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The Shale Delusion: Why The Party’s Over For U.S. Tight Oil

Tyler Durden's picture




 

Submitted by Arthur Berman via OilPrice.com,

The party is over for tight oil.

Despite brash statements by U.S. producers and misleading analysis by Raymond James, low oil prices are killing tight oil companies.

Reports this week from IEA and EIA paint a bleak picture for oil prices as the world production surplus continues.

EIA said that U.S. production will fall by 1 million barrels per day over the next year and that, “expected crude oil production declines from May 2015 through mid-2016 are largely attributable to unattractive economic returns.”

IEA made the point more strongly.

“..the latest price rout could stop US growth in its tracks.

In other words, outside of the very best areas of the Eagle Ford, Bakken and Permian, the tight oil party is over because companies will lose money at forecasted oil prices for the next year.

Global Supply and Demand Fundamentals Continue to Worsen

IEA data shows that the current second-quarter 2015 production surplus of 2.6 million barrels per day is the greatest since the oil-price collapse began in 2014 (Figure 1).

Figure 1. World liquids production surplus or deficit by quarter. Source: IEA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

EIA monthly data for August also indicates a 2.6 million barrel per day production surplus, an increase of 270,000 barrels per day compared to July (Figure 2).

Figure 2. World liquids production, consumption and relative surplus or deficit by month.

Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

It further suggests that the August production surplus is because of both a production (supply) increase of 85,000 barrels per day and a consumption (demand) decrease of 182,000 barrels per day compared to July.

The world oil demand growth picture is discouraging despite an increase in U.S. gasoline consumption (Figure 3).

Figure 3. World liquids demand growth. Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

World liquids year-over-year demand growth has fallen by almost half from 2.3 percent in September 2014 to 1.2 percent in August 2015. This is part of overall weak demand in a global economy that has been severely weakened by debt.

The news from both IEA and EIA is, of course, terrible for those hoping for an increase in oil prices.

U.S. production has fallen 510,000 barrels of crude oil per day since April 2015 while OPEC production has increased 1.2 million barrels per day since the beginning of the year (Figure 4). U.S. production increases in the first quarter of 2015 were partly because of an oil-price rally that ended badly this summer, and because of new projects coming on-line in the Gulf of Mexico.

Figure 4. OPEC and U.S. crude oil production. Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

It appears that OPEC is winning the contest with U.S. tight oil producers to see which can continue to over-produce oil at low prices. IEA ended its September Oil Monthly Report saying,“On the face of it, the Saudi-led OPEC strategy to defend market share regardless of price appears to be having the intended effect of driving out costly, “inefficient” production.”

In other words, tight oil and oil sands production.

With Iran poised in early 2016 to add almost as much oil as the amount of the U.S. production decline to date, the outlook for tight oil producers could not be worse. And yet, the sell-side analysts and investment bank research groups continue to chant the refrain of logic-defying hope for tight oil producers in the face of crushingly low oil prices.

Party On, Dude!

This week, Raymond James joined the chorus with its bewildering “Energy Stat: U.S. Operators’ Response to Low Oil Prices? Get More Efficient!”

The message is all about rig productivity and drilling efficiencies. I showed in my post last week that these measures are nothing but red herrings to distract from the unavoidable truth that all tight oil companies are losing money at current oil prices.

I would like to say that Raymond James is simply repeating the shop-worn and illogical cliché that “We’re losing money but making it up on volume” but it’s much worse than that.

There is no mention of money in the report. There is not a single dollar sign ($) in the text or figures nor are there are there any costs, prices or cash flows mentioned. That seems odd since Raymond James is, after all, a financial advisory company.

Raymond James presents 30-day IP (initial production rate) data to show that everything is fine and getting better in the tight oil patch.

Really guys? Is that why oil companies are laying off staff, cutting budgets and selling assets?

Besides, everyone knows that IPs are a practically meaningless predictor of EUR or profitability, and something that producers often manipulate to create press releases in order to satisfy investors.

