Friday, May 14, 2010

Oil Boom in N. Dakota; March Output Sets Record

North Dakota crude oil production reached a new record high of 277,407 barrels of oil per day in March 2010 (see chart above, data here), with most of the increased oil production coming from the Bakken and Three Forks Sanish oil formations (source).

Oil production in North Dakota is growing exponentially and has now doubled over the last two years from fewer than 138,000 barrels per day in February 2008, and tripled over the last five years from 92,500 barrels per day in February 2005.

Associated Press -- "At the current pace, North Dakota is quickly gaining ground on California, the nation's third-biggest oil producer. (MP: North Dakota ranked ninth in 2006, and recently surpassed Louisiana to become the fourth largest oil-producing state.) Lynn Helms, director of the state Department of Mineral Resources, said North Dakota's 4,736 active oil wells pumped an average of 277,407 barrels a day in March, the latest figures available. The state was producing about 150,000 barrels a day in April 2008.

The record 8.6 million barrels produced in March was up from the previous high of 7.3 million barrels in February. Production could hit 300,000 barrels daily this summer, and 350,000 barrels next year."

45 Comments:

At 5/14/2010 2:48 PM, Blogger juandos said...

Thanks for the link...

Very good news I think...

 
At 5/14/2010 11:01 PM, Blogger VangelV said...

How is a production rate of 59 barrels per day considered good news? From what I see it looks as if the shale miracle is being exposed as the fraud that it is. The data shows that depletion rates run at least 50% per year and well life is much shorter than the companies assumed.

 
At 5/15/2010 8:41 AM, Anonymous Anonymous said...

VangeIV said,

"How is a production rate of 59 barrels per day considered good news?"

You might be talking about wells from the old days. Companies today are having much more success drilling the Bakken: for example, five long-lateral high-frac stage wells completed by Brigham Exploration had a combined IP rate of almost 15,000 bpd. Continental Resources had 10 wells in the 1st quarter that were producing a combined 13,000 bpd.

Now is the Bakken enough to make the US energy independant, or is it enough to offset the terrible depletion rates of worldwide oil production? No, not even close. The looming oil production problem, that's going to be a tough one to beat. We can do it, but it's going to take a long time to sort that mess out.

 
At 5/15/2010 9:38 AM, Blogger VangelV said...

You might be talking about wells from the old days. Companies today are having much more success drilling the Bakken: for example, five long-lateral high-frac stage wells completed by Brigham Exploration had a combined IP rate of almost 15,000 bpd. Continental Resources had 10 wells in the 1st quarter that were producing a combined 13,000 bpd.

First, there were not that many old wells in the Bakken area until the past few decades. The number of producing wells stood around 200 as late as 1999. The numbers exploded after horizontal drilling made production viable. But we are still looking at the depletion rate problem. An IP rate of 15,000 bpd is quite likely to be below 1,000 bpd within three years, particularly if it is in the part of the formation that has low permeability and requires fracture to get any reasonable flow rates in the first place. It is obvious that one could look at the formation and find a few wells that could be very profitable for their operators but unless that is the norm the area play could still be uneconomic.


Now is the Bakken enough to make the US energy independant, or is it enough to offset the terrible depletion rates of worldwide oil production? No, not even close. The looming oil production problem, that's going to be a tough one to beat. We can do it, but it's going to take a long time to sort that mess out.

I do not believe that the Bakken is enough to offset the loss of production due to depletion. While we could always see an annual increase if we get a number of new projects coming on line at once the economics make any sustainable increases in production unlikely. I know that Mark likes to be optimistic on this front but there is a difference between optimism and being naive about the reality. What we need are real solutions and from where I stand those are unlikely to come from shale or other unconventional sources over the medium term.

 
At 5/15/2010 10:12 AM, Blogger juandos said...

"How is a production rate of 59 barrels per day considered good news"...

Well vangeIV consider the following posted back on April of this year in Commodities Now: 'Platts reports that current Bakken crude output is about 200,000 barrels per day (b/d) and the North Dakota Pipeline Authority estimates that the field's yield could rise quickly to between 400,000 b/d to 500,000 b/d over the next 10 years before tapering off'...

"I do not believe that the Bakken is enough to offset the loss of production due to depletion"...

Consider the following from the site, Next Big Future dated March 17, 2010:
US Oil Production Will Increase with Offshore Oil, Bakken Oil and New California Oil

 
At 5/15/2010 7:54 PM, Blogger VangelV said...

...consider the following posted back on April of this year in Commodities Now: 'Platts reports that current Bakken crude output is about 200,000 barrels per day (b/d) and the North Dakota Pipeline Authority estimates that the field's yield could rise quickly to between 400,000 b/d to 500,000 b/d over the next 10 years before tapering off'...

I read the Platts claims in Rigzone. Platts is a specialty news service that has understated the diversity of opinion regarding the prospects of shale prospects and is only concentrating on the story being spun by the companies trying to promote their share prices by making claims that are not supported by the evidence.

The big problem is the depletion rate, which Platts ignores. Given the low prices and the high cost of stimulating horizontal wells in the Bakken middle formation I do not see how we can get the projected production numbers being sustainable. (Let me note that a spike to a new production high followed by a crash will not change this argument.)

Consider the following from the site, Next Big Future dated March 17, 2010:
US Oil Production Will Increase with Offshore Oil, Bakken Oil and New California Oil


Thank you for making my point for me. As was shown in Mark's EIA reference, US offshore production is in decline in the Gulf and unlikely to recover to the old highs without massive new investment. Given the latest sentiment in Congress you will not see any new leases that would permit new drilling in most offshore areas for quite some time.

But assume that Congress will allow drilling for now so that we can examine the points made in the article. In no particular order let us look at a few.

"Continental Resources has 13,000 barrels of oil per day from ten wells completed in the first quarter of 2010 mostly in the Bakken oil field."

New wells only producing 1,300 bpd in an area where declines are rapid. How is this positive?

There are at least four offshore projects with 135,000 barrels of oil per day expected to start in 2011.

The BP accident just increased insurance rates by several hundred percent. Costs went up sharply while production declined thanks to new regulations that will limit productivity. If we are lucky, the new production will offset most of the depletion from existing operations.

Based on the expected offshore completions and completion of more Bakken oil wells and the Oxidental California field - August, 2010 could see the 6 million barrels of oil per day.

This may be possible but to keep production level or increasing you need more drills than are available because the new wells have higher depletion rates.

Domestic crude oil production for February 2010 reached 5.5 million barrels per day, the highest level since June 2005 and 3.6% higher than February 2009.

This should be the most devastating statement for the optimists. Hundreds of billions in new investment was needed to get production rates to match the 2005 levels. How does that allow anyone to be optimistic about future production in the US?

It should be obvious that record highs in drilling activity and new investment were necessary to keep production flat in an environment where borrowing and insurance costs were very low and prices were increasing rapidly. Now that we have seen demand collapse and prices stabilize, where is the incentive to take huge risks to develop assets that will provide more shareholder value if they were left in the ground for a longer period? In this environment it makes more sense to allow reserves to increase and conserve cash by taking fewer exploration and development risks. The smart players are not drilling as much as they can. They have cut expenditures, maximized cash flow and are busy obtaining reserves in the equity markets where they are cheaper and safer to obtain than by using the drill bit.

