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The new year now upon us has brought out the usual quota of predictions about what 2016 has in store, and I propose as usual to make my own contribution to that theme. I’ve noted more than once in the past that people who make predictions about the future really ought to glance back at those predictions from time to time and check how well they’re doing. With that in mind, before we go on to 2016, I’d like to take a moment to look back over the predictions I made last year. My post on the subject covered a lot of territory in the course of offering those predictions, and I’ve trimmed down the discussion a bit here for the sake of readability; those who want to read the whole thing as originally published will find it here. In summarized form, though, this is what I predicted:

“The first and most obvious [thing to expect] is the headlong collapse of the fracking bubble […] Wall Street has been using the fracking industry in all the same ways it used the real estate industry in the runup to the 2008 crash, churning out what we still laughably call “securities” on the back of a rapidly inflating speculative bubble. As the slumping price of oil kicks the props out from under the fracking boom, the vast majority of that paper—the junk bonds issued by fracking-industry firms, the securitized loans those same firms used to make up for the fact that they lost money every single quarter, the chopped and packaged shale leases, the volumetric production agreements, and all the rest of it—will revert to its actual value, which in most cases approximates pretty closely to zero.

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

The New Cartel Running the Oil Sector

December 30, 2015

The New Cartel Running the Oil Sector

As oil prices wallow near multi-year lows, it’s becoming increasingly clear that the new cartel controlling oil prices is not OPEC but world credit markets. From Saudi Arabia’s record $100 billion deficit to shale oil’s continuing reliance on cheap credit funding, it’s clear that no major oil producer or company in the world right now is economically self-sufficient based on oil revenues alone. This situation has left the flow of oil and the decision on when to stop pumping the increasingly tarnished black gold in the hands of banks rather than oil men.

The idea that bank loans to oil companies may be in trouble is not new but there are increasing signs of late that these distress energy loans could end up defaulting and leaving banks with a mess to deal with. At the national level, countries like Saudi Arabia won’t forfeit their assets to creditors of course, but their ability to keep running deficit funding is going to increasingly depend on bond market appetite for energy related debt. That could be problematic in 2016. With the Federal Reserve starting to raise interest rates, bond investors may find that they don’t need to invest in energy debt to garner yield as they have in 2015, and this in turn could start to crimp oil production.

Economists often like to cite cartels as having the power to control production, but at this point it looks like the only group with any ability to actually curtail (or expand) production are the major banks that direct capital market flows. Of course that production power is indirect, but it is real nonetheless.

Banks are not required to disclose the loans they hold to investors and Federal regulators don’t disclose this data either as it would potentially risk a run on certain banks, but regulators are definitely taking note of energy related loans in bank portfolios.

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

“Miracle of American Oil”: Continental Resources Courted Corporate Media to Sell Oil Exports

December 29, 2015

“Miracle of American Oil”: Continental Resources Courted Corporate Media to Sell Oil Exports

A document published by the Public Relations Society of America, discovered by DeSmog, reveals that from the onset of its public relations campaign, the oil industry courted mainstream media reporters to help it sell the idea of lifting the ban on crude oil exports to the American public and policymakers.

Calling its campaign the “Miracle of American Oil,” the successful PR effort to push for Congress and the White House to lift the oil exports ban was spearheaded by Continental Resources, a company known as the “King of the Bakken” shale oil basin and founded by Harold Hamm. Hamm served as energy advisor to 2012 Republican Party presidential candidate Mitt Romney.

Image Credit: Public Relations Society of America

The campaign launched on December 16, 2013, the 40th anniversary of the Organization of the Petroleum Exporting Countries (OPEC) oil embargo, and won the prestigious PRSA Silver Anvil Award.

According to the document, submitted to PRSA to detail the logistics and reach of the PR effort, it was “designed to influence public policy and/or affect legislation, regulations, political activities or candidacies — at the local, state or federal government levels.”

And it all began with a kick-off dinner in Washington, D.C., hosted by Continental Resources and attended by some of the most influential mainstream media energy reporters in the United States.

