Tuesday, December 20, 2011

Ohio, Kansas May Be Next States to See Oil Booms

1.  CNNMoney -- "Ohio hasn't been an oil powerhouse for nearly 100 years. But thanks to controversial new drilling technology, the state that once produced a third of the nation's crude and was the birthplace of John D. Rockefeller's mighty Standard Oil could once again be a significant source of domestic supply.

If given the proper development, Ohio could be producing 200,000 barrels of crude a day by 2020.  Based on current production rates it would be enough to make Ohio the sixth-largest oil producing state in the country and put it ahead of such heavyweights as Louisiana and Wyoming. The industry is poised to create 200,000 jobs and half a billion dollars in tax revenue in Ohio over the next five years, and landowners are already getting $3,000 to $5,000 per acre for leasing their land."

2. Motley Fool -- "Some states have gotten all the attention in America's rush toward unconventional energy plays. North Dakota and Montana benefit enormously from the Bakken shale. The Appalachian-girding Marcellus shale has caused controversy in Pennsylvania and New York due to methods used to extract oil and gas from the ground. Energy-conscious investors took notice of Colorado when Anadarko Petroleum found major oil and gas reserves in the Wattenberg formation.

Kansas might be the next state up to bat."

23 Comments:

At 12/20/2011 6:54 PM, Blogger Marshall said...

Looks like a good idea. Even if they it was150,000 jobs over the next five years would be highly beneficial to get us back to full employment with actual jobs. On the tax side it is always preferred to get any increases from new production and not have suck the life out of existing business. The sooner to proper development the better.

 
At 12/20/2011 7:05 PM, Blogger Buddy R Pacifico said...

Kansas? Yes, here is a map of the oil and gas fields in Kansas. Most of the recent activity is near the Oklahoma border, in the southern part of the state. Oil production is up, with natural gas interest tepid because of low prices.

 
At 12/20/2011 8:50 PM, Blogger VangelV said...

I think that what is needed is a big picture view.

The per well production rate is not looking good in the Bakken.

When we look at total production in Montana and the North Slope with ND and SD we see that the capital consuming increase in the Bakken has hidden the decline in very profitable output of the North Slope.

Sorry Mark but so far the evidence indicates that the shale boom is just another bubble that is not different that many previous bubbles that we have witnessed in the past.

 
At 12/20/2011 9:30 PM, Blogger Unknown said...

The notion that oil production from Alaska isn't capital consuming is laughable. Maybe we should send Vange to work in the North Slope oil fields so he can see for himself. If oil in Alaksa was so much easier than oil in North Dakota, why are there droves of drillers falling over each other to drill in North Dakota, but not Alaska?

And yeah, I like that 2007 figure for Bakken wells. Really up-to-date! *laughs again*

 
At 12/20/2011 9:37 PM, Blogger Unknown said...

Oh yeah, and as for Ohio and bubbles ...

Since we all know how much money oil drillers are losing in North Dakota, it would appear they really enjoy losing gobs of money on these unprofitable, bubble-esque shale plays, because oil companies have already leased millions of acres in Ohio (and Michigan, I might add) in this new play in their never-ending effort to lose as much money as they possibly can. After some 4-5 years of intensive activity in North Dakota, these companies surely must have determined these plays are poised to be a bubble soon to burst, but since they enjoy losing so much money they keep drilling and drilling, and leasing ever more amounts of land, in a never-ending quest to deplete not only the oil in the ground, but also their investor's money and their own stashes of cash (if they've even got any left, that is).

*laughs again*

 
At 12/20/2011 9:44 PM, Blogger VangelV said...

The notion that oil production from Alaska isn't capital consuming is laughable. Maybe we should send Vange to work in the North Slope oil fields so he can see for himself. If oil in Alaksa was so much easier than oil in North Dakota, why are there droves of drillers falling over each other to drill in North Dakota, but not Alaska?

Nonsense. Oil production in Alaska provides a positive return on investment. And you are not seeing drilling because of federal rules that prohibit drilling in ANWAR.

