by Dan Dicker
Dec 11, 2016 |
OilPrice.com
The OPEC production agreement, which we called correctly, has already helped hoist the profitable
oil stocks we held, but what about 2017? One way I've looked at oil and oil stocks is by looking at
the crude curve the differentials between monthly contract prices. And a recent big move in the
curve makes 2017 look very positive indeed.
I've seen all kinds of futures curves in my 30+ years of trading oil, and many analysts believe that
the crude curve is really predictive of the future but more often than not, it is merely an outline
of what traders and hedgers are thinking.
here's a look at Thursday's curve:
... ... ...
These numbers represent an enormous change from the numbers we saw even two weeks ago, before the
big OPEC deal in Vienna. Since 2014, we had been seeing a deep contango market, where oil prices in
the future were a lot higher than where they were trading in the front (present) months. But what
does a contango market mean?
Many like to look at contango markets as a signal of crude storage, and that has merit but I like
to look at the curve through the eyes of its participants: when the oil market is collapsing, as it
has been since 2014, players in the futures markets know that the costs of oil recovery fall well
above the trading price, and will buy future oil contracts banking on a recovery. This drives buying
interest away from the present and into the future and creates our contango. This kind of market is
dominated by the speculators, who are willing to buy (bet) on higher prices later on.
In contrast, the hedging players are in retreat in busting markets, dropping capex and working wells
and trying merely to survive to see the next boom. It's when prices begin to recover and they gain
confidence in future prices that they try to hedge and plan for the coming up-cycle. This is when
speculators, if they are buying, are likely to move closer to the front months if they're buying
while producers (commercials) are looking to sell futures 12-24 months out. Suddenly, you have a
curve that is being more dominated by commercial players, selling back months and creating the
backwardation we're starting to see right now.
You may remember that I was able to nearly predict this year's bottom in oil prices by looking
for that flattening move of the crude curve in February. This latest move from a discount to a
premium curve has moved more than two dollars in the last week alone. This gives me added confidence
in oil prices for 2017:
Let's look, as a practical matter, why a premium (backwardated) market is absolutely REQUIRED to
see a long-term recovery in oil.
Imagine you're a shale producer and you've seen prices move from $45 to $52. You've been waiting for
a move like this to restart some non-core acreage that you could have working by the middle of 2017.
With a deep contango market, you might have gotten $55 or even more for a hedged barrel of crude in
June of 2017.
But you're not alone in looking to come out of your bunker, hedge some forward production and
restart some idle wells every other producer is trying to do the same thing. If all of you could
depend on a future premium, every producer would hedge out new production and ultimately add to the
gluts that have been already slow to disappear.
Related: The OPEC Effect? U.S. Rig Count Spikes Most In 31 Months
If you think about it, a premium market works to DISCOURAGE fast restarts and quick restoration of
gluts that a two-year rebalancing process has only slowly managed to fix and this is a good thing.
Producers have to be wary of adding wells so quickly, even in a market that is clearly ready to
again rise in price. In a truly backwardated market, the futures work to keep the rebalancing
process on track and production increases slow. That governor on production is the key to keeping a
rallying market strong, and the frantic addition of wells at a minimum.
The proof of all this is in the type of curves we see depending on how the markets are trading.
Now, take another look at the December-December spread chart I put up and you'll see that a Contango
market was a critical component to the bull markets we saw in oil prior to 2014. Unless something
very strange is happening, a Contango curve is indicative of a strong market, while a backwardated
one indicates a market under pressure. It's something I've watched closely for more than 30 years to
help me find major trends.
And convinces me today that oil will have a constructive 2017.
By Dan Dicker for Oilprice.com
is out with crude only production numbers for October 2016. All charts are in thousand barrels
per day.
OPEC crude only production reached 33,643,000 barrels per day in October. This includes Gabon.
Since May, OPEC production has increased 1.05 million barrels per day.
- Algeria is in slow decline.
- There was a sudden drop in Angola oil production in October, down 200,000 barrels per day
since August. I have no idea what the problem was. There is nothing in the news to indicate any
problem.
- Ecuador was sharply down in August but seems to be holding steady for the last two years.
- Gabon was added to OPEC a few months ago but their production is so low it will have little
effect one way or the other.
- Indonesia will also not affect OPEC production in a big way one way or the other.
- Iran's increase since sanctions were lifted has slowed to a crawl. There are other problems
on the horizon for Iran. They are talking about changing all their oil field contracts to "buy
back" contracts. That is they want the option to nationalize all everything. This will likely
cause a mass exodus of foreign oil companies from Iran and hit their production considerably.
- Iraq's production was up 97,000 bpd in September and another 89,000 bpd in October. Iraq,
like everyone else in OPEC, is positioning themselves for an OPEC "freeze" in oil production.
So they are producing every barrel possible in order to freeze at the very highest level possible.
- Kuwait has recovered from the problems they had in April. I expect their production to flatten
out soon with a slight decline over the next few years.
- Libya's oil production was up 168,000 bpd in October. Is peace breaking out in Libya? I doubt
it but only time will tell.
- Nigeria increased production 170,000 bpd in October. It is likely erratic increases and declines
in production will continue.
- The decline in Qatar's oil production seems to have slowed since late 2014.
- Saudi saw a slight decline in October.
- The United Arab Emirates had some problems earlier this year but they seem to have recovered.
I think they will hold production steady for a while now. I really don't think they can increase
production much above 3 million barrels per day.
- Venezuela's oil production is still dropping but the decline seems to be slowing. Venezuela has
very serious economic problems. They are nearing the "failed state" status.
World oil supply is very near its November 2015 peak.
steve from virginia
says:
08/10/2014 at 12:30 pm
All this oil tens of billions of barrels all of it non-renewable, never to be seen- or made
use of again for a hundred million or more years, for all practical purpose, ever!
the greatest bulk of it put into cars where it is wasted, by people driving aimlessly in
circles from gas station to gas station for entertainment purposes only By way of this idiocy
we destroy ourselves and our futures. We aren't doomed, we are damned.
Mike, Sydney says:
10/10/2014 at 6:05 pm
The big mistake most energy illiterates make is to talk about their cars when the peak oil subject
comes up. Most hope or assume that another form of fuel or energy will power their ride post oil.
Peak oil is not just about cars. Oil is the reason why our civilization exists in its current
form. Oil is why we have 7 billion people on this planet. Oil is about agriculture and food supply,
it is about distribution of everything we buy and not least it is about the raw materials for
many if not most of our goods. It is about almost every economic and social transaction that takes
place.
When oil becomes expensive our economies and societies will implode, jobs and goods imported
from far away will disappear. This will apply worldwide. The citizens of Addis Ababa are just
as dependent as the ones in Amsterdam or Atlanta.
We have exhausted most of our soils and lost the skill to eke out a living from Mother Nature
without fertilizers and machines. Could it be that the least "developed" countries will lead post
oil because our "developed" nations are the least able to cope without oil?
Ron Patterson says:
10/10/2014 at 6:45 pm
Mike, that's exactly what I have been trying to tell folks for years. Most just don't want to
believe it. They see solar, wind and other such things as keeping BAU going for awhile.
Why don't you post over on the post section. We get a lot more traffic over there.
Peak Oil Barrel
Argh says:
04/06/2015 at 1:35 pm
Big mistake thinking that this crisis will not arrive with plenty of time to avoid it. Oil prices
will rise slowly over time. However we create energy, we will find a way to pay for locomotion
or create food.
Oil is down 50% This is because of new sources of supply combined with continuing energy efficiency
improvement. Doomed or damned, don't hold your breath. I am sure you will find something else
-- perhaps global warming, now climate change, to scare people with.
Don Wharton says:
06/10/2015 at 7:54 pm
Argh. Your comment suggests that you are a militantly ignorant troll. 97% of the competent climatologists
fully support the IPCC global warming summary model. There is no reasonable doubt about this science.
In my opinion there has been a revolution in drilling technology over recent years. However,
the measured rate of additional improvement is now very modest as measured by the US EIA.
Most of the recent improvement is explained by the discovery and exploitation of sweet
spots which are being rapidly drained. For an objective look at prospects going forward for oil
and gas you should read David Hughes' Drilling Deeper report.
This is an exhaustive analysis based on a data base of all existing US oil and gas wells. It
impressively documents a future of peak oil and gas based on fully exploiting fracking technology.
I don't see any magical technology that will get the projected fossil fuel resources required
for business as usual. It is just not there.
Nick G says:
12/15/2015 at 2:43 pm
Oil is the reason why our civilization exists in its current form.
Not really. There's nothing magical about oil. 100 years ago civilization was pretty recognizable,
and it didn't require oil.
Oil is about agriculture and food supply
For the moment. Batteries and synthetic fuel can move tractors. Electricity (from many sources)
can create fertilizer.
it is about distribution of everything we buy
Rail works awfully well.
is about the raw materials for many if not most of our goods.
Meh. It produces some of our raw materials. But plastic can be produced from a lot of different
hydrocarbons, and it's production doesn' necessarilly create CO2, so we could produce plastic
from coal for centuries. That's plenty of time for a smooth transition.
jay says:
09/24/2016 at 7:36 am
"Not really. There's nothing magical about oil. 100 years ago civilization was pretty recognizable,
and it didn't require oil." You missed his point entirely. The reason there is 7 billion people
now is because of oil and what it has done for industrial, agriculture ect ect ect.
There was 1.7 billion people 100 years ago. How many people do you think would be here if not
for oil and all it has done?
">For the moment. Batteries and synthetic fuel can move tractors. Electricity (from many sources)
can create fertilizer<".
This is lack of a better word retarded for you to even consider that a battery will be used
even in the distant future to power agricultural machinery on a mass scale. Maybe the little ride
on mower you cut grass with, but that is it.
" Rail works awfully well."
Ya it does, but when it gets to a terminal, it will have to be unloaded and transported
then. Which basically happens now, so what is your point? And your last comment I wont even pick
apart because you obviously know little to very little about the uses of oil and the advantages
it has brought humanity.
Johnny Honda says:
10/13/2015 at 2:44 am
@ Steve from Vaginia: Did you ever consider that some People have to drive to *work* and *produce*
so that you can sit around and swing your testicles and so that your mommy can prepare your lunch
and dinner?
So when you sit around the whole day you can think what happens in 300 years, when most of the
oil and gas has been used up. We don't have time for that, but we are sure that People will find
a solution.
Rubber Johnny says:
10/13/2015 at 5:59 am
One or the solution will be not driving to work and wasting time in gridlock so we can
have more time to swing our balls be 'productive' on our own and our real community's
terms. Real community that includes momma
Rubber Johnny
Argh says:
04/06/2015 at 1:30 pm
Oil will get more expensive, some day slowly. Right now the cost is down (50%!!!) because of new
sources and efficiency improvements. I think that those who predict doom will be disappointed.
SRSrocco says:
10/12/2015 at 1:23 pm
Argh,
The falling EROI destroys your lousy assumption in spades. Your time might be better spent burning books or working on one of the dozen worthless Presidential
campaigns.
Steve
RSAldeen says:
04/29/2015 at 1:50 pm
Oil is very precious raw material, our demand for oil increases day after day, year after year
and century after another. The search and use other sources such as atomic, wind, tide, solar,
geothermal and others will continue but the prospects / trend to keep on using oil as a main source
of energy still quite high and will continue with time due to the following reasons:
- Worldwide population trend is going up drastically. (Main factor).
- Oil as a source of energy still quite cheap in comparison with other sources.
- It may be easy to apply the new technology in certain fields but not for all fields.
- Oil proofs to be available all over the world and at different levels, hence oil production
cost will suit all the times and condition worldwide but not for all the countries.
- Oil is quite important as a raw material for petrochemical products, and our needs for plastic,
paints and other products increases day after day drastically.
- Oil civilization will continue for a few centuries to come if not for ever and playing with
its prices is subject to market condition, political matters, and other technical issues.
Matt Mushalik says:
05/12/2015 at 7:25 pm
Thanks for the graphs. Saudi Arabia may be ramping up production ahead of the air-conditioning
season. Around 600 kb/d are needed in the hottest month.
It is unbelievable what misinformation has been spread by the media. I attended a public
forum of the Australian Energy Council and one participant thought that OPEC had increased oil
production. My presentation on the need to replace oil by natural gas as transport fuel (instead
of exporting it as LNG) was met with silence and did not spark a debate. Another participant was
running away when he heard the word peak oil.
Greg Surgener says:
08/20/2015 at 3:57 am
Matt,
Im lost by ur comments. 1st of all the graphs clearly show that Opec has increased production
by 2+m/d in the last year.
2ndly, Saudi's oil output charts above are for just Oil not NG. Ive never been there, are you
suggesting they run generators from oil for electricity and subsequent air conditioning. Why
wouldn't
they run thier power plants on Natural Gas? Please educate me.
No doubt that investor sentiment and market makers are playing a significant role in price
decline, as opposed to actual supply/demand issues. How do you find out how much the Opec nations
have sold oil short in the various markets. Not a bad deal for them, if they can lay rigs down
World wide and make the money in the commodity markets while doing so. But prices can only slide
so far and for so long before that game is up. It seems like if short selling or hedging slows,
buyers will outweigh sellers and the price should rise soon
Your thoughts?
Greg
Ron Patterson says:
08/20/2015 at 5:41 am
Greg, Saudi Arabia is very short of natural gas and have been for several years now. They would
love to run all their power plants and desal plants on natural gas if they just had enough of
it. They don't. They do burn a lot of natural gas but their supply is far short of what they need.
Nick G says:
12/15/2015 at 12:48 pm
Ron,
As best I can tell, KSA is short of NG because they've fixed the price at a very low level
to subsidize domestic companies that use NG.
What have you seen about that?
Ron Patterson says:
08/20/2015 at 8:43 am
...Saudi is producing flat out right now just like every other OPEC country except Iran. Sanctions
are holding Iran back. Political violence is holding Libya back, but they are still producing every
barrel they can. It's just that violence keeps them from producing any more.
Keith says:
08/29/2015 at 4:55 am
A few comments:
- Re Saudi, yes their domestic usage of oil is around 3 M bopd (they produced 10.5 M in June
but exported around 7 M bopd). Their refinery capacity is increasing but a large amount is burnt
for electricity generation. They have delays in the development of some large gas fields, and
so gas supply is behind the demand curve. Various service companies such as Baker Hughes, Halliburton
and Schlumberger have been demonstrating unconventional gas production in Saudi as a response.
- Re Dan Wharton and the 97% of climate scientists, this has been shown to be a doubtful number
over and again. It comes from a paper by John Cook et al where they claimed to estimate the views
in over 12000 papers. See Richard TOl for an alternative view
http://wattsupwiththat.com/2015/03/26/richard-tols-excellent-summary-of-the-flaws-in-cook-et-al-2013-the-infamous-97-consensus-paper/
Most polls show a split of about 60 40 in terms of views on climate science, rather than 97
3 despite what POTUS may have tweeted.
Further re climate, most agree CO2 is a greenhouse gas but estimates of the temperature change
caused by a doubling of its concentration have been coming down over the last 15 years. In other
words, it may not warrant the type of policy response that is being promoted at present.
http://climateaudit.org/2014/09/24/the-implications-for-climate-sensitivity-of-ar5-forcing-and-heat-uptake-estimates-2/
Meanwhile the IPCC projections continue with climate sensitivity estimates of 3 to 6 degrees
when the more recent estimates of ECS and TRC are consistently under 2 degrees. So contrary to
what is alleged above, there is lots of doubt about the IPCC models. The latter point comes from
peer reviewed science, by, among others, Nic Lewis.
Keith says:
08/29/2015 at 6:44 am
Another point of interest is the relative steadiness of Venezuelan production. Allegedly various
of the empresas mixtas (Joint Ventures between PDVSA and International Oil Co.'s) are not proportionally
funded by PDVSA as they should be. As a result production is down or is not reaching targets.
Apparently contractor companies will not accept new contracts from PDVSA unless they set up an
escrow account or other arrangement that guarantees payment in foreign currency. It is surprising
therefore that Venezuelan production shows a slight rise since December.
skykingww says:
10/22/2016 at 4:35 pm
Yes one day we will be without oil that is pumped from the earth. This is not going to happen
for 100's of years. Our intellect will probably find chemical or biological solution to this problem
long before we run out. If not humanity will survive. Global warming, yes its real and one day
the Sun will double in size and engulf the earth. I am not worried about either. I hate winter
anyway.
