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First Oil, Now Shale Gas Set To Crash Amid "Orgy Of Over-Production"
Submitted by Arthur Berman via OilPrice.com,
Spending cuts for oil-directed drilling have dominated first quarter 2015 energy news but rig counts for shale gas drilling are too high.
Investors should pay attention to this growing problem. Bank of America fears sub-$2 gas prices now that winter heating worries are over. Low natural gas prices affect the economics for gas-rich oil production in the Eagle Ford Shale and Permian basin plays as well as for the shale gas plays.
Meanwhile, an orgy of over-production is taking place in the Marcellus Shale. Well head prices are now below $1.50 per thousand cubic feet of gas because of limited take-away capacity and near-saturation of regional demand. Even companies in the Wyoming, Susquehanna, Allegheny and Washington County core areas of the Marcellus play are losing money at these prices.
The rig count for shale gas plays has decreased by only half as much as for the tight oil plays. The reason appears to be that most shale gas companies do not have significant positions in the tight oil plays and must continue to drill to maintain production levels.
Shale gas rig counts have dropped only 19% for horizontal rigs and 25% for all rigs from 2014 highs. The corresponding decrease for tight oil plays is 41% and 46%, respectively, as shown in the table below.
Rig count change table for tight oil vs. shale gas plays as of March 20, 2015. Source: Baker Hughes and Labyrinth Consulting Services, Inc. (Click Image To Enlarge)
This has puzzled me because the shale gas plays are not commercial at less than about $6/mmBtu except in small parts of the Marcellus core areas where $4 prices break even. Natural gas prices have averaged less than $3/mmBtu for the first quarter of 2015 and are currently at their lowest levels in more than 2 years.
Henry Hub daily and quarterly average natural gas prices. Source: EIA and Labyrinth Consulting Services, Inc.(Click Image To Enlarge)
Most shale gas producers either do not have positions in the tight oil plays or are strongly gas-weighted in their production mix. These companies must continue to drill in shale gas plays despite poor economics in order to avoid the consequences of falling production levels.
The only criterion that seems to matter to investors these days is production guidance. If production drops, stock value will fall even farther than it has already. This will trigger loan covenants if asset values fall below thresholds set out in the loan agreements. When that happens, the loans will be called unless the companies can come up with more cash. This might result in bankruptcy. So, the drilling must continue as long as there is capital.
The table below shows the companies that have overlapping positions in both tight oil and shale gas plays based on current drilling activity.
Current rig counts for companies with positions in both tight oil and shale gas plays. Source: DrillingInfo and Labyrinth Consulting Services, Inc. Rig counts may differ from Baker Hughes because the source is different. (Click Image To Enlarge)
All companies in the table except Continental Resources are gas-weighted so maintaining gas production levels is important to them for the same reasons it is important to operators without tight oil exposure. Overall, the companies in the table operate only about one-third of all rigs in the shale gas plays. Shale gas is otherwise characterized by a different set of companies that feel they have no choice but to continue drilling and hope that investors don’t notice or care.
Shale gas rig count by operator. Source: DrillingInfo and Labyrinth Consulting Services, Inc. Rig counts may vary from Baker Hughes because the source is different. (Click Image To Enlarge)
But don’t oil-weighted companies face the same concerns about production levels?
I compared the change in rig count from January to March 2015 by operators in the Eagle Ford Shale play to understand how rig counts are being reduced. I found that key operators were strategically reducing their activity to the best locations in core areas in order to affect production levels the least (see chart below).
Eagle Ford Shale rig count comparison by operator, January and March 2015. Source: DrillingInfo and Labyrinth Consulting Services, Inc.(Click Image To Enlarge)
The next most active class of operators are holding drilling fairly constant in this most productive of tight oil plays. Then, there are a small number of new entrants to the play that are more than balanced by operators exiting the play. My previous post on Eagle Ford well performance showed that there are ample locations in the most commercial parts of the core areas for well-positioned operators to optimize production with fewer new wells.