 
At 5/16/2010 10:48 AM, Blogger juandos said...

"The big problem is the depletion rate, which Platts ignores. Given the low prices and the high cost of stimulating horizontal wells in the Bakken middle formation I do not see how we can get the projected production numbers being sustainable"...

Ahh, do you have something linkable that might sustain your point of view which I think is quite valid?

"The BP accident just increased insurance rates by several hundred percent"....

Hmmm, undoubtedly but again have you seen any new insurance quotes?

I'm always looking for new info regarding liability costs...

"Thank you for making my point for me. As was shown in Mark's EIA reference, US offshore production is in decline in the Gulf and unlikely to recover to the old highs without massive new investment"...

Well I personally am skeptical of any claims the EIA have to make but I'm not willing to call them a pack of liars...

BTW I'm glad you reminded me to look at RigZone again...

 
At 5/16/2010 1:49 PM, Anonymous Anonymous said...

Vange IV said,

"The big problem is the depletion rate, which Platts ignores. Given the low prices and the high cost of stimulating horizontal wells in the Bakken middle formation I do not see how we can get the projected production numbers being sustainable. (Let me note that a spike to a new production high followed by a crash will not change this argument.)"

I'm not sure what you're talking about. The current price support makes drilling the Bakken suitable. Yes, drilling the Bakken is much more difficult than drilling for Texas oil in the old days, there is the depletion issue. Certainly if oil was $40 a barrel, you wouldn't see this level of drilling, but the current price (something we anticipate will go up) is desirable enough to attract producers, and that we expect more drilling to come. I guarantee you we're defiantly making money drilling the Bakken.

 
At 5/16/2010 2:06 PM, Anonymous Anonymous said...

Juandos,

I've seen a few of VangeIV's comments from previous posts regarding oil and gas. While there is some truth to what he says, he tends to distort the picture more negatively than it should be, and he bull headily shoots down every feasible solution with knee-jerk reaction. I've seen him contest readers on other blogs, and he's no different.

I remembered him last year scaring another reader on this blog, stating "there could be natural gas shortages this winter, and that he could "see people freezing to death in their homes while Congress dithers."

 
At 5/16/2010 8:57 PM, Blogger VangelV said...

Ahh, do you have something linkable that might sustain your point of view which I think is quite valid?

There are a number of sources about shale depletion but most of them have to do with natural gas rather than oil. The oil info is available but I will have to search for it because I did not save the information. That said, you can find some very useful information at the link below.

http://www.aspo-usa.com/archives/index.php?option=com_content&task=view&id=355&Itemid=91

But before you read anything let me provide you with a warning. Shale production varies significantly depending on formation, the type of drilling methods used, and the area where the wells are drilled within the formation. For example, the Middle Bakken is very promising compared to the other two formations so what you see in the Middle Bakken cannot be extrapolated to the Upper or Lower formations.

That said, we can look at some company specific data for known fields already in production. One example is the Elm Coulee Field, which shows very low per well productivity even though the latest drilling technology and stimulation techniques are being used. When you get a 150 bpd production per well you are going to have a hard time convincing yourself that Bakken shale is any type of solution.

http://www.searchanddiscovery.net/documents/2006/06131walker/index.htm

Actually, the shale gas depletion story is much clearer because there is so much more data available for us to look at. If you do some reading you will find that shale gas wells are producing at least twice as quickly as conventional wells. Once again, shale production will need massive amounts of drilling just to keep depletion from causing production to fall off a cliff. You can find a discussion about the shale gas controversy at the link below.

http://www.theoildrum.com/node/5934

You might also pay careful attention to the conference calls of companies like Petrohawk. While management talks a good game and provides plenty of spin to make things look good you should note quite a few anomalies. It looks as if many of the shale players are busy selling off assets because they are having a hard time in the current low price environment. Many are now talking about restricting output from wells as a way to fight depletion in the hope that lower production rates will mean greater ultimate production. By doing so they are admitting that the critics have a very valid point about the depletion issue, which has yet to be fully addressed in the accounting.


Hmmm, undoubtedly but again have you seen any new insurance quotes?

The information I got came from BNN, which quoted an industry expert who pointed out that insurance rates will be reevaluated by the companies and that there will be a several hundred percent increase in costs if the liability amounts are increased as Congress is proposing. The final rates will not be set until after Congress votes on the legislation and the details become better known. Keep in mind that rates had already gone up due to the hurricane damage done by a succession of storms.


http://www.portfolio.com/business-news/2010/04/28/the-explosion-of-deepwater-horizon-oil-rig-could-have-disastrous-business-consequences

 
At 5/16/2010 8:58 PM, Blogger VangelV said...

I'm not sure what you're talking about. The current price support makes drilling the Bakken suitable. Yes, drilling the Bakken is much more difficult than drilling for Texas oil in the old days, there is the depletion issue. Certainly if oil was $40 a barrel, you wouldn't see this level of drilling, but the current price (something we anticipate will go up) is desirable enough to attract producers, and that we expect more drilling to come. I guarantee you we're defiantly making money drilling the Bakken.

I doubt that the industry is making money in shale oil and gas at these prices. From what I see, Burman is right and what we have are assumptions that claim that ultimate production will be much higher than the data suggests. That will force much of the capital investment to be written off in several years. From what I can see the industry is now funding its development activities by debt and asset sales. That process cannot continue for very long before most of the companies take massive hits and have to go into bankruptcy or get taken out by healthy players who might have a way to make a profit when better times come for the industry and they are ready to use the new Schlumberger technology that has been rejected because of the lower initial flow rates.

 
At 5/16/2010 9:06 PM, Blogger VangelV said...

I've seen a few of VangeIV's comments from previous posts regarding oil and gas. While there is some truth to what he says, he tends to distort the picture more negatively than it should be, and he bull headily shoots down every feasible solution with knee-jerk reaction. I've seen him contest readers on other blogs, and he's no different.

There is a lot more than some truth in what I write because the depletion story is very real and very important. What has 'saved' us from a price explosion is not a supply side solution but a collapse in demand. It is easy to have $4 gas when industrial use is a fraction of what it used to be and there are no major pressures during the heating season.

I remembered him last year scaring another reader on this blog, stating "there could be natural gas shortages this winter, and that he could "see people freezing to death in their homes while Congress dithers."

That is absolutely correct. We are an economic recovery and a cold winter away from having people freeze in their homes because they are at the end of the pipe and there is no natural gas for them to use. As I said above, we got lucky because the economic contraction caused demand to collapse. Sadly, a cold winter did cause more than a few people to die but that was due to other factors than a natural gas shortage.

We do not live in an imaginary world but here on a planet where reality matters. Hoping for a solution will not do the trick and betting our futures on what has been an obvious failure will do nobody but those investors who got in early on a nice story and cashed out during the inevitable suckers' rally. Sadly, I have seen many naive people make bets on expensive and unworkable alternative energy solutions without understanding what they were doing. Most are looking at huge losses and will never be able to recover their hard earned savings unless there is another bubble and another group of suckers to help them correct their errors.