The problem humanity will face and not discussed near enough is the lack of clean drinking
water. Everyday it becomes harder to deliver enough clean water to all areas in need. States fight
over the rights to what little water pass through their terrain every year. Many times it has
to be pumped from other states at a premium. The worlds population grows larger every second.
crops demand more and more. Ethanol was forced on us without thought as usual by the oil fear
mongers. You do not grow food to solve a commodity problem.
The land resources, water resources, and corrosive properties that Ethanol introduced far out
weigh any benefit accomplished but still its forced down our throats destroying everything its
poured into. So please build those oil pipelines all across the country and pump that oil at rates
that keep our prices low so I can drive in circles any time I feel like it. I am not going to
worry about it because about the time we run out of oil we will need those pipelines to pump clean
water to all that need it.
Eric Sepp says:
11/01/2016 at 2:56 pm
I agree with author. If you look at 2 previous OPEC meetings, the players claim disorder and inability
to control output only to find resolution the day after the meeting.
I believe OPEC is setting up for a freeze as we are only 1% oversupplied now. If the OPEC big
wigs need to fatten the bank accounts, what better way than to set up your own long call on the
cheap?
OPEC will shut in wells before the Fed adjusts interest rates resulting in magnified downward
pressure on oil.
Balance this with Iran and Iraq incapable of proper well maintenance and we will soon see inadequate
supply not later than 2qtr 17′.
cmejunkie says:
11/14/2016 at 4:05 pm
Angola: October 2016 decline chiefly due to Dalia maintenance (though might have peaked in this
cycle as no major is rushing to invest in Angola's deepwater wells).
http://www.brecorder.com/markets/energy/europe/314268-angolan-oct-crude-oil-exports-to-fall-as-dalia-enters-maintenance.html
Stavros H
says:
12/10/2016 at 4:11 am
What Ron Patterson and the Peak Oil-ers in general fail to include
in their calculations is the geopolitical aspect of oil, as well as
Global Economics.
In order for us to understand what the imperatives are in
dictating oil production levels, prices etc we should be at first
able to distinguish between the different types of oil producers.
To provide the most obvious contrasting example, let's take Russia
& the USA. These two major oil producers are quite dissimilar to
each other, if not outright opposites. For Russia a much poorer
country oil production is *the* core industry, as well as the
core export item which is vital for the country's success or
failure. The US a much wealthier country despite its high
production levels, is still a massive importer. This distinction
makes a world of difference. For the US, the aim of oil production
is to be maximized, so that imports can be minimized and also that
oil exporters (such as Russia) can enjoy far less strategic or
economic leverage. Hence, the expensive and risky gambit on shale
oil and tar sands in North America. For Russia on the other hand,
the goal is never to maximize production, their aim is to balance
production levels with price levels so that the Russian economy can
get the best results and the country the most leverage possible in
the long-run. My point here is that when we make forecasts over
future production we should always make the distinction between
countries that are producers, yet importers and countries that are
producers-exporters and rely to a high (or absolute) degree on oil
revenues for their well-being. So, the first distinction we can
make, is between oil-producing-exporters and
oil-producing-importers. The first category would include: Russia,
KSA, Iraq, Iran, Kuwait, UAE, Libya, Venezuela etc, while the 2nd
would include the US, China, UK, India etc But another, even more
important distinction is crucially important here. Some of the oil
exporters are part and parcel of the US-EU (NATO) economic-military
structure while others are not. The first category would include:
KSA, Kuwait, UAE, Norway, Canada etc while the second category
would include: Russia, Iraq*, Iran, Libya*, Venezuela, Kazakhstan
etc
From the above, another clear conclusion arises. The US-EU Axis
(NATO) has calculated that the oil exporters it doesn't already
control must be attacked until a high degree of control over them
can be imposed. This has taken the form of a direct military attack
as in the cases of Libya and Iraq, or the form of Hybrid Warfare
methods of sabotage and subversion against all the others.
Now, how does all this relate to actual production levels? My
point here is this, the dominant US-EU Axis is very much interested
in suppressing the levels of oil production (or conversely, the
level of prices) from places such as Russia, Iran, Iraq etc
whenever this is possible (for example, when the North Sea and
North Slope were being developed, or when shale/tar sands came
online more recently) In fact they have been doing exactly that for
decades now (pressure on Yeltsin's Russia, sanctions on Saddam's
Iraq, sanctions on Iran and now sanctions on Russia) As you can
see, the sanctions carousel shifts between these 3 oil giants that
NATO does not control.
This is the point I have been periodically making on this blog
but nobody seems to be picking up on it. Yes, countries such as the
US, Norway, UK, Indonesia etc have peaked to various degrees and
can only maintain or increase production temporarily via massive
capital expenditure and technological breakthroughs. While
countries that have been victims of US-EU (NATO) hostility are
merely trying to navigate out of the siege laid against them until
they hold enough leverage to produce closer to their real
potential.
So, for the umpteenth time, Russia, Iran, Iraq, Kazakhstan and
very possibly Libya and Venezuela are nowhere near the peaks and
will be growing producers in the coming decades. The only question
is whether this will be done under their own terms, or under NATO's
terms.
Ron Patterson
says:
12/10/2016 at 1:44 pm
For the US, the aim of oil production is to be maximized, so
that imports can be minimized and also that oil exporters (such
as Russia) can enjoy far less strategic or economic leverage.
Baloney! The US
government
does not have an aim of oil
production. The US
government
does not produce a single
barrel of oil. Oil, in the USA, is produced by private and
publicly owned companies. Their aim is to make money, nothing
else.
Hence, the expensive and risky gambit on shale oil and tar
sands in North America.
Again, that risky gambit was not made by the US government,
it was made by private and publicly owned companies. They took
that risky gambit because they thought they could make a
fortune. Do you really believe they had Russia in mind when they
decided to drill and frack that oil bearing shale? Do you really
believe they did it because they wanted Russia to enjoy less
economic leverage? I doubt that any of them really gave a shit
about Russia's welfare.
The US sanctions against Russia was because of their takeover
of Crimea and their invasion into Ukraine. It had nothing to do
with trying to suppress their oil production. Ditto for the
Iranian sanctions. Obama wanted to halt their development of
nuclear weapons. Good God man, do you really believe those
sanctions was about suppressing their oil production instead?
So, for the umpteenth time, Russia, Iran, Iraq,
Kazakhstan and very possibly Libya and Venezuela are nowhere
near the peaks and will be growing producers in the coming
decades.
Libya and Venezuela peaked long ago. Russia is at her
peak right now. Iran is very likely post peak. Iraq can increase
production slightly but is very near her peak. Kazakhstan is at
1.75 million bpd and if they can manage to keep the toxic oil
from Kashagan from corroding their pipes they may one day get to
2 million bpd. Big deal.
Stavros H
says:
12/10/2016 at 7:13 pm
So you really believe that the USG has no way of influencing
what the various American corporations do? There is no such
thing as "free-market" in the abstract, the state is involved
heavily every step of the way. Legislation, regulation,
taxation, subsidies (or lack thereof) directions to financial
institutions, bail-outs etc etc etc. I am not of course
saying that the USG commands US corporations as would be the
case under say a Stalinist system, but you can bet it can
*influence* it. Several laws were passed around more than a
decade ago in order to precisely encourage shale operations
(Cheney was behind them) Secondly, I find it shocking that
you deny the most obvious statement I made, namely that major
oil importers struggle any which way they can to minimize oil
imports, maximize own oil production (if they have any oil
reserves that is) and also control the countries that do
export oil. Just read what the CIA said about the Persian
Gulf right after WWII. Control of oil-rich regions has been
an absolute imperative for US FP since then. Astonishing that
anyone that can doubt that. As for your claims about
anti-Russian sanctions, again your ignorance about
geopolitics is astonishing.
The Ukraine crisis was provoked by NATO itself (see:
EuroMaidan) and Russia reacted to it. NATO was long looking
for an excuse as well as the right timing for imposing
sanctions on Russia.
The Ukraine crisis, as well as
rising oil production in North America provided a perfect
opportunity for those sanctions to be imposed at the time
they did, otherwise they would have looked pretty pathetic.
And notice what the sanctions were all about: a) no
selling of oil equipment to RUS firms, b) no lending to RUS
oil firms, c) no US-EU oil corporation can invest in RUS oil
or cooperate with RUS oil companies. This, coupled with a
crushed price was hoped that would discourage/impede the
Russian oil industry. It's so eye-popping it hurts. BTW, I am
not moralizing here, I am just presenting the facts as I see
them, from the prism of RealPolitik.
As for your persistent belief that every country in the
world has peaked in terms of oil production. How long do you
have to be proven wrong until you admit it? I am sure that
you thought that Iraq under Saddam had "peaked" or that
during the early years of US occupation it had also peaked.
But what do we see?
A war ravaged country being able to rapidly expand
production. Imagine what the Iraqi oil production levels
would be if the country enjoyed some relative piece and the
global market called for it? My point here is that these
countries are constrained by market as well as geopolitical
factors, which you seem to completely ignore.
So, I hope that your blog is still around in the coming
years, when all of Russia, Iran, Iraq, Libya, Venezuela &
Kazakhstan boost oil production. Some of them will boost
their production massively, others significantly. You will
see.
Hickory
says:
12/11/2016 at 12:07 am
I'm sure the world looks like you depict it, from where
you look Stravos. But it doesn't look like that from here.
Russia has sanctions imposed on it for acting aggressive
on its borders. I'm sure it feels uncomfortable to be
surrounded, and not have a good port to the south for its
navy. I truly believe that USA and the rest of the modern
world were hoping Russia would join in a constructive and
cooperative role after the Soviet breakup, but they have
failed miserably so far. Still hope though.
And Iran has sanctions imposed because they have been
an extremely aggressive theocracy that no one wants to
have nukes- the sanctions imposed included China and
Russia as sponsors. Also, it was to Russia advantage
economically, to not have Iranian oil on the market.
China, Europe and USA do prefer to have Iranian oil on
the market, but not at the cost of a theocracy (bizarre)
with nucs.
More to say- but thats enough to chew on.
AlexS
says:
12/11/2016 at 5:58 am
"Russia has sanctions imposed on it for acting
aggressive on its borders"
What about >90% of
Crimea's population voting for re-unification with
Russia?
"extremely aggressive theocracy"
What about Saudi Arabia sponsoring terrorists all
around the world? Is it a perfect modern democracy?
Stavros H
says:
12/11/2016 at 6:01 am
I talk Real-Politik but you have again collapsed into
the cheap hypocritical nonsense of the MSM and
pseudo-experts. The mere suggestion that Iran has been
"aggressive" is insulting to my intelligence. Iran
can't be aggressive regardless of their inner desires.
Iran can only hope to defend itself from the US & its
allies and even that would have been impossible without
Russian and Chinese support from behind the scenes. I
don't see why you think that Russia & China going along
with the West on imposing sanctions on Iran somehow
proves that the excuse for them was truthful. No,
Russia & China both make deals with the West all the
time, in the hope that they can serve their own
interests as best possible. If it means screwing Iran
in some cases, then so be it. Every state is in this
for its very own interests (no permanent allies, only
permanent interests)
As for Russia. There wouldn't be a more catastrophic
scenario imaginable for the West (especially Europe) if
Russia ever managed or was allowed to enter the global
marketplace in anything remotely resembling "fair
terms". The reason why NATO is so obsessed with Russia
is because that country possesses *all* the necessary
elements (massive hydrocarbon reserves, nukes, metals,
strategic location, geographic size) for a superpower,
except of course the economic part. But, as NATO
strategists are keenly aware, that can change, and if
it does, then the Global Balance of Power changes
radically and at the expense of NATO. This is why
Russia is NATO's number one target and not say China,
or India or anybody else. Most people have been fooled
by thinking that power in international relations is
all about the size of your GDP. While this may be true
for most countries, it's definitely not true when it
comes to Russia. If I were NATO I would be doing the
same and more in order to bring Russia down.
AlexS
says:
11/26/2016 at 5:50 am
IEA expects oil investment to fall for third year in 2017
Thu Nov 24, 2016
http://www.reuters.com/article/us-iea-oil-investment-idUSKBN13J08H
Investment in new oil production is likely to fall for a third year in 2017
as a global supply glut persists, stoking volatility in crude markets, the head
of the International Energy Agency (IEA) said on Thursday.
"Our analysis shows we are entering a period of greater oil price
volatility (partly) as a result of three years in a row of global oil
investments in decline: in 2015, 2016 and most likely 2017," IEA director
general Fatih Birol said, speaking at an energy conference in Tokyo.
"This is the first time in the history of oil that investments are
declining three years in a row," he said, adding that this would cause
"difficulties" in global oil markets in a few years.
Oil prices have risen to their highest in nearly a month, as
expectations grow among traders and investors that OPEC will agree to cut
production, but market watchers reckon a deal may pack less punch than Saudi
Arabia and its partners want.
The Organization of the Petroleum Exporting Countries meets next week to try
to finalize to output curbs.
"Our analysis shows that when prices go to $60, we'll make a big chunk of
U.S. shale oil economical and within the nine months to 12 months of time, we
may see a response coming from the shale oil and other high-cost areas," Birol
told Reuters, speaking in an interview on the sidelines of the conference.
"And this may again put downward pressure on the prices."
Birol said that level would be enough for many U.S. shale companies to
restart stalled production, although it would take around nine months for the
new supply to reach the market.
The IEA director general said it is still early to speculate what Donald
Trump's presidency in the United States will have on energy policies.
"Having said that, both U.S. shale oil and U.S. shale gas have a very strong
economic momentum behind them," Birol said.
"Shale gas has significant economic competitiveness today, and we think it
will be so in the next years to come."
AlexS
says:
11/26/2016 at 7:50 am
Оpposite view on 2017 global upstream capex from BMI Research:
Oil Firm
Spending Seen Up in 2017 for First Time Since 2014
September 23, 2016
https://www.bloomberg.com/news/articles/2016-09-23/oil-firms-seen-spending-more-next-year-for-first-time-since-2014
Capital spending seen growing 2.5% in 2017 and 7%-14% in 2018
U.S. independents, Asian giants seen spurring spending growth
The oil industry may be ready to open its wallet after two years of
slashing investments.
Companies will spend 2.5 percent more on capital expenditure next year
than they did this year, the first yearly growth in such spending since
2014, BMI Research said in a Sept. 22 report. Spending will increase by
another 7 percent to 14 percent in 2018. It will remain well below the $724
billion spent in 2014, before the worst oil crash in a generation caused
firms to cut back on drilling and exploration to conserve cash, the
researcher said.
North American independent producers, Asian state-run oil companies and
Russian firms are prepared to boost investments next year, outweighing
continued cuts from global oil majors such as Exxon Mobil Corp. and Total
SA, BMI said, based on company guidance and its own estimates. Spending will
increase to a total of $455 billion next year from $444 billion this year,
BMI said.
"North America is where we're really expecting things to turn around,"
Christopher Haines, BMI's head of oil and gas research, said by telephone.
"We've seen a push to really reduce costs, reduce spending and take out any
waste and inefficiency. These companies have gotten to the point where
they're all set up to react."
BMI's outlook is more optimistic than groups like the International
Energy Agency, which said last week that the industry might cut spending in
2017 for a third year in a row as companies continue to grapple with weaker
finances. Oil prices still hover around $50 a barrel, less than half the
level of the summer of 2014.
shallow sand
says:
11/26/2016 at 1:18 pm
From what I am reading, Permian hz wells will be drilled in greater numbers in
2017, regardless of price.
These wells are generally less prolific than those in the Bakken and EFS.
However, the money has been raised and therefore it will spent.
To me, a good question is how much money is being diverted away from longer
term projects that will ultimately produce more oil, to drill these Permian
wells?
The Permain wells have no staying power. Under 50 bopd after 24 months is
the rule, not the exception. Under 200,000 cumulative in 60 months is the rule,
not the exception.
We shall see.
AlexS
says:
11/26/2016 at 4:00 pm
"To me, a good question is how much money is being diverted away from longer
term projects that will ultimately produce more oil, to drill these Permian
wells?"
shallow sand
The companies that are postponing longer term projects are not the same
companies that are planning to increase drilling in LTO plays.
Boomer II
says:
11/26/2016 at 4:12 pm
"The companies that are postponing longer term projects are not the same
companies that are planning to increase drilling in LTO plays."
I
assumed he meant investment money. If investors want to be in gas and
oil, are they picking the companies with best chance of long-term success
(if there is such a thing anymore)?
AlexS
says:
11/26/2016 at 4:53 pm
"I assumed he meant investment money. "
Yes, but international oil
majors and U.S. shale companies generally have different investor
base.
