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Three years after the oil price crash, the U.S. shale patch is on its second growth phase and is expected to continue to increase its production, at least through the next five years.

The global oil markets have become increasingly dependent on U.S. tight oil supply—and the oil industry is still coming to grips with this new reality, Simon Flowers, Chairman and Chief Analyst at Wood Mackenzie, wrote in a recent article.

Current projections put the Permian on the forefront of the United States’ ability to deliver increased tight oil supply to the global markets. However, forecasts for the shale patch are as dynamic as production and drilling rates are. And some ‘known unknowns’ have been surfacing such as higher gas-to-oil ratios in some wells, and the parent/child wells issue, Flowers says.

Wood Mackenzie said last month that signs had started to show that intensified drilling in the Permian doesn’t deliver commensurate volumes of oil. Although WoodMac thinks that such setbacks could just be growing pains and Permian drillers could indeed ‘change the laws of physics’, it had warned three months ago that drillers might soon start to test the region’s geological limits. If exploration and production companies can’t overcome the geological constraints with tech breakthroughs, Permian production could peak in 2021, putting more than 1.5 million bpd of future production in question and potentially significantly influencing oil prices, WoodMac said in September.

In his December article, WoodMac’s Flowers included this observation in the Permian’s ‘known unknowns’:

“Growth might also be constrained by shareholders demanding that independents rein back from volume-driven targets.”

Those ‘known unknowns’ serve as a warning: the oil market can’t be complacent and just assume that the Permian boom will deliver as expected, according to Flowers.

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

When boom is bust: the shale oil bonanza as a symptom of economic crisis

December 5, 2017

When boom is bust: the shale oil bonanza as a symptom of economic crisis

The gradual climb in oil prices in recent weeks has revived hopes that US shale oil producers will return to profitability, while also renewing fevered dreams of the US becoming a fossil fuel superpower once again.

Thus a few days ago my daily newspaper ran a Bloomberg article by Grant Smith which lead with this sweeping claim:

“The U.S. shale revolution is on course to be the greatest oil and gas boom in history, turning a nation once at the mercy of foreign imports into a global player. That seismic shift shattered the dominance of Saudi Arabia and the OPEC cartel, forcing them into an alliance with long-time rival Russia to keep a grip on world markets.”

I might have simply chuckled and turned the page, had I not just finished reading Oil and the Western Economic Crisis, by Cambridge University economist Helen Thompson. (Palgrave Macmillan, 2017)

Thompson looks at the same shale oil revolution and draws strikingly different conclusions, both about the future of the oil economy and about the effects on US relations with OPEC, Saudi Arabia, and Russia.

Before diving into Thompson’s analysis, let’s first look at the idea that the shale revolution may be “the greatest oil and gas boom in history”. As backing for this claim, Grant Smith cites a report earlier in November by the International Energy Agency, predicting that US shale oil output will soar to about 8 million barrels/day by 2025.

Accordingly, “ ‘The United States will be the undisputed leader of global oil and gas markets for decades to come,’ IEA Executive Director Fatih Birol said … in an interview with Bloomberg television.”

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

Can The Gas Glut Kill The Permian Boom?

November 22, 2017

Can The Gas Glut Kill The Permian Boom?

The Permian basin continues to add new oil production, but shale drillers in West Texas could face an unexpected problem: too much natural gas.

Natural gas is produced as a byproduct when drilling for oil. Oil tends to be more lucrative, so shale companies typically target oil in places like the Permian, and the gas is considered an added benefit. However, the Wall Street Journal reports that shale drillers in the Permian are struggling with too much gas and not enough places to put it.

The gas pipelines from the West Texas shale fields are at capacity. To the north, the market is saturated with gas from the Rockies and Canada, the WSJ says. And while there are several natural gas pipelines under construction that would carry gas from Texas to Mexico, those projects are not yet online. One key pipeline, the Gulf Coast Express, won’t come online until 2019, and several other projects have similar timelines.

While Permian producers really want to continue to ramp up oil production, they are extracting more gas than they know what to do with. The result is plunging spot prices for gas. According to the WSJ, the Waha trading hub in West Texas has gas selling for 57 cents/MMBtu below Henry Hub prices. With Henry Hub at roughly $3/MMBtu, that puts West Texas gas at something like $2.50/MMBtu.

But gas output is expected to continue to climb. With no space left on any pipelines, prices will continue to crater. Analysts, according to the WSJ, see gas prices in the region dropping further, potentially trading for a $1/MMBtu discount relative to Henry Hub.

