Dec

5

 With the price of oil down from 120 a few months ago to 66 today, what do the energy boys on this site think about the prospects for oil and oil industry in the future, near and middle. I am interested in a forecast for the next 3 months particularly.

Gordon Haave writes:

Mine is that oil will continue to collapse. The whole boom was a creation of the commodities index industry and it is starting to unwind and also nobody gives a shit anymore about the Americas and Israel's wars.

Orson Terrill writes:

Sorry about the delay, quite busy, we're planning to take advantage of a slow down.

Saudi Arabia is the Fed in oil. Don't fight them. They said 50% of production in TX would be effected about a month ago. That was a promise not a description. The models I've used suggest we are getting close to that.

It is not far fetched that TX WTI production is showing signs of leveling off in 3 months.

Crude rough models (double entendre) for TX suggest that WTI Production should be down by at least 25% or more in 18 months given current prices, the initial production curves in TX relative to the price of WTI, the decline rate, and the total cost completing a well. I can go back and find the work I did on that, if someone wanted to take my back of envelope work more seriously.

Re-pressurizing presents a threat to that drop in production, but there is some evidence that zipper fracturing is reducing the returns to re-pressurizing wells, which is an expensive process. They can merely stabilize the well, pack up and come back later.

Given that most tools and equipment are leased, the land is leased, the well is drilled by contractors, and it can be done in 30 days…. The short run price elasticity of supply for land based shale plays is very high; they can just send everything and everyone one home, and wait.

The larger companies own rigs; EOG owns about 22 rigs in the Eagle Ford (I use EOG as a yardstick to measure others with).

That is what might catch people by surprise. Just how fast they can and will stop, and how quickly the production comes down to the extremely high decline rates (45%-90% in the first year, roughly 50% in the second, and 30% in the third).

FACT: drilling is slowing down already. FACT: The two merged companies are demanding less of certain services related to drilling. FACT: EOG is one of the, if not the best company in TX at drilling in these complicated shale formations; at these prices many of their wells will not be profitable. I know that is true. FACT: CHK wanted to unwind their aggressive push towards gas under the last CEO, and has been pushing hard in TX for Oil…. The wells they developed in the summer were more expensive than EOG's in the summer. EOG averaging about 6.7 million a well in total cost, it looked like CHK was closer to 8. They need to get initial production rates of twice the average to make sure they are doing better than breaking even. FACT: Saudi Arabia said they believe about 50% of production will be affected by the current price. On Speculation: I advised that was as a promise, not a description of the price at the time… and sure enough OPEC, on Thanksgiving, was not good for TX.

SPEC: I think that its just the beginning for the oil field services companies, because there are some planning and services that go into drilling a well, cementing, fracturing, re-pressurizing, plugging and abandoning.

SPEC: The oil field services that have heavy equipment which is rented out will suffer proportionately.

SPEC: Some E&Ps may generate huge cash flow as they substantially reduces CAPEX on new wells,relative to the next year of flowing oil…


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4 Comments so far

  1. Jens Pinkernell on December 5, 2014 1:18 pm

    The next 3 months are hard to predict. Here are my facts though: we still have new leases coming into our office for the Midland Glascock County - and my partner was just offered a staggering amount for his Glasckock wells drilled by Energen. This boom is far from over! Jens.

  2. stf on December 5, 2014 3:22 pm

    1) in 2 months you will see the low … must converge with a resolution Russian Vs rest of the world concerted .

    2) If that don’t happen and the situation degenerates this war can continue indefinitely … but it will be a pretext to justify the failure of expansionary policies completely inappropriate, since it did not solve the structural problems but they have exasperated (drop in consumption everywhere)

    the point 1) is a conseguence of point 2)

    they create the problems, then the they make profits in the problems … always

  3. Gregory Rehmke on December 6, 2014 12:53 am

    Predictions are hard, especially about the future. Consider oil market predictions just six or seven years ago. People weren’t discussing whether horizontal drilling and hydraulic fracturing were profitable at $70 or $80 a barrel because these technologies were not even known outside a few marginal players. Shale production begins to take off in 2009, when oil prices were $33 in January and hit $60 in September. Chart: http://www.aei.org/wp-content/uploads/2012/10/oiltop41.jpg