Oil majors are viewed as defensive stocks, slowly growing, but with
strong balance sheets, paying high dividends and buying back shares.
On the contrary, shale companies are viewed as high risk high
reward stocks, with aggressive growth strategies, highly leveraged.
shallow sand
says:
11/26/2016 at 6:46 pm
I meant both.
ExxonMobil, Chevron, ConnocoPhillips, Hess, Marathon and Oxy all
have significant LTO production and all are, or were considered
international upstream producers.
I agree the supermajors are defensive stocks. But there were
many "growth" stock US companies which explored and produced
offshore/internationally or both, prior to the LTO boom.
I may be wrong, we shall see.
AlexS
says:
11/26/2016 at 7:39 pm
Most of large US E&Ps and mid-sized integrateds have divested
their overseas assets during the years of shale boom.
I'm not sure that Exxon and Chevron are planning to increase
their shale exposure in the near term. For Exxon, US upstream
operations were hugely loss-making in 2015-16. And it has
recently made two relatively large discoveries outside US.
shallow sand
says:
11/26/2016 at 11:10 pm
AlexS. Are those XOM international discoveries primarily oil
or gas?
Also, for the international assets you refer to
which US companies divested, do you know whether the buyers
are aggressively developing them? Just a guess, but I suspect
maybe not.
11/30 is a big day, hoping for a cut, hard to say if it
occurs whether it will be adhered to, other than by maybe the
Gulf States.
AlexS
says:
11/27/2016 at 6:33 am
shallow sand,
Both are oil discoveries:
1) Liza discovery offshore Guyana, with potential
recoverable resource of 800 million to 1.4 billion
oil-equivalent barrels
http://news.exxonmobil.com/press-release/exxonmobil-says-second-well-offshore-guyana-confirms-significant-oil-discovery
2) Owowo field offshore Nigeria with a potential
recoverable resource of between 500 million and 1 billion
barrels.
http://news.exxonmobil.com/press-release/exxonmobil-announces-significant-oil-discovery-offshore-nigeria
shallow sand
says:
11/27/2016 at 9:27 am
AlexS. Thank you for the information.
Interesting to
note Nexen is a partner in both ventures, while Hess
and Chevron are in one each.
I agree XOM has sustained significant losses in
North America, but they continue to spend money on new
wells. Had they not spent the money they have in North
America (both shale and tar sands) would the money have
been spent elsewhere. A tough one to know the answer
to.
I recall XOM was going to partner in Russia on
projects and those were halted for political reasons?
Did those projects go ahead without them?
AlexS
says:
11/27/2016 at 6:39 pm
shallow sand,
I'm not saying that Exxon stopped
investing in U.S. upstream. My point is that oil
supermajors, like Exxon, Chevron, BP, Shell and Total are
not diverting investments from deep offshore, LNG and
other long-term projects to U.S. shale. They cut upstream
capex both in U.S. and in overseas projects.
The chart below shows Exxon's E&P capex in
2007-2015 (in US$bn). There was a sharp increase in US
capex (both in absolute in relative terms) following the
XTO deal. In 2015, the company cut spending both in the US
and abroad
Hi,
Here are my updates as usual. GOR declined or stayed flat for all years except 2010 in September.
Is it the beginning of a new trend?
FreddyW says:
11/16/2016 at
3:50 pm
Here is the production graph. Not that much has happened. There was a big drop for 2011. 2009
on the other hand saw an increase. Up to the left, which is very hard to see, 2015 continues to
follow 2014 which follows 2013 which follows 2012. Will we see 2013 reach 2007 the next few months?
Watcher says:
11/16/2016 at
10:34 pm
Freddy, these latest years, the IP months are chopped at the top. Any chance of showing those?
The motivation would be to get a look at the alleged spectacular technology advances in the
past, oh, 2 yrs.
FreddyW says:
11/17/2016 at
2:10 pm
Its on purpose both because I wanted to zoom in and because the data for first 18 months or so
for the method I used above is not very usable. Bellow is the production profile which is better
for seeing differences the first 18 months. Above graph is roughly 6 months ahead of the production
profile graph.
Watcher says:
11/17/2016 at
2:40 pm
Excellent.
And I guess we can all see no technological breakthru. 2014's green line looks superior to
first 3 mos 2015.
2016 looks like it declines to the same level about 2.5 mos later, but is clearly a steeper
decline at that point and is likely going to intersect 2014's line probably within the year.
There is zero evidence on that compilation of any technological breakthrough surging output
per well in the past 2-3 yrs.
In fact, they damn near all overlay within 2 yrs. No way in hell there is any spectacular EUR
improvement.
And . . . in the context of the moment, nope, no evidence of techno breakthrough. But also
no evidence of sweetspots first.
I suppose you could contort conclusions and say . . . Yes, the sweetspots were first - with
inferior technology, and then as they became less sweet the technological breakthroughs brought
output up to look the same.
Too
Much
Coincidence.
It's all bogus.
Watcher says:
11/17/2016 at
8:12 pm
clarifying, the techno breakthrus are bogus. They would show in that data if they were real.
And it would be far too much coincidence for techno breakthrus to just happen to increase flow
the exact amount lost from exhausting sweet spots.
This suggests the sweetspot theory is also bogus, unless there are 9 years of them, meaning
it's ALL been sweetspots so far. 9 yrs of sweetspots might as well be called just normal rather
than sweet.
Mike says:
11/17/2016 at
8:59 pm
It is pretty much all bogus, yes, Watcher. With any rudimentary understanding of volumetric
calculations of OOIP in a dense shale like the Bakken, there is only X BO along the horizontal
lateral that might be "obtained" from stimulation. More sand along a longer lateral does not necessarily
translate into greater frac growth (an increase in the radius around the horizontal lateral).
Novices in frac technology believe in halo effects, or that more sand equates to higher UR of
OOIP per acre foot of exposed reservoir. That is not the case; longer laterals simply expose more
acre feet of shale that can be recovered. Recovery factors in shale per acre foot will never exceed
5-6%, IMO, short of any breakthroughs in EOR technology. That will take much higher oil prices.
Its very simple, actually bigger fracs (that cost lots more money!!) over longer laterals
result in higher IP's and higher ensuing 90 day production results. That generates more cash flow
(imperative at the moment) and allows for higher EUR's that translate into bigger booked reserve
assets. More assets means the shale oil industry can borrow more money against those assets. Its
a game, and a very obvious one at that.
Nobody is breaking new ground or making big strides in greater UR. That's internet dribble.
Freddy is right; everyone in the shale biz is pounding their sweet spots, high grading as they
call it, and higher GOR's are a sure sign of depletion. Moving off those sweet spots into flank
areas will be even less economical (if that is possible) and will result in significantly less
UR per well. That is what is ridiculous about modeling the future based on X wells per month and
trying to determine how much unconventional shale oil can be produced in the US thru 2035. The
term, "past performance is not indicative of future results?" We invented that phrase 120 years
ago in the oil business.
Watcher says:
11/18/2016 at
12:03 am
That, sir, is pretty much the point. I see what looks like about 20% IP increase for the extra
stages post 2008/9/10. How could there not be going from 15 stages to 30+?
I see NO magic post peak. They all descend exactly the same way and by 18-20 months every drill
year is lined up. That's actually astounding - given 15 vs 30 stages. There should be more volume
draining on day 1 and year 2, but the flow is the same at month 20+ for all drill years. This
should kill the profitability on those later wells because 30 stages must cost more.
But profit is not required when you MUST have oil.
Watcher says:
11/18/2016 at
12:14 am
You know, that is absolutely insane.
Freddy, is there something going on in the data? How can 30 stage long laterals flow the same
at production month 24 as the earlier dated wells at their production month 24 whose lengths
of well were MUCH shorter?
FreddyW says:
11/18/2016 at
2:55 pm
I can only speculate why the curves look like they do. It could be that the newer wells would
have produced more than the older wells, but closer well spacing is causing the UR to go down.
FreddyW says:
11/16/2016 at
3:57 pm
Here is the updated yearly decline rate graph. 2010 has seen increased decline rates as I suspected.
The curves are currently gathering in the 15%-20% range.
Dennis Coyne says:
11/16/2016 at
5:33 pm
Hi FreddyW,
What is the annual decline rate of the 2007 wells from month 98 to month 117 and how many wells
in that sample (it may be too low to tell us much)?
FreddyW says:
11/16/2016 at
6:02 pm
2007 only has 161 wells. So it makes the production curve a bit noisy as you can see above. Current
yearly decline rate for 2007 is 7,2% and the average from month 98 to 117 would translate to a
10,3% yearly decline rate. The 2007 curve look quite different from the other curves, so thats
why I did not include it.
Dennis Coyne says:
11/16/2016 at
9:27 pm
Hi Freddy W,
Thanks. The 2008 wells were probably refracked so that curve is messed up. If we ignore 2008,
2007 looks fairly similar to the other curves (if we consider the smoothed slope.) I guess one
way to do it would be to look at the natural log of monthly output vs month for each year and
see where the curve starts to become straight indicating exponential decline. The decline rates
of many of the curves look similar through about month 80 (2007, 2009, 2010, 2011) after 2011
(2012, 2013, 2014) decline rates look steeper, maybe poor well quality or super fracking (more
frack stages and more proppant) has changed the shape of the decline curve. The shape is definitely
different, I am speculating about the possible cause.
FreddyW says:
11/17/2016 at
3:37 pm
2007 had much lower initial production and the long late plateau gives it a low decline rate also.
But yes, initial decline rates look similar to the other curves. If you look at the individual
2007 wells then you can see that some of them have similar increases to production as the 2008
wells had during 2014. I have not investigated this in detail, but it could be that those increases
are fewer and distributed over a longer time span than 2008 and it is what has caused the plateau.
If that is the case, then 2007 may not be different from the others at and we will see increased
decline rates in the future.
Regarding natural log plots. Yes it could be good if you want to find a constant exponential
decline. But we are not there yet as you can see in above graph.
One good reason why decline rates are increasing is because of the GOR increase. When they
pump up the oil so fast that GOR is increasing, then it's expected that there are some production
increases first but higher decline rates later. Perhaps completion techniques have something to
do with it also. Well spacing is getting closer and closer also and is definitely close enough
in some areas to cause reductions in UR. But I would expect lower inital production rather than
higher decline rates from that. But maybe I΄m wrong.
Dennis Coyne says:
11/17/2016 at
8:42 am
Hi FreddyW,
Do you have an estimate of the number of wells completed in North Dakota in September? Does
the 71 wells completed estimate by Helms seem correct?
Dennis Coyne says:
11/17/2016 at
12:40 pm
Hi FreddyW,
Ok Enno's data from NDIC shows 73 well completions in North Dakota in Sept 2016, 33 were confidential
wells, if we assume 98% of those were Bakken/TF wells that would be 72 ND Bakken/TF wells completed
in Sept 2016.
FreddyW says:
11/17/2016 at
2:19 pm
I have 75 in my data, so about the same. They have increased the number of new wells quite alot
the last two months. It looks like the addtional ones mainly comes from the DUC backlog as it
increased withouth the rig count going up. But I see that the rig count has gone up now too.
Pete Mason says:
11/16/2016 at
3:49 pm
Ron you say " Bakken production continues to decline though I expect it to level off soon."
A few words of wisdom as to the main reasons why it would level off? Price rise?
Dennis Coyne says:
11/16/2016 at
5:28 pm
Hi Pete,
Even though you asked Ron. He might think that the decline in the number of new wells per month
may have stabilized at around 71 new wells per month. If that rate of new completions per month
stays the same there will still be decline but the rate of decline will be slower. Scenario below
shows what would happen with 71 new wells per month from Sept 2016 to June 2017 and then a 1 well
per month increase from July 2017 to Dec 2018 (89 new wells per month in Dec 2018).
Guy Minton says:
11/16/2016 at
8:41 pm
I am not so convinced that either Texas or the Bakken is finished declining at the current level
of completions. There was consistent completions of over 1000 wells in Texas until about October
of 2015. Then it dropped to less than half of that. The number of producing wells in Texas peaked
in June of this year. Since then, through October, it has decreased by roughly 1000 wells a month.
The Texas RRC reports are indicating that they are still plugging more than they are completing.
I remember reading one projection recently for what wells will be doing over time in the Eagle
Ford. They ran those projections for a well for over 22 years. Not sure which planet we are talking
about, but in Texas an Eagle Ford does well to survive 6 years. They keep referring to an Eagle
Ford producing half of what they will in the first two years. In most areas, I would say that
it is half in the first year.
The EIA, IEA, Opec, and most pundits have the US shale drilling turning on a dime when the oil
price reaches a certain level. If it was at a hundred now, it would still take about two years
to significantly increase production, if it ever happens. I am not a big believer that US shale
is the new spigot for supply.
Dennis Coyne says:
11/16/2016 at
10:03 pm
Hi Guy,
The wells being shut in are not nearly as important as the number of wells completed because
the output volume is so different. So the average well in the Eagle Ford in its second month of
production produces about 370 b/d, but the average well at 68 months was producing 10 b/d. So
about 37 average wells need to be shut in to offset one average new well completion.
Point is that total well counts are not so important, it is well completions that drive output
higher.
Output is falling because fewer wells are being completed. When oil prices rise and profits
increase, completions per month will increase and slow the decline rate and eventually raise output
if completions are high enough. For the Bakken at an output level of 863 kb/d in Dec 2017 about
79 new wells per month is enough to cause a slight increase in output. My model slightly underestimates
Bakken output, for Sept 2016 my model has output at 890 kb/d, about 30 kb/d lower than actual
output (3% too low), my well profile may be slightly too low, but I expect eventually new well
EUR will start to decrease and my model will start to match actual output better by mid 2017 as
sweet spots run out of room for new wells.
Guy Minton says:
11/17/2016 at
7:14 am
Guess I will remember that for the future. The number of producing wells is not important. Kinda
like I got pooh poohed when I said the production would drop to over 1 million barrels back in
early 2015.
Dennis Coyne says:
11/17/2016 at
10:39 am
Hi Guy,
Do you agree that the shut in wells tend to be low output wells? So if I shut down 37 of those
but complete one well the net change in output is zero.
Likewise if I complete 1000 wells in a year, I could shut down 20,000 stripper wells and the
net change in output would be zero, but there would be 19,000 fewer producing wells, if we assume
the average output of the 1000 new wells completed was 200 b/d for the year and the stripper wells
produced 10 b/d on average.
How much do you expect output to fall in the US by Dec 2017?
Hindsight is 20/20 and lots of people can make lucky guesses. Output did indeed fall by about
1 million barrels per day from April 2015 to July 2016, can you point me to your comment where
you predicted this?
Tell us what it will be in August 2017.
I expected the fall in supply would lead to higher prices, I did not expect World output to
be as resilient as it has been and I also did not realize how oversupplied the market was in April
2015. In Jan 2015 I expected output would decrease and it increased by 250 kb/d from Jan to April,
so I was too pessimistic, from Jan 2015 (which is early 2015) to August 2016 US output has decreased
by 635 kb/d.
If you were suggesting World output would fall from Jan 2015 levels by 1 Mb/d, you would also
have been incorrect as World C+C output has increased from Feb 2015 to July 2016 by 400 kb/d.
If we consider 12 month average output of World C+C, the decline has been 340 kb/d from the 12
month average peak in August 2015 (centered 12 month average).
Guy Minton says:
11/18/2016 at
4:50 am
The dropping numbers are not as much from the wells that produce less than 10 barrels a day, but
from those producing greater than 10, but less than 100. The ones producing greater than 100 are
remaining at a consistent level over 9000 to 9500. The prediction on one million was as to the
US shale only. It is your site, you can search it better than I can,
Guy Minton says:
11/18/2016 at
6:20 am
But then don't take my word for it. You can find the same information under the Texas RRC site
under oil and gas/research and statistics/well distribution tables. Current production for Sep
can be found at online research queries/statewide. It is still dropping, and will long term at
the current activity level. Production drop for oil, only, is a little over 40k per day barrels,
and condensate is lower for September. Proofs in the pudding.
My guess is that you would see a lot more plugging reports, if it were not so expensive to plug
a well. At net income levels where they are, I expect they would put that off as long as they
could.
AlexS says:
11/16/2016 at
8:51 pm
Statistics for North Dakota and the Bakken oil production are perfect, but not for well completions.
From the Director's Cut:
"The number of well completions rose from 63(final) in August to 71(preliminary) in September"
(North Dakota total)
From the EIA DPR:
The number of well completions declined from 71 in August to 52 in September and rose to 58
in October
(Bakken North Dakota and Montana).
