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The Permian isn’t just suffering from a bottleneck for oil, but also for natural gas.

In 2016, for instance, gas flows leaving the Permian typically clocked in at about 3.6 billion cubic feet per day (Bcf/d), according to S&P Global Platts. That number has ballooned to 6.3 Bcf/d as of May 2018.

Obviously, the surge in gas flows from the Permian is the result of a massive increase in gas production. Gas output has surged more than 135 percent since 2013 and is expected to rise to just shy of 10.5 Bcf/d (including natural gas liquids) in June 2018. The problem is that the region’s ceiling on takeaway capacity stands at about 7.3 Bcf/d.

Skyrocketing natural gas production has unsurprisingly weighed on regional prices. According to S&P Global Platts, natural gas prices at the Waha Hub in West Texas traded at an 8-cent per MMBtu discount to Henry Hub two years ago, but that discount widened to about $1/MMBtu this month.

With so much gas on their hands, Permian drillers have resorted to higher rates of flaring. The Environmental Defense Fund estimates that top Permian producers are flaring as much as 10 percent of their gas. “This flaring is so extreme, it can be seen from space,” EDF says. “In 2015 alone, enough Texas Permian natural gas was flared to serve all of the Texas household needs in the Permian counties for two and a half years.”

S&P Global Platts reported that gas flows to Mexico have increased over the past few weeks, relieving some pressure. But infrastructure within Mexico hasn’t been able to keep up with the supply of gas north of the border, so some of the pipelines are under-utilized. In any event, the gas volumes moving to Mexico will be swamped by new supply coming online in the Permian. At some point, the glut of gas could force curtailments in drilling.

…click on the above link to read the rest of the article…

This Federal Policy Enabled the Fracking Industry’s $280 Billion Loss

May 14, 2018

This Federal Policy Enabled the Fracking Industry’s $280 Billion Loss

Most people probably aren’t familiar with the acronym ZIRP. It stands for zero interest rate policy and is the policy that unintentionally created the American fracking bubble — just one of its many consequences.

And while most people may not know much (if anything) about ZIRP or the Federal Reserve (Fed), it is likely that they are aware of the impact this policy has on their own lives.

Do you have money in your checking account? Are you lucky enough to have savings? Have you noticed how you don’t make any interest on that money and haven’t for almost 10 years?

You can thank the Fed and ZIRP for that. One of the results of the Fed’s zero interest rate policy is that the average American saver ends up with close to zero interest on their money in the bank. This is one of the reasons that ZIRP is often described as a wealth transfer from American savers to debtors. Because the shale industry is deeply in debt, these companies directly benefit from this arrangement.

Below is a chart of rates for certificates of deposit (CD) since 1980 — historically a safe investment that gave people a decent return on their savings.

Since 2010, if you put your money in a CD, you would not even be keeping up with inflation due to the low interest rate. That isn’t supposed to be how it works.

And as this next chart shows, historically that hasn’t been how it works. The graph below is the federal funds rate since 1950 (this is the interest rate that banks charge each other to lend excess cash overnight). It’s very clear that starting in 2008, the chart flatlined (due to ZIRP) and stayed that way for years — something that had not happened before.

…click on the above link to read the rest of the article…

The efficiency of US shale oil drilling and production

May 14, 2018

The efficiency of US shale oil drilling and production

Posted on May 14, 2018 by Euan Mearns

In my recent Oil Production Vital Statistics post, commenter rjsigmund posted a link to this EIA update on shale oil production efficiency which in my opinion contains some astonishing data on how the industry has drilled better and better wells, year on year, for a decade. US production is heading higher. At the same time turbulence has gripped the global oil market sending Brent above $77 / barrel as fresh sanctions loom for Iran and Venezuelan production continues to free fall.

What is shale oil?

First a very brief update on what we mean by shale oil and how it is produced. Oil and gas is formed in the Earth’s crust when organic rich source rocks become deeply buried (>3000 m depth), heated (>100˚C) and squeezed. Some of this oil escapes from the source rock and migrates upwards where some of it is trapped in porous sandstones or limestones. This conventional oil or gas was accessed for decades using vertical or sub-vertical wells (Figure 1) and would flow freely to surface under its own buoyancy pressure.