It is worth noting that the top group of operators in the Eagle Ford Shale play have reasonably good balance sheets (see the table in my previous post) and are not particularly vulnerable to loan covenant threshold triggers. This cannot be said for many of the top operators in the shale gas plays shown in the table below.
Summary table of 2014 year-end financial data for natural gas-weighted U.S. land-based E&P companies. All dollar amounts in millions of U.S. dollars. FCF=free cash flow; CF/CE=cash flow from operations/capital expenditures. Source: Google Finance and Labyrinth Consulting Services, Inc. (Click Image To Enlarge)
The table shows financial data through year-end 2014. What it reveals is not pretty. 2014 negative cash flow reached $15.5 billion, an increase of $7.2 billion over 2013. Much of this increase involved Southwestern Energy’s puzzling acquisition of Chesapeake’s West Virginia Marcellus Shale position that increased that company’s negative cash flow by almost $5 billion over 2013.
On average, shale-gas companies earned only 68 cents for every dollar that they spent in 2014. Total debt increased almost $10 billion to $93.5 billion and average debt exceeded stated equity by 18% excluding companies with negative equity including the now-bankrupt Quicksilver Resources.
Shale gas plays are commercial failures. The misuse of capital to continue to increase production while destroying price and shareholder equity has gone on for too long. Investors should demand that shale gas companies cut rig counts at least as much as tight oil companies have.
Rig Count Summary for the Week Ending March 20, 2015
Rig counts are important today because they may indicate future trends for oil prices. Horizontal wells in the Bakken, Eagle Ford and Permian basin plays produced about 3.5 million barrels of crude oil per day in November 2014 (see table below). These are, therefore, the key plays to watch for rig count decreases.
U.S. key tight oil play production. Source: Drilling Info and Labyrinth Consulting Services, Inc. (Click Image To Enlarge)
The horizontal rig count for these key plays–Bakken-Eagle Ford-Permian HRZ-dropped 25 rigs this week (23 rigs last week) and was down 40% from the 2014 maximum. The horizontal rig count for tight oil plays overall dropped 22 rigs this week (32 last week) and is 41% lower than the 2014 maximum (see the first table above in this post). Rigs for all tight oil plays were down 31 this week (39 last week) and are 46% lower than 2014 maximum rig counts.
Summary of most changed rig counts by play. Source: Baker Hughes and Labyrinth Consulting Services, Inc.(Click Image To Enlarge)
The plays with the greatest change from their respective 2014 maximum rig counts may be viewed as the least commercially attractive to producers. This suggests that the Barnett, Granite Wash, and Permian All are the least attractive.
It is interesting that the Bakken moved into this category this week. Well head prices in the Bakken have now fallen below $30 per barrel. The play is geologically solid but wells are expensive, the pay-out times are fairly long because relatively low decline rates for a shale play, and rail transport adds a lot to the cost of each barrel of oil.
The overall U.S. rig count for the week ending March 20, 2015 was 1,069 of which 1,030 were land rigs. Only about 25% of total land rigs and 11% of horizontal rigs are drilling outside of the major shale gas and tight oil plays. Detailed data for all of the plays are shown in the table below.
Summary table for all U.S. land rig counts. Source: Baker Hughes and Labyrinth Consulting Services, Inc. (Click Image To Enlarge)
This and other data continues to suggest decreasing U.S. tight oil production and increasing world demand. Rig count continues to fall for the critical oil-producing plays and that means that things are on track for an oil-price recovery sooner than later.
Investors should carefully examine why shale gas players have not reduced rig counts more. Continued drilling in the Marcellus will crush natural gas prices further. The fact that there are 34 rigs running in the Haynesville Shale is economically baffling. We may only speculate on why there are 51 rigs in the Woodford Shale and why some operators now call it the SCOOP play.
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http://www.ijreview.com/2015/03/277752-high-school-dance-theme-got-cance...
