Peak Expensive Oil

[ProdigyofZen]

Re: Peak Expensive Oil

- The dramatic reduction in costs to drill in North America is partly due to massive overcapacity in the oil services sector - too many rigs, too many frac pumpers, too much everything. It will take some time to work off the excess capacity, retire/scrap equipment, consolidate players - all the things necessary for the services sector to regain some pricing power. In the meantime the upstream companies will enjoy very low day rates (there will be some initial upward pressure on rates as the services companies cannot keep working at break even, but those initial increases will be modest and muted).

I was discussing servicing costs with an operator in the Permian/Eagle Ford.

He said everything has been cut to the bone and only the engineers who would always have a job are the ones still around. The problem is that as he continues to drill and produce his service costs have risen by 10% because the service companies are struggling to stay afloat. So any incremental drilling or production that occurs they jump on it and raise their costs immediately.

I assume what he is describing is exactly what you mean by "there will be some initial upward pressure on rates as the services companies cannot keep working at break even, but those initial increases will be modest and muted."

I can see oil prices cycling above $100/bbl before the decade is out.

[verdo]

Re: Peak Expensive Oil

Interesting. So do you guys think we're out of the woods in terms of experiencing a severe recession in the U.S. between now and 2020 that would cause prices to remain depressed longer?

[GRG55]

Re: Peak Expensive Oil

Let me start with "this time is different", as it truly is.

There are a LOT of moving parts that determine the state of the global crude oil business and markets. The "analysis" that I see invariably slices out a subset and generally attempts to examine things from a necessarily simplified view. I seriously doubt I can do much better in one post.

The multi-year secular trends in oil price are predominantly driven by fundamentals. The short term perturbations around the secular trend, and the invariable overshoots whenever the trend changes, are largely political event driven (the 1979 Iranian Revolution peak, the 1991 Gulf War I spike and the present OPEC/Saudi inspired downslide are some examples). Layered on top of this, to make it even more complex, are the antics of the US Government and the Federal Reserve in respect to the comparative exchange value of the Reserve Currency in which commodities, including oil, are popularly priced (Others here may have quite a different view from the above and I respect that. However, I don't wish to debate it.)

So what is different this time? And why might it matter? Shale resources have changed things considerably.

• During the last secular oil price decline (1980-1999) the physical supply pipeline could not react quickly to the price change. Projects were huge, some of the largest were offshore (the massive Prudhoe Bay anticline and the prolific North Sea fields among those developments), international in scope, and often governed by comparatively rigid contracts with host governments that stipulated development expenditure commitments to hold the assets (and fund their expected tax take). Combined with the psychological residue of two shortage events (1973 and 1979) the capital spending taps were difficult to turn down. Hence the oil price started its secular decline in 1980, collapsed when Saudi Arabia opened the spigots in 1986, and continued to grind down even further into the low of 1999 (the year North Sea oil production peaked).
• Although major field developments in Saudi Arabia and the opening up to capital investment in Iraq and Russia contributed material supply increases during the most recent secular price increase (1999 to 2014), the largest production increase by far was in the continental USA. And those increases came from the "unconventional resource" base which is not burdened with international megaproject contract negotiations, investment & project timelines or legal agreement spending obligations.
• In the USA the "short-cycle" unconventional resource plays allow the industry to turn the capital spending tap on and off almost instantly. The USA rig count drop in this downturn is faster than any other decline in 30 years (1985, 1997, 2001, 2008).
• Similarly the speed and amplitude of capital spending reductions by the industry is unprecedented.
• Unconventional resource development has collapsed the time between capital investment and first production. This is not confined to the shale oil plays. The shift from Canadian oil sands mining megaprojects to in-situ steam assisted gravity drainage (SAGD) exploitation has had a similar effect.
• However, it works the other way around too. The steep decline rates for unconventional resources mean that production will adjust more quickly to the downside as well when the capital investment rate is throttled back,as it has been recently. We will not see a 19 year grinding decline in oil prices this time.
• This is the closest thing to "just in time" inventory (supply) management the oil industry has ever enjoyed.
• The dramatic domestic unconventional resource F&D (finding and development) cost improvements, which will be furthered by the present squeeze in the over supplied North American oil services sector, means the "equilibrium" price for profitable unconventional resource exploitation is going to be lower, much lower, than most observers (and "analysts") currently expect.
• For some years after the financial crisis crude oil prices held above $80 in the belief that the marginal cost of remote and offshore developments (Brazil, deepwater US Gulf Coast, West Africa, South China Sea, Siberia & the Russian Arctic, and even troubled Kashagan in the Caspian Sea) required high prices to provide future supply. These projects are now largely uneconomic (although severe currency declines like the BRL, NGN and RUB offset part of this disadvantage) as long as developing onshore conventional resources remains the dominant supply source at the margin. That will be another driver for unconventional onshore resource owners to rationalize, restructure and further lower their costs to remain competitive...the salad days of oil being priced based on remote regions or deepwater offshore F&D are gone.

