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We Are Witnessing A Fundamental Change In The Oil Sector
Submitted by Arthur Berman via OilPrice.com,
The U.S. oil production decline has begun.
It is not because of decreased rig count. It is because cash flow at current oil prices is too low to complete most wells being drilled.
The implications are profound. Production will decline by several hundred thousand barrels per day before the effect of reduced rig count is fully seen. Unless oil prices rebound above $75 or $85 per barrel, the rig count won’t matter because there will not be enough money to complete more wells than are being completed today.
Tight oil production in the Eagle Ford, Bakken and Permian basin plays declined approximately 111,000 barrels of oil per day in January. These declines are part of a systematic decrease in the number of new producing wells added since oil prices fell below $90 per barrel in October 2014 (Figure 1).
Figure 1. Eagle Ford, Bakken and Permian basin new producing wells by month. Source: Drilling Info and Labyrinth Consulting Services, Inc
(Click image to enlarge)
Deferred completions (drilled uncompleted wells) are not discretionary for most companies. Producers entered into long-term rig contracts assuming at least $90 oil prices. Lower prices result in substantially reduced cash flows. Capital is only available to fulfill contractual drilling commitments, basic costs of doing business, and to complete the best wells that come closest to breaking even at present oil prices.
Much of the new capital from junk bonds and share offerings is being used to pay overhead and interest expense, and to pay down debt to avoid triggering loan covenant thresholds. Hedges help soften the blow of low oil prices for some companies but not enough to carry on business as usual when it comes to well completions.
The decrease in well completions provides additional evidence that the true break-even price for tight oil plays is between $75 and $85 per barrel. The Eagle Ford Shale is the most attractive play with a break-even price of about $75 per barrel. Well completions averaged 312 per month from January through September 2014 when WTI averaged $100 per barrel (Figure 2). When oil prices dropped below $90 per barrel in October, November well completions fell to 214. As prices fell further, 169 new producing wells were added in December and only 118 in January.
Figure 2. Eagle Ford new producing wells (2 month moving average) and WTI oil prices. Source: Drilling Info, EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
Bakken break-even prices are higher at about $85 per barrel. Well completions averaged 189 per month from January through September 2014. In November, only 80 new producing wells were added. In December and January, 123 and 114 new wells were added, respectively. Orders for rail cars used to transport oil decreased by 70% in the first quarter of 2015 compared with the fourth quarter of 2014.
Figure 3. Bakken new producing wells (2 month moving average) and WTI oil prices. Source: Drilling Info, EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
Permian “shale” play break-even prices are also about $85 per barrel based on declining well completion data. Well completions averaged 175 per month from January through September 2014. In January 2015, only 35 new producing wells were added.
Figure 4. Permian “shale” new producing wells (2 month moving average) and WTI oil prices. Permian “shale” includes horizontal wells in the Bone Springs, Consolidated, Delaware, Spraberry, Wolfcamp,Trend Area and related combinations of those reservoirs. Source: Drilling Info, EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
Much of the commentary about the backlog of deferred completions is exaggerated and irrelevant unless oil prices increase to $75 or $85 per barrel. The assumption underlying most industry chatter these days is that oil prices will return to normal.
The world oil market is undergoing a fundamental structural change in response to expensive oil. Producers are trying to survive by limiting expenditures. While analysts have been focused on rig counts, deferred completions have emerged as the initial path to lower U.S. oil production. This unanticipated outcome suggests that others may follow. While everyone is waiting for higher oil prices and for things to return to normal, what we may be witnessing is the end of normal.
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bullshit. production is always lower this time of year.
Yup. Historically when oil drops this time of year it picks up again end q1 to mid q2. It's right there on the f&$%ing chart.
Wait, I thought all these wells were supposed to go dry within a few months of completion. You mean to tell me existing wells are going to stay productive for like.... a long time? I don't believe you.
Yeah over 45 years a single well can produce almost as much oil as the world uses every 45 minutes.
What a great investment!
Fracked wells produce for 45 years? LOL!!!
Yes that is the upper estimate and requires the well being restimulated very often.
I like to go with the upper estimates when comparing fracked wells to global oil consumption just to demonstrate that even the high estimates are nothing.
This is why, on a percentage of total population basis, the developing nations will never achieve a large middle class.