A "White People Are Evil Theme" would never be a problem.
Many of these gas drillers, especialy in Texas are drilling for wet gas to feed the multi-billion $ Ethyl crackers being built all up and down the Texas and Louisana coast right now to produce ethylene a major sythetics base feed stock.
http://en.wikipedia.org/wiki/Natural-gas_condensate
Based on ZH's constant whining about the poor oil & natural gas producers, I am submitting a petition to insist they raise their prices and that the middle
class volunteer to pay higher prices for gasoline, diesel, heating oil, kerosene, and all other oil/gas products, and apply lube to their rectums.
#PoorShell
#PoorBP
#PoorStatoil
#PoorOthers
Oil as a by-product.
Thanks. That explains many mysteries;)
stupid white people being laughed at by the people they think their whiteness offends. they don't realize their whiteness is offensive when they decide these ridiculous nonissues with a huge dose of their racism.
Whites are morons for watching anti-whote TV and Hollywood plus sports like college ball. Dumbest thing in the world is a white male at a college ball game cheering on players getting free tuition while they pay for it. IDiots.
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://goo.gl/ezLA00
"Orgy of over-financialization" -- fixed it for you...
...manipulation & tyranny.
Look to PM's for a prime example of why the glut notion is complete nonsense [aka BS]
correct, it's not like money/credit creation actually requires any real collateral anymore...
tick tock motherfuckers...
What a load of crap.
What people should be wondering is why America is stroing more oil than it produces.
So IF oil is going to go dn more, why does America import it at this price and stores it?
Why are they even concidering to store oil in dry lakebeds?
MATH
Yeah sure, Americans know shit about that but there must be some with a calculator no?
So it’s for a war or a severe supply crash or dollar crash.
take your pick. But it’s got nothing to do with oversupply from frackers.
I love over-production.
I just want to know why oil (and gas) isn't even cheaper. I said back in Jan oil had put in it's lows for the year. Looked like I was going to get my head handed to me on that call. OK, I guess we did technically dip below that briefly last week, so I'll say it was a bad call on my part. But here's the thing- we're in so much deeper weeds than even in January I should be getting CRUSHED right now. Yet it still levitates instead of hitting daily new lows.
Houston-based energy contractor Willbros Group Inc. (NYSE: WG) saw its stock shares plummet by more than 50 percent on March 18 after the company warned that it could face credit defaults that would raise "substantial doubt" about its ability to continue operating.
http://www.bizjournals.com/houston/blog/drilling-down/2015/03/houston-en...
Top Insitutional Holder:
Wells Fargo w/ 3,334,089 shares
http://finance.yahoo.com/q/mh?s=WG+Major+Holders
There's gonna be a spectacular ripple effect of these O&G companies going bankrupt I suspect, not only massive layoffs but secondary defaults as creditors, shareholders, bondholders, etc feel the crunch.
why should they?
Every major oil company has a trading desk. I bet they are putting in a major bid to support financing for their projects. They see it as buying time before some other geopolitical factor raises the price organically and they can exit their bet.
Just like the Peak Oil alarmists predicted. /sarc
So, make some predictions there pretty boy, you see natural gas and oil just getting cheaper and cheaper forever, LOL!
Make a call for a year, five years, or ten years out, if you can.
Personally, I don't know how anyone can now that price discovery is long dead....
Again, "over-financialization" bullshit. It's not like money/credit creation actually requires any real fucking collateral anymore...
I wasn't the one claiming that the sky was falling.
Just like ZH predicted for five years, and up until a few weeks ago.
Anyone else remember Gail Tyverberg?
Gail Tvyeberg.
Yup
However the silver lining is that any price below 2.40/mmbtu will make coal, nuclear and even the wind industry non-competitive. So with ever more natural gas pushing into the system, much like bond convexity, cogen becomes stupidly profitable as one approaches 1.30/mmbtu usd.