Nonetheless, they forecast “2015 to be a banner year for both oil/gas well productivity gains.” Interesting but irrelevant since it’s going to be an atrocious year for profits.

Here is my table from last week’s post for the best of the tight oil companies in the best parts of the plays.

Table 1. 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.

EOG, Pioneer and Continental lost between $10 and $24 per barrel in the first half of 2015 but Raymond James says, “Never mind and party on, Dude!”

This report by Raymond James is both misleading and clearly out-of-touch with the price and investment environment that the International Energy Agency and the Energy Information Administration describe.

Conclusions

ExxonMobil CEO Rex Tillerson summarized the situation this week in an interview with Energy Intelligence:

“It [tight oil] will compete. Will all of it compete at all pricing? No.”

For the next year or so, tight oil wells will not be commercial except in the best parts of the best plays. Tight oil companies will lose money. For the most part, the efficiency gains are behind us.

Until market fundamentals of supply and demand come into balance, prices will remain low. Goldman Sachs predicted yesterday that U.S. oil prices through the first quarter of 2016 will be “low enough to discourage investment in new oil production and shrink the global glut of crude.”

Clearly for now, the party is over for tight oil.

 

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Tue, 09/15/2015 - 13:59 | 6551588 0b1knob
0b1knob's picture

If I had a nickel for everytime ZH predicted the end of shale oil, I'd have enough nickels to buy my own oil company....

Tue, 09/15/2015 - 14:03 | 6551609 Jumbotron
Jumbotron's picture

I'm sure you have some money.  Put it where you mouth is if you think ZH is full of shit.

Tue, 09/15/2015 - 14:03 | 6551612 PAPA ROACH
PAPA ROACH's picture

The "party" is not over, and Art Berman has been dead a$$ wrong for YEEEEARS now. The world itself cannot sustain on cheap oil anymore, thus we will see a cycle repeat and prices to move higher again. Shale is not a bust at all, just need higher pricing. Berman would have you believe that shale doesn't produce if you read his works on it. I would stay far away from Bill Powers too.

Tue, 09/15/2015 - 15:08 | 6551971 Element
Element's picture

That will not happen until demand builds globally again, and we are just at the beginning of a slow-in and therefore a slow-out global recession with persistently slumping global demand, for about five years of global demand drop so far. People need to be getting ready to winter-over this, not take risks in a false spring before it even gets cold. The snow will be deep this season.

Tue, 09/15/2015 - 15:09 | 6551973 Stackers
Stackers's picture

The party is over for tight oil, deep water oil, tar sands oil, Venezuelian oil, north sea oil, arctic oil and a whole list of other major global oil supplies. My fears at this point are that oil stays sub-$50 for more than 2 years killing the economic viability of about half of global oil drilling and we have serious supply shortages in 3-5 years

Tue, 09/15/2015 - 16:41 | 6552422 cougar_w
cougar_w's picture

Here's something interesting to smoke in your normalcy-bias pipe:

SA is in trouble. Big trouble. At the given oil price and decreasing demand, the Kingdom is running significant budget deficits. Today the crown prince came out promising free houses and cars to the restless masses. The place has been a FSA paradise for 30 years running, there is an entire generation (or two) of Saudi youth that have never so much as got a paper cut working in an office. If the spigot of hand-outs and perks shuts off even a little these guys are likely to completely lose their shit. The war into Yemen and bad blood with ISIS (and Iran) has everyone's undies in a bunch. Beheadings have been on the rise. The worst is, if things get seriously out of hand then the people working the oil fields might just go home leaving the Kingdom to pump their own oil. Good luck with that.

So what happens to oil supply+price+demand if SA goes lights-out in a serious way? If you think "price goes up" you might be right in the short run, and absolutely wrong in the long run. People are already finding alternatives, and the global economy is imploding around them. Without the SA oil the shit might seriously hit the fan, blowing up all sorts of things on the sidelines. Like, the entire global financial system without which just about nothing can be priced because nothing can be made/transported/distributed/purchased.