In “shale oil” (also known as light tight oil – LTO), it is the low permeability source rocks themselves that are the drilling target. Oil does not flow freely for these rocks and requires the assistance of hydraulic fracturing (fracking). The default operational mode is to drill a long horizontal well, fracture it and pump it full of proppant (normally sand) that keeps the fractures open allowing the oil or gas to flow out (Figure 1). The main shale oil and gas basins of the USA are shown in Figure 2.

Figure 1 Cartoon showing conventional gas being accessed by a vertical well and shale gas being accessed by a sub-horizontal well.

…click on the above link to read the rest of the article…

Skeptic Geologist Warns: Permian’s Best Years Are Behind Us

May 14, 2018

Skeptic Geologist Warns: Permian’s Best Years Are Behind Us

Geologist Arthur Berman, who has been skeptical about the shale boom, warned on Thursday that the Permian’s best years are gone and that the most productive U.S. shale play has just seven years of proven oil reserves left.

“The best years are behind us,” Bloomberg quoted Berman as saying at the Texas Energy Council’s annual gathering in Dallas.

The Eagle Ford is not looking good, either, according to Berman, who is now working as an industry consultant, and whose pessimistic outlook is based on analyses of data about reserves and production from more than a dozen prominent U.S. shale companies.

“The growth is done,” he said at the gathering.

Those who think that the U.S. shale production could add significant crude oil supply to the global market are in for a disappointment, according to Berman.

“The reserves are respectable but they ain’t great and ain’t going to save the world,” Bloomberg quoted Berman as saying.

Yet, Berman has not sold the EOG Resources stock that he has inherited from his father “because they’re a pretty good company.”

The short-term drilling productivity outlook by the EIA estimates that the Permian’s oil production hit 3.110 million bpd in April, and will rise by 73,000 bpd to 3.183 million bpd in May.

Earlier this week, the EIA raised its forecast for total U.S. production this year and next. In the latest Short-Term Energy Outlook (STEO), the EIA said that it expects U.S. crude oil production to average 10.7 million bpd in 2018, up from 9.4 million bpd in 2017, and to average 11.9 million bpd in 2019, which is 400,000 bpd higher than forecast in the April STEO. In the current outlook, the EIA forecasts U.S. crude oil production will end 2019 at more than 12 million bpd.

…click on the above link to read the rest of the article…

The Future Of U.S. Oil Relies On A Single Play

May 8, 2018

The Future Of U.S. Oil Relies On A Single Play

U.S. oil production recently broke another record, jumping to 10.619 million barrels per day (mb/d) in the last week in April, and the sky seems to be the limit for U.S. shale drillers. However, the fate of U.S. oil, and ultimately a large slice of total additional output for the entire world, is all predicated on aggressive forecasts from one place: the Permian Basin.

Total global oil production is expected to rise by 6.4 mb/d by 2023, according to the International Energy Agency.

Offshore Mexico and Brazil are set to see higher levels of spending and development, and the IEA sees higher output from Iraq, the UAE and Kuwait over the next few years. Still, the U.S. accounts for 3.7 of the 6.4 mb/d of new supply through 2023.

In other words, more than half of all new production over the next five years will come from the U.S., and almost all of that will come from the Permian. The Bakken edges up a bit but declines again, as does the Eagle Ford. For all intents and purposes, U.S. shale has basically peaked outside of the Permian.

In that context, it is not an exaggeration to say the Permian is the most important place on the planet in terms of new oil supply.

Image source: artberman.com

Permian production is expected to double between 2018 and 2023, rising to 4.1 mb/d. That means that West Texas will be producing nearly as much oil as Iraq, OPEC’s second largest producer.

The oil market – and thus, the global economy – appears to be highly vulnerable with so much of the world’s supply growth dependent on one location.

