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The Biggest Red Herring In U.S. Shale
Submitted by Arthur Berman via OilPrice.com,
Rig productivity and drilling efficiency are red herrings.
A red herring is something that takes attention away from a more important subject. Rig productivity and drilling efficiency distract from the truth that tight oil producers are losing money at low oil prices.
Pad drilling allows many wells to be drilled from the same location by a single rig. Rig productivity reflects the increased volume of oil and gas thus produced by each of a decreasing number of rigs. It does not account for the number of producing wells that continues to increase in all tight oil plays.
In other words, although the barrels produced per rig is increasing, the barrels per average producing well is decreasing (Figure 1).
Figure 1. Bakken oil production per rig vs. production per well.
Source: EIA, Drilling Info and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
Rig productivity is a potentially deceptive measurement because it does not consider cost and apparently it always increases. It gives a best of all possible worlds outcome that seems to defy the laws of physics. Drilling productivity gives the false impression that as the rig count approaches zero, production approaches infinity.
Barrels per rig is interesting but the cost to produce a barrel of oil is what matters.
Similarly, drilling efficiency measures the decrease in the number of days to drill a certain number of feet. This is also interesting but, unless we know how it affects the cost to produce a barrel of oil, it is not useful.
The data contained in 10-Q and 10-K SEC forms provides a continuing view of a company’s financial position during the year. This allows us to determine a company’s cost per barrel and its components that rig productivity and drilling efficiency do not provide.
Pioneer, EOG and Continental SEC Filings for The First Half of 2015
First-half 2015 SEC filings for Pioneer, EOG* and Continental show that these companies are all losing money at an average realized crude oil price of $48 and range of $44-52 per barrel that includes hedges. I chose these companies to study because they have good positions in the best tight oil plays, and provide a weighted cross-section of Bakken, Eagle Ford and Permian production performance (Table 1).

Table 1. Play representation of Pioneer Natural Resources Company, EOG Resources, Inc. and Continental Resources, Inc.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
First, I looked at operating costs summarized in Table 2.

Table 2. Second quarter (Q2) and first half (H1) 2015 operating costs for Pioneer, EOG and Continental compared with the same periods in 2014.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
Operating costs for Pioneer, EOG and Continental decreased by about 15%, 12% and 16%, respectively, in 2015 compared with 2014. This had nothing to do with rig productivity or drilling efficiency since those are capital costs; we are talking here about operating costs.
Decreases were because of reduced staffing costs, lower taxes because of lower oil prices and revenues, and generally lower costs of doing midstream business as service providers lowered their prices to remain competitive in a lower oil-price environment.
Next, I investigated how production rates changed in response to lower oil prices. Continental’s production increased 12% in 2015. Both Pioneer’s and EOG’s 2015 daily production rates, however, were flat compared with 2014 as these companies apparently exercised discipline in the face of lower prices (Table 3).

Table 3. 2015 vs. 2014 daily production rate comparison for Pioneer, EOG and Continental.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
This is important because it means that capital expenditures by Pioneer and EOG in the first half of 2015 were to maintain rather than grow production.
Table 4 and Figure 2 summarize operating and maintenance capital costs for H1 2015 for these three companies along with their realized prices per barrel of oil equivalent (BOE) and calculated net margins per BOE. BOE prices represent a blend of crude oil ($44-52 per barrel), natural gas liquids ($15-16 per barrel) and natural gas ($2.45-2.53 per Mcf) prices.

Table 4. First half (H1) 2015 cost per barrel of oil equivalent summary for Pioneer, EOG and Continental.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
Figure 2. First half (H1) 2015 cost per barrel of oil equivalent summary for Pioneer, EOG and Continental.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
Even though Continental’s capital expenditures were for both maintenance and growth, I used 80% of its capex for a potential comparison with Pioneer’s and EOG’s full maintenance capital costs.
All three companies lost money on a unit basis for H1 2015. EOG lost the least at $9.74 per Boe (28% of its realized price). Pioneer lost $23.48 (75% if its realized price per Boe) and, Continental, $24.04 (69% of its realized price per Boe).
Any analyst or journalist who says that tight oil companies are doing fine at lower oil prices because of rig productivity, drilling efficiency or any other factor needs to look at the data. For less substantial and less well-positioned companies than the three in this study, the losses are probably far worse.
These observations are consistent with the trends in cash flow shown in Table 5.

Table 5. Cash flow summary for 2014 and 2015 for Pioneer, EOG and Continental.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
All three companies had negative free cash flow in H1 2015. Pioneer out-spent cash flow by $781 million; EOG out-spent cash flow by $966 million; and, Continental out-spent cash flow by $1.1 billion.
