Is the U.S. oil renaissance overhyped? U.S. oil production grew faster than almost all the...


Is the U.S. oil renaissance overhyped? U.S. oil production grew faster than almost all the world's major energy players last year, but some analysts think the industry can't maintain its blistering growth. AllianceBernstein sees the marginal cost of crude in the U.S. at ~$95/bbl, which makes new production vulnerable to sharp price drops. Also, declining Bakken and Eagle Ford well production rates suggest “the best is behind us."
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Comments (16)
  • David de los Angeles
    , contributor
    Comments (7784) | Send Message
     
    Unconventional petroleum is indeed being advertized as a "game changer", a virtually limitless source of inexpensive energy. This includes bitumen (found in Canada's "oil sands", oil shale, shale oil (which are different), and shale gas. Ignoring all of the technical issues, these are not profitable products to produce and distill into gasoline, diesel, and fuel oils. Many of these "fracking" operations are indeed producing large quantities of natural gas, liquids, oils, and so forth but they are not producing much in way of profits. It is not profitable, it will not be sustained.
    13 Jun 2013, 06:59 PM Reply Like
  • Philip Marlowe
    , contributor
    Comments (1583) | Send Message
     
    There are going to be some efficiency gains as they retrofit the rigs to use natural gas straight from the wells instead of diesel. After that, who knows.
    13 Jun 2013, 07:00 PM Reply Like
  • David de los Angeles
    , contributor
    Comments (7784) | Send Message
     
    Mr. Marlowe,

     

    You are of course correct that anything is possible, however one can only project on what is known at the moment. Hydraulic facturing is an expensive process, much more so than conventional drilling. Further, "fracked" wells are well known to produce for much shorter amounts of time than conventional wells. Higher production costs plus shorter production lives mean higher costs per unit produced.

     

    The question is not whether the costs will drop, but will they drop below the cost of conventional gas? So long as the market price is driven by conventional sources and so long as fracked sources are more expensive, fracking will not produce a profitable product.
    15 Jun 2013, 12:04 AM Reply Like
  • geologist
    , contributor
    Comments (586) | Send Message
     
    You have no idea at all about what you are talking about. Tight oil from shale formations, and tight gas from shale formations are both profitable. Both cost more that conventional wells, but they are profitable in a world where oil is priced at $95/bbl and gas is $4/kcg ($18/kcf in many other countries). Yes fracing and Hz drilling result in higher well cost, but with the high rates of initial flow the wells pay out faster and with multi-pad drilling many more wells can be drilled at a lower cost than conventional wells. Yes the decline rates are very high ... up to 90%, but the wells are profitable.

     

    You are correct regarding mined shales with immature petroleum in the shale is not profitable. And if we were drilling where oil was priced at $20/bbl, you would be correct that tight oil shales would not be profitable thus would not be able to compete with conventional oil and gas reservoirs. But don't make a blanket statement that tight oil and tight gas from shale formations is not profitable. That is very misleading to folks who do not understand the oil & gas business. Regards
    16 Jun 2013, 10:55 AM Reply Like
  • David de los Angeles
    , contributor
    Comments (7784) | Send Message
     
    Hello geologist,

     

    I posted immediately to Mr. Maher about QEP's South Antelope operation in the Three Forks formation. It is reportedly a "monster". I will not reproduce the entire posting here except to note that....

     

    It was producing about 2,300 BPOEP/D which is quite impressive and the b exponent was 1.8 but within a year it was producing less than 500 BPOEP/D. They hyprebolic initial decline was a very steep 87% and half of the EUR was expected to produced within 5.5 years, if it produced as expected.

     

    One of the most mature and well developed shale gas fields is the Fayetteville shale. For this area, the average bfc per well is 1.19, the cost of drilling the wells is 2.8 MUSD, the royalties are 22.5%, the cost of land is 5,000 USD/acre, other expenses (e.g. Lease Operating Expenses, General and Administration, &c) is 1.50 USD/Mscf, severance tax 0.11 USD/Mscf, the Find and Develop costs are 4.89 USD/Mscf so, assuming 8% discount rate and 160 acres well spacing and 50% of the leased land is developed, a full cycle break even price is 8.31 USD/ MMBtu[1]. This is not near the current market price for natural gas [2].

     

    I would ask, if this is profitable, where are the profits? Which firms that operate shale fracing fields are paying dividends from those fields?

     

    [1] http://bit.ly/142GYt7

     

    [2] http://1.usa.gov/AguyqD
    17 Jun 2013, 01:27 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2863) | Send Message
     
    That ignores that production results from some of EOGs acreage is starting to show increasing IP rates and EURs. Fracking is still in its infancy, and well results will improve as people "crack" the code of the individual shale plays.
    13 Jun 2013, 07:10 PM Reply Like
  • David de los Angeles
    , contributor
    Comments (7784) | Send Message
     
    Hello Mr. Maher,

     

    Which wells are those? Can you site any data?

     

    It is very common for fracked wells produce well the first few months but what does the slope of the curve look like? QEP recently reported on their South Antelope operation in the Three Forks formation. It was producing about 2,300 BPOEP/D which is quite impressive and the b exponent was 1.8 but within a year it was producing less than 500 BPOEP/D. They hyprebolic initial decline was a very steep 87% and half of the EUR was expected to produced within 5.5 years, if it produced as expected[1].