 
At 5/17/2010 9:34 AM, Blogger juandos said...

O.K. VanggelV, thanks for that link but I don't buy into their peak oil drivel...

 
At 5/17/2010 10:27 AM, Anonymous Anonymous said...

Juandos,

Read VangeIV's 9:06 PM comment - see what I mean?

Sorry, but if witnessing production hit highs not seen since the early 70s, or seeing storage stretched to the max and Russia losing its #1 gas spot was all bad news, meaning we had risk of people freezing to death last winter because of gas shortages, I must be living in the wrong imaginary world.

 
At 5/17/2010 2:26 PM, Blogger VangelV said...

O.K. VanggelV, thanks for that link but I don't buy into their peak oil drivel..

You are free to ignore the peak oil story if you wish. But if you do, please try not to blame anyone when the supply side issues do great harm to your standard of living.

The optimists used the price declines to argue that the Peak Oil story was wrong. But the price collapse was not caused by new supplies because production is now below where it was in the 2005 to 2007 plateau. The collapse came because demand fell off a cliff as the economic contraction changed consumer and corporate activities. The latest decline is causing a massive amount of damage to the marginal shale producers and we are about to see many assets sales as companies try to stay alive. That won't be very good for future production because we need drills to be working just to keep depletion at bay. Eventually, the new projects coming on line thanks to the hundreds of billions of investment will not produce enough oil and gas to offset declines from existing fields and supply will decline until the surplus capacity is gone once again. That will ensure that during any meaningful recovery prices will be substantially higher than they are now.

 
At 5/17/2010 2:39 PM, Blogger VangelV said...

Sorry, but if witnessing production hit highs not seen since the early 70s, or seeing storage stretched to the max and Russia losing its #1 gas spot was all bad news, meaning we had risk of people freezing to death last winter because of gas shortages, I must be living in the wrong imaginary world.

You are confused. US oil production is nowhere near its historical peak.

http://www.mnforsustain.org/images/oil_lisbon_laherrere_us_fig3.jpg

And even though hundreds of millions were spent on offshore drilling, coal bed methane, and shale production, the US natural gas production has yet to get back to its old high.

http://tonto.eia.doe.gov/energyexplained/images/charts/natural_gas_consumption_production_net_imports-large.gif

The bottom line is that the cheap oil and gas is long gone and the US has wells that have very low productivity. With declines in production in Russia and elsewhere it looks as if Europe will have to buy more of its gas from the LNG market. If there is an economic recovery we are going to have trouble meeting the growing demand out of the aging fields that currently produce much of our gas.

 
At 5/17/2010 3:44 PM, Anonymous Anonymous said...

"You are confused. US oil production is nowhere near its historical peak."

I was writing about natural gas.

 
At 5/17/2010 6:37 PM, Blogger VangelV said...

I was writing about natural gas.

The same is true about natural gas. Production was higher in the 1970s even with so much of it being not counted because it was flared off or re-injected into the reservoirs. As I wrote above, it took hundreds of billions in new investment that managed to get a one shot increase from coal bed methane and the Gulf. Neither of those sources is likely to be sufficient to offset the rapid depletion in the future and shale is not economic at current prices so that will not be a solution either.

The US has already seen its best days as a producing nation and is now looking at marginal deposits that are expensive and technically challenging. The safest plays are the companies that are still working conventional reserves and are prudent with their cash flows because, unlike the debt heavy shale gas players, they are likely to survive the volatility created by the collapse in demand and will be in a position to profit from the future increase in prices. The only way the high risk marginal players make it is if we get some event that drives prices much higher in the near future. While that is possible I would not want to make time dependent bets.

 
At 5/17/2010 10:12 PM, Anonymous Anonymous said...

"The same is true about natural gas. Production was higher in the 1970s even with so much of it being not counted because it was flared off or re-injected into the reservoirs."

But your graph indicated that '08 gas production was at it's highest production since the early '70s. While it didn't match those levels, it sure looked close.

Also, I decided to do some homework while scoping the EIA. I remembered you recently said that America's recent gas bump was largely due to coal bed methane increases, not shale gas. That doesn't seem to be the case to me.

http://www.eia.doe.gov/dnav/ng/ng_prod_coalbed_s1_a.htm

http://www.eia.doe.gov/dnav/ng/ng_prod_shalegas_s1_a.htm

 
At 5/18/2010 10:32 PM, Blogger VangelV said...

But your graph indicated that '08 gas production was at it's highest production since the early '70s. While it didn't match those levels, it sure looked close.

The data shows greater production in the 1970s. (As I wrote, keep in mind that in the 1970s gas that was flared and re-injected was not accounted for very accurately, if at all.) You also have to keep in mind that gas wells were much more productive in the 1970s. There are thousands more wells today still producing less gas than in the 1970s. Given the price volatility and the damage done to the shale players drilling activity will pull back again because the producers can't make money at these price levels.

Also, I decided to do some homework while scoping the EIA. I remembered you recently said that America's recent gas bump was largely due to coal bed methane increases, not shale gas. That doesn't seem to be the case to me.

http://www.eia.doe.gov/dnav/ng/ng_prod_coalbed_s1_a.htm

http://www.eia.doe.gov/dnav/ng/ng_prod_shalegas_s1_a.htm


You need to do some more digging and look at the problem that is staring us in the face. While CBM had a nice increase in volume and produces the same amount as shale formations, most of the established areas are now in decline. (For the record, CBM decline rates are much lower than those for shale.) You might be interested in Bill Powers' piece on Colorado's CBM problems. (He is a shale and CBM optimist and he still can't quite make out the case that you are pushing.)

http://www.financialsense.com/editorials/powers/2010/0517.html

For the record, Canadian drillers have had the same problems as their American counterparts. In the first two months of the year, which are the busiest for drillers in Canada, we saw only 826 natural gas wells drilled, which projects to approximately 2,600 for the year, well below the 4,000 drilled in the previous 12 month period. That implies that the producers are not seeing the same picture that you are. And for the record, the NEB is projecting a decline in Canadian natural gas exports, which would cause a problem for any projected economic recovery, and leaves Americans vulnerable to cold weather next winter.

No matter how you like to spin this story, the North American drillers are telling us all we need to know. Drilling off shore is down significantly as is drilling of conventional gas and oil plays. Given the low prices most producers are now postponing plans and are going to reduce their exploration activities by a material amount. Given the depletion issue that is a problem for any hope of an economic recovery. That means that the downside for oil and gas will come from demand destruction, not a supply boom.

Before I end this, let me warn you about the reliance on official data. Both the IEA and EIA have had a big problem with their estimates of reserves and future production and have been caught with their pants down. Recently we have seen more sober analysis that has finally acknowledged what mindful people have known for some time. Peak Oil production is upon us and there is no way to get sustainable production back to the previous high levels. You might want to look to take advantage of pullback by buying cash rich companies with decent reserves in safe areas of the world.

 
At 5/18/2010 10:36 PM, Blogger VangelV said...