Table 5 also reveals that EOG was cash-flow positive in 2014 before oil prices collapsed although Pioneer and Continental lost money even at higher oil prices. I wanted to compare EOG’s costs when the company was cash-flow positive to more recent costs when it was cash-flow negative (Table 6).

Table 6. EOG Resources’ 2015 vs. 2014 costs per barrel of oil equivalent.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
I have already discussed the probable causes for lower operating costs but the 20% decrease in capital costs is significant and may be behind some of the claims that rig productivity and efficiency are important. I do not know what percentage of capex for 2014 was for growth vs. maintenance. My allocation of 85% of capex is, therefore, arbitrary but probably over-states the amount of capex savings between 2015 and 2014. It provides a net margin per BOE that is consistent with the positive cash flow for 2014 shown in Table 5, and with recent statements by the company that it would resume full drilling at around $60 per barrel oil prices.
One of my clients just drilled a well to more than 14,000 feet onshore Texas using a high-horse power top-drive rig designed for horizontal drilling. The day rate for the drilling rig decreased by almost 40% from the initial quote in the fall of 2014 to when the contract was signed in the spring of 2015.
This leads me to believe that most, if not all, of the recent capex savings by EOG and other tight oil producers is because of price deflation and not because of increases in rig productivity or efficiency.
The EIA Drilling Productivity Report
If we have learned anything watching the rig count fall since December 2014 without much corresponding fall in oil production, it is that rig count is a very poor predictor of anything except where capital is going. Drilling productivity is just another variant or derivative of rig count and comes burdened, therefore, with all of its vagaries.
At the same time, there are problems with how the EIA uses rig productivity in their monthly Drilling Productivity Report (DPR). EIA assumes a 2-month lag between well spud and first production for all unconventional plays but this is incorrect for the three most important tight oil plays.
Figure 3 shows that the average time from spud to first production for the Eagle Ford is at least 75 days; for the Bakken, 120 days; and, for the Permian “shale” plays, 90 days.
Figure 3. Data analysis for well spud to first production for the Bakken, Eagle Ford and Permian basin tight oil plays.
Source: Drilling Info and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
There are additional problems with EIA’s DPR such as inclusion of considerable conventional oil production in the Permian basin, and with the broad definitions of play regions that include many wells and plays not relevant to the tight oil and shale gas plays of interest (EIA acknowledges these issues in its methodology explanation).
Conclusions
The best way to understand the details and changes in the cost of producing oil and gas is by evaluating data in 10-Q and 10-K SEC filings. Costs have declined since oil prices collapsed and hard times hit the industry. Most of this decrease in cost is part of a larger deflationary trend in commodities and currencies and not because of rig productivity and drilling efficiency as many believe.
To some extent, lower costs compensate for the lower price of oil but none of the tight oil companies evaluated in this study are profitable in the $44-52 per barrel range of reported realized oil prices. They are all losing money.
Rig productivity and drilling efficiency measurements do not account for declining average well productivity. They will only become useful if they can be related to the marginal cost of producing a barrel of oil. For now, they are distractions from the more important subject of tight oil profitability.
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Bullish.
Shale is a high-entropy endeavor, centrally managed with some strings visible and some not.
It's political. Who pays the price? When?
What high revenue-generating enterprise with loads of secondary and tertiary participants is not political?
Even in socialist utopias with glittery white unicorns and livable wages for all workers, if it involves licensing, government approvals and regulations, it will be political.
It is the nature of the beast, has been for since the start of mankind and will remain that way until we are removed from this rock.
Those willing to tough it out, navigate the bureaucracy and dance when "The Man" says dance will profit handsomely.
Oil Price has been pushing this narrative for quite awhile. The problem has really been the easy bond market that ZIRP created and the optimists who were looking for sure bets and easy money. The oil patch isn't going away. but it will being going back to the professional gamblers. I know a lot of them and they are waiting for the collapse to buy up leases cheap.....
When a rig is stacked out all the best senior hands are offered jobs on rigs that haven't been stacked out. There is consolidation and the best hands are left. These remaining rigs are like all star teams on the best equipment the industry has ever seen. Drilling wells in 5 days is not unheard of.
Anything to sell those junk bonds. Just throw it on the wall and hope it sticks.
Oil and gas know one needs in an over supplied market, fire and carcinogens shooting out your tap water, and fake numbers after fake numbers.
Who cares, know one tell the truth anymore.
The Saudi's and Obama are driving them out of business.