Regular readers of the Washington oil and gas industry beat will find the names of the dinner attendees, disclosed in the document, familiar.

Image Credit: Public Relations Society of America

“The campaign not only served as a catalyst to correct public misconceptions, but it also propelled crude oil exports to the top of the U.S. Senate’s agenda,” Continental boasted on the PRSA document.

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

The Confidence Game Is Ending

December 21, 2015

The Confidence Game Is Ending

Immediately after the Fed hiked interest rates last Wednesday – after sitting at 0% for 7 years – markets acted pretty much as one might expect. The Fed tightens monetary policy when the economy is strong so rising stock prices, rising interest rates and a strong dollar are all things that make sense in that context. I am sure there were high fives all around the FOMC conference room. Too bad it didn’t last more than one afternoon. By the close Friday, the Dow had fallen nearly 700 points from its post FOMC high, the 10 year Treasury note yield dropped 13 basis points, junk bonds resumed their decline and the dollar was basically unchanged. Not exactly a ringing endorsement of the Fed’s assessment of the US economy.

I’m not saying the Fed’s rate hike is what caused the negative market reaction Thursday and Friday. The die for the economy has likely already been cast and right now it doesn’t look like a particularly promising roll. Raising a rate that no one is using by 25 basis points is not the difference between expansion and contraction. And a bit over a 3% drop in stocks isn’t normally much to concern oneself with; a 700 point move in the Dow ain’t what it used to be.

The pre-existing conditions for the rate hike were not what anyone would have preferred. The yield curve is flattening, credit spreads are blowing out and the incoming economic data is not improving. Inflation is running at a fraction of the Fed’s preferred rate and falling oil prices have been neither transitory nor positive for the economy, at least so far. The Fed is not unaware of this backdrop – they may not like it or acknowledge it publicly but they aren’t blind – but seems to have decided the financial instability consequences of keeping rates at zero longer are greater than any potential benefit. A sobering thought that.

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

Just About Every Part of the Permian Basin is Unprofitable at $30 Per Barrel

December 21, 2015

Just About Every Part of the Permian Basin is Unprofitable at $30 Per Barrel

Sorry about that. I know that many believe that U.S. shale and tight oil plays are commercial even at current low oil prices but data on the Permian basin and Bakken plays simply does not support that belief.

To make matters worse, Pioneer and EOG have made outrageous claims about Permian basin reserves in their 3rd quarter 2015 earnings reports that no sensible person should believe. Statements like these simply add to the mistaken idea that tight oil plays get a pass on the laws of physics and economics and that somehow the U.S. is going to beat Saudi Arabia as the low-cost “swing producer” of the world. I wish that were true but trust me–based on data, that’s not going to happen.

The Permian basin is one of the oldest producing areas in the United States. It has been thoroughly drilled and is in a hyper-mature phase of development. The Spraberry, Wolfcamp and Bone Springs plays that Pioneer and EOG are pursuing (Figure 1) are really secondary recovery projects in which horizontal drilling and hydraulic fracturing have replaced water and CO2 injection methods used in the past. Few new reserves should be expected. Most of the claims that these companies make are really about higher recovery efficiency of existing reserves.

None of these plays are remotely commercial at present oil prices. In the most-likely per-well reserve case, these plays require break-even oil prices in the range of at least $50-$75 per barrel, and current wellhead prices in the basin are less than $30 per barrel.

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

Deja Vu All Over Again

December 14, 2015

Deja Vu All Over Again

Janet Yellen will increase interest rates for the first time in nine years on Wednesday. She isn’t raising them because the economy is strengthening. The economy just happens to be weakening rapidly, as global recession takes hold. The stock market is 3% lower than it was in December 2014, and has basically done nothing since the end of QE3. Wall Street is throwing a hissy fit to try and stop Janet from boosting rates by an inconsequential .25%. Janet would prefer not to raise rates, but the credibility and reputation of her bubble blowing machine is at stake. The Fed has enriched their Wall Street benefactors over the last six years, while destroying the real economy and the middle class.