(Click to enlarge)

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

The IEA Is Grossly Overestimating Shale Growth

November 17, 2017

The IEA Is Grossly Overestimating Shale Growth

This week, the IEA said that U.S. shale would dominate the oil and gas markets over the next decade, rising to “a level 50 percent higher than any other country has ever managed.” With a “remarkable ability to unlock new resources cost-effectively,” U.S. shale will add millions of barrels of new oil supply by 2025.

But some view such heady predictions as fanciful. There are a variety of reasons why U.S. shale could struggle to add several million additional barrels per day over the next few years. But here are just a few.

First, shale suffers from steep decline rates, much steeper than conventional wells. That means drilling is like running on a treadmill—more and more wells need to be drilled just keep production flat. The extraordinary rate of drilling over the past few years means that the industry not only needs to keep going at that frenzied pace, but it needs to expand its rate of drilling to add more barrels.

Just to cite a small example of the challenge the industry faces, the Permian Basin—the most prolific in the U.S.—has a legacy decline rate that has exploded over the past few years.

According to the EIA, the basin will lose 165,000 bpd of production in December, meaning that the industry needs to add that amount in fresh supply to keep output from falling. The agency does see the industry bringing 223,000 bpd of new supply online in December, but that nets out to only an addition of 58,000 bpd after the decline rates are factored in. The Permian hasn’t yet seen its output peak, but it will be very tall task to keep production growing for years to come, especially since the decline rate grows larger and larger.

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

U.S. SHALE OIL PRODUCTION UPDATE: Financial Carnage Continues To Gut Industry

November 15, 2017

U.S. SHALE OIL PRODUCTION UPDATE: Financial Carnage Continues To Gut Industry

As the Mainstream media reports about the next phase of the glorious U.S. Shale Oil Revolution, the financial carnage continues to gut the industry deep down inside the entrails of its horizontal laterals. The stench of fracking fluid must be driving shale oil advocates utterly insane as they are no longer able to see the financial wreckage taking place in these companies quarterly reports.

This weekend, one of my readers sent me the following Bloomberg 45 minute TV special titled, The Next Shale Revolution. If you are in need of a good laugh, I highly recommend watching part of the video. At the beginning of the video, it starts off with President Trump stating that the U.S. has become an energy exporter for the first time ever. Trump goes on to say, “that powered by new innovation and technology, we are now on the cusp of a new energy revolution.” While I have to applaud Trump’s efforts for putting out some positive and reassuring news, I wonder who is providing him with terribly inaccurate energy information.

I would kindly like to remind the reader; the United States is still a NET IMPORTER of oil. We still import nearly six million barrels of oil per day, but we export some finished products and a percentage of our shale oil production. Thus, we still import a net of approximately three million barrels per day of oil.

A few minutes into the Bloomberg video, both Pioneer Resources Chairman, Scott Sheffield, and Continental Resources CEO, Harold Hamm, explain how advanced technology will revolutionize the shale oil industry and bring down costs. I find that statement quite hilarious as Continental Resources and Pioneer continue to spend more money drilling for oil and gas then they make from their operations.

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

How Has the US Fracking Boom Affected Air Pollution in Shale Areas?

November 6, 2017

How Has the US Fracking Boom Affected Air Pollution in Shale Areas?

$Trucks in front of a flare at a fracking site$

Urban air pollution in the U.S. has been decreasing near continuously since the 1970s.

Federal regulations, notably the Clean Air Act passed by President Nixon, to reduce toxic air pollutants such as benzene, a hydrocarbon, and ozone, a strong oxidant, effectively lowered their abundance in ambient air with steady progress.

But about 10 years ago, the picture on air pollutants in the U.S. started to change. The “fracking boom” in several different parts of the nation led to a new source of hydrocarbons to the atmosphere, affecting abundances of both toxic benzene and ozone, including in areas that were not previously affected much by such air pollution.

As a result, in recent years there has been a spike of research to determine what the extent of emissions are from fracked oil and gas wells — called “unconventional” sources in the industry. While much discussion has surrounded methane emissions, a greenhouse gas, less attention has been paid to air toxics.

Upstream Emissions

Fracking is a term that can stir strong emotions among its opponents and proponents. It is actually a combination of techniques, including hydraulic fracturing, that has allowed drillers to draw hydrocarbons from rock formations which were once not profitable to tap.