Mother Nature and Thermodynamics are driving them out of business. Shale Oil is by DEFAULT less desirable than light sweet crude that had many more years, under tons more crust and tons more pressure to refine naturally before we even get out hands on it. The shallow sea that buried the middle of the country from the Gulf of Mexico to Canada did not supply enough raw natural ingrediants such as plant and animal life, plus natural mineral content, in addition not enough pressure from a deep enough layer of rock to compress and naturally heat the kerogens to form light sweet crude. Plus, not as much time, either to cook it properly.
Therefore, the capital costs needed to extract Shale and Tar Sands like in Canada for that matter, could only come into play in the Infintie Ponzi world we find ourselves in. Obviously, cheaper and better technology played an important part in extacting the "shit around the toilet bowl" geologically speaking and continues to do so today. But cheap and better technology comes from the same Infinite Ponzi scheme. And the Infinite Ponzi scheme is coming to an end.
And so is the amount of shale oil and tar sands that can be ECONOMICALLY extracted in order for the leveraged oil companies to pay back loans. Obviously, cash flow is the name of the game now. And well.....we can see how that is going.
Even if prices rise again, as they will, as we continuously draw down the global stock of ALL energy stores, much less CHEAP and EASILY EXTRACTED stores, these price rises will cause drilling to pick up. Which only means that we draw down these stocks even quicker. Thus exacerbating the problem of fueling the Utopia which was built by Infinite Ponzi and actually helps to sustain it.
'Cheap' is relative, as is economics of exchanges in general. If there is underlying need and demand, there will be an economic price the market will bear. So what does 'cheap' oil mean then? Or 'expensive' oil? Expensive relative to what? No having it? High price just leads to substitution and different technologies altogether being developed and used. So no 'problem', and no crisis develops, just relative economic adjustments. Resources have always done that and always will.
Get rid of oil and you get rid of modern society. Substitutions have not been developed. Cheap oil is affordable for the masses. Expensive oil is not. If the masses cannot afford to pay the price that is required to increase production year after year, then oil is expensive to produce, and this is an issue that you need to take a long view on. Oil production needs to increase on an exponential curve to match our ponzi economy. That means that there are no problems with oil supplies, until there are. Then it's all of a sudden. That's the problem with things that follow exponential curves or are required to. Everything looks fine until all of a sudden they blow up.
Actually they have. Either you are not informed and/or not paying attention ..
http://peswiki.com/index.php/Directory:Keshe_Foundation
Which is unfortunately the same case for the majority of the human race ..
element......this ass wipe writer uses BOE and not the cost of a barrel of oil. who died and set the cost factor for BOE. what the hell does it cost for these companies to "GET A BARREL OF OIL OUT OF THE GROUND"? not the BOE cost.....more horse shit theory. fuck off crude price.com
Yes, and oil is infinite-right? Some thoughts I have posted before:
It is also much easier on the brain-housing-group to just assume that oil is not a finite resource and that there are endless fields of oil yet to be tapped. Better said, this is the route some folks take that don't do their homework. Do the homework! Check the meaning of EROEI and then follow up. Check how reliable the ME statements are regarding 'known' reserves. Also, check out what the real extraction rate is for known reserves. Then the next time you read an article about a 'huge' find of 20 billion brls you will know that the world consumes 33+ billion brls of oil a year and that the 'huge' field will have peaked at 10 billion brls of production. That is assuming that all the oil is actually extractable. This only means our production of cheap, easily accessible oil has peaked and is slowly declining. This fact does not bode well for a global economy/financial paradigm that runs, indeed depends, on growth.
This is one reason the world economy is on the rocks. The world needs ever more inexpensive oil to continue growth and to service debt. That is not happening and we are seeing the unhappy results. The world burns through better than 33 Billion brls of oil a year. So a find of 20 billions brls, although seeming large, really is less than a year's supply and that is assuming that all of the 20 bil brls is actually recoverable.
Perhaps some do, but I am not in that crowd. I believe they will continue to try to prop up the status quo as long as they possibly can. Then, when it is too clear that production can not meet needs, the problem will be blamed on other geopolitical or natural occurrences.......oh, wait, that is happening right now........
Oil will decrease in price when we see demand destruction again or perhaps temporarily when the dollar has a spike. All resources are finite and will get more scarce in this economy which survives and thrives on exponential growth. So, the alternatives are: Fewer and more expensive resources as in the current economic paradigm OR the current paradigm collapses and demand is destroyed in the process (2008 style). Nuff said.