Also, I decided to do some homework while scoping the EIA. I remembered you recently said that America's recent gas bump was largely due to coal bed methane increases, not shale gas. That doesn't seem to be the case to me.

http://www.eia.doe.gov/dnav/ng/ng_prod_coalbed_s1_a.htm

http://www.eia.doe.gov/dnav/ng/ng_prod_shalegas_s1_a.htm


I forgot to mention this. The EIA data is not very good. For example, it missed the fact that Colorado has produced a large amount of the nations CBM. I suspect that some of the CBM production has been lumped together with the conventional natural gas production but have no desire to do further research because I do not find the EIA data as useful as you seem to think that it is.

 
At 5/19/2010 10:40 AM, Anonymous Anonymous said...

VangeIV,

Again, there is an element of truth to what you discuss, but some of your claims don't hold up under scrutiny and this makes the argument appear less credible. I checked out your claim that Bakken only had 200 producing wells in 1999 - that too is false.

http://www.eia.doe.gov/pub/oil_gas/petrosystem/nd_table.html

For the record, I'm somewhat more in agreement with you about the worldwide oil situation.

 
At 5/19/2010 10:46 AM, Anonymous Anonymous said...

"I forgot to mention this. The EIA data is not very good. For example, it missed the fact that Colorado has produced a large amount of the nations CBM."

Are we talking about this?

http://www.eia.doe.gov/dnav/ng/ng_prod_coalbed_s1_a.htm

 
At 5/19/2010 2:20 PM, Blogger VangelV said...

Again, there is an element of truth to what you discuss, but some of your claims don't hold up under scrutiny and this makes the argument appear less credible. I checked out your claim that Bakken only had 200 producing wells in 1999 - that too is false.

http://www.eia.doe.gov/pub/oil_gas/petrosystem/nd_table.html

For the record, I'm somewhat more in agreement with you about the worldwide oil situation.



I thought that I had given a link to my source. Here you go.

http://www.theoildrum.com/node/3868

Sorry but I can't see how you can be positive about a very capital intensive activity that produces such low yields. When you are looking at such low per well production rates you can't think of the Bakken as a solution for American needs. If you are looking for a more promising and economic source I suggest that you look elsewhere.

http://www.vancouversun.com/business/Alberta+oilsands+become+largest+supplier+crude+2010+Report/3046820/story.html

 
At 5/19/2010 2:38 PM, Blogger VangelV said...

Are we talking about this?

http://www.eia.doe.gov/dnav/ng/ng_prod_coalbed_s1_a.htm


My mistake. I mislabeled my Numbers spreadsheets and mixed up shale with CBM production.

That brings me to an interesting point about hearing your story many times in the past. I don't know if you are old enough to remember but the great Colorado shale bonanza was a story talked about my whole life. Ayn Rand had one of her characters in Atlas Shrugged finally figure out how to make a fortune by getting oil out of shale. She did not make up the idea; just borrowed it from common wisdom about the incredible riches to be found in Colorado and Utah shales.

And as Walter Youngquist reminded us in Trail and Timber Magazine, (http://www.google.ca/url?sa=t&source=web&ct=res&cd=2&ved=0CB8QFjAB&url=http%3A%2F%2Fwww.cmc.org%2FUpload%2FArticlesDirectory%2F17.pdf&ei=NDz0S_y_BIbGlQfds_yjDQ&usg=AFQjCNGs3OfYVFgI_ZXxzO914Tj962fDfQ&sig2=bQqk6jaUbz0xJOrHY0uUew), Forbes Magazine was running stories in the 1960s touting the treasure that could run the country for 200 years. We saw major investment in Colorado shale production in the 1980s as well as the 1990s but the EIA shows no material production for the area. Given the money spent, all of the effort, and the poor production results, how is it possible that you can still believe that shale oil is a solution to America's problems?

 
At 5/19/2010 3:21 PM, Anonymous Anonymous said...

"I thought that I had given a link to my source. Here you go.

http://www.theoildrum.com/node/3868"

Okay, that makes sense. Somebody else didn't have their facts straight.

"We saw major investment in Colorado shale production in the 1980s as well as the 1990s but the EIA shows no material production for the area. Given the money spent, all of the effort, and the poor production results, how is it possible that you can still believe that shale oil is a solution to America's problems?"

I don't have much faith in Colorado shale. From what I can tell, it's different from the Bakken. Based on material I've read about the Bakken, some believe it can get jacked up to 400,000 bpd day. Will that make it a decent oil-producing region? Yes. Will it solve America's energy needs. No. Will it put a dent into the worldwide oil depletion situation? Hardly.

 
At 5/20/2010 12:12 AM, Blogger VangelV said...

Okay, that makes sense. Somebody else didn't have their facts straight.

As I wrote before, I would not accept the EIA tables as factually correct. It is very possible that the EIA uses old wells that are no longer in production. I would rather trust good analysts than the government bureaucrats who compile the data and have no incentive to be accurate.

Not too long ago the EIA and IEA were using depletion rates that were significantly lower. It was only after Mat Simmons pointed out the problem that they figured out their error and accepted a much more realistic number to reflect the reality that is supported by the actual data.

I don't have much faith in Colorado shale. From what I can tell, it's different from the Bakken. Based on material I've read about the Bakken, some believe it can get jacked up to 400,000 bpd day. Will that make it a decent oil-producing region? Yes. Will it solve America's energy needs. No. Will it put a dent into the worldwide oil depletion situation? Hardly.

First, the upper and lower Bakken formations are not all that different than some of the Colorado shale deposits. They will not be productive or economically viable. Even the middle formation, which is better, is not very economic at today's prices. And the issue of depletion is still important.

 
At 5/20/2010 9:32 AM, Anonymous Anonymous said...

"As I wrote before, I would not accept the EIA tables as factually correct. It is very possible that the EIA uses old wells that are no longer in production."

The following link shows how many wells N Dakota had per given year (between 1994-2008), and what those wells produced.

http://www.eia.doe.gov/pub/oil_gas/petrosystem/nd_table.html

While one can say the statistics aren't completely accurate, for Piccolo to state it only had 200-some producing wells in 1999 sounds odd.

"And the issue of depletion is still important."

Well, if the wells have a high depletion rate, then the Bakken - when it peaks out - will likely have a steep decline rate. A peak depends on how much viable oil can be obtained from it. More oil means a peak will come later, less crude means it will come sooner.

 
At 5/20/2010 9:47 AM, Anonymous Anonymous said...

VangeIV,

BTW - I did read Faith Birol's warning shot back in 2008.

http://www.independent.co.uk/news/science/warning-oil-supplies-are-running-out-fast-1766585.html

 
At 5/21/2010 7:19 AM, Blogger VangelV said...

Here we go folks. Someone just sent me the following piece from the FT. I suggest that all of you who think that shale is economic take a good hard look at the commentary.

http://www.ft.com/cms/s/0/6254ec9c-33f1-11df-8ebf-00144feabdc0.html

or

http://tinyurl.com/2cn4ox7

The issue, as I have clearly stated a number of times, is economics. What we have are operators who claim that they can produce gas and oil economically but they are not counting all of the cost and are using unrealistic EUR estimates that are not supported by any area specific data.