Wells drilled, completed, and DUCs in the Bakken.
Source: EIA DPR, November 2016
Dennis Coyne says:
11/16/2016 at
9:36 pm
Hi Alex S,
I trust the NDIC numbers much more than the EIA numbers which are based on a model. Enno Peters
data has 66 completions in August 2016, he has not put up his post for the Sept data yet so I
am using the Director's estimate for now. I agree his estimate is usually off a bit, Enno tends
to be spot on for the Bakken data, for Texas he relies on RRC data which is not very good.
shallow sand says:
11/17/2016 at
8:36 am
Dennis. Someone pointed out Whiting's Twin Valley field wells being shut in for August.
It appears this was because another 13 wells in the field were recently completed.
It appears that when all 29 wells are returned to full production, this field will be very
prolific initially. Therefore, on this one field alone, we could see some impact for the entire
state.
Does anyone know if these wells are part of Whiting's JV? Telling if they had to do that on
these strong wells. Bakken just not close to economic.
I also note that average production days per well in for EOG in Parshall was 24. I haven't
looked at some of the other "older" large fields yet, but assume the numbers are similar.
shallow sand says:
11/17/2016 at
8:58 am
Also, over 3000 Hz wells in ND produced less than 1000 BO in 9/16.
This is just for wells with first production 1/1/07 or later.
Dennis Coyne says:
11/17/2016 at
10:57 am
Hi Shallow sand,
I agree higher prices will be needed in the Bakken, probably $75/b or more. To be honest I
don't know why they continue to complete wells, but maybe it is a matter of ignoring the sunk
costs in wells drilled but not completed and running the numbers based on whether they can pay
back the completion costs. Everyone may be hoping the other guys fail and are just trying to pay
the bills as best they can, not sure if just stopping altogether is the best strategy.
There is the old adage that when your in a hole, more digging doesn't help much.
So my model just assumes continued completions at the August rate for about 12 months with
gradually rising prices as the market starts to balance, then a gradual increase in completions
as prices continue to rise from July 2017($78/b) to Dec 2018 (from 72 completions to about 90
completions per month 18 months later). At that point oil prices have risen to $97/b and LTO companies
are making money. Prices continue to rise to $130/b by Oct 2020 and then remain at that level
for 40 years (not likely, but the model is simplistic).
I could easily do a model with no wells completed, but I doubt that will be correct. Suggestions?
shallow sand says:
11/18/2016 at
8:20 am
Dennis. As we have discussed before, tough to model when there is no way to be accurate regarding
the oil price.
I continue to contend that there will be no quick price recovery without an OPEC cut. Further,
the US dollar is very important too, as are interest rates.
Dennis Coyne says:
11/18/2016 at
10:03 am
Hi Shallow sand,
At some point OPEC may not be able to increase output much more and overall World supply will
increase less than demand. My guess is that this will occur by mid 2017 and oil prices will rise.
OPEC output from Libya an Nigeria has recovered, but this can only go so far, maybe another 1
Mb/d at most. I don't expect any big increases from other OPEC nations in the near term.
A big guess as to oil prices has to be made to do a model.
I believe my guess is conservative, but maybe oil prices will remain where they are now beyond
mid 2017.
I expected World supply to have fallen much more quickly than has been the case at oil prices
of $50/b.
George Kaplan says:
11/17/2016 at
3:31 am
Probably to do with how confidential wells are included.
AlexS says:
11/17/2016 at
4:42 am
RBN explains EIA methodology:
"EIA does this by using a relatively new dataset-FracFocus.org's national fracking chemical
registry-to identify the completion phase, marked by the first fracking. If a well shows up on
the registry, it's considered completed "
Sydney Mike says:
11/17/2016 at
2:19 am
There is an unlikely peak oil related editorial writer hiding in the most unlikely place: a weekly
English business paper called Capital Ethiopia. The latest editorial is again putting an excellent
perspective on world events.
http://capitalethiopia.com/2016/11/15/system-failure/#.WC1ZCvl9600
For the record, I have no interest or connection to this publication other than that of a paying
reader.
Wouldn't it be nice if mainstream publications would sound a bit more like this.
Watcher says:
11/17/2016 at
11:34 am
the word oil does not appear anywhere on that.
Pete Mason says:
11/17/2016 at
4:56 am
Thanks all. I thought that the red queen concept meant that there had to be an increase in the
rate of completions. So that 71 year-on-year in north Dakota would only stabilise temporarily.
Perhaps the loss of sweet spots are being counteracted by the improvements in technology? I'm
assuming that even with difficulties of financing there will be a swift increase in completions
should the oil price take off, but not sure how sustainable this would be
Oldfarmermac says:
11/17/2016 at
6:03 am
Hi Pete,
Sometimes I think that once the price of oil is up enough that sellers can hedge the their
selling price for two or three years at a profitable level, it will hardly matter what the banks
have to say about financing new wells.
At five to ten million apiece, there will probably be plenty of money coming out of various
deep pockets to get the well drilling ball rolling again, if the profits look good.
Sometimes the folks who think the industry will not be able to raise money forget that it's
not a scratch job anymore. The land surveys, roads, a good bit of pipeline, housing, leases, etc
are already in place, meaning all it takes to get the oil started now is a drill and frack rig.
I don't know what the price will have to be, but considering that a lot of lease and other
money is a sunk cost that can't be recovered, and will have to be written off, along with the
mountain of debts accumulated so far, the price might be lower than a lot of people estimate.
Bankruptcy of old owners results in lowering the price at which an old business makes money
for its new owners.
Dennis Coyne says:
11/17/2016 at
8:32 am
Hi Pete,
The Red Queen effect is that more and more wells need to be completed to increase output.
As output decreases fewer wells are needed to maintain output. So at 1000 kb/d output it might
require 120 wells to be completed to maintain output (if new well EUR did not eventually decrease),
but at 850 kb/d it might require about 78 new wells per month to maintain output.
Heinrich Leopold says:
11/17/2016 at
8:11 am
The FED oil production number for October came out yesterday. In below chart the production decline
(blue line) is the same as in the previous month, yet the trend is still a massive decline year
over year. In my view year over year comparison can show the dynamic of a trend. And it shows
clearly that in the current cycle the oil price recovery is in contrast to the cycle in 2008/9
very slow and tentative.
The year over year oil price (green line in below chart) actually decreased again year over
year and the risk of a double dip in the oil price is growing by the day. Drilling follows very
cautiously the oil price in a parallel line (red line in below chart). If there would be really
a technological advantage for shale, the red and the green line would not be paralell, but the
red line for drilling would rise much stronger. This is actually the case for Middle East drilling,
which barely fell during this cycle. This indicates that most Middle East producers still have
high margins at the current oil price. Middle East producers and also Russia can quite easily
cope with an oil price of 40 +/- 10 USD per barrel. This is why I think that the oil price will
bounce at the bottom of the barrel within above range for a few years.
There is also something interesting going on with the world economy. The shippers rose exponentionally
over the last few days (DRYS up over 1000%). Also the baltic Dry index is up 600% since the beginning
of this year. House prices here in London fell mostly at the high end. Rents for expensives
homes are down by up to 36%. Donald Trump has clearly changed something already as it becomes
increasingly clear that the dollar hoarders are paying for the infrastructure spending. I am not
sure if he understands that he is doing a lot of harm to his own business empire as well.
Wake says:
11/17/2016 at
3:30 pm
I expect if that depressing old banker were here he would note that instability is dangerous,
and that all the moves in treasuries currency and possibly trade flow create changes of which
the results are difficult or impossible to predict
Oldfarmermac says:
11/18/2016 at
7:55 am
Hi Heinrich,
I can easily understand your assertion that Middle Eastern and Russian oil is profitable at
forty bucks.
But if the price is to stay around forty, then it follows that you think that between them,
the producers in the Middle East and Russia will be able to supply all the oil the world wants
for the next few years.
Am I correct in saying this?
Do you think western producers will continue to pump enough at a loss ( most of them are apparently
losing money at forty bucks ) to make up the difference?
If you are willing to venture a guess, when do you think the price will get back into the sixty
dollar and up range?
If you think it won't for a lot of years, is that because you believe the economy is will be
that anemic, or because electric cars will substantially reduce demand, or both ? Or maybe you
have other reasons ?
Heinrich Leopold says:
11/18/2016 at
9:49 am
oldfarmermac,
The US has thrown the gauntlet to OPEC by claiming to becoming an oil net exporter. This has
brought OPEC in a very difficult situation. If they cut and oil gets to 70 USD per barrel
shale will pick up the slack and produce the amount OPEC has cut within a short period of time.
So, OPEC is forced to cut again, until it has lost a lot of market share and thus also a lot
of revenue.
In my view OPEC has no other choice than to produce come hell and water until something breaks.
This could be that many shale companies give up or that for instance Iran is not allowed to export
as much as they do, or there is a major conflict in the Middle East, or Saudi Arabia is running
out of cash ..
He who has the market share now, will cash in when the oil price rises. And it will rise, yet
not until something breaks. This is how business works. This is how Microsoft crushed Apple in
the nineties in the PC market and Apple then crushed Nokia in the smart phone market .
I do not think that Saudi Arabia has the freedom to compromise here even if they want. If
they blink they will be crushed by shale producers. So, the stand-off will go on for a while,
at a loose-loose situation for both parties. However this is great luck for consumers as they
can enjoy low energy prices for 2 to 3 years.
Enno Peters says:
11/17/2016 at
11:48 am
I've also a new post on ND,
here .
George Kaplan says:
11/18/2016 at
8:28 am
Do you know why you show a significantly higher number of DUCs than Bloomberg do as reported
here?
http://www.oilandgas360.com/ducs-havent-flown-fast-since-april/
I think your numbers reflect numbers reported from ND DMR but Bloomberg might be closer to
reality for wells that will actually ever be completed (just a guess by me though). How do Bloomberg
get their numbers (e.g. removing Tight Holes, or removing old wells, not counting non-completed
waivers etc.)?
Enno says:
11/18/2016 at
10:56 am
George,
Yes indeed. The difficulty with DUCs is always, which wells do you count. I don't filter old
wells for example, and already include those that were spud last month (even though maybe casing
has not been set). I don't do a lot of filtering, so the actual # wells that really can be completed
is likely quite a bit lower. I see my DUC numbers as the upper bound. I don't know Bloombergs
method exactly, so I can't comment on that.
Oldfarmermac says:
11/18/2016 at
7:57 am
Discussion of Venezuelan politics should be in the open thread, but politics are going to determine
how much oil is produced there for the next few years, and the situation looks iffy indeed.
https://www.theguardian.com/commentisfree/2016/nov/17/venezuela-nicolas-maduro-dictatorship-elections-jeremy-corbyn
Watcher says:
11/18/2016 at
2:09 pm
Concerning Freddy's chart of production profile of wells drilled in various years.
They all line up by about month 18 of production. This should not be possible. The later wells
have many more stages of frack. They are longer, draining more volume of rock. But the chart says
what it says. At month about 18 the 2014 wells are flowing the same rate as 2008 wells. We know
stage count has risen over those 6 yrs. 2014 wells should flow a higher rate. The shape of the
curve can be the same, but it should be offset higher.
Explanation?
How about above ground issues . . . older wells get pipelines and can flow more oil . . . nah,
that's absurd.
There needs to be a physical explanation for this.
AlexS says:
11/18/2016 at
4:36 pm
These new wells have higher IPs, but also higher decline rates.
Closer spacing (see Freddy's comment above) and depletion of the sweet spots may also impact production
curves and EURs.
Watcher says:
11/18/2016 at
6:02 pm
That doesn't make sense. They are longer. By a factor of 2ish. How can a 6000 foot lateral flow
exactly the same amount 2 yrs into production as a 3000 foot lateral flows 2 yrs into production?
Look at the lines. At 18 months AND BEYOND, these longer laterals flow the same oil rate as
the shorter laterals did at the same month number of production. Higher IP and higher decline
rate will affect the shape, but There Is Twice The Length..
Dennis Coyne says:
11/18/2016 at
8:15 pm
Hi Watcher,
I don't think we have information on the length of the wells, since 2008 the length of the
lateral has not changed, just the number of frack stages and amount of proppant. This seems to
primarily affect the output in the first 12 to 18 months, and well spacing and room in the sweet
spots no doubt has some effect (offsetting the greater number of frack stages etc.).
Listen to Mike, he knows this stuff.
Watcher says:
11/18/2016 at
8:31 pm
From
http://www.dtcenergygroup.com/bakken-5-year-drilling-completion-trends/
STATISTICS
The combination of longer lateral lengths and advancements in completion technology has allowed
operators to increase the number of frac stages during completions and space them closer together.
The result has been a higher completion cost per well but with increased production and more emphasis
on profitability.
In the past five years, DTC Energy Group completion supervisors in the Bakken have helped oversee
a dramatic increase from an average of 10 stages in 2008 to 32 stages in 2013. Even 40-stage fracs
have been achieved.
One of the main reasons for this is the longer lateral lengths operators now have twice as
much space to work with (10,000 versus 5,000 feet along the lateral). Frac stages are also being
spaced closer together, roughly 300 feet apart as compared to spacing up to 800 feet in 2008,
as experienced by DTC supervisors.
By placing more fracture stages closer together, over a longer lateral length, operators have
successfully been able to improve initial production (IP) rates, as well as increase EURs over
the life of the well.
blah blah, but they make clear the years have increased length. Freddy was talking about well
spacing, this text is about stage spacing, but that is achieved because of lateral length.
Freddy can you revisit your graph code? It's just bizarre that different length wells have
the same flow rate 2 yrs out, and later.
FreddyW says:
11/19/2016 at
7:22 am
Take a look at Enno΄s graphs at https://shaleprofile.com/
. They look the same as my graphs and we have collected and processed the data independently
from each other.
George Kaplan says:
11/19/2016 at
1:39 am
If the wells have the same wellbore riser design irrespective of lateral length (i.e. same depth,
which is a given, same bore, same downhole pump) then that section might become the main bottleneck
later in life and not the reservoir rock. With a long fat tail that seems more likely somehow
compared to the faster falling Eagle Ford wells say (but that is just a guess really). But there
may be lots of other nuances, we just don't have enough data in enough detail especially on the
late life performance for all different well designs it looks like the early ones are just reaching
shut off stage in numbers now. I doubt if the E&Ps concentrated on later life when the wells were
planned they wanted early production, and still do, to pay their creditors and company officers
bonuses (not necessarily in that order).
Watcher says:
11/19/2016 at
3:31 am
Hmmm. I know it is speculation, but can you flesh that out?
If some bottleneck physically exists that defines a flow rate for all wells from all years
then that does indeed explain the graphs, but what such thing could exist that has a new number
each year past year 2?
We certainly have discussed chokes for reservoir/EUR management, but the same setting to define
flow regardless of length?
Hmmm.
George Kaplan says:
11/19/2016 at
4:01 am
The flow depends on the available pressure drop, which is made up of friction through the rock
and up the well bore (plus maybe some through the choke but not much), plus the head of the well,
plus a negative number if there is a pump. The frictional and pump numbers depend on the flow
and all the numbers depend on gas-oil ratio. Initially there is a big pressure drop in the rock
because of the high flow, then not so much. Once the flow drops the pressure at base of the well
bore just falls as a result of depletion over time, the effect of the completion design is a lot
less and lost in the noise, so all the wells behave similarly. That's just a guess I have never
seen a shale well and never run a well with 10 bpd production, conventional or anything else.
A question might be if the flow is the same why doesn't the longer well with the bigger volume
deplete more slowly, and I don't know the answer. It may be too small to notice and lost in the
noise, or to do with gas breakout dominating the pressure balance, or just the way the the physics
plays out as the fluids permeate through the rock, or we don't have long enough history to see
the differences yet.
clueless says:
11/18/2016 at
2:30 pm
Permian rig count now greater than same time last year.
Watcher says:
11/18/2016 at
3:27 pm
http://www.fool.ca/2016/11/16/buffett-sells-suncor-energy-inc-what-does-this-mean-for-the-canadian-oil-patch/
AlexS says:
11/18/2016 at
4:55 pm
Suncor's forecast for production [in 2017] is 680,000-720,000 boe/d. A midpoint would represent
a 13% increase over 2016.
http://www.ogj.com/articles/2016/11/suncor-provides-capital-spending-production-outlook-for-2017.html
Solid growth
R Walter says:
11/18/2016 at
5:47 pm
The only oil investment that has any feck is turmoil.
Or, Term Oil Corporation.