Boom crackup, and your demand falls off a cliff. Only the MIC buys it, and they pay next to nothing. Everyone else is working in the fields outside town just to eat.

Party over, big time.

Tue, 09/15/2015 - 15:02 | 6551934 Element
Element's picture

An unbeliever!

Tue, 09/15/2015 - 14:02 | 6551605 Carpenter1
Carpenter1's picture

Super majors have been reducing reserves for decades. Many thought they were losing an edge, now we know what they were up to. They'll be buying up reserves at pennies on the dollar and they will take complete control of the oil industry.

 

THERE WILL BE NO SMALL AND MID SIZE PLAYERS WHEN THIS IS OVER, ONLY SUPER MAJORS.

Tue, 09/15/2015 - 14:08 | 6551647 PAPA ROACH
PAPA ROACH's picture

True Dat! The financial center Dubai was a vision for the eventual end of oil in that country; a project to bring about a continuation of economy in the future. Saudi will also have a bleak future if it solely counts on its existing reserves, that have been producing since the late 1940's. Engineer a meltdown in global prices to pick up the carcases of levered companies, thus expanding your reserves via buying them elsewhere. Is the money they are going to borrow for their own economy, or to purchase energy assetts? Time will tell the story.

Tue, 09/15/2015 - 14:39 | 6551780 cornflakesdisease
cornflakesdisease's picture

Yes, why is Schlumberger and Halifburting buying up everything they lay their hands on these days & telling oil producers that they are willing to get paid via stakes and percentages of their land and wells?

Tue, 09/15/2015 - 14:04 | 6551615 Wahooo
Wahooo's picture

Dead horse, meet fist.

Tue, 09/15/2015 - 18:36 | 6552978 MSimon
MSimon's picture

The horse didn't feel a thing. And your fist got bruised. Win-win.

Tue, 09/15/2015 - 14:11 | 6551660 venturen
venturen's picture

$140/Barrel so Goldman can take massive profits....is Delusion! 

Tue, 09/15/2015 - 14:17 | 6551682 Chuck Knoblauch
Chuck Knoblauch's picture

Did that say US growth?

I swear I saw that above.

With inflation running between 8 and 10 %, what growth?

Tue, 09/15/2015 - 14:19 | 6551691 Bangin7GramRocks
Bangin7GramRocks's picture

Listen people. We all need to chip in and pay more at the pump. These patriotic oil producers need new planes, 20,000 sq ft mansions and bigger yachts. Besides, if you bastards don't agree to pay more now, the honorable oil men promise to stop producing and you will pay more later. So, be true to your nature and help grossly enrich these fine gentlemen in their time of need.

Tue, 09/15/2015 - 14:25 | 6551726 Bunghole
Bunghole's picture

I'd like to enrich them with some copper jacketed lead.

Tue, 09/15/2015 - 15:26 | 6552081 Jack Burton
Jack Burton's picture

Ha! Ha! If we were indeed ture patriots, we would pay triple the price for our gas and save the Frackers and the Farmers.

Tue, 09/15/2015 - 14:31 | 6551743 Jstanley011
Jstanley011's picture

Wait. I thought the party was over for cheap oil. Now the party is over for tight oil. Either way, though, the economy is doomed because of it. Makes perfect sense.

Tue, 09/15/2015 - 14:37 | 6551768 KingTut
KingTut's picture

Arthur has an agenda.  He knows his stuff, but his analysis is always skewed to the environmental side.  However, I believe he is still driving his car.  He spent years predicting that horizonal fracking wasn't working.  For some it wasn't and they paid the price.  But come on, US output doubled when he said it would fail. Superior geology, drilling and fracking technologies were beyond his biases. Also anyone who quotes the IEA on economics is clueless.

I don't want to imply that producers are doing great. They're not.  And if they borrowed money to drill wells, they'll deserve everything they'll get.