I think we can look at oil production throughout the time of the oil price spike in 2008 and see that production did not really increase. This says quite a bit in and of itself. I believe market price seeks a point at which increased production drowns further increase. This did not happen with oil in 2008. Instead, the economy crashed and oil crashed along with it. Each time oil price will increase to the point where it takes too much out of the economy, the economy then contracts and another oil price bottom is found. However, the tops and the bottoms will increase in price as we go into the future. In times of relative peace and little in the way of really bad events the tops and bottoms will increase fairly slowly and within a fairly narrow band. However, were there to be a black swan or important geopolitical event (war in ME?) then those narrow bands will be broached and quickly.
We consume about 25% of world oil production but only produce about 10%. Do we really think that the rest of the world will continue to foot the bill for our lifestyle? Don't think so. So, either we make the changes ourselves, just as I did, or it gets forced on us when the world decides not to buy our debt anymore. I am open to constructive suggestions as to how we can best help change along (no, and I don't mean Obama change either). Our populace refuses to accept that resources are finite. What is worse, our leaders don't tell the truth about it. They keep feeding us platitudes like if they stabilize the economy with massive money printing that everything will somehow be ok. I have yet to hear them really talk about resource issues and yes I know why. All we need to do is look at how Carter was excoriated (much deserved for other things but not for this) for telling us that we were heading into problems with resources.
Just a question.......does anybody here think that the TPTB will ever admit that there is a decline in cheap oil production? Or that production of energy is finite and that we are reaching the limits? IMO no, they won't. Why? Because of the havic that it would cause in the markets and society in general. So, how do you keep things going? ....think extend and pretend, using somebody else's money. Has anybody here seen the patterns of this game over the last two years? Not enough energy to continue exponential growth to service debt etc. But, we can't address the real problems because if we do then we get chaos. So, instead, let's make this a problem about global warming, climate change or just pollution. This is much more appealing than the actual problem of exponential growth.
My concern is that we are not addressing the true basic problem....instead we are dealing with symptoms. The real problem is finite resources. The most important of which is oil/energy. The cheap ever increasing availability of this resource over the last 100 years or so has allowed us to live like we do. What is more, it is the only thing that is propping up our consumption, leverage based, economy. The fact that production of this fantastic resource has become ever more difficult and expensive has huge implications that nobody seems willing to address. Instead we point fingers and decry that which was made possible by the very resource of which I speak. We can address the symptoms of our finite resource predicament, ad infinitum, and it will not change the basic fact. In other words, we need to address the real problem. Finite resources in a financial paradigm that requires exponential growth.
Just because Orwell doesn't describe the 'command economy' of Oceania, doesn't mean it won't exist.
The ratio of 'contented capitalism' over the 'price of oil' reaches the vanishing point at what, $200, $300 a barrel, in today's dollars.
That's when the TPTB tear off their masks revealing themselves as APP (Absolute Power Period.) There's no escaping it.
Say, didn't I see you and your lovely wife sleeping on the floor of Keleti Station in Budapest?
(just kidding, pal) :o)
So far you got 3 reds and 2 greens (one of them mine). An "economics" blog and so many don't understand economics. It is breath taking.
That is an excellent short explanation of resource economics.
The stone age didn't end because we ran out of stones. The oil age will not end because we ran out of oil.
It's an endless rolling out of red herrings around here, object for the sake of objection. Yeah, that will make a difference. Well, anyone who bothered checking would quickly see that substitutions and new technologies have in fact both been developed and implemented due to prices too high for too long for oil.
But they also presuppose (and want us to) that there actually is a 'cheap' oil 'shortage', now or pending. But that also is a grand lie and red herring.
Coal to oil and coal to gas projects are both currently operating in my country and fulfilling in export orders. But lets just ignore reality, and pretend coal can't be turned into any amount of synthetic oils and gases, or that every continent on earth still has large deposits of coal, or that Australia's is vast and easily accessible, (once you build roads and ports and railways, which will last hundreds of years in economically profitable operation) and has enough to keep the wheels of industry turning, globally, for hundreds of years - at a minimum.
Oh noes! Doom is but around the corner! We should feel bad for being so rotten and evil!
This is how I see it MS: http://www.zerohedge.com/news/2015-09-07/situation-smoldered-decades-now...
3 comments in 19 minutes? WTF? Cat got your tongue? Or NSA has your keyboard?
My cat's breath smells like cat food.
ROFL. Best cmment so far.
After three days of relaxing, getting away fro the Hedge, and forgetting about this shit, it's hard to come back and face reality.
Real like a codpiece.
I'm sure the NSA does monitor this site and comments. They probably have a dedicated team that does this, taking 50/50 breaks between ZH and the Porn Hub. I bet they also collect about equal Intel from both.
I don't think mode = average. Especially when you have mean staring you right in the face.
