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New IEA Data May Indicate A Slowdown In Rig Count Drop
New IEA Data May Indicate A Slowdown In Rig Count Drop
The IEA OMR is out early this month hence April’s edition of vital statistics comes early. The March 2015 Vital Statistics is here. EIA oil price and Baker Hughes rig count charts are updated to the end of March 2015, the remaining oil production charts are updated to February 2015 using the IEA OMR data. The main oil production changes from January to February are:
• World total liquids up 80,000 bpd
• OPEC down 90,000 bpd
• N America up 220,000 bpd
• Russia and FSU up 10,000 bpd
• UK and Norway up 100,000 bpd (compared with February 2014)
• Asia up 30,000 bpd
1. Global oil production is declining slowly but remains just above its long-term trend. Just over 94.04 Mbpd was produced in February.
2. The recovery in the oil price in February reversed in March and WTI has tested its January lows. Spreading conflict in the Middle East adds further complexity to the price dynamic.
3. The plunge in US oil rig count has slowed significantly although it continues falling slowly. This may signal a new phase of the oil price war that is discussed at the end of this post.
4. I anticipate that the price bottom may be in, but that price will bounce sideways along bottom for several months until we see significant falls in OECD production. Whilst there are signs that global production is falling slowly there is as yet little sign of a significant drop in US production.
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Low Oil Prices Not Enough To Kill Off Oil Sands, Yet
Low Oil Prices Not Enough To Kill Off Oil Sands, Yet
On Friday I visited the University of Alberta in Edmonton, where falling oil prices have brought a record provincial budget deficit despite aggressive tax increases and spending cuts. Here I pass along some of what I learned about how the plunge in oil prices is affecting Alberta’s oil sands operations.
A couple of factors have cushioned Canadian oil producers slightly from the collapse in oil prices in the U.S. First, while the dollar price of West Texas Intermediate has fallen 45% since June, the Canadian dollar depreciated against the U.S. dollar by 18% over the same period, and now stands at CAD $1.26 per U.S. dollar. Since the costs of the oil sands producers are denominated in Canadian dollars, the currency depreciation is an important offset. There has also been some narrowing of the spread between synthetic and other crudes. As a result of these factors, the University of Alberta’s Andrew Leach calculated that when WTI was selling for US $50 a barrel, Canadian producers were receiving CAD $60 per barrel of synthetic crude.
Related: U.S. Oil Glut Story Grossly Exaggerated
Source: Andrew Leach.
Oil sands and U.S. tight oil production have been the world’s primary marginal oil producers in recent years, by which I mean the key source to which the world could turn in order to get an additional barrel of oil produced. Ultimately, in this regime, it is the long-run marginal cost of the most costly producing operation that puts a floor under the price of oil.
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The Oil Price Crash and Economic Slow Down in China
The Oil Price Crash and Economic Slow Down in China
Two of the factors in the oil price crash are well constrained: 1) oversupply of expensive light tight oil (LTO) in North America and 2) the decision of OPEC to not cut production. The third possible factor of weak global demand is not so easy to constrain but the current oil price crash bears many of the same hallmarks as the 2008 finance crash. This has lead to speculation that weak global demand, stemming from masked economic woes, may also be playing a key role.
In response to this, commenter Javier sent me a collection of 10 charts that he had collected from various internet sources together with his commentary that forms the basis of this joint-post. These charts tell a clear story of a major economic slowdown in China. This most certainly will be implicated in the ongoing oil price weakness. The $10,000 question is will China make a cyclical rebound like it has done in the past?
Figure 1 GDP growth. YoY = year on year % change. Note many charts are not zero scaled. China’s economy is still growing at 7% per year but has slowed down dramatically from 12% 5 years ago. Such change has happened before, notably between 1994 and 1998 linked to the Asian currency crisis. The oil price hit $10 per barrel in 1998. And in 2007 to 2009 an even more sharp fall related to the financial crash was also accompanied by a crash in the oil price.
Javier points out that in a country with rapid population growth a higher GDP growth rate is required than in a country with stable or declining population and he suggests that 7% is in reality approaching recessionary levels.
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ExxonMobil CEO Wrong About “Resilience” Of Tight Oil Production
ExxonMobil CEO Wrong About “Resilience” Of Tight Oil Production
ExxonMobil CEO Rex Tillerson is wrong about the resilience of U.S. tight oil production.
Last week, The Wall Street Journal reported:
“…Mr. Tillerson pointed out that the collapse in natural-gas prices similarly had led the number of rigs drilling for that fuel to drop to 280 from north of 1,600 in 2008. Gas output jumped 50% in that time, he said. That is what you call resilience…While he didn’t see a perfect parallel between shale gas and shale oil, he said there were “lessons” to be learned.”
