weed whackers. it chews up the hoses, plugs the filters, and eats the gaskets. So they say. None of my stuff has died, as yet.
if that were true, every Mexican landscaper in Texas would be out of operation... as it is, you can hear E10 being converted into noise pretty much every day of the week...
You guys don't have ethanol-free marine gas to use for two-strokes? No sense paying road tax for fuel for a lawn mower or weed wacker.
Cars have more cylinders.
Pull the spark plugs of a car from the 90's run on that shit. Toast.
REC 90 non-ethanol is expensive and hard to find but milage in a mid 90's 8 cyl with an OD trans can jump up close to 25%
More BTU content in gasoline than ethanol. More energy means more miles / gal.
copy that, we'll be sure to put extra MTBE in your water table...
But, but we'll destroy are ozone, tree hugging fanatics claim.
/sarc
these dumfuks will keep on drilling at a loss as long as they can get loans for operations, or sell stock. I saw what happened in the nat gas market. When banking and the stock market is involved, normal profitablity is not a consideration. Miners are the same way.
too low cost of money distorts all businesses, retail comes to mind, no need to call names
The stock market was stupid.
The only question asked was "How much can you increase production?"
When thirty or so moderately sized companies are in the race to increase the most, with unlimited cash available, it gets to oversupply pretty soon. Additionally they drove acreage costs much much higher because having that on the books was a requirement. Look at the CHK writedowns and losses on acreage they could never drill.
“They might start reallocating capital, you might see projects slowed or shut down.”
Reallocating capital to what? Will the new projects create jobs? Or do they mean just keeping the capital idle in a bank?
Capital is allocated in normal markets.
ZIRP / QE are not part of a normally functioning market.
Reallocating from the banks to their pockets. Next step, a sign on a locked gate: "Closed, No Trespassing."
'capital idle in a bank'
Are you sure it's "idle"?
'Now wait…now listen…now listen to me. I beg of you not to do this thing. If Potter gets hold of this Building and Loan, there’ll never be another decent house built in this town. He’s already got charge of the bank. He’s got the bus line. He got the department stores. And now he’s after us. Why? Well, it’s very simple. Because we’re cutting in on his business, that’s why. And because he wants to keep you living in his slums and paying the kind of rent he decides. Joe, you had one of those Potter houses, didn’t you? Well, have you forgotten? Have you forgotten what he charged you for that broken-down shack? Here, Ed. You know, you remember last year when things weren’t going so well, and you couldn’t make your payments? You didn’t lose your house, did you? Do you think Potter would have let you keep it? Can’t you understand what’s happening here? Don’t you see what’s happening? Potter isn’t selling. Potter’s buying! And why? Because we’re panicking and he’s not. That’s why. He’s picking up some bargains. Now, we can get through this thing all right. We’ve got to stick together, though. We’ve got to have faith in each other.'
"Reallocating capital to what? Will the new projects create jobs? Or do they mean just keeping the capital idle in a bank?"
Stock buy-backs.
Maybe this explains why Obama is so unconcerned about the elections, his handlers are now applying the final coup de grace to the American economy and starting a world wide war with one deal with SA.
could it simply be that the cost of production is below $50 and they are still profitable at these prices levels ?
It depends on what exploration and financing costs are baked in, a W.Texas sipper well paid for decades ago can take the break, but the Saudi's have a two dollar a bbl cost to produce, they can take it to 30 and weather out the deck wash.
This is a power play pure and simple.
The saudis don't get price minus two bucks for their oil. They have to turn around and give their margin to the unwashed masses. For every barrel they pull out of the ground, they pay over $100 in freebies. They are simply fucked by deflation.
Read about completion improvements and production economics here:
Bakken Update: EOG Antelope Well Has One-Year Payback At $50/Bbl WTI
http://seekingalpha.com/article/2729005-bakken-update-eog-antelope-well-...
Jimmy Peanut Carter oil crisis Part II
Mmmmm, Peanut Oil! Now all I need is a tarp!
Does that mean Jeb Bush 2016?
Let me know when crude gets below $30 and I'll bet the ranch.
You won't hear the D word coming out of Fed mouths... but that's what it is. Deflation is tightening its grip on global economies and what commodity is better suited to bring them all to their knees than OIL?
http://www.globaldeflationnews.com/plummeting-oil-prices-spur-deflation-...
..you got it, while the world fears inflation it's deflation that causes nations to fail and we are in the grips of a serious structural deflationary cycle.
Hey America enjoy eating your seed crop and enjoy that two dollar gas while it lasts..
Demand is reality.
Falling demand for all commodities will be the wrecking ball that smashes the current economic fanasy.
If there are no buyers it has no value.
wow. thats big news. when is gold going to decouple from oil and shoot up?