     

    The problem is that many analysts assume that the entire production future will have the same hyperbolic profile with resulting hyperbolic curvature (i.e. the b exponents will remain greater than 1.0). However, the declining curve often shows two stages, with the slope dropping much more than anticipated. The higher EURs and longer expected well lives that this produces look good on paper but ignore that the decline rate progressively flattens to very low terminal decline rates of a few percent [2].

     

    If fracked natural gas is profitable, where are the profits? Chesapeake Energy, the largest developer of fracked natural gas, is struggling mightily. Stock prices are down, they are laying off employees, and they cutting back executive benefits.[3] Is Kodiak doing a lot better [4]?

     

    Traditional natural gas can be sold profitably at the wellhead for around 3 USD/1,000 cubic feet (tcf) [5] while fracked gas loses money at that price. Irrespective of how much natural gas is locked up in shale, if it is not profitable to produce, it will not be produced.

     

    [1] http://seekingalpha.co...

     

    [2] http://bit.ly/142GYt7

     

    [3] http://bit.ly/199tcrZ

     

    [4] http://seekingalpha.co...

     

    [5] http://1.usa.gov/GTsvcm
    15 Jun 2013, 12:24 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2863) | Send Message
     
    Look at the data on EOG's website and presentations, their Eagle Ford results continue to improve.
    16 Jun 2013, 02:09 PM Reply Like
  • David de los Angeles
    , contributor
    Comments (7784) | Send Message
     
    Mr. Maher,

     

    Can you provide some links to these websites and presentations?
    17 Jun 2013, 12:57 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2863) | Send Message
     
    http://bit.ly/11sHBdz
    17 Jun 2013, 08:09 AM Reply Like
  • David de los Angeles
    , contributor
    Comments (7784) | Send Message
     
    Mr. Maher,

     

    Thank you for the link, it was very interesting. EOG of course has non-fracing operations as well as fracing. The amount of petroleum being produced by non-conventional methods is indeed impressive. While some of the slides did present their "horizontal" production information as such, the slides about dividends did not separate out the conventional ("vertical") profits from the non-conventional ("horizontal") revenue streams.

     

    There is no question that there are plenty of petroleum products being produced from fraced wells. The question at hand is are they producing profits?
    17 Jun 2013, 03:26 PM Reply Like
  • Valuentum
    , contributor
    Comments (1425) | Send Message
     
    A great read on the outlook for crude -- we're not kidding. Reserve an afternoon for this read:

     

    http://bit.ly/13INrJp

     

    Kind regards,

     

    The Valuentum Team
    http://www.valuentum.com
    13 Jun 2013, 07:17 PM Reply Like
  • Hendershott
    , contributor
    Comments (1784) | Send Message
     
    I don't know any one touting shale oil and gas as a "virtually limitless source of inexpensive energy". But there is a awful lot of oil and gas in shale and deepwater. It may not be cheap but it's not that expensive and the amount available will tend to cap price increases. As far as being a game changer, the oil and gas industry calls it a revolution. Ask the Nigerians if the game has changed.
    13 Jun 2013, 07:47 PM Reply Like
  • David de los Angeles
    , contributor
    Comments (7784) | Send Message
     
    Hello Hendershott,

     

    The price sweet light crude oil (Brent and WTI for example) has increased four fold in the last tens years yet production has remained the same. Why has production not increased? The reason is that there is no more to be produced. The most sensitive measure of crude oil capacity is not production but “spare capacity”. “Spare capacity” is the ability of an oil producer to new oil production within 30 days and keep it up for at least 90 days. Spare capacity is world-wide and in the United States is decline [1].

     

    The Nigerian are producing as much sweet, light crude oil as they can (Bonny light, Qua Iboe) but they have not increased production. At around 100 USD/bbl they most certainly would if they could. However they cannot.

     

    [1] http://onforb.es/1adejX5
    14 Jun 2013, 11:55 PM Reply Like
  • Uncle Pie
    , contributor
    Comments (4323) | Send Message
     
    The marketplace does not much distinguish between the shale oil companies and the oil sands companies. The shale oil wells face very steep decline rates, with wells often producing 75% of everything they will ever produce in the first two years. Hence the shale oil companies must keep drilling, drilling, drilling just to stay even.
    Contrast that with the oil sands companies: an oil sands mine, once it is set up, will produce oil at a constant level for decades with NO production decline and NO exploration risk.
    According to Suncor's website, the carbon footprint of all the oil sands projects is 3.5% of the carbon footprint of North America's coal fired power plants. So to call Canada's oil "dirty" is a bit like the pot calling the kettle black. Especially as the US imports 980,000 barrels/ day of heavy from the friendly folks in Venezuela, and no one bats an eye.
    13 Jun 2013, 08:30 PM Reply Like
  • Hendershott
    , contributor
    Comments (1784) | Send Message
     
    An oil sands mine, once it is set up, will produce oil at a constant level for decades? Only as long as you keep mining. Decline rates on shale are well known and drilling techniques are changing because of that. Two mile horizontal fracs, different fluids , pad drilliing etc. It's too early to count shale out. As to Venezuela, everyone bats an eye, but Venezuela owns one of the largest US refineries, Citgo, the old Cities Service. Citgo can source from wherever they want, and they source from Venezuela. You should also know that Saudi Arabia owns half of Americas largest refinery. That refinery runs on Saudi heavy.
    14 Jun 2013, 10:13 PM Reply Like
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