And yeah, I like that 2007 figure for Bakken wells. Really up-to-date! *laughs again*

Feel free to include any figure that you want. Mark keeps citing data that has the average well production at less than 100 bpd so the 2007 figure is too high.

 
At 12/20/2011 9:46 PM, Blogger Glenn Jericho said...

It better be a legitimate boom. Shell is in Ohio writing oil and gas leases at $5,000+ an acre. With the standard landowner royalty of 1/8th (12.5%) of all oil and gas produced and sold (Shell is offering 20% royalty[!]), you have to have near-record wells to even turn a profit with natural gas at its current price. Nobody has even hit the Utica yet in Ohio (Marcellus is only in the far east of the state) unless the oil companies are keeping really tight lips about it. Keep in mind... $25 an acre was very generous two years ago. It has to bust soon.

 
At 12/20/2011 9:54 PM, Blogger VangelV said...

Oh yeah, and as for Ohio and bubbles ...

Since we all know how much money oil drillers are losing in North Dakota, it would appear they really enjoy losing gobs of money on these unprofitable, bubble-esque shale plays, because oil companies have already leased millions of acres in Ohio (and Michigan, I might add) in this new play in their never-ending effort to lose as much money as they possibly can. After some 4-5 years of intensive activity in North Dakota, these companies surely must have determined these plays are poised to be a bubble soon to burst, but since they enjoy losing so much money they keep drilling and drilling, and leasing ever more amounts of land, in a never-ending quest to deplete not only the oil in the ground, but also their investor's money and their own stashes of cash (if they've even got any left, that is).

*laughs again*


We saw the same thing during the internet and IT bubble. As long as there is financing and the promise of a bigger fool the game will keep going. The trick is to ignore the hype and to look at the 10-K today just as it was during the 1990s. And if you choose to look you see the same thing; a lot of negative cash flows and no real profit from shale oil production. And if you listen to the conference calls you will find that the mountebanks who were hyping up shale oil not all that long ago are bragging about how they are migrating away from shale gas and towards shale liquids. Yet, on the same conference calls we hear a lot of talk about funding gaps and asset sales.

From what I see the smaller players are leasing land because they are hoping that the majors who are desperate to hide their reserve declines will be forced to buy them. Their biggest asset is not the actual land or real reserves but the accounting rules that allow their leases to be converted into apparent reserves.

 
At 12/20/2011 10:04 PM, Blogger VangelV said...

It better be a legitimate boom. Shell is in Ohio writing oil and gas leases at $5,000+ an acre. With the standard landowner royalty of 1/8th (12.5%) of all oil and gas produced and sold (Shell is offering 20% royalty[!]), you have to have near-record wells to even turn a profit with natural gas at its current price. Nobody has even hit the Utica yet in Ohio (Marcellus is only in the far east of the state) unless the oil companies are keeping really tight lips about it. Keep in mind... $25 an acre was very generous two years ago. It has to bust soon.

Actually, it doesn't have to go bust soon. The value of the shale properties is not future production but the cover that the land positions provide to companies that are experiencing a decline in conventional reserves.

The US has not NI 43-101 equivalent. Shale gas companies do not have to really prove their reserve estimates by drilling test wells and proving the assumed decline curves. They can make assumptions that are not realistic without any worry of a penalty. At the same time the SEC also allows the companies to use the 6:1 BTU ratio for their boe reserve reporting instead of the over 20:1 USD price ratio.

The hit that the conventional companies will take when the bubble bursts will be offset by the much higher valuation of their actual reserves thanks to a large increase in the price of oil and gas. In the meantime they can actually use their inflated stock price to pick off smaller conventional producers that have economic reserves in the ground.

This is not to say that the bubble can't burst soon. Only that it does not have to.

 
At 12/20/2011 10:09 PM, Blogger Unknown said...

"We saw the same thing during the internet and IT bubble."

This is the funniest thing you've said yet.

Breaking news Vangel: You posted that while on the internet. The internet permeates everything these days, in case you haven't noticed. That "bubble" you spoke of has engufled world commerce, news and information, and is beginning to engulf human social lives as well.