Also known as Peak Oil.
http://www.bnsf.com/about-bnsf/financial-information/weekly-carload-reports/
The number of rail cars hauling petroleum is a constant in the range of 7,200 to 7,400 petroleum
cars hauled each week for a good six months now.
Seems as though petroleum by rail is more of a necessity than a choice.
The volume is down a good thirty percent since about 2013 when over 10,000 cars were hauled
per week.
Demand decreases, contracts expire, better modes of transport emerge and cost less. not as
much call for Bakken oil. Plenty of the stuff somewhere else in this world.
The trend is down, not up for petroleum hauled by rail.
If there were orders for Bakken oil for one million bpd, the production would be one million
bpd.
Bakken oil lost marketshare due to price drop.
Buyers can buy oil from anywhere.
GoneFishing says:
11/18/2016 at
6:34 pm
More Bakken petroleum is being moved by pipeline.
Over the whole rail system, petroleum and petroleum product rail car loadings were down to
10.5 thousand in September. That compares to a high point of 16.3 thousand railcars in Sept of
2014.
Coal car loadings are on the rise, from a low of 61,000 in April to 86,000 in Sept. Coal was
running a near steady 105,00 to 110,000 railcars every month in 2013 and 2014.
AlexS says:
11/18/2016 at
6:57 pm
The chart below from RBN shows that Bakken pipeline capacity did not increase since early 2015.
But production dropped, and this primarily affected volumes of Bakken oil transported by rail.
Given the higher percentage of oil transported by pipelines, the average transporation cost
for Bakken crude should have decreased. Interesting, however, that the price differential between
the well-head Bakken sweet crude and WTI has remained within the $10-12/bbl range.
Bakken Crude Production and Takeaway Capacity
Source: RBN
AlexS says:
11/18/2016 at
7:06 pm
This article from Platts explains better than me:
Analysis: Bakken discounts deepen as competition heats up
Houston (Platts)16 Nov 2016
http://www.platts.com/latest-news/oil/houston/analysis-bakken-discounts-deepen-as-competition-27711340
Bakken Blend differentials at terminals close to North Dakota wellheads held their lowest assessment
since December Tuesday, closing at the calendar-month average of the NYMEX light sweet crude oil
contract (WTI CMA) minus $6.25/b.
While one factor dragging on Bakken differentials has clearly been a tight Brent/WTI spread -
trading around 42 cents/b Tuesday, well in from the steady $2/b seen this summer - the return
of Louisiana Light Sweet to the Midwest market may also be having an impact, according to traders.
One trader said there was an increase in volumes heading up the Capline pipeline, however, differentials
suggest LLS is still too expensive, at least compared to Bakken. Platts assessed LLS at WTI plus
$1.15/b Tuesday.
Considered by some to be the "champagne of crudes," it is unclear what appeal LLS still has for
a Midwest refiner as margins for LLS actually - and unusually - lag those for Bakken.
S&P Global Platts data shows LLS cracking margins in the Midwest closed at $3.30/b Monday, compared
to Bakken cracking margins of $6.37/b. In fact, the advantage of cracking Bakken has grown steadily
since August.
Platts margin data reflects the difference between a crude's netback and its spot price.
Netbacks are based on crude yields, which are calculated by applying Platts product price assessments
to yield formulas designed by Turner, Mason & Co.
What is clear however, is that the steeper discounts available for Bakken provide the biggest
incentive for a Midwest refiner.
The cost of getting Bakken to this market is around $3.48/b, according to Platts netback calculations,
compared to just $1.02/b for LLS.
These costs make up a significant portion of the Bakken discount.
Further, LLS moving up the Capline after many years of relative inactivity does not necessarily
suggest a new trend is in the making. However, recent pipeline reversals between Texas and Louisiana
mean more Permian crudes are capable of reaching Louisiana refineries, and thus, if priced accordingly,
could displace incremental volumes of LLS from its home market.
With current pipeline capacity out of North Dakota typically full, the marginal Bakken barrel
often gets to market via rail, and this cost has traditionally sets the floor to Bakken's discount
to WTI. And part of the recent downturn in Bakken could be chalked up to an increase in railed
volumes to the US Atlantic Coast, as Bakken cracking margins there are again in the black.
In fact, Association of American Railroad's latest monthly and weekly data shows crude and refined
product rail movements appear to have bottomed, having grown in September from August.
Weekly data bears this out as well, showing increases in three of the last four weeks.
It remains to be seen how long this will last, however, should Energy Transfer Partners Dakota
Access Pipeline go ahead as planned.
Linefill for the pipeline could boost Bakken differentials, potentially making the grade too expensive
to rail east. However, the devil is in the details.
Traders and analysts have pegged Dakota Access pipeline tariffs between $4.50-$5.50/b for uncommitted
shippers between North Dakota and Patoka, Illinois. A further $6.50/b would be needed to bring
the crude south from Patoka to Nederland, Texas, sources have said.
If this $11-$12/b combined pipeline estimated cost were to pan out, it would be more expensive
than the $10.20/b Platts assumes in its Bakken USAC rail-based netback calculation.
AlexS says:
11/18/2016 at
8:59 pm
U.S.oil rig count was up 19 units last week, the largest weekly gain in 16 months.
Gas rig count is up 1 unit.
Permian basin: + 11 oil rigs
Bakken: -1
Eagle Ford: -1
Niobrara: +2
Cana Woodford: unchanged
Other shale plays: +2
Conventional basins: +6
Oil rig count in the Permian is up 73.5% from this year's low the biggest increase among
all US basins.
It is still only 41% of October 2014 peak, but this is much better than the Bakken and especially
the Eagle Ford where drilling activity remains depressed.
AlexS says:
11/18/2016 at
9:30 pm
The number of horizontal rigs drilling for oil in the Permian is now 54% of the 2014 peak.
Oil rig count in the Permian basin
source: Baker Hughes
AlexS says:
11/18/2016 at
9:42 pm
Weak drilling activity in the Bakken and the Eagle Ford helps to explain continued declines in
their oil production
Oil rig count in 4 other tight oil plays
Roger Blanchard says:
11/19/2016 at
8:17 am
Alex,
As of September 2016, 4 counties produced 90.1% of all the Bakken/Three Forks oil production
in North Dakota: McKenzie, Mountrail, Williams and Dunn. Relative to December 2014, North Dakota
Bakken/Three Forks oil production is off 243,098 b/d relative to December 2014 while the number
of producing wells is up 1861 based upon data from the state.
Based upon state data, the number of producing wells/square mile is 1.29 in Mountrail County,
1.22 in McKenzie County, 1.02 in Willams County, and 0.86 in Dunn County. How high can the number
of producing wells/square mile go?
Is there something more than reduced drilling to explain the drop in production?
George Kaplan says:
11/19/2016 at
8:35 am
This shows well density and production from last September. The distance is concentric from a
"production centre of gravity" i.e. weighted average by production for all wells. The core area
("sweet spot") is a circle of about 50 to 60 kms only (it's squashed out a bit to the west and
missing a bite in the SW). Maximum well density (and with the best wells is 120 to 160 acres,
and falls off quickly outside the core. The core is getting saturated.
AlexS says:
11/18/2016 at
9:53 pm
From a recent EIA report:
"U.S. drilling activity is increasingly concentrated in the Permian Basin . The Permian now
holds nearly as many active oil rigs as the rest of the United States combined, including both
onshore and offshore rigs, and it is the only region in EIA's Drilling Productivity Report where
crude oil production is expected to increase for the third consecutive month."
AlexS says:
11/18/2016 at
9:58 pm
The EIA DPR production volume estimates for the Permian include both LTO and conventional C+C
AlexS says:
11/18/2016 at
10:06 pm
Permian Basin also dominates M&A activity in the US E&P sector.
From the same EIA report:
"Several of the larger M&A deals involved Permian Basin assets, where drilling and production
is beginning to increase.
Based on data through November 10, the second half of 2016 already has more M&A spending than
the first half of 2016, but on fewer deals. The 93 M&A announcements in the third quarter of 2016
totaled $16.6 billion, for an average of $179 million per deal, the largest per deal average since
the third quarter of 2014. Although only 11 of the 49 deals so far in the fourth quarter of 2016
are in the Permian Basin, they accounted for more than half of total deal value."
http://www.eia.gov/todayinenergy/detail.php?id=28772
Heinrich Leopold says:
11/19/2016 at
6:09 am
RRC Texas for September came out recently. As others will probably elaborate more on the data,
I just want to show if year over year changes in production could be use as a predictive tool
for future production (see below chart).
It is obvious that year over year changes (green line) beautifully predicted oil production
(red line) at a time lag of about 15 month. Even when production was still growing, the steep
decline of growth rate indicated already the current steep decline.
The interesting thing is that the year over year change is a summary indicator. It does not
tell why production declines or rises. It can be the oil price, interest rates or just depletion
even seasonal factors are eliminated. It just shows the strength of a trend.
I am curious myself how this works out. The yoy% indicator predicts that Texas will have lost
another million bbl per day by end next year. That sounds quite like a big plunge. One explanation
could be the fact that we have now low oil prices and high interest rates. In all other cycles
it has been the other way around: low oil prices came hand in hand with low interest rates. This
could be now a major obstacle for companies to grow production.
This concept of following year over year changes works of course just for big trends, yet for
investment timing it seems exactly the right tool. Another huge wave is coming in electric vehicles
which are growing in China by 120% year over year. Here we have the same situation as for shale
7 years ago: Although current EV sales are barely 1 million per year worldwide, the growth rate
reveals already an huge wave coming. So as an investor it is always necessary to stay ahead of
the trend and I think this can be done by observing the year over year% change.
JG 11/16/2016 at
3:49 pm
I am a petroleum Geologist drilling wells in the Wolfcamp, the USGS report means nothing. They
periodically review basins to assess how much petroleum is there, we have been drilling Horizontal
wells in the Wolfcamp for almost a decade, and vertical wells for many decades. Right now there
are as many rigs running drilling this rock formation as there are in the rest of the country
combined, so it is already baked in to the US production data. This is not like a Saudi Arabia
field with a low drill and complete and development cost, it will take many billions of drilling
capital to get a small percentage of the oil in place. The big deal is that the area is fairly
resilient to low oil prices and will cushion the drop in US production due to lack of investment
in other basins.
Mike says:
11/17/2016 at
8:28 am
Thank you, JG -- Straight from the horses mouth, respectfully. The USGS lost all credibility with
me as to estimating TRR in the Monterrey Shale in California. It baffles me, after five years
of publically discussing unconventional shale oil resources, that modelers, internet analysts
and predictors completely ignore economics, debt and finances. Extracting oil is a business; it
must make money to succeed. If it does not succeed, all bets are off regarding predictions.
Dennis Coyne says:
11/17/2016 at
8:49 am
Hi Mike,
The Monterrey shale estimate was by the EIA not the USGS. The EIA had a private consultant
do the analysis and it was mostly based on investor presentations, very little geological analysis.
It would be better if the USGS did an economic analysis as they do with coal for the Powder
River Basin. They could develop a supply curve based on current costs, but they don't.
Do you have any idea of the capital cost of the wells (ballpark guess) for a horizontal multifracked
well in the Wolfcamp? Would $7 million be about right (a WAG by me)?
On ignoring economics, I show my oil price assumptions. Other financial assumptions for the
Bakken are $8 million for capital cost of the well (2016$). OPEX=$9/b, other costs=$5/b, royalty
and taxes=29% of gross revenue, $10/b transport cost, and a real discount rate of 7% (10% nominal
discount rate assuming 3% inflation).
I do a DCF based on my assumed real oil price curve. Brent oil price rises to $77/b (2016$)
by June 2017 and continue to rise at 17% per year until Oct 2020 when the oil price reaches $130/b,
it is assumed that average oil prices remain at that level until Dec 2060. The last well is drilled
in Dec 2035 and stops producing 25 years later in Dec 2060.
EUR of wells today is assumed to be 321 kb and EUR falls to 160 kb by 2035. The last well drilled
only makes $243,000 over the 7% real rate of return, so the 9 Gb scenario is probably too optimistic,
it is assumed that any gas sales are used to offset OPEX and other costs, though no natural gas
price assumptions have been made to simplify the analysis.
This analysis is based on the analyses that Rune Likvern has done in the past, though his analyses
are far superior to my own.
shallow sand says:
11/17/2016 at
9:00 am
I think when seismic, land, surface and down hole equipment is included, the number is much higher.
With $20-60K per acre being paid, land definitely has to be factored in. Depending on spacing,
$1-5 million per well?
Dennis Coyne says:
11/17/2016 at
10:07 am
Hi Shallow sand,
I am doing the analysis for the Bakken. A lot of the leases are already held and I don't know
that those were the prices paid. Give me a number for total capital cost that makes sense, are
you suggesting $10.5 million per well, rather than $8 million? Not hard to do, but all the different
assumptions you would like to change would be good so I don't redo it 5 times.
Mostly I would like to clear up "the number".
I threw out more than one number, OPEX, other costs, transport costs, royalties and taxes,
real discount rate (adjusted for inflation), well cost.
I think you a re talking about well cost as "the number". I include down hole costs as part
of OPEX (think of it as OPEX plus maintenance maybe).
shallow sand says:
11/17/2016 at
11:19 am
Dennis. The very high acreage numbers are for recent sales in the Permian Basin.
In reading company reports, it seems they state a cost to drill and case the hole, another
to complete the well, then add the two for well cost. This does not include costs incurred prior to the well being drilled, which are not insignificant.
Nor does it include costs of down hole and surface equipment, which also are not insignificant.
Land costs are all over the map, and I think Bakken land costs overall are the lowest, because
much of the leasing occurred prior to US shale production boom. I think a lot of acreage early
on cost in the hundreds per acre. Of course, there was quite a bit of trading around since, so
we have to look project by project, unfortunately. For purposes of a model, I think $8 million
is probably in the ballpark.
I would not include equipment for the well, initially, as OPEX (LOE is what I prefer to stick
with, being US based). The companies do not do that, those costs are included in depreciation,
depletion and amortization expense.
Once the well is in production, and failures occur, I include the cost of repairs, including
replacement equipment, in LOE. I am not sure that the companies do that, however.
I think the Permian is going to be much tougher to estimate, as there are different producing
formations at different depths, whereas the Bakken primarily has two, and the Eagle Ford has 1
or 2.
An example:
QEP paid roughly $60,000 per acre for land in Martin Co., TX. If we assume one drilling unit
is 1280 acres (two sections), how many two mile laterals will be drilled in the unit?
1280 acres x $60,000 = $76,800,000.
Assume 440′ spacing, 12 wells per unit.
$76,800,000/12 = $6,400,000 per well.
However, there are claims of up to 8 producing zones in the Permian.
So, 12 x 8 = 96 wells.
$76,800,000 / 96 = $800,000 per well.
Even assuming 96 wells, the cost per well is still significant.
If we assume 96 wells x $7 million to drill, complete and equip, total cost to develop is $.75
BILLION. That is a lot of money for one 1280 acre unit, need to recover a lot of oil and gas to
get that to payout.
Dennis Coyne says:
11/17/2016 at
1:22 pm
Hi Shallow sands,
I am neither an oil man nor an accountant, so regardless of what we call it I am assuming natural
gas sales (maybe about $3/barrel on average) are used to offset the ongoing costs to operate the
well (LOE, OPEX, financial costs, etc), we could add another million to the cost of the well for
surface and downhole equipment and land costs. Does an average operating cost over the life of
a well of about $17/b ($14/b plus natural gas sales of $3/b of oil produced)seem reasonable?
That
would be about $5.4 million spent on LOE etc. over the life of the well (assuming 320 kbo produced).
Also does the 10% nominal rate of return sound high enough, what number would you use as a cutoff?
You use a different method than a DCF and want the well to pay out in 60 months. This would correspond
to about a 14% nominal rate of return and an 11% real rate of return (assuming a 3% annual inflation
rate.)
AlexS says:
11/17/2016 at
9:05 am
"The Monterrey shale estimate was by the EIA not the USGS. The EIA had a private consultant do
the analysis and it was mostly based on investor presentations, very little geological analysis."
Exactly.
USGS' estimate as of October 2015 is very conservative:
"The Monterey Formation in the deepest parts of California's San Joaquin Basin contains an
estimated mean volumes of 21 million barrels of oil, 27 billion cubic feet of gas, and 1 million
barrels of natural gas liquids, according to the first USGS assessment of continuous (unconventional),
technically recoverable resources in the Monterey Formation."
"The volume estimated in the new study is small, compared to previous USGS estimates of conventionally
trapped recoverable oil in the Monterey Formation in the San Joaquin Basin. Those earlier estimates
were for oil that could come either from producing more Monterey oil from existing fields, or
from discovering new conventional resources in the Monterey Formation."