His point is that we should not expect a big drop in U.S. tight oil production just because the rig count is falling. He bases this prediction on what happened with gas production in 2008-2009 and afterward. That is wrong.
The fact that gas production didn’t decrease much in 2008-2009 despite a huge drop in rig count is incorrectly attributed to the high productivity of shale gas wells. The truth is that shale gas wasn’t a big component of total gas production at that time.
Related: Rig Count Irrelevant As US Output Continues To Soar
Let’s look at the rig count drop in 2008-2009. The chart below shows the various components of U.S. gas production and the gas-directed rig count.
Natural gas production components and gas-directed rig count, 2007-2014.
Source: Baker Hughes, EIA, DrillingInfo and Labyrinth Consulting Services, Inc.
(click image to enlarge)
The gas rig count fell from 1,601 in September 2008 to 675 by July 2009. By September 2009, gas production had decreased about 4.5 Bcf per day (4.5% of total). Shale gas only amounted to 12% of total gas supply at that time.
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Deciphering The Latest Rig Count Data
Deciphering The Latest Rig Count Data
The main take-away from this week’s rig count is that everything is on track for lower U.S. oil production by mid-year. The weekly changes vary but the overall trend since October is down and that is positive for achieving a better balance between supply and demand.
Please remember the following points and read my previous post “Oil Prices Don’t Change Because of Rig Count” if you haven’t already:
• Rig count is only one indicator of future production trends.
• Week-to-week changes are not critical but trends may become important.
• Horizontal rigs are more important than vertical rigs.
• Bakken, Eagle Ford and Permian basin are the most important plays for tight oil production in the U.S.
This week, the overall rig count was down 75 compared with 43 rigs last week. The horizontal rig count was down 51 compared with 33 rigs last week.
The Eagle Ford Shale play lost 9 horizontal rigs this week, the Permian lost 15 and the Bakken lost 3 rigs.
Rig Count Change Table. Source: Baker-Hughes, Labyrinth Consulting Services, Inc.
(Click to enlarge)
Related: Oil Price Crash A Blessing In Disguise For US Shale
The Bakken horizontal rig count is down 40% from its maximum in 2014. The Permian basin horizontal rig count is down 33% and the Eagle Ford is down 30%.
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“Default Monday”: Oil & Gas Companies Face Their Creditors
“Default Monday”: Oil & Gas Companies Face Their Creditors
Debt funded the fracking boom. Now oil and gas prices have collapsed, and so has the ability to service that debt. The oil bust of the 1980s took down 700 banks, including 9 of the 10 largest in Texas. But this time, it’s different. This time, bondholders are on the hook.
And these bonds – they’re called “junk bonds” for a reason – are already cracking. Busts start with small companies and proceed to larger ones. “Bankruptcy” and “restructuring” are the terms that wipe out stockholders and leave bondholders and other creditors to tussle over the scraps.
Early January, WBH Energy, a fracking outfit in Texas, kicked off the series by filing forbankruptcy protection. It listed assets and liabilities of $10 million to $50 million. Small fry.
A week later, GASFRAC filed for bankruptcy in Alberta, where it’s based, and in Texas – under Chapter 15 for cross-border bankruptcies. Not long ago, it was a highly touted IPO, whose “waterless fracking” technology would change a parched world. Instead of water, the system pumps liquid propane gel (similar to Napalm) into the ground; much of it can be recaptured, in theory.
Ironically, it went bankrupt for other reasons: operating losses, “reduced industry activity,” the inability to find a buyer that would have paid enough to bail out its creditors, and “limited access to capital markets.” The endless source of money without which fracking doesn’t work had dried up.
Could Oil Prices Plummet A Second Time?
Could Oil Prices Plummet A Second Time?
Are oil prices heading for a double dip?
The surge in shale production has produced a temporary glut in supplies causing oil prices to experience a massive bust. After tanking to a low of $44 per barrel in January, falling rig counts and enormous reductions in exploration budgets have fueled speculation that the market will correct sometime later this year.
However, there is a possibility that the recent rise to $51 for WTI and $60 for Brent may only be temporary. In fact, several trends are conspiring to force prices down for a second time.
Drillers are consciously deciding to delay the completion of their wells, holding off in hopes that oil prices will rebound, according to E&E’s EnergyWire. The decision to put well completions on hold could provide a critical boost to the ultimate profitability of many projects. Higher oil prices in the months ahead will provide companies with more money for each barrel sold. But also, with the bulk of a given shale well’s lifetime production coming within the first year or two, it becomes all the more important to bring a well online when oil prices are favorable. With prices still depressed – WTI is hovering just above $50 per barrel – drillers are waiting for sunnier days.