Let us look at Art Berman's analysis, which got him fired from an industry publication for being negative when companies like Petrohawk complained. Berman's data showed that the highest average EUR for any Haynesville operator came out in the range of 3.5 to 5.0 Bcf with most operators being significantly lower. The problem is that these operators need a 5 to 6 Bcf EUR to make the wells viable. He pointed out that even though the service industry was under major pressure well costs were running in the $7‐10 million range.

The bottom line is that the shale companies have been talking up a good story so that they could sell off their assets, not because they can produce a profit by drilling off the properties and funding operations out of cash flows. Once the majors get into the game they will stop producing gas because they will not want to take the losses. Instead, they will let the operating wells exhaust their production and will sit on the area until prices are significantly higher in the hope that they could make money in a high price environment.

 
At 5/21/2010 11:15 AM, Anonymous Anonymous said...

VangeIV,

I'm not a subscriber to FT, so I was unable to read articles from either link. Are there other links to the same stories?

Moving onto shale gas economics...

I know you've stated in the past that current gas prices are too low for practical shale gas production, and I don't doubt you're correct about this. However, this is an economics blog. If gas prices are too low because of the supply glut, then drillers will scale back and wait for excess supply to dissipate, which in turn will drive up the price. When the desired price level returns, so will the drillers.

 
At 5/21/2010 4:14 PM, Blogger VangelV said...

I'm not a subscriber to FT, so I was unable to read articles from either link. Are there other links to the same stories?

You can sign up for free. I believe that gives you access to four or five free views per month. That said, I will excerpt some of the more important points and post them below. (ref: http://tinyurl.com/2cn4ox7)

"...A couple of weeks ago, I quoted Ben Dell, an analyst with Bernstein Research in New York, as estimating the shale gas industry really needs a price of $7.50 to $8 to break even on its all-in costs of finding and producing the stuff, which would be a 60 per cent price rise. Not easy for many people, or industries, to pay these days.....

.......So I worked people in the energy service industry, and gas producers to try and refute Ben Dell’s numbers. I couldn’t. My industry sources’ numbers all converged close to $8 per mcf. They do not believe the producers are covering their all-in costs.

.....Here is one possible answer: the shale gas exploration and production companies leased a lot of acreage in the recent boom that needs to be proven as gas-laden within a short time to be kept on the books. They drilled with investors’ and lenders’ money to do that, and squeezed their suppliers to stretch out the budgets.

Now they’re selling the semi-proven acreage. The majors, which can’t seem to explore their way out of a grocery bag these days, at least in the onshore US, needed those elastic “reserves” to replace politically risky hydrocarbons in geologically better locations. They, and the remaining independent producers, will be bailed out by gas at $10 an mcf – double today’s level – or higher. Then the service industry will be able to raise prices to cover its full costs."

Bottom line is that there is a lot of incentive to drill at a loss to prove up reserves and sell those reserves to large majors looking to book those reserves in order to offset what is lost due to depletion. The majors would not have to produce natural gas because they don't need that production yet and can sit on what is in inventory until the drillers are forced to drop their costs substantially and/or prices start to rise.

You can find additional commentary by a number of other people. One is Bill Powers, who has been writing about unconventional production for a while. Earlier this year he wrote about BP's lousy investment when it purchased an interest in Chesapeake's Woodford Shale assets. It is not a good story for BP.

http://www.financialsense.com/editorials/powers/2010/0209.html

I also did a search and found the following article that references the FT story. The author goes over some of the same points again and repeats Burman's.

http://www.themarketoracle.biz/Article19641.html

 
At 5/21/2010 4:14 PM, Blogger VangelV said...

I know you've stated in the past that current gas prices are too low for practical shale gas production, and I don't doubt you're correct about this. However, this is an economics blog. If gas prices are too low because of the supply glut, then drillers will scale back and wait for excess supply to dissipate, which in turn will drive up the price. When the desired price level returns, so will the drillers.

The assumption is that the cost of production stays the same while shortages drive up the price of the end product. But that is not what happens. As production begins to ramp up because of the higher prices the costs also rise for the companies because of the extra demand for the driller's limited and other rising costs. The true economics are really determined by the energy produced per unit of energy invested and that is not a very good ratio when compared to conventional sources. Read the last sentence again. It is the foundation of the argument from the pessimist side and is the reason why we are facing a crisis that is extremely critical for future development. In the face of that crisis the worst thing that we can do is to buy into the optimists arguments without doing the necessary research that will provide us with an adequate answer.

 
At 5/23/2010 12:54 AM, Anonymous Anonymous said...

VangeIV,

I signed up to FT and read all of the linked material. While the articles do present a strong argument, with the FT editorial in particular being well written, it's still ultimately one side to a debate that's early in the game.

Also, I continue to find more holes in your information and analysis.
One example is the claim that the outer areas of the Bakken are similar to Colorado shale. While you do appear correct about the middle Bakken being the most productive area, upon doing some research, I found the comparison to be false. Colorado shale is organic rock that contains kerogen that must be heated through in situ or ex situ retorting to obtain synthetic oil. The Bakken, which in contrast is comprised of is comprised of actual crude that's locked rock that lacks permeability.

http://en.wikipedia.org/wiki/Oil_shale

http://en.wikipedia.org/wiki/Bakken_Formation

http://www.energyandcapital.com/articles/bakken-vs-green-river/1041

Also, I checked out Art Berman's blog.

http://petroleumtruthreport.blogspot.com/

There's obviously a lot of information on it. One claim that stood out is his assertion that horizontal drilling doesn't have substantially higher EUR than vertical drilling. I find that hard to believe. Ultimately, I'm going to need more time to read his blog as I'm sure he has some worthwhile information.

 
At 5/24/2010 1:06 PM, Blogger VangelV said...

I signed up to FT and read all of the linked material. While the articles do present a strong argument, with the FT editorial in particular being well written, it's still ultimately one side to a debate that's early in the game.

It may not be that early in the game. The investors in shale oil are discovering that things are not what they were expecting when many of the companies that were hyping the unconventional deposits were found to be selling off the assets they were telling shareholders were very valuable in order to raise money to prove up other reserves. Had shale production been truly economic the exploration would have been financed out of free cash flow.

Also, I continue to find more holes in your information and analysis.
One example is the claim that the outer areas of the Bakken are similar to Colorado shale. While you do appear correct about the middle Bakken being the most productive area, upon doing some research, I found the comparison to be false. Colorado shale is organic rock that contains kerogen that must be heated through in situ or ex situ retorting to obtain synthetic oil. The Bakken, which in contrast is comprised of is comprised of actual crude that's locked rock that lacks permeability.


You missed my point. I was making it clear that the Upper and Lower Bakken formations were not economic, just like the hyped up Colorado shales, which should have produced a similar amount of useful oil at a similar cost. Not long ago we were being told by government bureaucrats and industry 'experts' that we could economically produce oil from Colorado shale. You can see some of the methods described in the link below.

http://tinyurl.com/34df92q

Horizontal wells will not make them economic just as the true in-situ, modified in-situ, and Shell ICP conversion process could not make Colorado shale deposits economic. If the middle formation can't be economic at these prices what makes you think that the other ones will be?

http://en.wikipedia.org/wiki/Oil_shale

Great example of what I am talking about. I want to bring your attention to the excerpt below.