Drillers shatter layers of shale rock with high-pressure water, sand and chemicals to start the flow of hydrocarbons from a well. The hydraulic fracturing process itself, aside from its large demand for water, is possibly the least environmentally impactful step along the complete operational chain of drilling for hydrocarbons. Arguably, the more relevant environmental effects are wastewater handling and disposal, as well as the release of vapors from oil and gas storage and distribution.

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

How EIA Guestimates Keep Oil Prices Subdued

September 4, 2017

How EIA Guestimates Keep Oil Prices Subdued

The EIA has once again undercut its previous estimates for U.S. oil production, offering further evidence that the U.S. shale industry is not producing as much as everyone thinks.

The monthly EIA oil production figures tend to be more accurate than the weekly estimates, although they are published on several months after the fact. The EIA just released the latest monthly oil production figures for June, for example. Meanwhile, the agency releases production figures on a weekly basis that are only a week old – the latest figures run up right through August.

The weekly figures are more like guestimates though, less solid, but the best we can do in nearly real-time. It is not surprising that they are subsequently revised as time passes and the agency gets more accurate data.

But the problem is that for several months now, the monthly and the weekly data have diverged by non-trivial amounts. The weekly figures have been much higher than what the monthly data reveal only later. And remember, it is the monthly data that tends to be more accurate.

Let’s take a look. A month ago, I wrote about how the EIA’s monthly data for May put U.S. oil production at 9.169 million barrels per day (mb/d). But back in May, the EIA’s weekly figures told a different story. The agency thought at the time that the U.S. was producing nearly 200,000 bpd more than turned out to be the case. Here were the weekly estimates at the time:

• May 5: 9.314 mb/d

• May 12: 9.305 mb/d

• May 19: 9.320 mb/d

• May 26: 9.342 mb/d

But two months later, the EIA published its final estimate for May, and put the figure at 9.169 mb/d. So, as it turns out, the U.S. was producing much less in May than we thought at the time.

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

Why The Shale Oil “Miracle” Is Becoming A “Debacle”

August 27, 2017

klublu/Shutterstock

Why The Shale Oil “Miracle” Is Becoming A “Debacle”

Dispelling the magical thinking behind the hype

Energy is everything.

This is an amazingly important concept. Yet it’s almost universally overlooked.

Sometimes it’s hard to appreciate the magical role energy plays in our daily lives because most of what we experience is a derivative of it. The connection is hidden from direct view. Because of this, most people utterly fail to detect or appreciate the priceless and irreplaceable role of high net-energy fuel sources (such as oil and gas) to our modern lifestyle.

With high net-energy, society enjoys increasing complexity and technological advances. It’s what enables us to pursue massive goals like desalinating billions of gallons of seawater, or going to Mars. But without high net-energy fuel sources, our capabilities quickly regress to those of decades — or even centuries — past.

Which is why understanding where we truly are in the ‘net-energy story’ is so incredibly important. Is the US on the cusp of being “energy independent” from here on out? Is the “shale miracle” ushering in a glorious new ‘boom’ era that will vault America to unprecedented prosperity?

No. The central point of this report is that the US is deluding itself when it comes to energy abundance (generally) and oil (specifically).

Yet that’s not what we hear from the cheerleaders in the industry or in our media. From them, we hear a silver-tongued narrative of coming riches — a narrative that contains some truth, some myth, and a lot of fantasy.

It’s those last two parts — the myths and fantasies — that are going to seriously hurt many investors, as well cause a lot of extremely poor policy and investment decisions.

The bottom line is this: The US shale industry resembles a fraudulent Ponzi scheme much more so than it does any kind of “miracle”.

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

More Peak Shale: World’s Largest Miner Is Selling Its Shale Assets

August 22, 2017

More Peak Shale: World’s Largest Miner Is Selling Its Shale Assets

Over the past several months, we have wondered if despite new all time high shale production, whether the US shale sector in the has peaked. Some of our recent thoughts can be found in the following articles:

The “peak shale” narrative got a boost in late July when one of the world’s most bearish hedge funds, Horseman Global, announced it was aggressively shorting shale companies on the thesis that funding is about to “run dry”, resulting in a sharp drop in production and with the lack of capex, would lead to another round of industry defaults (while sending the price of oil higher).

More evidence was revealed in the latest Baker Hughes data, which showed that both active Horizontal and Permian oil rigs had finally peaked and were now declining, while the number of oil rigs funded by Public junk bond deals had plateaued, suggesting little interest in future funding:

Fast forward to today when overnight, we got the clearest indication yet that the US shale sector may have indeed have peaked, when BHP Billiton – the world’s largest miner – said it was in talks with potential buyers of its U.S. shale assets, purchased during a frenzied $20 billion buying spree in 2011, just as the price of oil peaked.

