Friday, July 20, 2012

Energy Fact of the Day

INFORUM -- "At the end of May, North Dakota had 336 idle wells that had been drilled but were waiting for fracking crews."

MP: Employment in North Dakota's oil industry has more than quadrupled since 2008 (see chart above), but it looks like the increases in employment haven't been keeping up with the increased demand for fracking workers, resulting in hundreds of idle wells.  Given enough time for the supply of workers to catch up to the rising demand, we can look for continued increases in North Dakota's phenomenal oil output as those idle wells become active.

15 Comments:

At 7/20/2012 8:39 AM, Blogger VangelV said...

MP: Employment in North Dakota's oil industry has more than quadrupled since 2008 (see chart above), but it looks like the increases in employment haven't been keeping up with the increased demand for fracking workers, resulting in hundreds of idle wells. Given enough time for the supply of workers to catch up to the rising demand, we can look for continued increases in North Dakota's phenomenal oil output as those idle wells become active.

Only if there is a decent return on investment. The fact is that as one moves away from the core areas well productivity declines sharply. And if this was such a great area why aren't the companies showing positive cash flows and stable debt levels on their balance sheets?

It is time that you looked at the real world mark. Outside of academia the return on capital will eventually wind up being important. We have already seen the sector run from shale gas, something that you were hyping not that long ago, because it has led to capital destruction. Unless the economics improve, and there won't be an improvement with shortages of competent people to do the job, we will see the same capital destruction in oil.

 
At 7/20/2012 9:35 AM, Blogger marmico said...

The rig count is flattening. Existing frack crews should be able to catch up with no problem.

A year ago the idle well count was 800.

 
At 7/20/2012 10:09 AM, Blogger Jon Murphy said...

Rig workers are making a ton out there. Man, did I enter into the wrong profession.

 
At 7/20/2012 1:44 PM, Blogger Its GSATT said...

"Only if there is a decent return on investment. The fact is that as one moves away from the core areas well productivity declines sharply"

Big whoop. All those jobs that are being created are being PAID in the real world. The only people it hurts are the investors who missed the "core" area and their well didn't pull as much $$$ as they wanted. boo hoo. There's obviously a great chance for a return on investment or they wouldn't be playing the game.

 
At 7/20/2012 1:53 PM, Blogger Jon Murphy said...

There's obviously a great chance for a return on investment or they wouldn't be playing the game.

Dr. Perry posted about a week or two ago a report saying these wells are expected to make something in the neighborhood of $1M per year over the course of their lifetimes.

 
At 7/20/2012 2:00 PM, Blogger Its GSATT said...

the last paragraph in marmico's 2nd link;

"Rig counts in the Williston basin dropped in April, May, and June, but are now setting
new records every few days. Utilization of rigs capable of +20,000 feet is over 90%, but
for shallow well rigs that can drill to 7,000 feet or less utilization remains below 50%.
The efforts to force federal regulation of hydraulic fracturing remain high."

So all these rigs that are going idle simply are not effective enough at getting down to the oil.......

Are these the wells that are missing the "core" area?

I cant drive a golf ball more than 150 yards. But don't be pissed when all you see in my bag is a 9 iron and a putter.

 
At 7/20/2012 9:23 PM, Blogger VangelV said...

Big whoop. All those jobs that are being created are being PAID in the real world. The only people it hurts are the investors who missed the "core" area and their well didn't pull as much $$$ as they wanted. boo hoo.

But that is the problem; workers can only continue to get paid if investors are willing to finance cash flow negative operations by diluting equity or increasing debt levels.

There's obviously a great chance for a return on investment or they wouldn't be playing the game.

If you follow the money you find that your assumption does not have to be true. If I can raise a lot of money and keep drilling for five years I can make $20-$50 million as CEO over those five years. At the end I walk away and the company folds. I did not lose my money. I lost the investors' money. And earning $20 million that way certainly beats working my ass off in the Arctic as an engineer and only making $10 million over a full lifetime.

I suggest that you go to a few natural resource conferences over a number of years. After a while you see some of the same old faces pushing new companies to naive investors. Yes, some of the new companies could turn your $10K into $2 million but it is far more likely that most of them will go to zero. Either case the people who are pushing them will get paid no matter what happens to you as an investor.