Thus, if history is to repeat itself and shale oil is akin to the internet, we can expect shale oil production to soar beyond anyone's expectations, probably to the point where it puts the brakes on the price of oil.

Nice job of shooting yourself in the foot!

 
At 12/20/2011 10:36 PM, Blogger Unknown said...

BTW, more than one commenter in this thread seems to have missed the title of this article:

"Ohio, Kansas May Be Next States to See Oil Booms"

Notice it says oil. Not natural gas - oil. As I write this, oil is trading at $97/barrel. I hope no one is going to tell me Utica shale oil isn't going to be profitable at $97/barrel. Or even $80/barrel. The only thing that's going to "pop" these "bubbles" is if oil falls to about $60/barrel or less and stays there for many years. Are you expecting that to happen? If you are, then yes, this will end up being yet another "bubble." If you aren't expecting that to happen, you can continue telling us this "bubble" is about to pop for the next year. And the year after that. And the year after that. And the year after that. And the year after that. And the year after that. And the year after that. And the year after that. And the year ...

 
At 12/20/2011 11:01 PM, Blogger VangelV said...

Breaking news Vangel: You posted that while on the internet. The internet permeates everything these days, in case you haven't noticed. That "bubble" you spoke of has engufled world commerce, news and information, and is beginning to engulf human social lives as well.

The internet is doing fine. But the people who invested in the internet stocks during the bubble got wiped out because the companies never made any money. If you look at the 10-Ks you will find out that the shale companies are not making any money. In fact, if you look at the production curves and EURs you can be certain that the reported depreciation is far too low and that write-downs are coming.

Keep in mind that we had a company like Nortel, which was reporting profits even as it was chewing through cash all through the bubble. But for some reason 'investors' never thought to subtract all those 'unusual one-time' write-offs that were reported so frequently that they could never be thought of as unusual. In the end Nortel wound up losing money during a massive bubble as it sold much of its product at less than cost. To see a current day equivalent look no further than the shale players.

 
At 12/20/2011 11:02 PM, Blogger VangelV said...

Thus, if history is to repeat itself and shale oil is akin to the internet, we can expect shale oil production to soar beyond anyone's expectations, probably to the point where it puts the brakes on the price of oil.

Nice job of shooting yourself in the foot!


I was talking about the investment results, not the actual viability of shale production. Right now I see no way to make shale production profitable at anywhere near these prices. To get economic production you need something more than a refinement of old technology.

 
At 12/20/2011 11:07 PM, Blogger VangelV said...

Notice it says oil. Not natural gas - oil. As I write this, oil is trading at $97/barrel. I hope no one is going to tell me Utica shale oil isn't going to be profitable at $97/barrel. Or even $80/barrel. The only thing that's going to "pop" these "bubbles" is if oil falls to about $60/barrel or less and stays there for many years. Are you expecting that to happen? If you are, then yes, this will end up being yet another "bubble." If you aren't expecting that to happen, you can continue telling us this "bubble" is about to pop for the next year. And the year after that. And the year after that. And the year after that. And the year after that. And the year after that. And the year after that. And the year after that. And the year ...

I do notice that it says oil. But not very long time ago Mark was hyping shale gas as well. And that story fell apart very quickly as the charlatans moved towards shale liquids and only kept their shares from collapsing by keeping their true depreciation costs artificially low by reporting EURs that are very unrealistic. But that game can't keep going on for very long because all those closed wells will have to be written down come time in the future. The only way to hide it is to keep drilling more and more but that only creates more and more losses and a bigger and bigger write-down later on down the line.

Anyone who is paying attention knows that the math does not work very well. Well that average less than 100 bpd because they have a depletion rate at 75-90% per year cannot pay for themselves when they cost $5 million to drill.

 
At 12/20/2011 11:17 PM, Blogger Unknown said...

This is really funny. You just keep shooting yourself in the foot, time and time again.

"I do notice that it says oil. But not very long time ago Mark was hyping shale gas as well."