This time it IS different.

US shale producers weather oil price storm

31 JULY 2016 • 6:52PM


Opec's worst fears are coming true. Twenty months after Saudi Arabia took the fateful decision to flood world markets with oil, it has failed to break the back of the US shale industry.
The Saudi-led Gulf states have certainly succeeded in killing off a string of global mega-projects in deep waters. Investment in upstream exploration from 2014 to 2020 will be $1.8 trillion less than previously assumed, according to consultants IHS. But this is an illusive victory
North America’s hydraulic frackers are cutting costs so fast that most can now produce at prices far below levels needed to fund the Saudi welfare state and its military machine, or to cover Opec budget deficits.
Scott Sheffield, the outgoing chief of Pioneer Natural Resources, threw down the gauntlet last week – with some poetic licence – claiming that his pre-tax production costs in the Permian Basin of West Texas have fallen to $2.25 a barrel...

...The “decline rate” of production over the first four months of each well was 90pc a decade ago for US frackers. This dropped to 31pc in 2012. It is now 18pc. Drillers have learned how to extract more...

...His company has cut production costs by 26pc over the last year alone. Pioneer is now so efficient that it already adding five new rigs despite today’s depressed prices in the low $40s, and it is not alone.


The Baker Hughes count of North America oil rigs has risen for seven out of the last eight weeks to 374, and this understates the effect. Multi-pad drilling means that three wells are now routinely drilled from the same rig, and sometimes six or more. Average well productivity has risen fivefold in the Permian since early 2012.
Consultants Wood Mackenzie estimated in a recent report that full-cycle break-even costs have fallen to $37 at Wolfcamp and Bone Spring in the Permian, and to $35 in the South Central Oklahoma Oil Province. The majority of US shale fields are now viable at $60...

...The crucial mid-tier drillers have weathered the downturn. Many are still able to raise funds at low cost. Total output in the US has fallen by 1.2m barrels a day to 8.5m since the peak in April 2015 - half of it tight oil or shale - but production has been bottoming out. They can cope with oil prices in the $40 to $50 range...

...Once that is cleared, frackers will have to build new rigs. Mr Sheffield said Pioneer can do this is in 135 days flat, a dramatic contrast to deep-water mega-projects that can take seven to 10 years.
This agility has changed the nature of the oil cycle. It means that Opec faces an unprecedented headwind from mid-cost producers. Shale stalwarts Anadarko and Hess say they will wait for $60 before investing heavily, but they are already preparing the ground.
The losers are high-cost projects elsewhere: off the coast of Nigeria and Angola, in the Arctic, or the oil sands of Canada and Venezuela’s Orinoco basin. He estimates that 4m to 5m barrels a day of future supply has been shelved around the world.
This sets the stage for an oil shortage and a price spike later this decade. Whether Opec can survive that long is an open question. Most of the cartel needs prices of $100 or higher to fund their regimes.
Venezuela is already in the grip of hyperinflation and food riots are spreading. Nigeria’s currency peg was smashed last month, and the naira has fallen 60pc. Angola has turned to the International Monetary Fund, Azerbaijan to the World Bank.
Saudi Arabia has deeper pockets but its net foreign reserves have fallen from $737bn to $562bn, even though it has begun borrowing money abroad. It burned through another $11bn last month.
Riyadh is trying to curb the country’s culture of subsidy and entitlement, but was forced to sack a minister and backtrack after a 500pc rise in water prices set off an outcry. It is the social contract from from cradle-to-grave that keeps the House of Saud in power...
pec's worst fears are coming true. Twenty months after Saudi Arabia took the fateful decision to flood world markets with oil, it has failed to break the back of the US shale industry.
The Saudi-led Gulf states have certainly succeeded in killing off a string of global mega-projects in deep waters. Investment in upstream exploration from 2014 to 2020 will be $1.8 trillion less than previously assumed, according to consultants IHS. But this is an illusive victory