…click on the above link to read the rest of the article…

Saudi Arabia’s $100 Oil Dilemma

April 23, 2018

Saudi Arabia’s $100 Oil Dilemma

Saudi Arabia is rumored to want oil prices at $100 per barrel, but if prices rise that high, it could sow the seeds of the next downturn.

Saudi officials want more revenues for their budget and a higher oil price to bolster the valuation of the Aramco IPO. But that short-term thinking could spell trouble not just for them, but also for oil prices, and ultimately for longevity of oil demand.

As Liam Denning of Bloomberg Gadfly points out, in the past decade, while oil prices have surpassed $100 per barrel for periods of time, they didn’t stay there for very long. In 2008, when oil nearly hit $150 per barrel, it was quickly followed by the financial crisis and a deep U.S. recession. Then, the period between 2011 and 2014, when oil was north of $100 per barrel, U.S. shale crashed the market with a wave of fresh supply.

If Saudi Arabia aims to drive up prices to triple-digit territory once again – and to be sure, that is only a rumor at this point – there are plenty of ways that could merely create the conditions for another bust.

First, oil prices are rising, in part, because demand is so strong, not just because OPEC is keeping barrels off the market. Oil at $100 would essentially amount to a doubling of the price from the past few years, which would quickly put an end to high demand growth rates.

A corollary to this is that $100 oil would likely impact economic growth. The economic recovery from the financial crisis in 2008 is almost a decade old at this point, much longer than the average upswing. History suggests that we are due for a recession at some point in the not-so-distant future. A spike in fuel prices around the world could help bring that on.

…click on the above link to read the rest of the article…

U.S. Shale’s Dirty Secret

March 16, 2018

U.S. Shale’s Dirty Secret

U.S. shale is surging, threatening to take even more market share away from OPEC. But the prospect of U.S. oil edging out barrels from the Middle East is not nearly as simple as it might seem.

Oil coming from the major shale plays in the U.S. is light and sweet, while a lot of oil coming from OPEC is medium or heavy, and often sour. A lot of refining capacity along the U.S. Gulf Coast, built up over years and decades, is equipped to handle heavier forms of oil. Before the shale revolution, refiners made their investments in downstream assets assuming the oil they would be using would come from places like Saudi Arabia and Venezuela.

Lighter shale oil is perfectly fine for making gasoline, but not the best for making diesel and jet fuel. Medium and heavy oil is needed for that.

But refiners have a tidal wave of light sweet oil on their hands, perhaps too much. The U.S. refining industry could max out its ability to swallow up light sweet oil from the shale patch, as the FT reports, particularly as U.S. shale drillers are expected to add upwards of 4 million barrels per day (mb/d) over the next five years.

Meanwhile, heavy crude production has waned as of late, with sharp declines in output in Venezuela and Mexico in the past few years. Shipments from Canada face a bottleneck because of fixed pipeline capacity. The result has been a somewhat tighter market for heavy oil, which refiners want to process into jet fuel and diesel.

In the years ahead, demand for gasoline could start to slow down as vehicles become more efficient and EVs start to gain more market share. Meanwhile, diesel demand has grown much faster, and will likely jump in 2020 as new regulations on dirty fuels from the International Maritime Organization take effect. That could force the shipping industry to switch from residual fuels to diesel, perhaps adding as much as 2 mb/d of demand for diesel, the FT reports.

In other words, volumes of lighter oil suited for gasoline production are soaring while production of medium and heavy oil used for diesel is flatter, even as diesel demand is poised to grow quickly. And refining capacity capable of handling light oil might not be up to the task.

…click on the above link to read the rest of the article…

Glut Or Deficit: Where Are Oil Markets Headed?

March 12, 2018

Glut Or Deficit: Where Are Oil Markets Headed?

A flurry of recent oil market forecasts have sent a lot of mixed messages about what to expect both in the near-term and over the next several years. Is U.S. shale about to flood the market, setting off another bust? Or is demand so strong that with the oil market already rapidly tightening, another price rally is in store?

Obviously, nobody knows how to untangle the long list of variables that will ultimately decide what happens next, but the divergence in opinions is rather striking.