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

The Latest Red Flag For U.S. Shale

August 22, 2017

The Latest Red Flag For U.S. Shale

The U.S. shale industry has had a rough few weeks, with a growing number of reports suggesting that the industry is facing much more financial trouble than many analysts had expected. Now, a new report adds further evidence to the notion that shale is losing its luster in a $50 per barrel market, with producers forgoing shale in favor of older wells.

U.S. shale was thought to be the most competitive source of oil out there, and indeed the industry appears to be ramping up production at today’s prices. Shale had adapted to a $50 per barrel market, producers had streamlined operations to make them almost resemble an assembly line, and in a volatile and unpredictable market, the short-cycle nature of shale drilling made it one of the least risky options for drillers.

But in just a few weeks’ time, investors are starting to ask major questions about the viability of shale drilling at such a large scale.

A couple of notable things have occurred in the past month or so. Pioneer Natural Resources, a top Permian producer, raised concerns when it told investors that its Permian shale wells were coming up with a higher natural gas-to-oil ratio than expected, a potentially worrying sign. The company also reported that it had trouble with some of its wells, forcing it to delay some completions.

Separately, Goldman Sachs reported that top investors are souring on U.S. shale E&Ps, with poor performances leading investors to search for ways to “reallocate capital” elsewhere in the energy space. That is big red flag for the shale industry, which is still struggling to consistently post profits despite the highly-touted cost reductions over the past few years.

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

Peak Shale: Anadarko Just Became The First US Oil Producer To Slash CapEx

July 24, 2017

Peak Shale: Anadarko Just Became The First US Oil Producer To Slash CapEx

It appears that Horseman Global’s Russell Clark may have been spot on with his bearish take on the US shale sector.

As a reminder, in his latest letter to investors, Clark said that “the rising decline rates of major US shale basins, and the increasing incidents of frac hits (also a cause of rising decline rates) have convinced me that US shale producers are not only losing competitiveness against other oil drillers, but they will find it hard to make money…. at some point debt investors start to worry that they will not get their capital back and cut lending to the industry. Even a small reduction in capital, would likely lead to a steep fall in US oil production. If new drilling stopped today, daily US oil production would fall by 350 thousand barrels a day over the next month.”

What I also find extraordinary, is that it seems to me shale drilling is a very unprofitable industry, and becoming more so. And yet, many businesses in the US have expended large amounts of capital on the basis that US oil will always be cheap and plentiful. I am thinking of pipelines, refineries, LNG exporters, chemical plants to name the most obvious. Even more amazing is that other oil sources have become more cost competitive but have been starved of resources. If US oil production declines, the rest of the world will struggle to increase output. An oil squeeze looks more likely to me.

While the bearish thesis has yet to play out, moments ago Anadarko poured cold water on US energy investors after it missed earnings badly, reporting a Q2 EPS loss of 77c, more than double the 33 cent loss expected.

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

US Shale Production Just Hit A New All Time High

July 17, 2017

US Shale Production Just Hit A New All Time High

One month ago, we reported that based on recent data, June oil output from shale producers would post the first double-digit production growth since July of 2015, when oil prices tumbled and a substantial portion of US production was briefly taken offline. While the final data has yet to be tabulated, it is safe to say that this is now the case.

Indicatively, while over the past year total U.S. production was up roughly 525kb/d, virtually all of it, or 98.5%, was the result of horizontal rig production in the Permian Basin, where output rose by just over half a million barrels per day.

The Permian basin has been leading the increase in horizontal oil rig count (+184%)

Also of note is that while US rig shows not signs of slowing yet, in its latest Weekly Oil Rig Monitor, Goldman predicted that $45/bbl is the price below which shale output would finally slow, although that price may also prove a substantial hurdle for many gulf budgets, whose all in cost of production – including mandatory and discretionary government outlays – is roughly the same if not higher.

Rig count (lhs), WTI spot prices (rhs, $/bbl, 3-mo lag)

But what is more notable, is that according to the June EIA Drilling Prodctivity Report forecast, in July total shale (note: not total) basin output would rise by 127kb/d from May’s 5.348mmb/d, and hit 5.475 mmb/d, surpassing the previous record of 5.46 mmb/d reached in March 2015. Today the EIA released its latest Drilling Productivity Report, and while the number is not official just yet, it is safe to say that as of July, the total US shale basin is producing a record amount of crude oil, which the EIA pegged at 5.472mmb/d, up almost exactly as predicted, and is expected to rise by a further 113kb/d in August to a new all time high of 5.585mmb/d.