 
At 7/20/2012 9:25 PM, Blogger VangelV said...

Dr. Perry posted about a week or two ago a report saying these wells are expected to make something in the neighborhood of $1M per year over the course of their lifetimes.

That is nice but why aren't these claims showing up as large positive cash flows on the balance sheets given the fact that most of the production takes place in the first two years? There is nothing like objective evidence to make nervous investors relax a bit. But that evidence is lacking and has been replaced by unsupported claims from sources that keep referencing each other as support.

 
At 7/20/2012 9:32 PM, Blogger VangelV said...

"Rig counts in the Williston basin dropped in April, May, and June, but are now setting
new records every few days. Utilization of rigs capable of +20,000 feet is over 90%, but
for shallow well rigs that can drill to 7,000 feet or less utilization remains below 50%.
The efforts to force federal regulation of hydraulic fracturing remain high."

So all these rigs that are going idle simply are not effective enough at getting down to the oil.......

Are these the wells that are missing the "core" area?


Almost all of the oil is found in the 'middle' Bakken formation, which is mostly made up of carbonate. The drills that can operate in the middle Bakken should be very busy. Those that can't because they are incapable of horizontal drilling or can't drill to the required depths will not be fully utilized.

 
At 7/20/2012 10:31 PM, Blogger Bakken1515 said...

Vangel you keep saying that all these companies are not making money in the Bakken and that no one can point out one that is showing positive cash flow and when I do all you sat is well they operate in more areas then just the Bakken well witch of these companies that you say are not are operating only in the Bakken witch are operating only in shale plays. From your posts it is clear that you do not understand the Bakken. Then you always bring up gas shale plays and say that is what is going to happen to the Bakken and that companies reinvented themselves and moved into the bakken but they where drilling the Bakken befor the shale gas boom and will be long after. Then you will say that all the "easy to get to oil" has already been drilled witch again shows that you do not understand the Bakken companies have been jumping rigs around to hold leases so drilled one well into a lease that could get up to as many as 14 wells just now they are started to utilize skid rigs that will go back to your easy to get to oil and finish the drilling that has just began. As long as oil is above $70 a bbl it will be profitable to drill in all of the Bakken not just the "core" areas

 
At 7/20/2012 10:46 PM, Blogger Bakken1515 said...

The rig count has dipped a little bit in nd last month there are many reasons for that but mainly companies are dropping old rigs with old technology that are capable of drilling Bakken wells but are not as cost effective, safe or as reliable as new rigs. Also they are going to more skid capable rigs as most leases are now held by drilling therefor less rig will be needed. Newly built rigs are moving into nd still as older rigs are being stacked out.

 
At 7/21/2012 6:10 AM, Blogger VangelV said...

Vangel you keep saying that all these companies are not making money in the Bakken and that no one can point out one that is showing positive cash flow and when I do all you sat is well they operate in more areas then just the Bakken well witch of these companies that you say are not are operating only in the Bakken witch are operating only in shale plays. From your posts it is clear that you do not understand the Bakken. Then you always bring up gas shale plays and say that is what is going to happen to the Bakken and that companies reinvented themselves and moved into the bakken but they where drilling the Bakken befor the shale gas boom and will be long after. Then you will say that all the "easy to get to oil" has already been drilled witch again shows that you do not understand the Bakken companies have been jumping rigs around to hold leases so drilled one well into a lease that could get up to as many as 14 wells just now they are started to utilize skid rigs that will go back to your easy to get to oil and finish the drilling that has just began. As long as oil is above $70 a bbl it will be profitable to drill in all of the Bakken not just the "core" areas

Let me take the points one at a time.

First, I bring up shale gas because Mark was hyping it not very long ago and is still hyping it without realizing that it has been a capital destroyer. In short, I told you so and was right when everyone was giving me the 'you don't' understand or 'they would not drill unless they could make money' arguments.

Second, the producers have been hyping all shale areas, not just the Bakken so the positive cash flows are required as evidence that oil liquids can be profitable.

Third, many of these companies have been around for many years so their expansion should be self financing given the production profiles and the math. The fact that they aren't is a problem.

Forth, the easy oil has been gotten out. See Elm Coulee as an example. The jumping around is because companies went outside of the core areas.