By and large, the discrepancy is over the difference between the short-term and the medium-term. Surging U.S. shale production is keeping the market well supplied right now, but soaring demand and the lack of major conventional projects in the works will lead to a price spike somewhere down the line.

Nevertheless, there is also disagreement over the immediate future. We are currently in the “calm before the storm,” according to Gary Ross, global head of oil analytics and chief energy economist at S&P Global Platts. “Pressure is going to build on crude prices,” he said in an interview with the WSJ. “We’re not feeling it now, but we will.”

Ross argues that oil demand is growing so quickly, that the market will absorb all the extra supply. He says China and India alone will take on an additional 1.1 million barrels per day (mb/d). Meanwhile, oil inventories are sharply down, thanks to the OPEC cuts. After refineries finish up maintenance season, the oil market will wake up to the fact that supplies are incredibly tight, Ross argues. “The world is going to be short come peak season,” he told the WSJ. “When the music stops, someone’s not going to have a seat.”

…click on the above link to read the rest of the article…

New U.S. Record-Level Oil Production! Peak Oil Theory Disproven! Not.

March 6, 2018

New U.S. Record-Level Oil Production! Peak Oil Theory Disproven! Not.

Well, I’m amazed and impressed. Tight oil production has pushed total United States petroleum output to more than 10 million barrels a day, a rate last seen almost a half-century ago. It’s a new U.S. record. Fifteen years ago I was traveling the world with a Powerpoint presentation featuring a graph of U.S. oil production history. That graph showed a clear peak in 1970 and a long bumpy decline thereafter.

My message: as went the U.S., so would go the world at some point in the fairly near future. Peak oil—the inevitable moment when global oil supplies started drying up—would be a watershed for industrial societies, leading to economic contraction, geopolitical crisis, and social upheaval.

So is it time for a retraction? The optics are certainly unfavorable for peak oil theorists like me. Our forecasts obviously failed, in that none of us expected the current surge in U.S. output. But permit me to offer some context.

Everyone agrees that the surge is almost entirely due to tight oil (globally, there has also been growth in bitumen from Canada, deepwater oil, and other unconventional sources). The application of hydrofracturing and horizontal drilling to low-permeability source rocks in the United States represents an amazing success story for the oil industry—at least in terms of raw petroleum output. But what conditions led to this bonanza?

Return with me now to those thrilling days of yesteryear—the year 2005, to be precise. That’s when the rate of world conventional oil production stopped growing and hit a plateau that continues to this day. Oil prices were already scrambling upward; by mid-2008 they had zoomed to nearly $150 per barrel. And it was at that moment that the global financial crisis erupted. Which was, by most accounts, a survival threat to industrial society.

…click on the above link to read the rest of the article…

EIA’s Shocking U.S. Oil Production Predictions

March 1, 2018

EIA’s Shocking U.S. Oil Production Predictions

Between 2010 and 2015, annual oil production in the U.S. grew by four million barrels per day (BPD). Production dipped in 2016, but then U.S. crude oil production again rose by 1.2 million BPD between January and December 2017, to levels that haven’t been seen since the early 1970s.

The surge in production is a result of growth in tight oil (more commonly known as shale oil). Many, including myself, never imagined that oil production could grow enough to threaten the U.S. oil production peak from 1970. But that looks inevitable at this point.

This production increase raises the question: Just how much will U.S. tight oil production increase before it peaks and begins to decline? Another million BPD? Three million BPD?

The Energy Information Administration’s latest Annual Energy Outlook (with projections to 2050) attempts to answer this question, modeling several scenarios for future oil production.

The Reference case projection assumes that known technologies continue to improve along recent trend lines. The economic and demographic trends that were used reflect the current views of leading forecasters.

In the High Oil and Gas Resource and Technology case, lower costs and a higher resource availability than in the Reference case are assumed. In the Low Oil and Gas Resource and Technology case, the assumption is of lower resources and higher costs.

Here are the EIA’s projections:

(Click to enlarge)

U.S. oil production projections.

Every case assumes at least a few more years of tight oil supply growth. The Reference case shows shale/tight oil production growth of two to three million BPD over the next three years, before leveling off and remaining at approximately that level until 2050.