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The Easy Oil Is Gone So Where Do We Look Now?
The Easy Oil Is Gone So Where Do We Look Now?
In 2008, Canadian economist Jeff Rubin stunned the oil market with a bold prediction: With the world economy growing at 5 percent a year, oil demand would grow with it, outpacing supply, thus lifting the oil price from $147 to over $200 a barrel.
The former chief economist at CIBC World Markets was so convinced of his thesis, he wrote a book about it. “Why the World is About to Get a Whole Lot Smaller” forecast a sea change in the global economy, all driven by unsustainably high oil prices, where domestic manufacturing is reinvigorated at the expense of seaborne trade and people’s choices become driven by the ever-increasing prices of fossil fuels.
In the book, Rubin dedicates an entire chapter to the changing oil supply picture, with his main argument being that oil companies “have their hands between the cushions” looking for new oil, since all the easily recoverable oil is either gone or continues to be depleted – at the rate of around 6.7% a year (IEA figures). “Even if the depletion rate stops rising, we must find nearly 20 million barrels a day of new production over the next five years simply to keep global production at its current level,” Rubin wrote, adding that the new oil will match the same level of consumption in 2015, as five years earlier in 2010. In other words, new oil supplies can’t keep up with demand.
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Arthur Berman: Why Today’s Shale Era Is The Retirement Party For Oil Production
Arthur Berman: Why Today’s Shale Era Is The Retirement Party For Oil Production
A leading geologist delivers the hard facts
As we’ve written about often here at PeakProsperity.com, much of what’s been ‘sold’ to us about the US shale oil revolution is massively over-hyped. The amount of commercially-recoverable shale oil is much less than touted, returns much less net energy than the petroleum our economy was built around, and is extremely unprofitable to extract for most drillers at today’s lower oil price.
To separate the hype from reality, our podcast guest is Arthur Berman, a geological consultant with 34 years of experience in petroleum exploration and production.
Berman sees the recent US oil production boost from shale drilling as and short-lived and somewhat desperate; a kind of last hurrah before the lights get turned out:
The EIA looks at the US tight oil plays and they see maybe five years before things start to fall off. I think it is less, but I am not going to split hairs. The point is that what we found is expensive and we have got a few years — not decades — of it.
So when we start hearing people pounding the table about how the United States should lift the ban on crude oil exports, well that is another topic if we are just talking about free trade and regulation, but what in the world is a country like ours doing still importing 5+ million barrels of crude oil a day and we have got maybe 2 years of supply from tight oil? What are we thinking about when we claim we’re going to export oil? That is just a dumb idea. It is like borrowing money from a bankrupt person.
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Slump in Oil Prices Brings Pressure, and Investment Opportunity
Slump in Oil Prices Brings Pressure, and Investment Opportunity
Now, as the cracks appear in the latest energy boom, the forces of failure and opportunity are stirring again. Resolute Energy, a Colorado company that borrowed big in the boom, is among those in an endgame that is being played up and down Wall Street and in the vast oil fields that new drilling methods have opened in recent years.
It is a struggle that could take place at scores of other companies, leading to thousands of layoffs, as well as losses for banks and investors. At the same time, new fortunes stand to be made.
When Resolute set out three years ago to buy thousands of acres in the oil patch of West Texas, lenders showered the company with hundreds of millions of dollars. But the company had little expertise in the costly and complicated horizontal drilling that it employed on its new property.
Such easy money has abruptly come to an end, mostly because oil prices have plunged, potentially making life much harder for companies like Resolute. Banks slashed the size of the company’s credit line late last year and imposed new lending conditions. Its stock has plummeted, and now trades for mere pennies.
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Oil Rig Count Plunges Most Ever, Oil Price Soars, Inventories Too: Catch Falling Knife, Get Fingers Sliced Off
Oil Rig Count Plunges Most Ever, Oil Price Soars, Inventories Too: Catch Falling Knife, Get Fingers Sliced Off
The oil industry is dead-serious when it talks about slashing operating cost and capital expenditures. They have to. Preserving cash is suddenly a priority, after years when money was growing on trees.
In the US, the cost cutting has reached frenetic levels. One place where it shows up on a weekly basis is the number of rigs actively drilling for oil. And that rig count dropped by 94 to 1,223 in the latest week, as Baker Hughes reported today. A phenomenal plunge, by far the worst ever. In January, the rig count crashed by 276, the most ever for a calendar month. That’s 18.4%! the rig count is now down 386 from its peak on October 10, by nearly a quarter!
