The upward revision for Permian resources is still pretty amazing. Yes, they are classed as “undiscovered, technically recoverable”. Sure, people may lose their shirts. Favourable economics are not guaranteed. But like with the oil price slump in 2014, someone else may step in and take the spoils if the initial drillers go to the wall. The industry as a whole proved more resilient than expected, even if individual operators didn’t.
Like in the last cycle, the number of DUCs (drilled uncompleted wells) is soaring again. In the last five years it has gone from 600 to 4,000 just in the Permian. Production has gone from 1.4 mbpd to 3.8 mbpd. There’s no doubt the resources exist to support huge expansion. Oil price and pipeline capacity could keep a lid on it in the short term, and current investors could get burned. In the long run the US, which has already edged out Russia for world’s second biggest producer, could even overtake the Saudis if the Permian turns out to be bigger than the mighty Ghawar field.
It is a reserve after you drill and get an estimate of recoverables
But then a shale well declines very fast and some are reduced to a useless trickle of oil within 4 years of first recovery and the well goes OPEX negative. The Permian is not the worst shale, you get near enough $1m of oil (at say $50 BBL) per hole there, other shale formations return a lot less than that.
Against that the new resource is quite far west, much in New Mexico rather than Texas, and the temptation for drillers is to ‘complete’ a couple of very sweet spots and claim that all their drilled/incomplete wells will be equally good resources once complete…and they won’t be complete in a hurry I can guarantee you.
Utter hogwash but the US drilling industry have plenty of previous in inflating massive bubbles.
I well remember the insane Gas bubble that exploded in Oklahoma in 1982 and if you only ever read one book on bubbles then you should read this classic on that notorious fiasco which boiled down to someone saying the deeper you drilled (deeper than anyone had ever drilled in fact) the higher the pressure would be and surely the more gas was down there…around 6 or 7 miles down it was.
Then people started to believe in this nonsense. The bubble collapse brought down one of the 10 largest banks in the US then and severely damaged 3 of the remaining top 20 banks at the time.
The shale bubble has sucked in $0.3TR of which $0.25TR needs full refinancing within five years and this for an industry that pays out 20% of its turnover last year (over $50 a barrel time) just to service the existing loans they have.
In the US you can lend to these clowns at a blended 7% or so or go risk free Fed Bonds for 10 years at 3%
I missed this letter from Colin Campbell which was published online last year. The first time I heard him give a public talk about peak oil he had already turned 70. Now in his late 80s he still anticipates a near term peak, and blames many problems from the GFC to immigration on it. I’m pretty sure that’s been thoroughly debunked. Nevertheless, as always, one day he will inevitably be right.
US oil production hit what looked like its all time peak of 9.6 million barrels per day in 1970. After that it declined for more than three decades until the shale revolution. The 1970 record was only beaten in 2018, after nearly half a century. Earlier this year it looked like the Permian Basin had maxed out, but even that was reversed in the summer, and US oil output hit a new record of 12.5 mbpd last month.
Nevertheless, the rig count is down about 20% over the last year, which suggests output must taper eventually. On the other hand the number of DUCs (wells drilled but not yet completed) is near all time highs of 8,000. So there is no sign of a near term supply crunch which is why oil prices are pretty lacklustre even after the attacks on Saudi installations last month.
Nay. That’s a common misconception… not helped by people like Hillary Clinton saying it in her presidential campaign. Just on oil alone the US consumes 20 million barrels of per day. It has managed to reduce its dependence on foreign imports from 60% to an impressive 40% but it is not – and never will be – within an ass’s roar of being independent.
Even then, it’s not a physical peak but a question of availability of capital:
“Going from nearly 2 million barrels per day annual growth in 2018, an all-time global record, to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation for shale producers,” said LeBlanc. “This is a dramatic shift after several years where annual growth of more than one million barrels per day was the norm.”
The key challenge for producers now is to meet investors’ new focus on return of capital. This comes at a time when companies are facing a prolonged period of lower prices and when access to financing from capital markets has become difficult, the report says. Exploration and production (E&P) companies are trading at multiples that are half to one-third of what they were in 2017, and debt markets are unwilling to provide fresh debt for all but the largest shale players.
“The combination of closed capital markets and weak prices are pulling cash out of the system,” LeBlanc says. “Investors are imposing capital discipline on E&P’s by pushing down equity prices and pushing up the cost of capital on debt markets.”
OPEC, meanwhile, are forecasting strong US shale growth out to 2025. If they have it wrong there could be some short time spikes in oil prices since the Saudis are not automatically able to take up any slack as in former years.
I think this time, unlike 2014, the Saudis will murder US shale proper and make sure it is dead and buried before they throttle the supply…and Putin will have to sign up to a proper OPEC+ mechanism too. So I see oil prices as very low for 2 years before they recover over $50 a barrel again.
Trump claims he’s going to come up with some bail out package for US shale. Whether he does or not, I’m not sure it’s going to go away that easily. The current operators may go to the wall, a ton of debt may have to be written off, but when oil prices bounce back there is still a viable business for somebody to run. The US is the world’s biggest oil producer and 60% of it comes from shale.
This is brinkmanship from the Saudis. They are caught between a rock and a hard place. Their prize asset has just been put up for sale but they’ve only managed to offload 1.5% of it so far. What’s more, they’ve promised handsome dividends to shareholders out to at least 2024. A depressed oil market now will scupper their chances of offloading any more of Aramco.
However, it sounds like they are going to repeat the same approach that failed in 2014. A 75% price drop – to average annual prices of $40 with brief forays into the $20s – did not kill off US shale then. Not sure why it would now.
I doubt it, the Saudis failed to kill the frackers and they will fail to stop EVs, electric cars will continue to improve, GM are making big investments in EVs now, their battery price seem to be close to $100 per kWh, so Tesla must be even lower
All the Saudis will do is bankrupt themselves. Good
History repeating itself perhaps, back in the early 1980s the US & SA pushed the oil price so low that it bankrupted the Soviet Union, now Russia and SA as rivals could keep the price low to squeeze out the US frackers.
Exactly. SA can produce at ~$10 a barrel, Russia more like $25-30 but the US frack boys have input costs around $40 a barrel before they make any money. Same with Canada and its shale producers.
They got squeezed hard in 2014 but not for long enough to put them out of business. I reckon it will take 2 years of low prices to make sure they get the message (and Exxon, who have grand plans in the shale belt too).
Russia shocked the world last week by blowing up its shaky alliance with OPEC. Moscow’s refusal to join with the cartel is aimed in part at drowning US shale oil companies that rely on higher prices in a sea of cheap crude.