…click on the above link to read the rest of the article…

Oil Prices: Collapse Now, Spike Later

February 12, 2018

Oil Prices: Collapse Now, Spike Later

Oil prices closed out the week sharply down, wiping out all the gains posted since the start of the year.

Surging U.S. shale production, along with broader financial turmoil, has clearly put an end to the bullish mood in the oil market. U.S. shale struck several blows against oil prices this week.

First, the EIA dramatically overhauled its forecasts, predicting U.S. oil production would hit 11 million barrels per day (mb/d) this year, rather than late next year. Then, on Wednesday, it revealed estimates that put U.S. oil production at 10.25 mb/d for the week ending on February 2, a staggering 330,000 bpd increase from a week earlier. Those weekly estimates are subject to revision when more data becomes available, but if those figures hold, it would point to a significant ramp up in drilling activity and new supply coming online.

As a result, it seems that, in the short run at least, U.S. shale has killed off the oil price rally, which saw WTI move from $50 per barrel in October to the mid-$60s per barrel by January. Brent saw a similar jump from the mid-$50s to $70.

But we’re now potentially moving into the next phase of this cycle, an all-too-familiar correction after prices have seemingly climbed too far.

This time around the downward swing could be aided by a rebound in the strength of the dollar. Typically, a weakening dollar pushes up oil prices, and the rapid run up in prices over the last few months occurred not coincidentally at a time when the dollar posted a steep decline. But the greenback has clawed back gains, particularly over the last week, with expectations of rising interest rates.

“The dollar index got down to 86 [cents], crude got to $66,” John Kilduff, founding partner of Again Capital, told CNBC.

…click on the above link to read the rest of the article…

U.S. Shale Companies Are Ready To Expand

February 11, 2018

U.S. Shale Companies Are Ready To Expand

The latest oil rally, which sees crude trading at close to its highest point in three years, is sufficient to garner considerable attention from market pundits, industry insiders and investors alike. It has raised the ugly specter of a sharp uptick in U.S. oil production driven by the much-anticipated shale oil boom.

Yet, there are signs that the potential for U.S. shale oil companies to rapidly expand production and return to the boom years witnessed before the prolonged oil slump appears overblown.

There are a range of constraints poised to prevent the rapid production growth many mainstream analysts had been predicting.

It was only in early December last year that an MIT study was released concluding that the U.S. vastly overstates oil production forecasts and that the EIA has been exaggerating the effect of fracking technology on well productivity.

According to MIT research, the EIA assumes that regular improvements in drilling technology and well design are boosting output at new wells by around 10 percent, yet their own research shows that it is closer to 6.5 percent. That, along with the EIA’s own monthly production data, which shows that U.S. oil output between January and November 2017 grew at a far more modest monthly average of 1.3 percent, indicates that the EIA’s weekly forecasts could very well be overstating U.S. oil production.

In the past, the optimistic figures provided by the EIA have suppressed the price of West Texas Intermediate or WTI, and this in part has been one of the contributing factors to the significant premium that has existed between WTI and Brent.

Nevertheless, that premium is closing, having fallen from over $6 per barrel at the start of 2018 to less than $4 for the last week of January 2018 amid falling U.S. inventories.

…click on the above link to read the rest of the article…

Oil Prices Tank As U.S. Drillers Add Massive Number Of Rigs

February 10, 2018

Oil Prices Tank As U.S. Drillers Add Massive Number Of Rigs

As if the recent nosedive that oil prices have taken in the last few days wasn’t bad enough—Baker Hughes reported a staggering increase to the number of rigs. The number of active oil and gas rigs increased by 29 to Baker Hughes data. This brings the total number of oil and gas rigs to 975, which is an addition of 234 rigs year over year.

The number of oil rigs in the United States rose this week by 26 with the number of gas rigs increasing by 3. The number of oil rigs now stands at 791 versus 591 a year ago. The number of gas rigs in the US now stands at 184, up from 149 a year ago.