And guess what? Mark was RIGHT about shale gas! Shale gas has been so utterly, completely successful it has completely kept the price of natural gas in check at low prices for some 3 years now, to the great benefit of consumers. It's sort-of like the supermarket business: Few companies make much money in the business, they've got razor thin profit margins, and yet ... they keep selling groceries to consumers, they keep remodeling stores, and so on, and so forth. Both are victims of their own success.

Or like the television-making business. Almost nobody makes money from selling TV's anymore, they're so ubiquitous and have become such a commodity with such intense competition that prices have crashed to the point of barely being profitable, if at all. But because of this, comsumers keep scooping the things up by the bucketful, and TV manufacturers have little choice but to continue makeing them.

Should the shale oil biz suffer the same fate as the shale gas, supermarket and TV industries, consumers all across the USofA will rejoice!

 
At 12/21/2011 9:04 AM, Blogger VangelV said...

And guess what? Mark was RIGHT about shale gas! Shale gas has been so utterly, completely successful it has completely kept the price of natural gas in check at low prices for some 3 years now, to the great benefit of consumers. It's sort-of like the supermarket business: Few companies make much money in the business, they've got razor thin profit margins, and yet ... they keep selling groceries to consumers, they keep remodeling stores, and so on, and so forth. Both are victims of their own success.

There is a HUGE difference. Retailers may have thin profit margins but they are profitable and can make a lot of money based on volume. (See Wall-Mart.) The shale gas companies were losing money at less than $7.50 gas even though they were in the sweet spots of the core areas of the best shale formations. Since they cannot hedge at prices high enough to lock in even a small profit the shale gas producers are forced to sell off 'assets' or to migrate to shale oil, which will allow them to attract more financing from financial institutions doubling up in the hope of getting some of their previously loaned money back.

Should the shale oil biz suffer the same fate as the shale gas, supermarket and TV industries, consumers all across the USofA will rejoice!

Really? How exactly consumers get cheap gas when producing it generates losses? Are you as ignorant of economics as you are of the shale gas and oil issues?

 
At 12/21/2011 9:19 AM, Blogger juandos said...

Bakken and Three Forks Development

Lewis & Clark/Pronghorn Prospects. Whiting's net production from the Lewis & Clark/Pronghorn prospects averaged 3,960 BOE per day in the third quarter of 2011, up 50% from the 2,640 BOE per day average in the second quarter of 2011. From July 15 through October 22, 2011...

 
At 12/21/2011 10:09 AM, Blogger VangelV said...

Lewis & Clark/Pronghorn Prospects. Whiting's net production from the Lewis & Clark/Pronghorn prospects averaged 3,960 BOE per day in the third quarter of 2011, up 50% from the 2,640 BOE per day average in the second quarter of 2011. From July 15 through October 22, 2011...

Wonderful example. Let us see what the referenced release tells us.


First, let us find why we saw an increase from 2,640 BOE per day to 3,960 BOE per day.

The answer is obvious because we read, "From July 15 through October 22, 2011, Whiting completed 12 new wells at Lewis & Clark/Pronghorn, bringing the total number of producing operated Pronghorn Sand(1) / Three Forks wells to 38."

That tells us that the company drilled 12 new producing wells to get 1,312 barrels of new production. So each new well added around 110 BOE per day to the average. But the data tells us that the IP figure for new wells is running at more than 1,000 bpd so why is the number so low? Well, that comes down to depletion. The new wells are needed to offset the massive decline of older wells.

I don't know about you but I am having problems with the need to drill so many expensive wells just to get such little new oil. Keep in mind that the cost of a well at drill depths that range from 5,500 to 6,500 feet comes to around $4.0 - $5.5 million depending on the length of the laterals.