The quarter point increase will be reversed in short order as soon as we experience market collapse part two. It will be followed with negative interest rates and QE4, as these academics have only one play in their playbook – print money. They created the last financial crisis and have set the stage for the next – even bigger collapse. John Hussman explains how their zero interest rate policy has driven speculators into junk bonds as the only place to get any yield.

Over the past several years, yield-seeking investors, starved for any “pickup” in yield over Treasury securities, have piled into the junk debt and leveraged loan markets. Just as equity valuations have been driven to the second most extreme point in history (and the single most extreme point in history for the median stock, where valuations are well-beyond 2000 levels), risk premiums on speculative debt were compressed to razor-thin levels. By 2014, the spread between junk bond yields and Treasury yields had fallen to less than 2.4%. Since then, years of expected “risk-premiums” have been erased by capital losses, and defaults haven’t even spiked yet (they do so with a lag).

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

EIA Says Shale Continues to Decline

December 9, 2015

EIA Says Shale Continues to Decline

The EIA’s Drilling Productivity Report has US shale oil on a steep decline. The below shale oil production charts are the EIA’s estimate of what shale production will look like through January 2016. Keep in mind this is the EIA’s estimate and not hard production numbers.

The big drops here are Eagle Ford, Bakken and Niobrara. They have the Permian still increasing in production. An expected drop of 116,000 barrels per day drop in January is very significant.

They have the Bakken in a continual decline after July. It is important to note that the EIA’s Drilling Productivity Report has the Bakken decline, July thrugh September, very close to what the North Dakota Industrial Commission has. So it appears that the DPR is getting better with its production estimates.

Eagle Ford is where the action is, or isn’t, depending on your point of view. Dropping 77,000 barrels per day to start the New Year does not bode well for shale production in 2016.

Niobrara appears to have the steepest drop since the March peak. But actually they, if the DPR is correct, will be down 28.37% since March while Eagle Ford is down 29.81%, The Bakken will be down 10.35% while the Permian will be up 7.59%.

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

U.S. Shale Lifelines Running Thin

October 28, 2015

U.S. Shale Lifelines Running Thin

As the world heads towards the start of the winter fuel oil season, crude prices still show little sign of a sustained upward move. Instead, oil seems to be trapped in a new “normal” range of around $40 to $55 a barrel. Shale oil producers have done a remarkable job in adjusting to that change in the environment, but it remains to be seen what the eventual damage to companies in the sector will be once the last crude hedges from the pre-collapse period finally settle in 2016.

With that uncertainty just around the corner, it is little wonder that financing has proven challenging for many shale firms. What might be more surprising though is where the financing that is available is actually coming from. Unlike in the past, many shale firms are having great difficulty tapping financing from either banks or public equity markets. Instead shale firms are turning to private equity firms and other unconventional sources of financing. In a report earlier this year, Reuters noted that there was $44 billion in high yield debt and share sales for the first half of 2015. That issuance though has increasingly become unfeasible as the much hoped-for fast rebound in oil prices has failed to materialize.

This lack of funding has created opportunities for patient and deep pocketed private equity firms. Asset sales, M&A deals, and bankruptcies have all been relatively limited thus far in the oil price fiasco in part because many firms had strong hedge positions, committed bank revolvers, and perhaps most importantly, because the spread between bid and ask prices on assets was wide.

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

The Dismal Thing Schlumberger CEO Just Said about US Oil

October 18, 2015

The Dismal Thing Schlumberger CEO Just Said about US Oil

2016 to be brutal. Then, dreams of “potential spike in oil prices”

An engineer in the oil industry, who’d sold his house in Houston and bailed out after finding work in another state, just told me this:

A young civil engineer that I am working with is looking for more permanent, stable work. He talked with a head hunter today. The head hunter suggested that the young engineer stay where he is. He said he had 30,000 resumes in his database of engineers who were looking for work right now. Just amazing. I don’t know how many engineers there are in Houston. 200,000? 300,000?