    Just as shale technology fields were unpredictable in 2006 and 2009, the next round of innovations are hard to guess. Shale oil production accelerated when shale gas prices collapsed. Within weeks, shale gas firms shifted to finding and drilling shale oil. And month by month drilling speeds increased and operational costs fell. Then lower costs expanded potential fields. New technologies and improving skills continue to lower drilling costs. And we don’t know is how many significant cost-cutting technologies are being tried out now among the many competitors and suppliers. Nor do we know what other innovations are on the shelf ready to be tried.

    By contrast, Chevron’s Tubular Bells deepwater project in the Gulf started production in November and is expected to produce 50,000 barrels of oil a day. The field was originally drilled in 2003 and construction started in late 2011.
    http://www.chevron.com/chevron/pressreleases/article/11172014_chevronconfirmsfirstoilproductionfromtubularbellsinthegulfofmexico.news

    Giant project that Chevron, Exxon and other fund need to be profitable at much lower possible oil prices looking ahead ten years for construction and production to start, and ahead another ten years for costs to be covered. Shale oil operations have much shorter time-horizons and we will soon see which firms continue at $60 a barrel.

    Also, it is worth considering technologies continuing to advance for deep-water drilling. Deep-water projects have been over budget in part because oil prices have stayed high for so many years, spurring huge exploration and development of new deep-water operations, from Brazil to Africa to Siberia and the Arctic. We don’t know which of these projects will continue and how much they will produce.

  4. douglas roberts dimick on December 7, 2014 11:22 pm

    Go USA

    Returning to Dallas from living 8 years in China this February, one of the first due diligence precepts to be booked was my sister in Houston stating: “We are becoming the center of the universe… right here in Houston, Dallas, Texas, the US.”

    Odd considering that China just overtook America as the largest economy.

    Energy… not just talking oil and gas here… control of energy to include water rights. Hence we have reviewed several energy deals since to include drilling, fracking, and mineral rights options.

    As a caveat, consider where we are big picture in terms of the market…

    https://www.google.com/search?num=100&newwindow=1&tbm=isch&tbs=simg:CAQSZRpjCxCo1NgEGgIICgwLELCMpwgaPAo6CAISFPEL_1wuRDIEMjwzuC7kWtxa4FvoIGiCt8whYKy9zSRiKN6Sb87SD1YhS4uYaBu9DHlXnTMWA8wwLEI6u_1ggaCgoICAESBHQu5TEM&sa=X&ei=fxaFVOLtGdS3yATUgIKwAg&ved=0CBsQwg4oAA&biw=1067&bih=478

    If in that context, what one correlates as the quantitative relativity of energy markets to the S&P, then note the 2020E Production, Mboe/d modeling of worldwide breakeven points…

    http://www.businessinsider.com.au/citi-breakeven-oil-production-prices-2014-11

    Note the 2020E Production, Mboe/d charting…

    https://www.google.com/search?num=100&newwindow=1&tbm=isch&tbs=simg:CAQSZRpjCxCo1NgEGgIICgwLELCMpwgaPAo6CAISFP0I5gj8CPoI1Qv7CIYI8gjzCP8IGiCtLc3z3MBh-XOsg54XvmJbll4K4AzEVG2MKsvvu_13UtwwLEI6u_1ggaCgoICAESBElZkBUM&sa=X&ei=0haFVIjYDcmSyASeyIGIAw&ved=0CBsQwg4oAA&biw=1067&bih=478#facrc=_&imgdii=_&imgrc=MsmNJ4CBSfl3lM%253A%3BCgMW_amflF4gPM%3Bhttp%253A%252F%252Fstatic1.businessinsider.com%252Fimage%252F5478971b69bedd1f6b9bd367-2581-1840%252Fciti-breakevens.png%3Bhttp%253A%252F%252Fjoeroseblog.blogspot.com%252F%3B2581%3B1840

    Impression: 3-6 months is a continuation of downward trending… This is not to say that the mother(s) of all bubbles — US equities, China — may not be realized — 2016?

    dr

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