I have been saying here for years, to cricket chirps (and of course catcalls from the peakoilers), that peak oil is driven by peak credit, and that when peak credit collapses, so will demand for oil, temporarily at least solving the peak oil "problem".
Credit is demand pulled forward in time. Look at any chart of (unsustainable) credit growth over the past 60 years, the past 30 especially, and then try again (unsuccessfully) to scare the shit out of me about peak oil.
I don't disagree with you. Almost my entire life has been lived in credit expansion/currency devaluation. I've never known anything but a diminshing standard of living, and I'm doing my best to prepare my children for the same.
The overall trend will be USD going south, not the price of oil.
The infinite growth economy could expand credit bubbles in untold new "investments" (tech, housing, tulips, whatever) forever until it hit physical limits, first and foremost being cheap energy. So Peak Oil -> Peak Credit, not the other way around.
Also my math was wrong...
45 year for 11 minutes worth of global consumption.
My mistake. The 45 minutes is US consumption only. :D
It takes a real man to admit to an error. +10
They just have to refill the well. Problem solved.
/s
4 factors that really matter for oil's price and production -
1- global credit creation drives global demand. It's clear that global credit creation is slowing and coming primarily from government sources. This is a big change in trend and without trend credit creation, you won't see trend oil consumption.
http://econimica.blogspot.com/2015/03/are-seeds-of-depression-sprouting.html
2- OECD nations (34 nations) peaked consumption in '05 and continue falling.
3- BRICS and developing world rate of increase is slowing as their credit creation is slowing. Without developing nation trend growth, the trend growth for oil consumption is broken.
4- all this has to be weighed against peaking global oil production. All producers of oil x-US/Canada peaked their output in '05 and are down since. Only the US / Canada's gains boosted production from '05 although this only amounted to a meager global increase of 3% on a 100% price increase over the same period.
http://econimica.blogspot.com/2015/04/how-peaking-global-crude-oil-production.html
Net net, it's a race between peak production and peak credit and potential hypermonetization...all very contradictory factors.
A lot of the companies were issuing junk bonds when oil was $90-$100/bbl. Where in the fuck is everybody getting the $75-$85 number? It is not realistic. More like $120-$130/bbl to keep the pace up.
They produce, but it isn't commercially viable to babysit them until the bitter end.
Then there is the bazhenov. Much of the best is under former Yukos territory. It will be a good place to dump the north american frack fleet soon, if prices stay low.
yes, oil sector changing from rich to poor!
Oilprce has picked a side and are cheerleading for it. Oil is a large variable and right now, the oil market is flat and it comes down to how much refined product can be sold. The price of WTI is being levitated which will keep borderline outfits going for awhile longer but if we don't have a good vacation season the market will get nasty.....
Enjoy the cheap gas while you can, my friend. This either ends with very expensive gas, or no gas.
Gas has gone up .40/ gallon in the 10 days here. Cali is known for trendsetting and leading the nation. Follow us shitheads over the clif and smile.
God I've got to get out of here. 95deg the last few days. It's the end of the world as we know it and I feel freaked out while everyone else feels fine.
Miffed
yes miffed,
our local prices in KY have bounced up 30 cents in the last week or so.
Not to worry, Governor Moonbeam is going to force what few refineries y'all have left to close and the gulf coast refiners will be glad to ship you fuel...for a price....
Our local prices have only gone up ~$0.15 or $0.20 or so. California always gets hosed on gas prices.
I thought the plan was to convert the biomass of water sucking almonds to ethanol in the name of stewardship and efficiency. Let them drink wine....... /sarc
Unfortunately children, there are no easy answers now.
Interestingly enough, during a teleconference today with a (San Fransisco) VP in biotech he said the problem is not with the water supply it is that without higher costs and penalties (controls) that the resource is willfully wasted. Grand Mal was narrowly avoided here in Colorado on that statement.
5 dollar gas, milk, bread...... the Golden State. A view of the unsustainable future.
Unfortunately children, there are no easy answers now.
Endeavour to persevere.
On planet a planet with 7+ billion people that require a tremendous amount of consumable calories and commodity chemicals in order to simply maintain the current standards of living, something like oil will have tremendous value and demand.
Financial "products" and other bullshit paper promises, not so much...
Can you tell us about the record supply and technology?
Can you tell us about the time, massive amount of capital and real resources it takes to bring new technology online? "Record supply",, for what? six months now? LMFAO!!!