I then called a friend of mine who works for Jacobs. Well, he no longer works there. He was laid off. A very seasoned engineer. He said he was glad I left Houston and that things were looking grim. Fluor and Technip had also laid off a lot of engineers. He said he heard that Fluor, which goes after megaprojects, had laid off 30 Process Engineers – which is what I am.

This is a bad indication. We are the first line of engineers on a project. Then, as the project moves forward, instrument, estimating, electrical, and structural engineers are brought on. If process engineers (chemical engineers) aren’t being used, that means there are fewer projects coming up to keep them busy.

So what happened to the hopes for a recovery?

Three months ago, Paal Kibsgaard, CEO of oil-field services giant Schlumberger, figured the oil industry in the US had bottomed out. But on Friday during the earnings call, he changed his tune.

The business environment “clearly got worsened in the third quarter,” he said. It’s going to get even worse in the US in the fourth quarter. And 2016 is going to be very tough. He doesn’t see a recovery until 2017.

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

Fracking Fraud

October 15, 2015

Fracking Fraud

$fracking_mess$

Photo by Jacques del Conte.

Hucksters for high volume hydraulic fracturing with horizontal drilling, the intensely industrial process by which x percent of natural gas and oil are mined in the United States today, loudly tout multiple benefits of the practice. Fracking reduces dependence on imports of crude oil. It generates jobs, profits and tax revenues. Fracked gas burns cleaner than coal, reducing smog and carbon pollution. Fracking leads to lower prices for gasoline and other petroleum products. It’s a variant of the last claim I examine here.

I live in Upstate New York, a place spared the direct ravages of hydrofracking by an especially vigorous years long opposition campaign that led Governor Andrew Cuomo to “ban” the process in 2014 (the next governor could reverse Cuomo’s decision). The state still suffers myriad indirect insults from fracking, including mile-long oil trains from the Bakken Shale, and a network of proposed pipelines, storage facilities and giant compressors to move fracked gas from Pennsylvania to New York and New England. Setting aside the grievous environmental damage of pipeline construction and the ‘round-the-clock threat of another Lac Megantic, New Yorkers were supposed to benefit from the lower costs of heating fuels promised by fracking supporters.

Northeasterners use a wide variety of fuels to ward off the winter chill: electricity, wood, corn, pellets, propane, kerosene, oil, natural gas, even coal. Natural gas is most common. Despite the promises, fracking has not prevented spikes in fuel costs. In recent years, several severe winters caused heating oil and electricity prices to skyrocket.

Given the flood of fracked gas from shale formations as close as the Marcellus, the price ought to have followed that of gasoline. Yet, while current wholesale natural gas prices are twenty-four percent lower than last year, Capital Region of New York customers of National Grid (the local utility) can expect a two percent drop in their bills.

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

Will declines in U.S. and Canadian oil production lead to a global decline?

September 28, 2015

Will declines in U.S. and Canadian oil production lead to a global decline?

At the beginning of this year I noted that all of the growth in world oil production* since 2005 has come from two countries: the United States and Canada. And, I suggested that since the growth in production in those two countries came from high-cost deposits–tight oil in the United States and tar sands in Canada–that the precipitous drop in oil prices would lead to declines in production in both countries.

I concluded that unless another area of the world suddenly started growing its oil production significantly that those declines would probably result in a worldwide decline in oil production.

Well, declines in the both the United States and Canada have arrived. It will be several months before we can know with any certainty whether those declines will translate into a persistent global decline. But this much we do know:

The International Energy Agency, a consortium of 29 countries tasked with tracking worldwide energy trends, said in its latest report that global oil production fell 600,000 barrels per day in July–and here’s the important part–“mainly on lower non-OPEC output.” That’s a reference to falling U.S. and Canadian production. One month does not make a trend. But the report notes that non-OPEC supply is expected to contract in 2016.

The report said that further declines in U.S. production are expected. Weekly estimates from the U.S. Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy, bear this out. The EIA put U.S. production at 9.1 million barrels per day (mbpd) for the week ending September 18; that’s down from 9.6 mbpd in early June.

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

Is cheaper driving here to stay?