However, costs are going down.  If you've ever visted an active drill, you might remember the three locomotive size diesel generators running full throttle. Cheaper diesel means cheaper drilling.  The rigs are paid for, so rental costs will come down to keep the rigs from going 100% idle.  The mineral rights were probably bought years ago.  Royalties are paid out of proceeds.  Most of the wild-catters are ex-cons, which if you've seen how dangerous their work is, is understandable.

Equally important is the export of oil and gas from the US to foreign markets with higher prices.  It reduces US supply, rasing prices here, and yields a more $ for producers.  Not a panacea, but right now every dollar counts.  As levered companies go under, a not too horrible vista opens up for unleveraged producers: less competition, lower costs and an international market to pressure prices upward.

Tue, 09/15/2015 - 15:21 | 6552047 Jack Burton
Jack Burton's picture

"If they borrowed money?"

I am afraid almost all did, and at Junk rates for many of them. Costs going down? I think you are on the margine there. Sure you can squeeze some out of costs. But, have you seen the Frack Sand Mines? That is a major input cost. Will free water always be available in the fracking zones? If not, costs will rise. The best geology was drilled first, because drillers want profits. And then you have the big producers, oil is world wide, you can never ever look at as a USA operation, the world cares nothing about Frackers, Only waht price oil sells for. Cheap oil is not found in Frack wells, but it is all across the Middle East, parts of Africa, Russia, Iran,

Remeber Iran, a world major producer of cheap oil. They have been locked out of major exports by sanctions. Their cheap oil is going to go into the world pipeline soon.

I don't share your thoughts on Frackers being able to drop production costs much futher. In a high oil price world, frackes still were on the margines. Now they are just plain screwed.

Will they come back? Sure, but only in a high oil price world. And more important, Frackers lived off of record low interest rates and money printing economics. If those end or slow down, and capital is priced to market, then borrowing to Frack will just not work.

Sadly, a false hope was sold. Those with a major stake in fracking will always see a bright side, they will be back. But I can't buy it. I will never slip one thin dime into Frackers. But I may buy into Russian Far East oil just getting developed.

Tue, 09/15/2015 - 16:53 | 6552490 cougar_w
cougar_w's picture

I get the sense that when the fracking ponzi implodes, they are not coming back. A lot of investors -- maybe a few big playerz --  are going to go BK in the wind down (or else there will be some very large and visible bail-outs, I don't think so) and when investors watch that play out they won't come anywhere near a fracking investment op in the future. So how do frackers raise money in a better market so they can resume operations? They go to the government of course. Will the Congress open the purse strings for these guys? Is that even a serious question? I guess if we are at serious war then the Interior Dept could run the tight oil plays themselves, but if that were the case then that oil would never make it onto Main Street, just never happen. People would be pulling their cars behind mules past the fracking sites, wondering how they could get some gasoline. Not gonna happen sucker.

Everyone thinks "price goes back up, it's all unicorns and turn the pumps back on" but reality doesn't work that way. Sometimes you get one shot at something before people are onto you. Take the money and run away. And I think that is what is going to happen with fracking.

Tue, 09/15/2015 - 14:45 | 6551815 cornflakesdisease
cornflakesdisease's picture

Have you seen the new land and sea based drilling rigs that are comming out this year?  They are almost completely automated.  They don't need very many men to run them.  Schlumberger just bought the German company that makes these things.  They cut labot costs 90%.

Tue, 09/15/2015 - 15:25 | 6552073 Jack Burton
Jack Burton's picture

Yep, and headed for an Arctic bonanza! Shallow arctic seas, and I mean shallow! I sailed those waters and they are shallow, easy to drill. Ice is a problem, but mother nature is taking care of that very fast! Also, those sea rigs are going to go to work off of the Russian Far East, a massive long cost line sure to hold big deposits, and again in shallow waters!

Frackers? They can't compete. They need 80-100 dollar oil and low interest rates!