I also do not like the fact that the, "Borrowing Base Increased from $1.1 Billion to $1.5 Billion." Or the fact that we get a lot of reports about 'cash costs' and have no idea just how accurate the EURs are likely to be. And let us note that about a quarter of the reported BOE production rate comes from nat gas at a 6:1 ratio. If we used the actual price ratio we would have a smaller production rate being reported. And let us also note that the reserves and the EURs are in question because of the very loose accounting rules in the US. If the EURs turn out to be smaller the depreciation costs would be larger and the company would have a great deal of trouble attracting the financing that it needs to maintain its production rates.

 
At 12/21/2011 12:58 PM, Blogger rstevens said...

Mr. "hope & change" will kill any hope & change when it comes to oil and/or coal. All which flies against all common sense. I am all for natural energy sources, however, Wind & solar do not power our cars, and produce electricity from 6-10 x the cost of crude, coal, and natural gas! All European models of wind & solar show we are stupid to follow their tremendous net loss!

 
At 12/21/2011 2:09 PM, Blogger NormanB said...

Why in these CNN, AP, NYT etc articles is fracking considered 'controversial' wereas wind power, solar power, electric cars and Global Warming aren't?

 
At 12/21/2011 2:50 PM, Blogger VangelV said...

Why in these CNN, AP, NYT etc articles is fracking considered 'controversial' wereas wind power, solar power, electric cars and Global Warming aren't?

Good question. All are scams.

 
At 12/21/2011 3:58 PM, Blogger juandos said...

"I don't know about you but I am having problems with the need to drill so many expensive wells just to get such little new oil"...

Good man vangIV!

That was exactly what I thought you would also find questionable but I didn't want to lead with it...

I also found the borrowing more than at bit problematic...

"If the EURs turn out to be smaller..."...

I also want to see how that shakes out and maybe by this time next year (possibly sooner) we'll know something about that...

 
At 12/21/2011 4:18 PM, Blogger VangelV said...

"If the EURs turn out to be smaller..."...

I also want to see how that shakes out and maybe by this time next year (possibly sooner) we'll know something about that...


Arthur Berman did some work a few years ago.

In 2007, I projected EUR for almost 2,000 horizontal wells in the Barnett Shale (World Oil, November 2007). At that time, these were the only horizontal wells with enough production history to evaluate. Now, with two additional years of production, I revised the decline curves for the same control set of 1,977 horizontal wells. The overall EUR decreased 30% from my previous estimate, and the average per-well EUR fell from 1.24 Bcf to 0.84 Bcf. The reason is clear: most wells do not maintain the hyperbolic decline projection indicated from their first months or years of production. Production rates commonly exhibit abrupt, catastrophic departures from hyperbolic decline as early as 12-18 months into the production cycle but, more commonly, in the fourth or fifth years for the control group. Pressure is drawn down and hydraulically produced fractures close...

Operators often state that shale plays have about a 30 to 40-year production life, but I found that the average commercial life for horizontal wells is about 7.5 years, although the mode is four years. There are many wells that should have 8-12 years of production but few that will extend beyond 15 years. About 75 percent of predicted EUR in horizontal Barnett wells has been produced by Year 5. In the control group, the first wells were drilled in 2003, and already 15% have reached their economic limit five to six years into their production life cycle...

I decided to examine the validity of the other common technique used in new play evaluation: prediction of EUR from IP. I projected decline curves for all the horizontal wells in the Barnett, and the resulting cross-plot of IP versus EUR provided a broad range of EURs that might be associated with a particular IP. For example, the well with the highest EUR in the Barnett Shale (8.8 Bcf) has a good correlation with IP (7.94 MMcfd). The next-best well has a EUR of 8.6 Bcf and a poor correlation to an IP of 4.28 MMcfd, while the fourth-best well has a EUR of 7.1 Bcf and an even poorer correlation to the IP of 1.9 MMcfd. In the end, I would prefer a high IP to a low one but, since approximately half of the EUR is produced in the first year, a well’s early decline rate is more important than IP in predicting reserves....


Sorry but I worked too hard for my money to risk it on money losing ventures that have only lost as little as they have because they picked off the low hanging fruit in the hope that they will wind up being profitable when the less productive reserves will have to be developed.

And I know enough about math to understand the depletion problem.

 

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