Royal Dutch Shell has announced that its in situ extraction technology in Colorado could become competitive at prices over $30 per barrel ($190/m3), while other technologies at full-scale production assert profitability at oil prices even lower than $20 per barrel ($130/m3).[42][54][55] To increase efficiency when retorting oil shale, researchers have proposed and tested several co-pyrolysis processes.[56][57][58][59][60]

This was supposedly a breakthrough that would provide cheap oil for the US and would free it from the need to import much of its energy needs. But like most of the hyped up analysis, it did not work as promised and Shell is no longer pursuing its plans as vigorously because it is running into significant difficulties.

http://www.denverpost.com/business/ci_14457934

http://en.wikipedia.org/wiki/Bakken_Formation

Let us look at one of the comments on the page that you cited. We read:

The greatest Bakken oil production comes from Elm Coulee Oil Field, Richland County, Montana, where production began in 2000 and is expected to ultimately total 270 million barrels. In 2007, production from Elm Coulee averaged 53,000 barrels per day (8,400 m3/d) — more than the entire state of Montana a few years earlier.

I have already pointed out that the Elm Coulee is the best of the Barnett plays but still displays low productivity with marginal economics. If shale were the future of oil production, why is the EIA showing that Montana's production peaked in 2005?

http://www.eia.doe.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPMT1&f=M

 
At 5/26/2010 1:23 PM, Anonymous Anonymous said...

"You missed my point. I was making it clear that the Upper and Lower Bakken formations were not economic, just like the hyped up Colorado shales, which should have produced a similar amount of useful oil at a similar cost."

Okay, but you said that the "Upper and Lower Bakken formations are not all that different from some Colorado shale." That made it sound like the two have similar physical composition.

"Not long ago we were being told by government bureaucrats and industry 'experts' that we could economically produce oil from Colorado shale. You can see some of the methods described in the link below.

http://tinyurl.com/34df92q"

Yes, I agreed with you that Colorado shale is a lost cause.

"Horizontal wells will not make them economic just as the true in-situ, modified in-situ, and Shell ICP conversion process could not make Colorado shale deposits economic. If the middle formation can't be economic at these prices what makes you think that the other ones will be?"

The linked article above describes Colorado shale extraction methods. The various methods need to heat the kerogen to extract synthetic crude. The Bakken contains actual crude; it can be unlocked using a combination of horizontal drilling and hydraulic fracturing methods.

"I have already pointed out that the Elm Coulee is the best of the Barnett plays but still displays low productivity with marginal economics. If shale were the future of oil production, why is the EIA showing that Montana's production peaked in 2005?"

Yes, I recalled what you indicated about Elm Coulee and the Middle Bakken in general. You appear correct about these. I see that Montana did peak, but it appears it was never much of a producer, and N Dakota seems to be picking up the brunt.

Anyway, I'll say again that if the Bakken hits 400,000-500,000 bpd, it will make the region a decent producer, but hardly a savior for a country that consumes over 18 mbpd. It certainly won't put much of a dent into the 6.5% (or 6.7%?) global depletion rate the EIA's been warning us about.

 
At 5/27/2010 3:30 PM, Blogger VangelV said...

Okay, but you said that the "Upper and Lower Bakken formations are not all that different from some Colorado shale." That made it sound like the two have similar physical composition.

I meant mostly economically but have not problem with some of negative physical factors that are similar. The shales are very poor from the standpoint of porosity and permeability. Even if the Colorado shales had better quality hydrocarbons they would still not be viable due to the other factors.

The linked article above describes Colorado shale extraction methods. The various methods need to heat the kerogen to extract synthetic crude. The Bakken contains actual crude; it can be unlocked using a combination of horizontal drilling and hydraulic fracturing methods.

That was not my point. I was talking about optimism regarding the economics of the process that would deliver marketable crude. We were told that the methods described could produce crude at a cost of $40 or so but the real numbers became significantly larger. I am saying that the same is likely to be true of the Bakken numbers. We have already seen that the producers can't make a profit at prices that are higher than what they projected as the necessary minimum for them to be viable. What we have is an accounting game that ignores real world data and assumes ultimate recoveries that are higher than reality would suggest.

Yes, I recalled what you indicated about Elm Coulee and the Middle Bakken in general. You appear correct about these. I see that Montana did peak, but it appears it was never much of a producer, and N Dakota seems to be picking up the brunt.

Again, I did not seem to have made my point clearly enough. The problem I am pointing to is the real world data that exposes the new resources for what they are.

As a shale play Elm Coulee is actually a great find that made very good money for the players lucky enough to have productive properties. But the problem is the low productivity when compared to the production of wells that are being replaced. In the earlier days, when the US had plenty of oil and gas a simple (and cheap) vertical well could produce a flow rate of thousands of barrels per day that had a low depletion rate. Today we have to use complex horizontal wells that cost ten times or more in real terms but produce average flow rates that are ten to a hundred times lower and deplete at a much faster rate. The bottom line is that we get a much lower energy return on the energy invested and as such are vulnerable to bottlenecks in a production chain that is highly stressed by financial, regulatory, political, and economic demand.

Anyway, I'll say again that if the Bakken hits 400,000-500,000 bpd, it will make the region a decent producer, but hardly a savior for a country that consumes over 18 mbpd. It certainly won't put much of a dent into the 6.5% (or 6.7%?) global depletion rate the EIA's been warning us about.

That is the problem. By the time the Bakken gets to a high production rate, it will not be producing enough barrels to offset the depletion from conventional domestic sources. And until the economics improve you will not see companies produce at high rates because there is no incentive among the established producers to waste their reserves at such low prices.

 
At 5/28/2010 12:15 PM, Anonymous Anonymous said...

"The shales are very poor from the standpoint of porosity and permeability. Even if the Colorado shales had better quality hydrocarbons they would still not be viable due to the other factors."

I don't think the Bakken-Colorado shale is an accurate comparison. It's likely that if Colorado shale could be produced economically today, the oil companies would be hitting it as we write.

"I was talking about optimism regarding the economics of the process that would deliver marketable crude. We were told that the methods described could produce crude at a cost of $40 or so but the real numbers became significantly larger. I am saying that the same is likely to be true of the Bakken numbers."

Bakken producers were making money off of horizontal drilling in the '90s when oil prices were dirt cheap, so they're likely making money with the $70-80 a barrel range now.

"In the earlier days, when the US had plenty of oil... Today we have to use complex horizontal wells that cost ten times or more... The bottom line is that we get a much lower energy return on the energy invested and as such are vulnerable to bottlenecks"

I'm well aware that America's best oil days are well behind it. I mentioned that I'm more in agreement with you about the worldwide oil situation. I never said the Bakken is a savior, but but it does represent scraping at the bottom of a barrel. Getting 400,000-500,000 bpd out of the Bakken, however, will be better than not getting it.

"That is the problem. By the time the Bakken gets to a high production rate, it will not be producing enough barrels to offset the depletion from conventional domestic sources."