I have to go now because I have to drive my son to his rugby game. I will see if I missed anything and respond later.

 
At 7/21/2012 6:49 AM, Blogger marmico said...

Newly built rigs are moving into nd still as older rigs are being stacked out

Sure, the existing rig fleet is becoming more efficient at drilling. But the rig count is flattening, which suggests that employment in drilling and fracking is peaking.

If Perry's employment chart was in log terms it would be easier to visualize.

Of course, oil patch jobs in building infrastructure to service the producing wells will continue to rise.

So it would be my position that unless the rig count picks up substantially total oil patch employment in the Bakken is within 20% of peak. The quadrupling days are over.

 
At 7/21/2012 9:30 PM, Blogger Bakken1515 said...

Vangle you say the producers are hyping all shale areas not just Bakken but all these articles have been about the Bakken only. Can you tell me any producer that is only drilling in the Bakken that is not showing a positive cash flow? You always say read the sec fileings (witch I will admit I know nothing about) do they break it down and show that their operations in the Bakken are not cash flow positive? Or does it just show there operations as a whole are not? Also why is it that because they are no longer really drilling in the elm coulee field that all the easy oil is gone? Are you trying to say that is the only "core Bakken area" in the entire Williston basin? There are LOTS of very very good Bakken/three forks fields in the Williston basin. I don't know if you don't understand how the leasing works but once a producer drills on a lease that holds their lease for good if they do not drill before the lease expires other producers can get the lease. So rigs jumping around not finishing all drilling planed in a leased section is not because they are moving out of core areas it is due to them wanting to hold leases by drilling. As I have stated before now there is a large increase of skid capable rigs in ND because of getting most of there leases held by drilling.

 
At 7/22/2012 2:40 PM, Blogger VangelV said...

Vangle you say the producers are hyping all shale areas not just Bakken but all these articles have been about the Bakken only. Can you tell me any producer that is only drilling in the Bakken that is not showing a positive cash flow? You always say read the sec fileings (witch I will admit I know nothing about) do they break it down and show that their operations in the Bakken are not cash flow positive? Or does it just show there operations as a whole are not?

I have made it clear that I have yet to see shale producers who have shown positive cash flows in their SEC filings. While I would not expect even good areas to yield positive cash flows in the early stages if the returns are what is being touted I would expect to see self financing operations within two to three years. The fact that these are hard to find shows that the industry is hyping the shale prospects.

And you are forgetting a few things. Producers of conventional oil and gas should be cash flow positive and profitable because they have higher quality assets than the shale players. I do expect most of the players to have positive cash flows from their conventional reserves.

I have said that I am ready to be convinced. All you have to do is to show me filings that show positive cash flows, stable debt levels, and a sound dividend policy. If the Bakken were what it is hyped up to be that would not be difficult because most of the players will show great results.

Also why is it that because they are no longer really drilling in the elm coulee field that all the easy oil is gone?

The Elm Coulee was a very profitable field in Montana. When its production declined so did Montana's because there was no new easy to recover oil available. While I am sure that there will be a few more profitable areas in the state I doubt that you will find that the average well is capable of producing a positive return.

That is my point with ND. Much of the easy oil has been pulled out of the ground. While the middle formation may have a few more profitable areas the upper and lower Bakken are not looking as promising. That means that when we look at the production profile we will have a hard time finding a way to have sustainable production of 1 MMbpd as has been suggested on this blog.

Are you trying to say that is the only "core Bakken area" in the entire Williston basin?

No.

There are LOTS of very very good Bakken/three forks fields in the Williston basin. I don't know if you don't understand how the leasing works but once a producer drills on a lease that holds their lease for good if they do not drill before the lease expires other producers can get the lease. So rigs jumping around not finishing all drilling planed in a leased section is not because they are moving out of core areas it is due to them wanting to hold leases by drilling. As I have stated before now there is a large increase of skid capable rigs in ND because of getting most of there leases held by drilling.

I know how leasing works and pointed to the problem that it caused for the shale gas producers who had to drill even when no sane individual wanted to produce at a loss. I don't think that most of the leases will turn out to be profitable in the Bakken because I do not believe that the average well will produce as much as is being assumed. That means that we will have a few companies that produce a decent return and many that will destroy capital because they will sell the oil for less than it cost to produce it.

 

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