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

Will Central Banks Derail The Shale Boom?

June 30, 2017

Will Central Banks Derail The Shale Boom?

The U.S. Federal Reserve has already increased interest rates several times, most recently in June, with promises to do much more. Rate hikes pose a problem for the oil industry, which has used debt to underpin a drilling boom across the U.S. shale patch. Higher rates could raise the cost of drilling.

But low oil prices, and few prospects for a strong rebound in the near-term – and possibly even the medium- and long-term – undercut the rationale for higher rates. After all, inflation is soft, and low commodity prices have a lot to do with that.

In fact, the decline of oil prices this year has led to even lower inflation than expected, not just in the U.S., but also in Europe. The Fed has insisted that weak inflation is “transitory,” but more people are starting to wonder if that is true. “There is now a much bigger chance that there will be an important disinflationary impact from lower oil prices,” Thierry Wizman, global interest rates and currencies strategist for Macquarie, told MarketWatch. With oil prices and broader inflation low, why raise rates?

Still, the Fed seems intent on moving forward. And the Bank for International Settlements (BIS), a group of central banks from around the world, urged central banks a few days ago to continue the “great unwinding.” That is, the extraordinary monetary stimulus stemming from the 2008-2009 financial crisis needs to be reined in. Fed chair Janet Yellen has warned about overpriced asset classes, a side effect of loose monetary policy. The hawkish Fed thinks that monetary policy needs to tighten in order to prevent overheating. Related: The Downturn Is Over, But U.S. Oil Companies Face A Huge Problem

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

What’s Wrong With The U.S. Oil Export Boom

June 20, 2017

What’s Wrong With The U.S. Oil Export Boom

The lead editorial in Friday’s Wall Street Journal was pure energy nonsense.’

“Lessons of the Energy Export Boom” proclaimed that the United States is becoming the oil and gas superpower of the world. This despite the uncomfortable fact that it is also the world’s biggest importer of crude oil.

The piece includes the standard claptrap about how the fracking revolution has pushed break-even prices to absurdly low levels. But another article in the same newspaper on the same day described how producers are losing $0.33 on every dollar in the red hot Permian basin shale plays. Oops.

The main point of the editorial, however, is to celebrate a surge in U.S. oil exports to almost 1 million barrels per day in recent weeks. The Journal calls lifting the crude oil export ban that made this possible “a policy triumph.” What the editorial fails to mention is that exports actually fell after the ban was lifted, and only increased because of Nigerian production outages (Figure 1).

(Click to enlarge)

Figure 1. U.S. Oil Exports Have Increased As Nigerian Production Has Fallen. Source: EIA and Labyrinth Consulting Services, Inc.

Tight oil is ultra-light and can only be used in special refineries, most of which are in the U.S. It must be deeply discounted in order to be processed overseas in the relatively few niche refineries designed for light oil. That’s why Brent price is higher than WTI.

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

Wall Street Is Pouring Money Back Into Shale

April 17, 2017

Wall Street Is Pouring Money Back Into Shale

With oil prices seemingly on firm footing, Wall Street is pouring money back into the shale sector, expecting profits even at $50 per barrel.

The private equity industry raised an estimated $19.8 billion in funds for energy investment in the first quarter of this year, or about three times as much as the same period in 2016. The figures indicate a more aggressive approach from private equity in shale drilling, and rising expectations that the oil market is set to rebound. The data comes from Preqin, and was reported on by Reuters.

The optimism comes even as oil prices have languished in the $50 per barrel range since November, after briefly dipping into the $40s last month. The hopes of a stronger rebound by now have been dashed, and oil analysts have steadily revised their expectations, pushing out their projections for stronger price gains. The extraordinary gains in U.S. crude oil inventories in the first quarter caught the market – and OPEC – by surprise, killing off hopes of oil heading north of $60 per barrel.

But the new money from Wall Street need not depend on $60+ oil. Lenders are confident that their investments will turn out to be profitable even at the prevailing market price today. That is because shale drillers have dramatically cut their costs, pushing breakeven prices down. “Shale funders look at the economics today and see a lot of projects that work in the $40 to $55 range,” Howard Newman, head of private equity fund Pine Brook Road Partners, told Reuters. His firm dumped $300 million in Permian driller Admiral Permian Resources LLC in March.

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

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