Previous USGS estimates were for conventional oil:
"In 2003, USGS conducted an assessment of conventional oil and gas in the San Joaquin Basin,
estimating a mean of 121 million barrels of oil recoverable from the Monterey. In addition, in
2012, USGS assessed the potential volume of oil that could be added to reserves in the San Joaquin
Basin from increasing recovery in existing fields. The results of that study suggested that a
mean of about 3 billion barrels of oil might eventually be added to reserves from Monterey reservoirs
in conventional traps, mostly from a type of rock in the Monterey called diatomite, which has
recently been producing over 20 million barrels of oil per year."
https://www.usgs.gov/news/usgs-estimates-21-million-barrels-oil-and-27-billion-cubic-feet-gas-monterey-formation-san
Mike says:
11/17/2016 at
1:24 pm
I am corrected, RE; USGS and Monterrey. I still don't believe there is 20G BO in the Wolfcamp.
Most increases in PB DUC's are not wells awaiting frac's but lower Wolfcamp wells that are TA
and awaiting re-drills; that should tell you something. With acreage, infrastructure and water
costs in W. Texas, wells cost $8.5-9.0M each. The shale industry won't admit that, but that's
what I think. What happens to EUR's and oil prices after April of 2017 is a guess and a waste
of time, sorry.
Dennis Coyne says:
11/17/2016 at
8:54 am
Hi JG,
What is the average cost of drilling and completion (including fracking) for a horizontal Wolfcamp
well?
Does the F95 estimate of 11 Gb seem reasonable if oil prices go up to over $80/b (2016 $) and
remain above that level on average from 2018 to 2025?
Boomer II says:
11/17/2016 at
3:25 pm
What most interests me are suggestions that there is so much available oil in Wolfcamp and what
that will do to oil prices and national policy. Seems like any announcement of more oil will likely keep prices low. And if they stay low,
there's little reason to open up more areas for oil drilling.
AlexS says:
11/16/2016 at
3:53 pm
"Their assessment method for Bakken was pretty simple pick a well EUR, pick a well spacing,
pick total acreage, pick a factor for dry holes multiply a by c by d and divide by b."
The EIA and others use the same methodology
AlexS says:
11/16/2016 at
4:09 pm
USGS estimates for average well EUR in Wolfcamp shale look reasonable: 167,ooo barrels in the
core areas and much lower in other parts of the formation.
I do not know if the estimated potential production area is too big, or assumed well spacing
is too tight.
The key question is what part of these estimated technically recoverable resources are economically
viable at $50; $60; $70; $80; $90, $100, etc.
Significant part of resources may never be developed, even if they are technically recoverable.
Dennis Coyne says:
11/16/2016 at
5:17 pm
Keep in mind these USGS estimates are for undiscovered TRR, one needs to add proved reserves times
1.5 to get 2 P reserves and that should be added to UTRR to get TRR. There are roughly 3 Gb of
2P reserves that have been added to Permian reserves since 2011, if we assume most of these are
from the Wolfcamp shale (not known) then the TRR would be about 23 Gb. Note that total proved
plus probable reserves at the end of 2014 in the Permian was 10.5 Gb (7 Gb proved plus 3.5 GB
probable with the assumption that probable=proved/2). I have assumed about 30% of total Permian
2P reserves is in the Wolfcamp shale. That is a WAG.
Note the median estimate is a UTRR of 19 Gb with F95=11.4 Gb and F5=31.4 Gb. So a conservative
guess would be a TRR of 13.4 Gb= proved reserves plus F95 estimate. If prices go to $85/b and
remain at that level the F95 estimate may become ERR, at $100/b maybe the median is potentially
ERR. It will depend how long prices can remain at $100/b before an economic crash, prices are
Brent Crude price in 2016$ with various crude spreads assumed to be about where they are now.
AlexS says:
11/16/2016 at
7:01 pm
Dennis,
where your number for proven reserves in the Permian comes from?
In November 2015, the EIA estimated proven reserves of tight oil in Wolfcamp and Bone Spring formations
as of end 2014 at just 722 million barrels.
http://www.eia.gov/naturalgas/crudeoilreserves/
AlexS says:
11/16/2016 at
7:16 pm
US proved reserves of LTO
Dennis Coyne says:
11/16/2016 at
9:11 pm
Hi Alex S,
I just looked at Permian Basin crude reserves (Districts 7C, 8 and 8A) and assumed the change
in reserves from 2011 to 2014 was from the Wolfcamp. I didn't know about that page for reserves.
It is surprising it is that low.
In any case the difference is small relative to the UTRR, it will be interesting to see what
the reserves are for year end 2015.
Based on this I would revise my estimate to 20 Gb for URR with a conservative estimate of 12
Gb until we have the data for year end 2015 to be released later this month.
My guess is that the USGS probably already has the 2015 year end reserve data.
AlexS says:
11/16/2016 at
9:26 pm
Dennis,
The EIA proved reserves estimate for 2015 will be issued this month. I think we will see a
significant increase in the number for the Permian basin LTO.
Also note that USGS TRR estimate is only for Wolfcamp.
I can only guess what could be their estimate for the whole Permian tight oil reserves.
But the share of Wolfcamp in the Permian LTO output is only 24% (according to the EIA/DrillingInfo
report).
Dennis Coyne says:
11/16/2016 at
10:09 pm
Hi Alex S,
http://www.beg.utexas.edu/resprog/permianbasin/index.htm
At link above they say Permian basin has 30 Gb of oil, so if both estimates are correct the
Wolfcamp has 2/3 of remaining resources.
AlexS says:
11/17/2016 at
4:32 am
Dennis,
Wolfcamp is a newer play than Bone Spring and Spraberry. That's why its share in the Permian
LTO production is less than in TRR.
Dennis Coyne says:
11/17/2016 at
8:21 am
Hi AlexS,
That makes sense. I also imagine the USGS focused on the formation with the bulk of the remaining
resources. It is conceivable that the 30 Gb estimate is closer to the remaining oil in place and
that more like 90% of the TRR is in the Wolfcamp, considering that the F5 estimate is about 30
Gb. That older study from 2005 may be an under estimate of TRR for the Permian, likewise the USGS
might have overestimated the UTRR.
shallow sand says:
11/16/2016 at
5:18 pm
AlexS. Another key question, which is price dependent, is how many years will it take to fully
develop the reserves?
Dennis Coyne says:
11/16/2016 at
5:38 pm
Hi Shallow sand,
If oil prices go back to $100/b in 2018 as the IEA seems to be concerned about, it could ramp
up at the speed of the Eagle Ford (say 2 to 3 years). It will be oil price dependent and perhaps
they won't over do it like in 2011-2014, but who knows, some people don't learn from past mistakes.
If you or Mike were running things it would be done right, but the LTO guys, I don't know.
AlexS says:
11/16/2016 at
7:08 pm
shallow sand,
Yes, you are correct. And there are multiple potential production scenarios, depending on the
oil prices.
Boomer II says:
11/16/2016 at
3:39 pm
From the USGS press release.
USGS Estimates 20 Billion Barrels of Oil in Texas' Wolfcamp Shale Formation
"This estimate is for continuous (unconventional) oil, and consists of undiscovered, technically
recoverable resources.
Undiscovered resources are those that are estimated to exist based on geologic knowledge and
theory, while technically recoverable resources are those that can be produced using currently
available technology and industry practices. Whether or not it is profitable to produce these
resources has not been evaluated."
Watcher says:
11/16/2016 at
4:11 pm
This is an important way to assess.
If it requires slave labor at gunpoint to get the oil out, then that's what will happen because
you MUST have oil, and a day will soon come when that sort of thing is reqd.
George Kaplan says:
11/16/2016 at
3:16 pm
This follows on from reserve post above (two a couple of comments). In terms of changes over the
last three years there really weren't anything much dramatic. We'll see what 2016 brings, especially
for ExxonMobil, but it looks like they already knocked a big chunk off of their Bitumen numbers
already in 2015.
Note I went through a lot of 20-F and 10-K reports watching the rain fall this morning and
copied out the numbers, I'm not guaranteeing I got everything 100%, but I think the general trends
are shown.
Note the figures are totals for all nine companies I looked at.
Jeff says:
11/16/2016 at
3:20 pm
IEA WEO is out:
http://www.iea.org/newsroom/news/2016/november/world-energy-outlook-2016.html presentation
slides, fact sheet and summary are available online (report can be purchased). IEA seems to be
_very_ concerned about underinvestment in upstream oil production. Several pages of the report
is devoted to this, the title of that section is "mind the gap". More or less all of the content
has been discussed on this website, including the issue with high levels of debt and that this
can affect suppliers' capacity to rebound, and how much demand can be reduced as a result of a
stringent carbon cap.
From the fact sheet (available free of charge):
"Another year of low upstream oil investment in 2017 would risk a shortfall in oil production
in a few years' time. The conventional crude oil resources (e.g. excluding tight oil and oil sands)
approved for development in 2015 sank to the lowest level since the 1950s, with no sign of a rebound
in 2016. If there is no pick-up in 2017, then it becomes increasingly unlikely that demand (as
projected in our main scenario) and supply can be matched in the early 2020s without the start
of a new boom/bust cycle for the industry"
Presentation 1:09 Dr. Birol gives his view: "depletion never sleeps"
George Kaplan says:
11/17/2016 at
3:42 am
I wonder who that paragraph is aimed at. As I indicated above the companies that would be investing
in long term conventional projects don't have a very large inventory of undeveloped reserves (17
Gb as of end of 2015, some of this has gone already this year and more is in development and will
come on stream in 2017 and 2018 (and a small amount in later years for approved projects). I'd
guess there might only be less than 10 Gb (and this the most expensive to develop) that is currently
under appraisal among the major western IOCs and larger independents; allowing for their partnerships
with NOCs in a lot of the available projects that could represent 20 to 30 Gb total. That really
isn't very much new supply available, and a large proportion is in complex deep water projects
that wouldn't be ramped up fully until 6 to 7 years after FID (i.e. already too late for 2020).
Really the main players need to find new fields with easy developments, but they obviously aren't,
probably never will, and actually aren't looking very hard at the moment.
Jeff says:
11/17/2016 at
7:24 am
My interpretation is that this is IEAs way of saying that it does not look good. Those who can
read between the lines get the message. Also, a few years from they will be able to say "see we
told you so".
It's impossible for IEA to make statements like: "the end of low cost oil will negatively affect
economic growth", "geology is about to beat human ingenuity" etc.
WEO have become more and more bizarre over the years. On the one hand they contain quantitative
projections which tell the story politicians wants to hear. On the other hand, the text describes
all sorts of reason of why the assumptions are unlikely to hold. Normally, if you don't believe
in your own assumptions you would change them.
Wen
November 19, 2016 at 6:58 am
To me it feels like Mazzucatto is promoting keynisanism. That's not really new and, if Philip
Mirowski is to be believed, the neoliberal thought collective already has a strategy to shoot
it down. May I suggest a more genuine example of rethinking(from Mirowski himself)
https://www.youtube.com/watch?v=xfbVPDNl7V4&list=PLQWdiYL5PMXHtFu6RpVfKyHftAmYlkxW7&index=10
and his accompanying paper 'Markets Come to Bits: Evolution, Computation and Markomata in
Economic Science'
https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwj5yNvb4bTQAhVBNY8KHWNLBnIQFggcMAA&url=http%3A%2F%2Fwww.uq.edu.au%2Feconomics%2FPDF%2Fint%2FMirowski.pdf&usg=AFQjCNGWnjLqCE3459qPKnbW161SC7c6VA
linda a
November 19, 2016 at 7:31 am
Where is the sustainable part? It is not in goals of growth. The goal should be sustainable
evolution.
Government enshrines process and practices. It doesn't evolve well. Government also has a devastating
track record on picking investments to incentivize - oil over ethyl alcohol back in the 1920's.
Promoting land development and farming practices in the western plains that created the dust bowl.
Government does do an amazing job of steam rolling contrary information, ideas, etc.
Sound of the Suburbs
November 19, 2016 at 8:06 am
The rigorous and scientific economics profession just needs to decide
"Which way is up?"
40 years ago, most economists and almost everyone else believed the economy was demand driven
and the system naturally trickled up. Now most economists and almost everyone else believes the
economy is supply driven and the system naturally trickles down. Economics has been turned upside
down in the last 40 years.
For a supply side, trickle down world you need Neo-Keynesian stimulus, where money is fed into
the top of the economic pyramid, the banks, to be lent out, invested and trickle down.
For a demand driven, trickle up world you need traditional Keynesian stimulus, where money
is fed into the bottom of the economic pyramid through infrastructure spending, to create jobs
and wages which will be spent into the economy and trickle up.
The West has been doing Neo-Keynesian stimulus for the last eight years and asset prices have
been maintained but little has trickled down to the real economy.
Oh dear, today's economics is upside down, let's try some good old Keynesian fiscal stimulus.
Brexit and Trump are the result of not working out "which way is up?" a little sooner.
Sound of the Suburbs
November 19, 2016 at 8:06 am
China did fiscal stimulus after 2008, how did that go? China was the engine of global growth
after 2008, its insatiable demand for raw materials made lots of other emerging economies boom
too. Keynes is the man; he's the right way up.
Sound of the Suburbs
November 19, 2016 at 8:12 am
Let's form a global economy guided by ideas of economic liberalism where we put the economy
first over the interests of people.
1980s boom
Early 1990s bust
Late 1990s boom
Early 2000s bust
Mid 2000s boom
Late 2000s bust
2008 on stagnation
Unfortunately, no one really understood how the economy worked.
2008 "How did that happen?"
What more evidence do we need?
What is wrong with economics when science can successfully send space craft to the outer edges
of the solar system?
Science has been allowed to develop successfully as it cannot be modified to suit certain vested
interests to make them richer.
Economics is not like this.
There is something wrong with economics that was first spotted at the end of the 19th century
and pretending it is a real science today is little more than wishful thinking.
Thorstein Veblen wrote an essay in 1898 "Why is economics not an evolutionary science?". Real
sciences are evolutionary and old theory is replaced as new theory comes along and proves the
old ideas wrong. Economics jumps about like a cat on a hot tin roof and is not evolutionary, in
the late 1970s Keynesian ideas were ditched for the ideas of Milton Freidman. We threw out the
old Keynesian economics and bought in something new and untested just as we are about to embark
on globalisation, it was asking for trouble. Milton Freidman hadn't realised real science is evolutionary.
Looking back we can see other problems.
Malthus came up with an economics that worked for the vested interests of the land owning class.
Ricardo came up with an economics that worked for the vested interests of the financial class.
Marx came up with an economics that worked for the ideology he was trying to put forward.
It's complex, quite fuzzy and can be easily biased to suit vested interests.
Early on it became very apparent to the wealthy and powerful that economics needed to be biased
in the right direction for their interests.
As Classical Economics reached its zenith in the 19th Century it had come to some unfortunate
conclusions powerful, vested interests didn't like so they backed a new, neoclassical economics
that missed out the undesirable conclusions from Classical Economics like the differentiation
of "earned" and "unearned" income.
Most of the UK now dreams of giving up work and living off the "unearned" income from a BTL
portfolio, extracting the "earned" income of generation rent.
The UK dream is to be like the idle rich, rentier, living off "unearned" income and doing nothing
productive.
This distinction between "earned" and "unearned" income has been buried ever since, but was
hidden is later revealed by who this economics favours.
Neoclassical economics led to the Wall Street Crash of 1929 and the Great Depression, where
its ideas just made things worse.
Keynes came up with some new ideas that were incorporated into the "New Deal" and the recovery
began in the US.
Keynes ideas had some unpleasant conclusions as well and so economists moulded some of Keynes
ideas into neoclassical economics ready to use after the Second World War. Keynes had said that
capitalism was inherently unstable and recognised the dangers from financial asset investing,
not the sort of ideas that were desirable.
The Golden Age of the 1950s and 1960s followed.
The new hybrid Keynesian ideas went wrong in the 1970s and its ideas did not lead to recovery.
The powerful vested interests sought an opportunity to bring back their really biased pure
neoclassical economics and use it as the basis for a global economy.
It was improved, but still had all the old problems:
1920s/2000s high inequality, high banker pay, low regulation, low taxes for the wealthy,
robber barons (CEOs), reckless bankers, globalisation phase 1929/2008 Wall Street crash 1930s/2010s
Global recession, currency wars, rising nationalism and extremism
Left to their own devices, powerful vested interests will develop an economics that is so biased
the economic system will collapse due to the polarisation of wealth at the personal and national
level (like now).