Wed, 09/16/2015 - 04:10 | 6554217 Rakshas
Rakshas's picture

I guess it depends on what you mean by completely automated but in 1998 Varco/MD Totco was selling this concept for such rigs, they even went so far as to suggest being able to someday control the rigs remotely, National Oilwell had a similar concept perhaps a few years more advanced Cyberbase they called thiers.  No question there have been improvements in certain areas of operation onboard these rigs but with more automation comes other issues that require specialists as such  we are about at a limit now I think.  With all the mergers in the equipment supply sector over the past decade and a half competition in innovation has fallen off a cliff it seems which has taken the edge off a lot of these companies ability to improve their products - the prevailing attitude these days seems to be "yeah so what it's not like you have a choice we are the only game in town" ....... sounds vaguely familiar.  

At any rate reducing labor costs does not mean less expensive by any means not only is the price of equipment substantially higher,  the costs to maintain automated equipment in the offshore environment is often overlooked or wished away by the drilling contractors. Further, the client companies are, understandably, increasingly imposing zero day rate penalties for downtime and there are just so so so many things that can cause downtime.....so many... Thus for the sake of a few thousand dollar component you can have a half billion dollar rig that should be getting 2-300K per day getting nothing for days or weeks depending on the availability of parts; and that is a whole 'nother story...........    

I am still waiting for the life like super realistic Fembots the Japanese have been promising us for the past couple of decades, the only truly interesting example of automated drilling equipment that should be on the market..... I do hope they leave out the nag circuitry though.... 

Tue, 09/15/2015 - 15:14 | 6552000 autofixer
autofixer's picture

What are those boom town hookers going to do this Winter?  

Tue, 09/15/2015 - 18:42 | 6553011 MSimon
MSimon's picture

Produce more efficiently.

Tue, 09/15/2015 - 17:48 | 6552252 bid the soldier...
bid the soldiers shoot's picture

CAUSE AND EFFECT

Why The Party’s Over For U.S. Tight Oil
"Peak oil" in the early part of this century was the cause of the boom in tight oil.


Now that 'peak oil" has passed and the production of crude oil again exceeds the demand for crude oil, we are no longer in "PO" and any method used to end 'peak oil" is superfluous. 

Tue, 09/15/2015 - 16:13 | 6552294 Cloud9.5
Cloud9.5's picture

Shale oil reversed American production decline.  Without it, the decline resumes.  As this article mentions there are two sides to this coin.  The first being a significant ramping up of production of higher priced oil, the second being a corresponding destruction of demand for that higher priced oil.  This convergence produced a perfect storm resulting in a surplus and falling prices.  Look at the ten year chart on gasoline prices and you will notice that between 2007 and 2008 prices spiked.  What followed next was collapse.

 

http://www.gasbuddy.com/Charts

 

 

The political reaction to this collapse was to pump a tremendous amount of money into the system to force a recovery.   What followed next was an undulating plateau of higher prices.  It appears we are now falling off that plateau and prices are collapsing again.

 

 

When prices collapsed in 08, the economy rolled over and went into decline.  I don’t think we ever recovered from that decline.  Sure the .01% made a lot of money.  On main street it is a different story.  Picture this process as a rubber ball rolling down a flight of stairs.  Each time it rolls off a stair there is a little bounce but the high is not quite as high as the bounce before it and the overall trend is downward.

Tue, 09/15/2015 - 18:27 | 6552944 MSimon
MSimon's picture

Shale puts a cap on oil prices.

Sat, 09/19/2015 - 01:40 | 6568322 Bonecrusher
Bonecrusher's picture

On a related note, Texas unemployment rate drops to 4.1%, the lowest since 2001.

"AUSTIN -- The Texas seasonally adjusted unemployment rate fell to 4.1 percent in August, the lowest rate of unemployment for Texas since January of 2001. The Texas rate continued to trend below the national unemployment rate, which stood at 5.1 percent in August."

http://www.yourhoustonnews.com/spring/news/texas-unemployment-rate-drops-to-lowest-since/article_3db811c8-5e86-11e5-b408-87db999808b8.html

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