What the US and globe does with literally a fuel stock which pushes the cost of plastics, biochems and base load electricity to its cheapest $/thermal unit (of any fuel stock since the industrial revolution Glascow Scotland thermal coal which went for 0.005/mmbtu adjusted for inflation:dol ) is the 'next big thing'.
Until some skunk figures out fusion, and that becomes our nth generation problem.
Plenty of Peak Oil writers predicted long term price declines (either as the main scenario, or a second possibility instead of price increases - it all depends on timing - where we are in the lifecycle of the world's developed petroleum deposits [how far past peak output for any given field], how fast demand diminishes and if it involves price rationing, where the world's major economies are in their implosion, etc.) The rate at which consumption contracts (or expands) is what really matters. If you can get demand down far enough, fast enough, you can do pretty well transitioning to lower net-energy - many alarmists predicted this would be accomplished through war and genocide, but prolonged economic depression has the same effect. All that matters in the big picture is whether or not demand and supply can meet. Demand blinked first thanks to the very skillful direction of our ongoing depression. Reversals are not just possible but quite likely. If you'll recall, coal veins have been mined for millennia, and the late classical Greeks had steam engine technology - so why didn't everyone heat their homes and power transport with coal? It has something to do with market price vs. affordability.
Have to agree with this one. The dry gas drilling orgy is crazy.
I thinks we'll hear the phrase ' loan covenants ' a lot this year.
there will be only the military industry left in US.
At my age there is nowhere left to go.
"When Bank of America talks,sheeple listen"
Is that why KS rail reported coal shipments in the dumb Tyler u dummy? What else are pwr generators using wood? No NGAS dope..they are swtiching in droves....i agree Marcellus NGAS supply is irrational tied to CF need but demand is rising and if measure days of supply for NGAS it looks alot better vs just supply drive without taken into account demand rise\
The only guess that one need make is, Who will end up with the assets out of foreclosure? Blackstone or Goldman?
"One gas company for you, and one for me..."
The banksters need to repay us.
Hint: They're both owned and controlled by the same people.
However, Orgies themselves will never crash.
They just limp away.
Say it ain't so Arthur Berman......who made a cottage industry out of screaming that these plays don't really work and won't really ever make the postulated reserves...darling of the peak oil crowd at oildrum...how can there be an oversupply Art when there were never enough reserves there? Someone's decline curves are working Art - how about another tour of industry luncheons where you admit you were a flat wrong all along?
Don't know WTF is going on here in Aus, we are still paying $1.30/L - just over $5 a gallon i think.
Someone's making a killing and we were just warned of new hikes to come - and we just bend over and take it some more.
When did we become such pussies, are they testing to see how far the population can be pushed?
natgas daily at the start of March showed lower
http://bullandbearmash.com/chart/natural-gas-daily-ready-test-258-suppor...
USD strength should continue to push energies lower - and yes, the USD has pulled back, but not likely for long
Most drilling for shale gas stopped in 2010-11, with the crash in gas prices.
A couple of points:
1. Are these rigs really drilling for shale gas or are they drilling for high-value liquids rich gas and condensate? I suspect it is the latter. Liquids rich gas yields NGL that is then fractionated into ethane, propane, butane, pentane, and heavier hydrocarbons. These products have thousands of uses, and on a combined basis, command a higher price than the raw NGL removed from the gas. In the strategy to drill for liquids rich gas, the dry gas (methane) becomes a byproduct that is dumped on the market (or in the Bakken, flared).
2. An E&P company would drill for dry gas if it has a supply contract with a nearby utility or industrial plant that generates its own power. Also one would drill for dry gas if the lease called for a well to be drilled to hold the property. One would also drill for dry gas if an interest in the property was sold (like to the Chinese or Statoil) and the new partner was obligated to pay a large portion of the costs.
The EPA is trying to stop the flaring. It will go into electric production.
And we will be seeing DEATH to coal. Invest in GE and the small turbine electicric generators.