Lots of other inconvenient stuff is missing too, which has lead to many of the recent mistakes,
including 2008 and its aftermath:
1) The true nature of money and how it is created and destroyed on bank balance sheets.
2) The work of Irving Fischer, Hyman Minsky and Steve Keen on debt inflated asset bubbles.
Their inflation, bursting and the debt deflation that follows.
3) Richard Koo on balance sheet recessions.
You can bias economics to suit vested interests but you can't make that biased economics work.
Economics needs to be rebuilt form the bottom up in an evolutionary, scientific, manner not
missing out the bits that are inconvenient for wealthy and powerful vested interests.
You can't put the economy first without good economics.
Let's get busy.
doug
November 19, 2016 at 8:18 am
If we are to rethink capitalism, let's make sure to include as one key element the banishment
of the phrase "human capital".
Sound of the Suburbs
November 19, 2016 at 8:21 am
"On both sides of the Atlantic, public companies are sitting on record piles of cash-around
$2 trillion in the U.S. and a similar amount in Europe"
Keynes called it the "liquidity trap". 1929 and 2008 were both debt inflated asset bubbles,
where securitising loans increased leverage. Keynes studied the Great Depression and noted monetary
stimulus lead to a "liquidity trap". Businesses and investors will not invest without the demand
there to ensure their investment will be worthwhile. The money gets horded by investors and on
company balance sheets as they won't invest. Cutting wages to increase profit just makes the demand
side of the equation worse and leads you into debt deflation. Central Banks today talk about the
"savings glut" not realising this is Keynes's "liquidity trap".
US firms engage in share buybacks as they don't want to invest in expansion.
Investors pour into negative yielding bonds and gold for safety.
Keynes realised wage income was just as important as profit as wage income looks after the
demand side of the equation.
This is why you need fiscal stimulus to create jobs and wage income to spur demand.
Say may have said "supply creates its own demand" but he was wrong.
As we can see businesses and investors don't believe Say either and this why they are hoarding.
a different chris
November 19, 2016 at 8:35 am
>Stagnation is not caused by the deterministic forces of an ageing population, high savings,
and exhausted tech opportunities. Rather, it is a result of falling private and public investment
that has prevented the emergence of new investment opportunities.
So I expected an explanation of why "falling investment" isn't directly correlated to "exhausted
tech opportunities" and the like. Didn't get it.
The usual techno-libertarian babble with the libertarian part jammed into the closet so as
to appeal to the political classes.
tegnost
November 19, 2016 at 11:37 am
I think the problem with your problem is that it's not clear where the next phase of growth
will come from, and as tech has reached a pinnacle, maybe the new thing will turn out to be surprisingly
luddite and the searching for it may be better done by collective action which then is picked
up by the private sector with the public part moving on to lead the thing that replaces that because
this old world keeps spinning around in spite of the fact that people are always haunted with
the notion that it might stop .think y2k, jan 1 2000 was going to and did happen regardless of
the perceived capacity for our systems to bear it. Like in the election where the private sector
thought it could lead us where they wanted us to go but it turns out they were wrong and they're
actually following
a different chris
November 19, 2016 at 12:22 pm
(not that I don't believe in the general idea, that's what made me sad..)
Sound of the Suburbs
November 19, 2016 at 9:07 am
The secret is in how money works, which is why hardly any economists understand either the
problem or the solution.
Money and debt are opposite sides of the same coin. If there is no debt there is no money.
Money is created by loans and destroyed by repayments of those loans.
From the BoE:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
After the system has been flooded with lots of debt by encouraging bankers to maximise profit
with their debt products, you get to a point where everyone is paying down debt and few people
are taking on new loans. This makes the money supply contract, making it harder to pay down the
debt.
When the repayments are larger than the new debt being taken on, the money supply starts contracting.
The Government needs to step in as the borrower of last resort to keep the money supply stable,
otherwise you head into a deflationary spiral.
Central Banks are the lender of last resort and Governments are the borrowers of last resort.
Central Banks print money for banks (QE) and, as no one is borrowing, it stays in the financial
system blowing bubbles and doesn't get to the real economy as seen from the low inflation round
the world.
Central Banks printing money for the Government to engage in fiscal stimulus gets the money
directly into the economy.
What they have been trying to do all along, the intermediary has just changed.
Banks never got the money into the real economy.
Keynes studied a similar situation in the Great Depression where debt deflation had taken hold.
He realised businesses and investors won't invest in the real economy when there is no demand.
Today we see all the global businesses hoarding cash and engaging in share buybacks, they won't
invest because there is no demand to make this worthwhile.
Keynes realised wage income was just as important as profit, wage income creates demand.
Keynes understood money.
Today's businesses think they should maximise profit by cutting wages, reducing wage income
and demand and making the whole thing worse.
Today's economics is basically the same as that of the 1920s, its neoclassical economics and
its core remains unchanged.
Neoclassical economics believes supply creates its own demand "Say's Law". It didn't then and
it doesn't now.
Neoclassical economics believes capitalism naturally reaches stable equilibriums. It led to
a Wall Street Crash and Great Depression then and it led to a Wall Street Crash and global recession
now.
The FED engaged in QE then, it has engaged in QE now, it didn't really work either time.
It was the "New Deal" that bought the US out of the Great Depression, it's what the world needs
now.
Saturating an economy in debt will always lead to debt deflation and the only way out is fiscal
stimulus.
Richard Koo studied this in the Japanese debt deflation from 1989 to today:
https://www.youtube.com/watch?v=8YTyJzmiHGk
He explains the mistake Christina Romer made analysing data from the Great Depression leading
Central Banks to think they could get us over 2008 with monetary policy.
In the first 12 mins.
Austerity is the worst thing you can do as it accelerates the contraction of the money supply.
When the US was panicking about the fiscal cliff it was because Ben Bernanke had read Richard
Koo's book and knew cutting Government spending would drive the US economy into recession.
Richard Koo understands money, he has worked in a Central Bank (New York Federal Reserve).
The secrets of money are not included in the neoclassical economics studied by economists outside
the Central Banks. The consequences of the secrets of money are understood by very few who work
in the Central Banks, they often favour austerity when it is the worst thing you can do.
Kent
November 19, 2016 at 9:07 am
While I don't disagree with the this essay in the whole, I think it misses an important piece.
There must be something that drives government investment. In the 1950s the government's investment
in the highway system crowded in investment in the auto industry as well as investments in suburban
housing. Those were things that could drive generations of wealth creation.
Green energy investments might do some of that today, but nowhere near on that scale. Besides
that, what else is there?
Anon
November 19, 2016 at 4:11 pm
What else?
Maybe a conversion to "single-payer" medicine expanded to include a geater range of services;
child-services, elder care, and the like. These are people intensive services that can be performed
by a wide range of skilled and semi-skilled people. It puts people to work at a job that is becoming
essential as boomers age.
financial matters
November 19, 2016 at 9:09 am
I think Mazzucato's work is very timely.
I think that her idea of private public partnerships may be the opposite of that of Trump.
There is worry that Trump's idea of this is privatization of assets to benefit a few in line
with crony capitalism.
Mazzucato on the other hand wants the public to share profits and not just losses.
I think Trump does understand that fiscal stimulus is important and can outweigh the austerity
oriented goal of balancing a budget.
Government has the deep pockets that can get huge projects like energy alternatives and public
transportation off the ground. Mazzucato wants to do it in a way that benefits the public rather
than what we have been seeing with the profits of these projects funneled to the 1%.
a different chris
November 19, 2016 at 12:25 pm
>I think that her idea of private public partnerships may be the opposite of that of Trump.
Oh the Judean People's Front not those right b*stards in the People's Front of Judea. Got it.
>Government has the deep pockets that can get huge projects like energy alternatives and public
transportation off the ground.
Well then just do it. What does the private financial sector have to do with it? I'm pretty
sure Solyandra didn't cost anybody a single vote they would have gotten otherwise so why did
they even involve the private financial again note the important word, here sector?
financial matters
November 19, 2016 at 12:54 pm
I'm not opposed to a more socialistic type response and actually see this as a move in that
direction.
She wants though to work within a capitalist system. Recognizing that the government has a
lot of control even in so called 'free markets' this often leads to monopoly type activities.
The government gives away important work such as in drug research or technology to the private
sector and lets them run with it with little control.
She would like to see more control over this work. It can be given to pharmaceutical and tech
companies to improve and market but not without controls in the public interest such as limiting
excessive drug prices and not having all the tech gains of a product go to a few execs but be
distributed to the overall public which helped fund the research in the first place.
In infrastructure it would emphasize the overall good to the economy of good infrastructure
and not let a few companies benefit by control over tolls for example.
ali
November 19, 2016 at 9:27 am
trying to better capitalism is the wrong path. the lack of investments is caused by the growing
impossibility to get profit out of it which is the effect of capitalism itself (tendency of
falling profit rate).
Yves Smith
Post author
November 19, 2016 at 2:40 pm
Kalecki disagrees with you and later empirical work backs him up.
Capitalists choose to run the economy at less than full employment because they don't like
workers having the power they'd have (more say over work conditions, less of a pay gap with capitalists)
if they could quit their jobs and find another one readily. They seek a higher profit level than
is necessary and chronically underinvest as a result.
ChrisAtRU
November 19, 2016 at 4:47 pm
+1 YES! See also Joan Robinson (re: unemployment):
The first function of unemployment (which has always existed in open or disguised forms)
is that it maintains the authority of master over man. The master has normally been in a position
to say: "If you don't want the job, there are plenty of others who do." When the man can say:
"If you don't want to employ me, there are plenty of others who will," the situation is radically
altered.
January 23rd 1943
Alternative Solutions To A Dilemma
washunate
November 19, 2016 at 9:31 am
Uh, one small problem. Capitalism isn't the problem. Unless we're simply using the word capitalism
to describe any fascist combination of imperialism abroad and corporate subsidies at home.
For example:
The failure by policy-makers to fully understand the dynamics of the capitalist system
This is the state of economic discourse on the left? Policy-makers understand the dynamics
quite well. That's why they have done everything possible to undermine the rule of law and individual
rights at the heart of market-based economics.
Concentration of wealth and power isn't a failure of public policy. It's the point.
JTMcPhee
November 19, 2016 at 9:39 am
Yas, No True Libertarian would allow erosion of the ruleoflaw and individualrights if only
those could be preserved, everythiing would fall into its preordained place Market-based economics
http://www.nakedcapitalism.com/2011/11/journey-into-a-libertarian-future-part-i-%e2%80%93the-vision.html
, in six parts for those who want to imagine the Libertarian Paradise
Code Name D
November 19, 2016 at 12:27 pm
Accept Libertarians don't belive in rights, but rather in a batch of comodities they call "rights"
that exist for the soul purpous of being bartered away to the ownership class.
Science Officer Smirnoff
November 19, 2016 at 4:37 pm
We are lucky to have this freely available-
Illiberal libertarians: Why libertarianism is not a liberal view
by Samuel Freeman in Philosophy and Public Affairs
http://sites.sas.upenn.edu/sfreeman/files/illiberal_libertarians_ppa_2001.pdf
Two highlights
p.147
. . . What is striking about libertarians' conception of political power is
its resemblance to feudalism . By "feudalism" I mean a particular conception of political power,
not the manorial system or the economic system that relies on the institution of serfdom (as
in European medieval feudalism).
p.149
. . . Liberalism evolved in great part by rejecting the idea of privately
exercised political power, whether it stemmed from a network of private
contracts under feudalism or whether it was conceived as owned
and exercised by divine right under royal absolutism. Libertarianism
resembles feudalism in that it establishes political power in a web of
bilateral individual contracts. Consequently, it has no conception of
legitimate public political authority nor any place for political society,
a "body politic" that political authority represents in a fiduciary capacity.
Having no conception of public political authority, libertarians
have no place for the impartial administration of justice. People's
rights are selectively protected only to the extent they can afford protection
and depending on which services they pay for. Having no conception of a political society,
libertarians have no conception of the common good , those basic interests of each individual
that according to liberals are to be maintained for the sake of justice by the impartial exercise
of public political power.
paulmeli
November 19, 2016 at 11:31 am
"Concentration of wealth and power isn't a failure of public policy. It's the point."
This gets to the root of the problem.
Norb
November 19, 2016 at 9:54 am
Rethinking capitalism and rolling back the corporate coup d'etat will be difficult as most
citizens have no idea what has taken place. Trumps election is good in one sense, it will be no
longer possible to obfuscate corporate interests as somehow also in the best interests of the
citizenry. The are in fact opposites.
Rethinking capitalism leads to rethinking the legitimacy of power centers. The cyclical political
theatre between a sham duopoly hopefully is over, or will be over when Trump fails to deliver
in any meaningful way for the working class. The time is now for rediscovering the true power
in government lies with the people, not with some enthroned elite. It is somewhat ironic that
it took the Queen of England to point that out in her indirect way.
lyman alpha blob
November 19, 2016 at 10:27 am
The author seems to have a hard time shaking certain conventional assumptions.
If future growth is to take a different path
If that path is negative then maybe they have a point but we can't have perpetual growth in
a closed system which is what this planet is.
And then this part:
As early as 1821, David Ricardo worried about the effect of mechanization on labor displacement.
What was important then, and should inform our thinking now, was that profits (from mechanization)
be reinvested into production, meaning that, in Ricardo's time, while some jobs fell away,
others were created.
This also seems a little shortsighted and somewhat vague. How much exactly do we need to produce?
Based on the amount of garbage floating around in the ocean and the rising global temperatures
it would seem we've probably already overdone it.
This is another author who seems to think that money really does grow on trees, ie it's a naturally
occurring phenomenon like the weather that we are subject to and can't change much rather than
a tool made by human beings that can be used any way we see fit.
Rather than factories running 24/7 producing mounds of cheap crap that breaks down and needs
to be replaced on a regular basis just to keep enough people marginally employed and constantly
buying stuff, would it really be so bad to have automation that produces enough of what we need
and then stops for a while until there's a new need, coupled with a job guarantee and BIG?
cnchal
November 19, 2016 at 5:16 pm
It boils down to, do you want a rip roaring economy for all or a habitable planet?
Perhaps we can escape this with a combination of jawb guarantee and BIG. You're hired and your
jawb is to do nothing. The problem is when you are off the jawb, spending the money earned by
doing nothing
Jef
November 19, 2016 at 11:24 am
What caused the economic collapse was hitting the obvious limits of economical resource extraction
and environmental limits to absorbing our industrial waste stream.
The global economy is 100% dependent on resource extraction, production, and disposal.
We have tried to deny this reality by jiggering around with economic, monetary, and financial
theories as if they, along with technolology can over come it. All that has done is increase inequality
and empower what I call the cannibalistic phase of capitalism.
What is needed is just about the opposite of capitalism. We need to figure out how to pay people
to do less way less, have less, consume less, procreate less .
Yves Smith
Post author
November 19, 2016 at 2:31 pm
We are facing a longer-term economic collapse if we don't restructure the economy to be vastly
less wasteful. But the crisis in 2008 was not the result of resource extraction. This was a financial
crisis and I (and many others) described at great length how it came about. My argument was that
it was the result of bad economic ideology, applied over a period of 50 years.
Thor's Hammer
November 19, 2016 at 11:30 am
Sigh- another blind Economist wandering through the zoo, stumbling upon an elephant's trunk,
and conjuring up ideas to make it GROW longer.
Sustained exponential growth is mathematically impossible. At any rate of growth, the end result
is that humans and their things end up occupying every square inch of territory, using every joule
of energy, and consuming every natural resource until collapse intervenes.
Natural capital - the physical characteristics of the biosphere- is the foundation of all life
including that of homo sapiens. Any economic theory that fails to build from this fundamental
fact is mere econobabble.
Humans are a tribal species who have devoted much of their "human capital" to warfare since
the current genetic strain succeeded in exterminating the Neanderthals. Any discussion of contemporary
capitalism in the USA that fails to examine the pivotal role of the military-industrial state
is fatally flawed.
The goal of economic policy should be the maximization of quality of life for a population
level that can live in harmony with the billions of other inhalants of the biosphere- a goal diametrically
opposed to homo sapiens goal of growth in ability to dominate it.
paulmeli
November 19, 2016 at 11:39 am
"Sustained exponential growth is mathematically impossible."
Two things. Growth is more like an annuity of 1 at compound interest. if we are growing at
r% per year the growth curve would be (1+r)^n.
Growth can be based on human resources, rather than real resources, i.e. services as opposed
to consumption.