And yet, it’s still just the beginning. The chart shows the breathless fracking-for-oil boom that started after the financial crisis. Not included are the rigs drilling for natural gas. That fracking boom had started years earlier and ended in a glut and total price destruction that continues to this day (chart). Note the two-month cliff-dive, the worst ever. During the financial crisis, the oil rig count fell 60% from peak to trough. If this oil bust plays out the same way, the rig count would drop to 642! The bloodletting in the industry would be enormous.
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40 % of US petroleum product exports didn’t grow since 2011
40 % of US petroleum product exports didn’t grow since 2011
This is another post in the series on how US tight oil has impacted on global oil markets. This time we look at US petroleum product exports.
(1) Destination of US product exports
Fig 1: US petroleum product exports by destination and type of growth
Data source: http://www.eia.gov/dnav/pet/pet_move_expc_a_EP00_EEX_mbblpd_a.htm
Exports started to grow already in 2005, a year which appears in many graphs as a turning point. While the growth looks impressive, around 40% of US exports no longer increased since 2011, a year after the very beginning of the tight oil boom (see 1,500 kb/d grid line in Fig 1)
Note that in all graphs of this post 2014 figures have been estimated with data up to October 2014, without seasonal adjustments.
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Tight Oil Production Will Fade Quickly: The Truth About Rig Counts
Tight Oil Production Will Fade Quickly: The Truth About Rig Counts
U.S tight oil production from shale plays will fall more quickly than most assume.
Why? High decline rates from shale reservoirs is given. The more interesting reasons are the compounding effects of pad drilling on rig count and poorer average well performance with time.
Rig productivity has increased but average well productivity has decreased. Every rig used in pad drilling has approximately three times the impact on the daily production rate as a rig did before pad drilling. At the same time, average well productivity has decreased by about one-third.
This means that production rates will fall at a much higher rate today than during previous periods of falling rig counts.
Most shale wells today are drilled from pads. One rig drills many wells from the same surface location, as shown in the diagram below.
(click image to enlarge)
The Eagle Ford Shale play in South Texas is one of the major contributors to increased U.S. oil production. A few charts from the Eagle Ford play will demonstrate why I believe that U.S. production will fall sooner and more sharply than many analysts predict.
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The most important thing to understand about the coming oil production cutbacks
The most important thing to understand about the coming oil production cutbacks
What the current oil price slump means for world oil supply is starting to emerge. “Layoffs,” “cutbacks,” “delays,” and “cancellations” are words one sees in headlines concerning the oil industry every day. That can only mean one thing in the long run: less supply later on than would otherwise have been the case.
But perhaps the most important thing you need to understand about the coming oil production cutbacks is where they are going to come from, namely Canada and the United States.
Why is this important? For one very simple reason. Without growth in production from these two countries, world oil production (crude oil plus lease condensate which isthe definition of oil) from the first quarter of 2005 through the third quarter of 2014 would have declined 513,000 barrels per day. That’s right, declined. Including Canada and the United States, oil production rose just under 4 million barrels per day.
That means substantial cutbacks in the development of new oil production in Canada and the United States could lead to flat or falling worldwide oil production.
But, why will any oil production cutbacks come primarily from Canada and the United States? For another very simple reason. Post-2005 oil production growth in these countries came from high-cost deposits in Canada’s tar sands and in America’s tight oil plays. New production from these high-cost resources simply isn’t profitable to develop in most locations at current prices.
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HYPE, BROKEN PROMISES AND SHALES
HYPE, BROKEN PROMISES AND SHALES
The term shale revolution has been used so much that it almost has no meaning anymore. But were shales ever really the energy panacea promised or merely a self styled hype machine? Would the frenzy in drilling ever have truly taken off if it weren’t for cheap money? These are valid questions which have not been explored adequately because too many investors, journalists and elected officials were caught up in shale mania. But was this ever truly an exercise that would provide long term benefits to American consumers?
It is an inarguable fact that shales have produced copious quantities of hydrocarbons in the past few years but this is not really surprising given that the wells, by their very nature, produce the most oil or gas they will ever produce in the first twelve months or so of their lives. So when the industry engages in a frenzy of drilling and brings many wells online very rapidly and essentially all at once, then it stands to reason that it will look like an enormous success. For a short while.
The problem is that operators have not been able to maintain a stable long term production profile. Looking at the following chart, one can see why.
A great portion of all new wells being drilled in the best of our shale plays are doing nothing more than replacing declines in older wells. And older, in this case, means a mere 4-5 years. Not decades. If one considers the per well production in both the Bakken and the Eagle Ford, it peaked in June, 2010. Although there have been countless wells added since that time, the production per each individual well has never reached that level again. This is highly problematic in the long run.
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