I made myself very clear that it wouldn't.

 
At 5/28/2010 8:15 PM, Blogger VangelV said...

I don't think the Bakken-Colorado shale is an accurate comparison. It's likely that if Colorado shale could be produced economically today, the oil companies would be hitting it as we write.

The Bakken shales are not economic at today's prices. That is why the original players are selling off assets and borrowing to drill new wells. They are willing to take a loss because by proving up that it is possible to produce oil and gas they can sell off their properties to the majors, which are looking for reserves in what they believe are politically secure areas of the world.

My point is that we were hearing exactly the same thing about Colorado shales that we are hearing about Bakken shales today. But the upper and lower formation of the Bakken are not much different than Colorado shales, which is the reason why the work being done is in the middle formation.

Bakken producers were making money off of horizontal drilling in the '90s when oil prices were dirt cheap, so they're likely making money with the $70-80 a barrel range now.

The wells are much more expensive to drill today than they were in the 1970s. At $7 million or so a pop you need a lot more production to get a decent return at today's oil prices. You still can't make money in the upper or lower formation and the middle formation is not very profitable or prolific. At 150 barrels per day average production you are going to need a lot of drilling to get a decent volume out of the area. (Don't forget the depletion when projecting that drilling out a few years.)

I'm well aware that America's best oil days are well behind it. I mentioned that I'm more in agreement with you about the worldwide oil situation. I never said the Bakken is a savior, but but it does represent scraping at the bottom of a barrel. Getting 400,000-500,000 bpd out of the Bakken, however, will be better than not getting it.

My point is that it makes little sense to get 500,000 bpd because the reserves in the ground will gain value with time. It would be a lot better to wait until prices are much higher than to waste potential profits and current cash flow by drilling when prices are as low as they are and possibly going lower if the economic contraction resumes.

The way I see it, the value of that oil will be much higher when there is a realization that we are on the back end of Hubbert's curve.

 
At 5/29/2010 12:17 PM, Anonymous Anonymous said...

"The Bakken shales are not economic at today's prices. That is why the original players are selling off assets and borrowing to drill new wells."

You're distorting the picture again. The scenario you're describing sounds like what's happening in shale gas, and you may be correct that players aren't making money in that game. However, we currently have a huge anomaly in the oil-gas price ratio that normally sees the two commodities march in lockstep.

"My point is that we were hearing exactly the same thing about Colorado shales that we are hearing about Bakken shales today. But the upper and lower formation of the Bakken are not much different than Colorado shales, which is the reason why the work being done is in the middle formation."

If the Middle Bakken is the place to be, that's where the players will drill. If the upper and lower formations don't have squat, the drillers will stay away from those areas.

"The wells are much more expensive to drill today than they were in the 1970s. At $7 million or so a pop you need a lot more production to get a decent return at today's oil prices."

I was referring to the '90s but that's not important. Yes, horizontal drilling and hydraulic fracturing methods do command a premium. That's why we didn't see producers hit the Bakken en mass 8 years ago like we are now.

"It would be a lot better to wait until prices are much higher than to waste potential profits and current cash flow by drilling when prices are as low as they are and possibly going lower if the economic contraction resumes."

From a long-term standpoint this argument makes sense, but creditors and investors may not have the patience. Drilling equipment and operations are very expensive, and the company needs a continuous flow of income to keep wheels turning. Besides, the smart players are likely thinking about the future (meaning higher oil prices), and want to get in while the doors are open. It doesn't make sense to wait on the sidelines now, then down the road, kick yourself because all of the good acreage is locked up.

 
At 5/30/2010 9:40 PM, Blogger VangelV said...

You're distorting the picture again. The scenario you're describing sounds like what's happening in shale gas, and you may be correct that players aren't making money in that game. However, we currently have a huge anomaly in the oil-gas price ratio that normally sees the two commodities march in lockstep.

You may be right that we will see the two commodities move together eventually. And if you want to argue that the oil market is manipulated to keep prices lower than they otherwise would be by doing swaps, you would get a sympathetic hearing from me. But none of this matters because the shale plays are not economic and anywhere close to today's prices. The price could rise by 50% and most shale formations would still be uneconomic if one used proper accounting methods. What could save shale is the coming of the collapse in Gulf natural gas production, the peak in CBM production, and the inability to deliver stranded Arctic gas to markets due to a lack of infrastructure. But none of these events are likely to be material in the short term so unless we see a busy hurricane season, have Katla go off, or get a brutally cold winter, gas prices could stay low for a while. (I must confess that as an investor in the energy sector, I would not like that but things are what they are.)

If the Middle Bakken is the place to be, that's where the players will drill. If the upper and lower formations don't have squat, the drillers will stay away from those areas.

Indeed, that is what is happening. The problem with facing reality is the eventual realization by the optimists that their reserve estimates are way too high.

Yes, horizontal drilling and hydraulic fracturing methods do command a premium. That's why we didn't see producers hit the Bakken en mass 8 years ago like we are now.

The problem for producers is that horizontal drilling is so expensive and the depletion rates so high that they can't make much in the way of returns, even in most of the areas where the middle Bakken formation is OK. As I said, it only makes sense to drill if you want to sell off 'reserves' to the majors who do not need immediate production over the next few years.

From a long-term standpoint this argument makes sense, but creditors and investors may not have the patience. Drilling equipment and operations are very expensive, and the company needs a continuous flow of income to keep wheels turning. Besides, the smart players are likely thinking about the future (meaning higher oil prices), and want to get in while the doors are open. It doesn't make sense to wait on the sidelines now, then down the road, kick yourself because all of the good acreage is locked up.

The problem with the argument is that you can't finance drilling activity out of cash flow and stay afloat for long. This is why the original players are selling off assets to pay for drilling that would allow them to sell even more assets. The acquirers will have to act prudently and will reduce activity unless the prices move high enough to allow them to finance production by selling a portion of the production in the futures markets and hope to make a killing on the rest. The prudent play is still to keep reserves in the ground until it makes sense to get them out. Given the relative valuations I would be selling off any shale properties and be looking to add coal or conventional oil to my portfolio.

 
At 6/01/2010 2:11 PM, Anonymous Anonymous said...

"You may be right that we will see the two commodities move together eventually. And if you want to argue that the oil market is manipulated to keep prices lower than they otherwise would be by doing swaps, you would get a sympathetic hearing from me. But none of this matters because the shale plays are not economic and anywhere close to today's prices. The price could rise by 50% and most shale formations would still be uneconomic if one used proper accounting methods."

Well, I didn't say the price gap would close, I merely said there's anomaly. In terms of oil prices being low due to manipulation... that's a different subject that I'm not getting into. From what I've gathered, in fact, it sounds like there's smidgen of excess inventory - though I don't think we're going to see $30 oil again, and I do think $100+ oil will be a norm within the next few years, if not in several.

Again, if gas prices are too low too low to make shale gas practical, then the market will inevitably straighten things out and bring proper price supports. Some players will get cracked, but the market's never been sympathetic when it cooks omelets.

"Indeed, that is what is happening. The problem with facing reality is the eventual realization by the optimists that their reserve estimates are way too high."