So, in a nutshell, that's a long way of showing that companies that load up with too much debt do really badly in downturns. And companies that are prudent do much worse in the boom, but tend to out last everyone else in a deep downturn. ... not exactly a new concept.
I was hoping they would keep fracking and bring poisonous water to the warmongering American public.
Perhaps throw in a few earthquakes to boot.
Pump oil out of the ground, at break even, or at a loss. Ship oil halfway across country. Use more fuel and energy resources to refine it. Haul halfway back across country, and use it to fuel tractors to plant and harvest corn, utilizing fresh water and petroleum based fertilizers. Process corn into ethanol, using even more water and fuel. Mix ethanol into gasoline, inject huge subsidies to make it work, ethanol then ruins the components of your engine, forcing you to go and buy another car.
It's a cycle.
More drivel. Not one mention of "high-grading"
"The sharp decline in oilfield service (OFS) costs and a focus by explorers on the best drilling locations (i.e. high-grading) may mitigate the drastic drop in commodity prices and improve the bottom line for the exploration and production (E&P) sector, according to experts.
An analysis by IHS Energy found that U.S. E&Ps may post a 25-30% increase over 2014 in average efficiencies of their onshore upstream capital investments. Researchers also are forecasting a 60%-plus increase in overall capital efficiencies by the end of this year from 4Q2014.
"This substantial improvement for E&P performance results from many forces, but the key driver is the compounding effect of the high-grading of drilling locations combined with the continuing reduction in drilling and completion costs"
Also there is substantional DUC (drilled but uncompleted) inventory.
"Well completions are primarily focused on the larger unconventional plays (that is, high grading), and IHS expects that as costs continue to fall and oil prices begin to rise, the industry will start to drill the prime picks from the inventory of 2,500-3,000 drilled but uncompleted [DUC] wells that exist in the U.S. unconventional plays,"
As the oil price (eventually) goes up, costs will rise again. Cherry picking and working down the fracklog can only be done once and will only go so far.
A few more quarters of these wellhead prices and your argument will go in the rubbish bin...where it belongs. All eyes are on the financial statements for these companies now. Sorry.
Yep, a guy in the industry told me not to expect production decline/price rise because there's tons of shut-in production.
Drill it and they will flow.
maybees.
I've been debating fellow Zero hedgers on the viability and cost benefit analysis of shale and fracking, only to be shouted down and down voted by the Star Spangled Banner brigade, who can't help themselves in another warped attempt, but promote U.S exceptionalism in the field of shale and fracking, in some pathetic attempt to convince me I've got the maths wrong.
I did say in that debate, there's no point in arguing with those who refuse to do basic maths and that only time will prove who's correct. I'm not ideologically driven regarding the pros and cons of shale or fracking, but the maths just don't add up. Likewise, the same with my stance on Ethanol. As of today, according to an article I was reading at the dentist a few months ago, to make one full tank of Ethanol/Bio-Fuel(corn), can feed a family of 4(in corn) for 6 months. The article may or may not be a propaganda piece, but if true and I have no reason to doubt its veracity. How the hell can politicians promote ethanol as a GREEN FUEL?
The reality is, so much of what we are led to believe as fact, is in fact bovine manure.
Kind of like how I was down voted above. Hey, I get it. People don't like hard facts- especially when it doesn't agree with the continuation of the comfy lifestyles everybody has become so used to.
well said
oil was the ultimate transformer
and not just our physical society
oil makes us do all sorts of stupid things
and believe things even sillier.
Like buildings overcoming gravity
Terrorists under every bed
The constitution is disposable,
Dick Cheney was the vice president,
and America is the exception to all empires
Apparently a thorough analysis. It confirms the conventional logic that traditional wells (with oil flowing without huge efforts) produce cheaper than fracking wells which employ expensive additional machinery and consumables. I would assume that the picture is much bleaker than obvious from the SEC filings. The auditors are certainly putting "lipstick on the pig". Micro- and macroeconomically it is a disaster that valuable natural ressources are wasted at this price level and not saved for a later day.
All your red herrings take attention away from the most important subject of all.
The longer that graduate is misinformed, the better shale oil stocks will do on the exchanges.
The avg barrels per rig increase when percentage of rigs producing average output or below average decline leading to complete closure of depletion (leaving a lot of oil in the ground).
This is dynamics of a collapse of total number of rigs. Most of those high producing rigs will be depleted sooner than expected which should be later this fall and coincides with the hedge expiration and fracking credit collapse as predicted in this eight month old post below.
https://sostratusworks.wordpress.com/2015/01/15/the-shale-game/
Or there will be big grandma bailout; QF(racking) of Junk Bonds.