Been working on fusion for over 50 years now. Name one city that gets 100% of their power using a fusion reactor?
Some people will have access to consumable calories and the resources to maintain their standard of living, most will not.
same as it ever was...
Fusion is wonderful until they actually make it work and then the greenie's will make sure it's not built.....
Nobody gets even 0.01 % of their power from fusion. Huge sunk costs so far with nothing to show at all.
Go ahead petro dollar, lets see what you've got.
What Normal are they talking about?????
Speaking of oil, Rockefeller's 6th heart transplant was successful:
http://worldnewsdailyreport.com/david-rockefellers-sixth-heart-transplan...
One of the best quotes:
«Every time I get a new heart, it is like the breath of life is swept across my body. I feel reenergized and alive» he told reporters.
Thank goodness we have that going for us. These old vampires will never die.
jesus fuck
The story is bogus...
His skin might fall off before the 7th
Wonder if he gets to pick his donors before hand
he must have good insurance
I feel pretty certain he was at the bottom a waiting list due to age constraints & no other match was to be found.
Scroll 2/3 rds down. He's got a lawsuit against his well connected sister.
http://www.abeldanger.net/2012/05/mcconnell-links-sisters-missing.html
So do they put it in surgically, or does he just eat it?
It requires an altar, an obsidian blade and a full moon while calling on Hastur....
... and when he's done, he likes to have a crisp refreshing drink of children's tears afterward
There won't be a 7th. He'll just get his head transplanted.
http://www.cnn.com/2015/04/03/health/italian-neurosurgeon-says-human-hea...
Funny but all bullshit
http://www.snopes.com/media/notnews/rockefeller.asp
Ideally, a major nuclear war in the Middle East could take some of the excess oil production offline.
We need a Nuclear War soon, fellas.
please kill the wild west fracking industry...
its just a bunch of good'ol hillbillies gambling
So the Tribe in the Central banks aren't gambling...with your money no less? Which industry needs a good purging?
Rigged.
LNG (liquified natural gas) is the only "oil" play right now in the US. There are probably 5 big projects for LNG processing and shipping facilities in the US. Most of the end users of the product will be "off-continent" - ie Europe, Far East , etc.
Not to mention the 5 far larger LNG projects outside of the US.. end users also off-continent - mostly Asia, like S. Korea and Japan, who have close to zero domestic hydrocarbon production.
Nothing better that driving a 10/mpg and listening to Washington DC complain about petrodollar deficit. Bringing in those carbon electric cars gained nothing other than increasing our national debt obligations.
The problem with these analyses is that they are using a cost base ($75 to $85/bbl) that is no longer applicable. When things are nuts, equipment and people are in short supply, and the capacity cost to move your production is high, then sure, these numbers have relevance. But when the patch crashes like it has, the producers gain the upper hand on pricing and they absolutely behead the service providers. $75 to $85 costing simply is not the case right now, its not even remotely close to that in this environment. Equipment, people and capacity are easy to get, and much much cheaper to get as well.
Cut those numbers by at least 1/3 and you are likely closer to reality.
Another issue is that the deferred completions will not just sit there and die as suggested. There is a time limit on how long you can leave a well uncompleted before you have to plug it. I believe it is 1 year in most states. So, one of two things is going to happen. 1) original company that spent $3 mil to drill the well will spend the extra $5 mil to complete it and produce oil, hoping to get some of their money back. 2) go bankrupt or sell the asset to another company who will get that original wellbore for something less than $3 mil and then go ahead and complete it for $5 mil and produce it.
Regardless, that wellbore won't sit there and, as Soph said above this post, the cost of services will come down if times continue to be tough. A $5 mil completion job may become a $3.5 mil job. That's how it works. write-offs and price adjustments, but the ROI of that hole in the ground will climb back above 20% before it is plugged and abandoned.
Normal is high oil prices? WTF?
My bullshit meter just pegged.
Fuck your high oil prices, assclown.
Grimaldus
It's all a lie. The reduction of rig counts comes from wells that have not been completed and are not producing any oil what so ever. The rigs that are producing are paying the bills. They will increase what they can to cover expences. We have an extreme oil glut now. Price at the pump should be going down. As someone else has said, The market is rigged and minipulated.
Cool. If everyone wants higher oil, then lower oil is a sure thing. Dump everything into SCO!