How much do you think reserves are overestimated by?

"The problem with the argument is that you can't finance drilling activity out of cash flow and stay afloat for long. This is why the original players are selling off assets to pay for drilling that would allow them to sell even more assets. The acquirers will have to act prudently and will reduce activity unless the prices move high enough to allow them to finance production by selling a portion of the production in the futures markets and hope to make a killing on the rest. The prudent play is still to keep reserves in the ground until it makes sense to get them out. Given the relative valuations I would be selling off any shale properties and be looking to add coal or conventional oil to my portfolio."

Again, in the first several sentences, the scenario you describe sounds like what's going on in the shale gas industry. If oil was $40 a barrel, then I might believe you.

In terms of saving oil for better days... I'd say from a long-term standpoint, that makes sense because I think oil will get more expensive, but producers seem to think it's worth drilling now. I'd say coal is a smart thing to get into. In fact, I think Warren Buffet made a good decision buying BNSF (hint: largest hauler of coal in the country).

 
At 6/01/2010 9:17 PM, Blogger VangelV said...

Well, I didn't say the price gap would close, I merely said there's anomaly. In terms of oil prices being low due to manipulation... that's a different subject that I'm not getting into. From what I've gathered, in fact, it sounds like there's smidgen of excess inventory - though I don't think we're going to see $30 oil again, and I do think $100+ oil will be a norm within the next few years, if not in several.

The issue is not inventory levels but reserve depletion and production rates. We have more inventory now because demand has collapsed due to an economic contraction that has forced marginal users in Europe and the US out of the market. But there is no doubt that the world will have a hard time getting total production back to the 2005 levels without massive new investments that I do not see coming. And even if they were made there is no guarantee that they will be able to offset the depletion rates that we are observing in existing fields.

Again, if gas prices are too low too low to make shale gas practical, then the market will inevitably straighten things out and bring proper price supports. Some players will get cracked, but the market's never been sympathetic when it cooks omelets.

There is a problem. As prices of gas go up so will the price of the drilling services needed to support large shale gas production levels. The economics will always be a problem for the shale producers because there isn't enough drill capacity to meet demand. That is why you will see the producers of shale gas scale back and take a prudent approach that will allow them to make better profits by not pushing production rates higher than they should be if returns were to be optimized.

How much do you think reserves are overestimated by?

OPEC reserves are probably 50% lower than what is being reported. The shale gas industry reporting is probably worse.

Again, in the first several sentences, the scenario you describe sounds like what's going on in the shale gas industry. If oil was $40 a barrel, then I might believe you.

My observations are valid. The shale producers are selling off assets to finance drilling activities because they can't be funded out of free cash flow. That is a big problem given the $70 price level and all of the hype about how production can be economic at much lower prices.

In terms of saving oil for better days... I'd say from a long-term standpoint, that makes sense because I think oil will get more expensive, but producers seem to think it's worth drilling now.

It is worth it if they can find a bigger fool to buy their 'reserves.' It isn't if you want to generate cash flow because you can't do it at the current prices for most of the shale wells. While some are clearly profitable, they are the exception to the rule.

I'd say coal is a smart thing to get into. In fact, I think Warren Buffet made a good decision buying BNSF (hint: largest hauler of coal in the country).

My eleven year has been buying coal companies for three years and is sitting on around 600% profits even after the companies got crushed during the pullback. I think that his logic will work out because known deposits of coal are still cheap and most of the players can survive a downturn of a few years. Given the push to shut down some American production and the political issues in some jurisdictions his choices might just jet help him pay for his university education.

 
At 6/05/2010 11:21 AM, Anonymous Anonymous said...

"The issue is not inventory levels but reserve depletion and production rates. We have more inventory now because demand has collapsed due to an economic contraction that has forced marginal users in Europe and the US out of the market..."

I think my statement that $100 a barrel oil will be a norm within a few years, if not several, matches the rhetoric.

"The issue is not inventory levels but reserve depletion and production rates. We have more inventory now because demand has collapsed due to an economic contraction that has forced marginal users in Europe and the US out of the market. But there is no doubt that the world will have a hard time getting total production back to the 2005 levels without massive new investments that I do not see coming. And even if they were made there is no guarantee that they will be able to offset the depletion rates that we are observing in existing fields."

True to a degree, but I have a great deal of faith in markets. Producers who best meet consumer demand while keeping costs properly in line will be rewarded; those who fail will be punished.

"OPEC reserves are probably 50% lower than what is being reported. The shale gas industry reporting is probably worse."

I was asking about the Bakken. OPEC is another topic, although I know Saudi Arabia gets most of its oil from a handful of giant oil fields, so that may be worthy of speculation.

Speaking of oil, you might want to keep an eye on this. Matt Simmons has been speculating that a separate, larger leak is spewing oil five or six miles from the Deep Horizon site. It's hard to say if Simmons is correct, but I know BP abandoned a botched well that's a few miles away from the known leak, just several months prior. (I don't have the link on hand, but I'll post it if I can find it.)

"My observations are valid. The shale producers are selling off assets to finance drilling activities because they can't be funded out of free cash flow. That is a big problem given the $70 price level and all of the hype about how production can be economic at much lower prices."

If Bakken producers made money in the '90s, when oil was cheaper and wells were less productive, they're likely making money now.

"My eleven year has been buying coal companies for three years and is sitting on around 600% profits even after the companies got crushed during the pullback. I think that his logic will work out because known deposits of coal are still cheap and most of the players can survive a downturn of a few years. Given the push to shut down some American production and the political issues in some jurisdictions his choices might just jet help him pay for his university education."

Good for him.

 
At 6/05/2010 3:59 PM, Blogger VangelV said...

True to a degree, but I have a great deal of faith in markets. Producers who best meet consumer demand while keeping costs properly in line will be rewarded; those who fail will be punished.

The problem is depletion. At the current rate we need to bring to production an equivalent of a Saudi Arabia every year of so. That is not easy to do given the lack of significant discoveries over the past few decades. The solution is to have rising prices force marginal users out of the markets for several years until there is an adjustment to the new reality.

I was asking about the Bakken. OPEC is another topic, although I know Saudi Arabia gets most of its oil from a handful of giant oil fields, so that may be worthy of speculation.

I believe that the USGS estimates are no better than those of the OPEC governments. All of them have used numbers that are too optimistic.

Speaking of oil, you might want to keep an eye on this. Matt Simmons has been speculating that a separate, larger leak is spewing oil five or six miles from the Deep Horizon site. It's hard to say if Simmons is correct, but I know BP abandoned a botched well that's a few miles away from the known leak, just several months prior. (I don't have the link on hand, but I'll post it if I can find it.)

I heard this on the Puplava broadcast. By August the relief wells should have taken care of the leak so the long term damage to the Gulf environment will be minor. BP has a long way to go to match the Ixtoc I leak.

If Bakken producers made money in the '90s, when oil was cheaper and wells were less productive, they're likely making money now.

There are a few wells that can make money at lower prices but the average well in the formation can't make money at today's prices. That is the problem here; we have to evaluate the entire formation and that is still far from economic.

 

Post a Comment

Links to this post:

Create a Link

<< Home