Code Name D
November 19, 2016 at 12:37 pm
You are wrong on both counts. If "growth" is just "compound intrest," than you have a pointless
economey, one that is not based in the real world,
Second, "human resourcs" is a "real resource" and thus havefundemental limits.
This is the origial point. You can not have an economey that violates the 2nd law of thermal
dynamics. Economist need to stop pretending physics dosn't apply.
susan the other
November 19, 2016 at 1:45 pm
the entropy that exists in our economies is a failure to organize at a much more complex and
complete level they say that nuclear energy is an incomplete technology and we all know how
disastrous it can be so is economics and it is because capitalism is a simplistic theory. Steve
Keen is so good on this subject. He almost makes me see in graphic form how we should reverse
our thinking from outward fractals of "productivity and profits" to something that goes deep instead.
We need to change the concept of vertical integration to deep integration make productivity
be coherent all the way down the economic food chain from the profits to the bacteria in the ground.
Repair the environment at all levels of production and account for the costs of using even the
smallest thing this would indeed put a cramp in capitalism.
OpenThePodBayDoorsHAL
November 19, 2016 at 2:07 pm
"Economists need to stop pretending."
There, fixed it for you, the idea that an infinitely-complex system that is massively swayed by
human emotion is somehow "model-able" is silly. The queen called everybody's bluff, recall what
the august "economists" finally said after she asked what happened and why: "We don't know".
Second-order silly is the idea that a centrally-planned, command-and-control approach can work
on such a system. Keynes and the others that came up with this hoo-haw were admirers of Stalinist
Russia, at the time the Bloomsbury and other pink crowd were gushing "I have seen the future and
it works!". The idea is "let's raise X number cows because we project we will need leather for
Y number of shoes". After you're done falling off your chair laughing take a moment to realize
that's exactly what they try to do today with the price of money and the level of demand in the
economy.
There are too many unintended consequences, look at ZIRP for example, they thought free money
would make people borrow more but (being rational) people saw they would get no current income
so boosted their savings instead.
So:
Let bad debts clear, otherwise you're just suppressing brush fires on the forest floor and eventually
the whole thing burns to the ground. Mario Draghi buying CCC-rated junk is precisely what you
should not do.
And to Watt4 Bob below, the only "creative destruction" we have today is for people and households.
Zombie banks, oil companies, insurers, big pharma, military companies, the surveillance-industrial
complex are completely isolated from creative destruction by the big fat thumb of the gumment
on the scales.
Thor's Hammer
November 19, 2016 at 4:17 pm
Paul, Please step back and analyze the logical fallacy in your statement. Exponential growth
based upon human resources ("rather than real resources" means that at some point in the growth
cycle humans have to eat human resources rather than food.
Anyone who makes the (common) claim that you do simply does not understand the meaning of exponential
growth. Model growth at any rate and you eventually reach the point where the next increment of
growth fills the entirety of any finite universe. If production grows exponentially at the 3%
target often bandied about as desirable the entire world would be covered by the human capital
you hope will provide an escape from mathematical certainty. It only takes about 400 years of
3% exponential growth starting with only one Einstein or one bite of information to reach the
finite limit of our planet. And it matters not a whit whether the human capital walks around in
a physical body or is condensed into bits & bites and stored on a flash drive, the mathematics
are the same.
Because we live in a real world with real physical limits, sustained long term growth will
always be impossible and collapse of growth inevitable. Any theory of economics worth more than
toilet paper should recognize that fundamental fact.
For those confused about real world limits to exponential growth, watch this short lecture:
https://www.youtube.com/watch?v=bRc-YfcXVYo
Thor's Hammer
November 19, 2016 at 4:42 pm
Perhaps a more straightforward introduction to exponential growth:
https://www.youtube.com/watch?v=W2rTQpdyCFQ
paulmeli
November 19, 2016 at 6:17 pm
Thor, with all due respect you've misunderstood what I wrote. Your response killed a bunch
of straw men.
The point about human resources was that the growth in consumption is some 20 times greater
than population growth. Take that for what it's worth, I think that is a big part of the problem.
The first point was purely arithmetic. An annuity of 1 at rate r for n periods fits the curve
of GDP growth (a proxy for growth) like a glove. Compound interest is calculated using the same
formula. Beyond that I don't know what you're arguing against.
You can do the same for growth in federal spending, growth in Investment, etc. They all fit
the annuity curve. Your "3% exponential growth" is an annuity of 1 at 3% compounded for n periods.
Which IS an exponential relationship, but it puts growth in perspective when you look at it
as analogous to compounding interest. For me at least.
Watt4Bob
November 19, 2016 at 11:33 am
Rethinking capitalism and rolling back the corporate coup d'etat will be difficult as most
citizens have no idea what has taken place.
It's worse than that.
Hysteresis, one of my favorite new vocabulary words, is the reason there's no easy fix for
the system that is currently circling the drain.
That being the damage done by neo-liberal, creative destruction was actually destructive
destruction.
It is impossible to simply turn-back the hands of time, the damage is done, the manufacturing
base that supported a healthy working-class has been destroyed, and there is no actual path for
revival of that reality.
This is the reason we are faced with the necessity of creating a new economy, TPTB have destroyed
any path to what we might call a 'normal' economy from our current condition.
Hysteresis, means "Nope, you can't get there from here."
That used to be a Yankee farmer joke, now it's a perfectly good explanation for our situation.
Gaylord
November 19, 2016 at 11:51 am
Assuming infinite growth on a finite planet is the fatal hubris of capitalism, which assumes
that economics exist apart from the laws of nature. We are experiencing inevitable contraction
because we have exceeded the limits of earth's ability to sustain our species' rapacious demands
and destructive lifestyles. We are already experiencing catastrophic effects from our destruction
of the planet's climate moderating system, which ultimately will destroy our habitat. We have
seen this coming for a long time, yet leaders, heads of state, and academicians (including this
author) continue to think in outmoded ways, particularly about our disregard of the ecosystem
which will result in near-term mass extinction. Human exceptionalism is the fatal flaw that will
wipe out most if not all life on this planet.
Disturbed Voter
November 19, 2016 at 11:55 am
In the past, disaster was local, because hubris met its match locally. With a global civilization,
we dream of going to Mars to trash another planet from scratch. But when disaster is truly global,
the result will be truly apocalyptic. Humanity has had a good run; eat, drink and love while you
still can.
Disturbed Voter
November 19, 2016 at 11:52 am
There is an ancient battle between Heraclitus and Parmenides. Either dynamics is reality, or
statics is reality. The reality is, both are real. Change is liberal, stasis is conservative.
Unfortunately neither is a panacea, because there is no panacea, it all depends on context. When
change is required, conservative-ism brings us the French Revolution as an unintended consequence.
When stasis is required, liberal-ism brings us the French Revolution as an intended consequence.
Sometimes change happens, sometimes things stay the same and either can be good or bad for you
individually. Generalizing beyond this is over-generalization.
Katharine
November 19, 2016 at 12:04 pm
While I acknowledge that this was written for an audience of economists, I do not think economists
should expect to have much influence on the development of new systems until they learn to express
themselves in language intelligible to an educated general audience. I can parse the clause, "Skills
have always been an endogenous function of investment." I know the meaning of every word in it.
I have no idea what it is supposed to communicate. It is not my problem, but the author's, that
she fails to state what she considers a key point in language that conveys meaning. In fact, the
sentence which follows the jargon appears to say what needed to be said; it is not at all clear
what purpose the jargon was intended to serve, other than to signal membership in a professional
club. Its primary effect is to break the flow of thought and annoy the non-specialist reader.
susan the other
November 19, 2016 at 2:04 pm
i got that feeling as well too many economists fail to make a satisfying point when it is
pretty obvious by now what's wrong
Synoia
November 19, 2016 at 12:25 pm
The point about companies hording profits is, I believe a key point. The money belongs to the
shareholders, and the individual shareholder have to place investments and not indulge in share
buybacks.
A second point not mentioned, after the great recession the chose solution was to preserve
as much debt and debt service as possible, ignoring the asserting "debt which cannot be repaid,
will not be repaid."
Code Name D
November 19, 2016 at 12:46 pm
Why does money BELONG to the shareholder? The author did note that there was $3 trillion in
buybacks but investment still remains mis-directed.
susan the other
November 19, 2016 at 2:08 pm
" shareholders have to place investments " in order for capitalism to progress. But oops,
we have come to the end of an era and altho there are trillions of dollars on the sidelines, there
is no place to invest. Like the guy in MASH said re Christianity: You guys haven't come up with
a new idea for 2000 years.
Altandmain
November 19, 2016 at 6:40 pm
The fatal flaw of the current system is that it is not designed to benefit the majority of
people. It is a system of rent extraction, made to benefit a few people on top at the expense
of the general public.
It needs more than just a rethinking. It needs a ground up design. The problem is that the
rent seekers have control of business and government. Both institutions will not be used for public
benefit, but rather for the benefit of the extractive elite at the expense of the rest of society.
As for what has been learned the elite do not "want" to learn the lessons that need to be
learned. That is the problem that we face.
R Walter
says:
11/18/2016 at 5:47 pm
The only oil investment that has any feck is turmoil.
Or, Term Oil Corporation.
Also known as Peak Oil.
http://www.bnsf.com/about-bnsf/financial-information/weekly-carload-reports/
The number of rail cars hauling petroleum is a constant in the range of 7,200 to 7,400
petroleum cars hauled each week for a good six months now.
Seems as though petroleum by rail is more of a necessity than a choice.
The volume is down a good thirty percent since about 2013 when over 10,000 cars were
hauled per week.
Demand decreases, contracts expire, better modes of transport emerge and cost less. not
as much call for Bakken oil. Plenty of the stuff somewhere else in this world.
The trend is down, not up for petroleum hauled by rail.
If there were orders for Bakken oil for one million bpd, the production would be one
million bpd. Bakken oil lost marketshare due to price drop. Buyers can buy oil from
anywhere.
GoneFishing
says:
11/18/2016 at 6:34
pm
More Bakken petroleum is being moved by pipeline. Over the whole rail system, petroleum
and petroleum product rail car loadings were down to 10.5 thousand in September. That
compares to a high point of 16.3 thousand railcars in Sept of 2014.
Coal car loadings are on the rise, from a low of 61,000 in April to 86,000 in Sept.
Coal was running a near steady 105,00 to 110,000 railcars every month in 2013 and 2014.
AlexS
says:
11/18/2016 at
6:57 pm
The chart below from RBN shows that Bakken pipeline capacity did not increase since
early 2015. But production dropped, and this primarily affected volumes of Bakken oil
transported by rail.
Given the higher percentage of oil transported by pipelines, the average
transportation cost for Bakken crude should have decreased. Interesting, however,
that the price differential between the well-head Bakken sweet crude and WTI has
remained within the $10-12/bbl range.
Bakken Crude Production and Takeaway Capacity
Source: RBN
AlexS
says:
11/18/2016 at
7:06 pm
This article from Platts explains better than me:
Analysis: Bakken discounts deepen as competition heats up
Houston (Platts)16 Nov 2016
http://www.platts.com/latest-news/oil/houston/analysis-bakken-discounts-deepen-as-competition-27711340
Bakken Blend differentials at terminals close to North Dakota wellheads held their
lowest assessment since December Tuesday, closing at the calendar-month average of
the NYMEX light sweet crude oil contract (WTI CMA) minus $6.25/b.
While one factor dragging on Bakken differentials has clearly been a tight Brent/WTI
spread - trading around 42 cents/b Tuesday, well in from the steady $2/b seen this
summer - the return of Louisiana Light Sweet to the Midwest market may also be having
an impact, according to traders.
One trader said there was an increase in volumes heading up the Capline pipeline,
however, differentials suggest LLS is still too expensive, at least compared to
Bakken. Platts assessed LLS at WTI plus $1.15/b Tuesday.
Considered by some to be the "champagne of crudes," it is unclear what appeal LLS
still has for a Midwest refiner as margins for LLS actually - and unusually - lag
those for Bakken.
S&P Global Platts data shows LLS cracking margins in the Midwest closed at $3.30/b
Monday, compared to Bakken cracking margins of $6.37/b. In fact, the advantage of
cracking Bakken has grown steadily since August.
Platts margin data reflects the difference between a crude's netback and its spot
price.
Netbacks are based on crude yields, which are calculated by applying Platts
product price assessments to yield formulas designed by Turner, Mason & Co.
What is clear however, is that the steeper discounts available for Bakken provide
the biggest incentive for a Midwest refiner.
The cost of getting Bakken to this market is around $3.48/b, according to Platts
netback calculations, compared to just $1.02/b for LLS.
These costs make up a significant portion of the Bakken discount.
Further, LLS moving up the Capline after many years of relative inactivity does
not necessarily suggest a new trend is in the making. However, recent pipeline
reversals between Texas and Louisiana mean more Permian crudes are capable of
reaching Louisiana refineries, and thus, if priced accordingly, could displace
incremental volumes of LLS from its home market.
With current pipeline capacity out of North Dakota typically full, the marginal
Bakken barrel often gets to market via rail, and this cost has traditionally sets the
floor to Bakken's discount to WTI. And part of the recent downturn in Bakken could be
chalked up to an increase in railed volumes to the US Atlantic Coast, as Bakken
cracking margins there are again in the black.
In fact, Association of American Railroad's latest monthly and weekly data shows
crude and refined product rail movements appear to have bottomed, having grown in
September from August.
Weekly data bears this out as well, showing increases in three of the last four
weeks.
It remains to be seen how long this will last, however, should Energy Transfer
Partners Dakota Access Pipeline go ahead as planned.
Linefill for the pipeline could boost Bakken differentials, potentially making the
grade too expensive to rail east. However, the devil is in the details.
Traders and analysts have pegged Dakota Access pipeline tariffs between
$4.50-$5.50/b for uncommitted shippers between North Dakota and Patoka, Illinois. A
further $6.50/b would be needed to bring the crude south from Patoka to Nederland,
Texas, sources have said.
If this $11-$12/b combined pipeline estimated cost were to pan out, it would be
more expensive than the $10.20/b Platts assumes in its Bakken USAC rail-based netback
calculation.
AlexS
says:
11/18/2016 at 8:59 pm
U.S.oil rig count was up 19 units last week, the largest weekly gain in 16 months.
Gas rig count is up 1 unit.
Permian basin: + 11 oil rigs
Bakken: -1
Eagle Ford: -1
Niobrara: +2
Cana Woodford: unchanged
Other shale plays: +2
Conventional basins: +6
Oil rig count in the Permian is up 73.5% from this year's low the biggest increase
among all US basins.
It is still only 41% of October 2014 peak, but this is much better than the Bakken and
especially the Eagle Ford where drilling activity remains depressed.
AlexS
says:
11/18/2016 at 9:30
pm
The number of horizontal rigs drilling for oil in the Permian is now 54% of the 2014
peak.
Oil rig count in the Permian basin
source: Baker Hughes
AlexS
says:
11/18/2016 at 9:42
pm
Weak drilling activity in the Bakken and the Eagle Ford helps to explain continued
declines in their oil production
Oil rig count in 4 other tight oil plays
Roger Blanchard
says:
11/19/2016 at
8:17 am
Alex,
As of September 2016, 4 counties produced 90.1% of all the Bakken/Three
Forks oil production in North Dakota: McKenzie, Mountrail, Williams and Dunn.
Relative to December 2014, North Dakota Bakken/Three Forks oil production is off
243,098 b/d relative to December 2014 while the number of producing wells is up 1861
based upon data from the state.
Based upon state data, the number of producing wells/square mile is 1.29 in
Mountrail County, 1.22 in McKenzie County, 1.02 in Willams County, and 0.86 in Dunn
County. How high can the number of producing wells/square mile go?
Is there something more than reduced drilling to explain the drop in production?
George Kaplan
says:
11/19/2016 at
8:35 am
This shows well density and production from last September. The distance is
concentric from a "production centre of gravity" i.e. weighted average by
production for all wells. The core area ("sweet spot") is a circle of about 50 to
60 kms only (it's squashed out a bit to the west and missing a bite in the SW).
Maximum well density (and with the best wells is 120 to 160 acres, and falls off
quickly outside the core. The core is getting saturated.
AlexS
says:
11/18/2016 at 9:53
pm
From a recent EIA report:
"U.S. drilling activity is increasingly concentrated in
the Permian Basin . The Permian now holds nearly as many active oil rigs as the rest of
the United States combined, including both onshore and offshore rigs, and it is the only
region in EIA's Drilling Productivity Report where crude oil production is expected to
increase for the third consecutive month."