At 11:24 am EST, the price of a WTI barrel was trading down $1.35 (-2.21 percent) to $59.80—almost a staggering $5.00 under this same time last week. The Brent barrel trading down $1.39(-2.14 percent) to $63.42, also almost $5 per barrel under last week, and a loss of 9 percent since the highs in late January.

Pressing on prices are robust US production. US crude oil production rose again, to 10.251 million bpd, from 9.919 million bpd the week before, setting another new high and surpassing the psychological threshold of 10.0 million bpd.

Last week, the EIA pressured prices even further when it changed its US production forecast, with their prediction that the US would reach 11 million bpd by the end of 2018—a full year earlier than its previous estimates that it had made just last month.

The Permian basin rig count saw the greatest increase to the number of rigs at 10.

At 1:09pm EST, WTI was trading at $59.03 (-$2.12) with Brent trading at $62.68 (-$2.13).

Party On, Dudes

February 9, 2018

Party On, Dudes

As of this week, the shale oil miracle launched US oil production above the 1970 previous-all-time record at just over ten million barrels a day. Techno-rapturists are celebrating what seems to be a blindingly bright new golden age of energy greatness. Independent oil analyst Art Berman, who made the podcast rounds the last two weeks, put it in more reality-accessible terms: “Shale is a retirement party for the oil industry.”

It was an impressive stunt and it had everything to do with the reality-optional world of bizarro finance that emerged from the wreckage of the 2008 Great Financial Crisis. In fact, a look the chart below shows how exactly the rise of shale oil production took off after that milestone year of the long emergency. Around that time, US oil production had sunk below five million barrels a day, and since we were burning through around twenty million barrels a day, the rest had to be imported.

Chart by Steve St. Angelo at www.srsroccoreport.com

In June of 2008, US crude hit $144-a-barrel, a figure so harsh that it crippled economic activity — since just about everything we do depends on oil for making, enabling, and transporting stuff. The price and supply of oil became so problematic after the year 2000 that the US had to desperately engineer a work-around to keep this hyper-complex society operating. The “solution” was debt. If you can’t afford to run your society, then try borrowing from the future to keep your mojo working.

The shale oil industry was a prime beneficiary of this new hyper-debt regime. The orgy of borrowing was primed by Federal Reserve “creation” of trillions of dollars of “capital” out of thin air (QE: Quantitative Easing), along with supernaturally low interest rates on the borrowed money (ZIRP: Zero Interest Rate Policy). T

…click on the above link to read the rest of the article…

Future U.S. Oil Production Will Collapse Just As Quickly As It Increased

February 8, 2018

Future U.S. Oil Production Will Collapse Just As Quickly As It Increased

While U.S. oil production reached a new peak of 10.25 million barrels per day, the higher it goes, the more breathtaking will be the inevitable collapse. Thus, as the mainstream media touts the glorious new record in U.S. production that has both surpassed its previous peak in 1970 and Saudi Arabia’s current oil production, it’s a bittersweet victory.

Why? There are two critical reasons the current record level of U.S. oil production won’t last and is also, a house of cards. First of all, oil production profiles tend to be somewhat symmetrical. They rise and fall in the same manner. While this doesn’t happen in every country or every oil field, we do see similar patterns. For example, this similar trend is taking place in both Argentina and Norway:

Here we can see that oil production increased, peaked and declined in a similar pattern in both Argentina and Norway. However, many countries had their domestic oil industries impacted by wars, geopolitical events, and or enhanced oil recovery techniques that have resulted in altered production profiles. Regardless, the United States experienced a symmetrical oil production profile from 1930 to 2007:

As we can see in the chart, U.S. oil production from 1930 to 2007 increased and then declined in the same fashion. On the other hand, the new Shale Oil Production trend is much different. What took 23 years for U.S. oil production to double from 5 million barrels per day (mbd) in 1947 to a peak of nearly 10 mbd in 1970, was accomplished in less than a decade with the new shale oil industry. Total U.S. oil production doubled from 5 mbd in 2009 to over 10 mbd currently.

…click on the above link to read the rest of the article…

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