September 23, 2015

Is cheaper driving here to stay?

Gasoline may stay cheap until we burn through the current market glut in perhaps a year.

We are now seeing declining growth and a deflationary economic contraction globally. In fact, the current $40-plus a barrel oil price is by itself good proof of that. The global collapse in the price of oil shows that with global supply remaining roughly constant over time at about 95 million barrels per day. The current low oil price, together with a price slump in other industrial commodities like iron ore, is really an indication of a broad and deep contraction in the global economy, much like 2008-2009.

The Texas shale drilling industry was supposed to keep us driving normally forever, or at least until the economy could recover enough so we could afford to make a transition to electric cars, right? Everyone connected to Wall Street and its financial followers with any media influence were saying that only about a year ago. Then the global oil price gradually collapsed from over $100 a barrel in mid-2014, down to its current price of about $45.

The reason that the Texas shale drilling boom is now in a state of deep decline and won’t easily bounce back is that shale drilling is losing money. Shale oil really needs $80 a barrel or above to break even in the context of fast well decline and shrinking number of sweet spots left to drill.

Shale drillers must keep producing oil at a loss because of their largely junk bond financing.

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

Bakken Flat but the EIA Predicts Decline

September 16, 2015

Bakken Flat but the EIA Predicts Decline

The North Dakota Industrial Commission has published the July production data forThe Bakken and for all North Dakota.

Bakken production was down 5,430 barrels per day while all North Dakota was down 9,410 bpd.

Here is a more amplified view of what has happened during the last 12 months.

Bakken barrels per day per well has been falling faster than for all North Dakota. This is because a lot of very low producing conventional wells are being shut down.

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

Shale Oil’s “Dirty Little Secret” Has Been Exposed

September 12, 2015

Shale Oil’s “Dirty Little Secret” Has Been Exposed

On Friday, on the way to diving into Goldman’s $20 crude call, we recapped our characterization of low crude prices as a battle between the Fed and the Saudis, a battle which is now manifesting itself in budget troubles in Riyadh and a concurrent FX reserve burn. Here’s what we said:

When Saudi Arabia killed the petrodollar late last year in a bid to bankrupt the US shale space and secure a bit of leverage over the Russians, the kingdom may or may not have fully understood the power of ZIRP and the implications that power had for struggling US producers. Thanks to the fact that ultra accommodative Fed policy has left capital markets wide open, the US shale space has managed to stay in business far longer than would otherwise have been possible in the face of slumping crude. That’s bad news for the Saudis who, after burning through tens of billions in FX reserves to help plug a yawning budget gap, have now resorted to tapping the very same accommodative debt markets that are keeping their competition in business as a fiscal deficit on the order of 20% of GDP looms large.

Still, as we went on to point out, it looks like the Saudis have dug in for the long haul here and the strain on non-OPEC production is starting to show as the IEA now says “the latest tumble in the price of oil is expected to cut non-OPEC supply in 2016 by nearly 0.5 million barrels per day (mb/d) – the biggest decline in more than two decades, as lower output in the United States, Russia and North Sea is expected to drop overall non-OPEC production to 57.7 mb/d.”

“US light tight oil, the driver of US growth, is forecast to shrink by 0.4 mb/d next year,” the agency adds.

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

Jean Laherrere’s Bakken Update

August 25, 2015

Jean Laherrere’s Bakken Update

Jean Laherrere sent me the below charts the other day. I had planned on posting them with more Bakken data. But my schedule has been busy so I am posting them alone.

Jean’s interpretation for ND is as follows

Bakken ultimate = 3 Gb

Non Bakken ultimate = 2.2 Gb

ND ultimate 5.2 Gb

Detail

Quite symmetrical like the EIA drilling productivity data, but in contrary to EIA/AEO2015 with a peak in 2020

It will be interesting to see the evolution in the next few months

The Hubbert Linearization puts the Bakken about half way to the end.

The rest of North Dakota, less the Bakken, is just about finished.

With this chart Jean puts North Dakota production right at the peak.

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

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