Outrun Change

We need to learn quickly to keep up with the massive change around us so we don't get run over. We need to outrun change.

About those dropping oil prices – 2

 

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(Photo by James Ulvog; five more reasons why gas prices are going down.)

This is second of several posts on the drop in oil prices. Not to worry – human ingenuity will kick in again as prices drop.

10/31 – Bakken.com – Fracking is saving Americans billions of dollars – The American Petroleum Institute estimates that without fracking, crude oil prices would be somewhere between $12 and $40 a barrel higher. That means Americans would otherwise be paying around $250 billion a year more in energy costs.

10/30 – Wall Street Journal – Energy Boom Can Withstand Steeper Oil-Price Drop – Some drillers in the U.S. will have trouble as prices drop and some locations may not be economical, but there are huge numbers of drillers who own huge numbers of sites that will be profitable at lower prices that we see today.

Check out the range at which drilling is still profitable; data from the article and a cool chart:

  • Permian Basin – $57 – $75
  • Eagle Ford – $53 – $65
  • Bakken – $61-$75
  • Niobrara – about $64 to about $68
  • Overall U.S. shale – 80% are profitable at $40 – $80 for WTI

Out of the money:

  • Mississippi Line – about $84
  • Scoop – $91

Drilling in Bakken, Permian Basin, and Eagle Ford might slow somewhere around $70; might drop a lot in mid to lower $60s. Let’s see how Venezuela, Indonesia, Russia, and Iran do if oil breaks the $70 mark.

Another astounding thing I didn’t realize (yes, yes, I’m slow on the uptake). Check out the number of rigs in each area:

  • 322 – Permian Basin
  • 198 – Bakken
  • 196 – Eagle Ford

There are more rigs drilling in Permian than either Bakken or Eagle Ford!

That’s over 700 rigs running in 3 huge fields. Exquisitely cool.

10/24 – Gaurav Sharma at Forbes – Saudis Vs Oil Markets: Who’s Playing Whom – The strategies of various major players (i.e. Saudi Arabia, remainder of OPEC) is way over my head. Breakeven prices in various countries are mentioned in the article, which is what caught my interest. As a reference point, the author’s assertion on the breakeven point needed by various producers, which I will put in quotes without tons of ellipses:

  • Kuwait $75
  • Qatar $71
  • United Arab Emirates $80
  • Venezuela $162.
  • Iran $134
  • Nigeria $126
  • Russia around $100
  • North America shale oil …profitable at …around $90
  • Canadian oil sands $75

From what I’ve read elsewhere (especially Million Dollar Way, who pointed me to this article at Forbes), the producers in Bakken have varying breakeven points, ranging from under $100 down to $50 or $60. Remember I’m still learning what’s what. Oil pricing is new to me.

10/23 – Mark P. Mills at Wall Street Journal – The Oil Price Swoon Won’t Stop the Shale Boom – Three reasons the down part in a routinely up and down industry won’t stop shale production. I will summarize.

First, production in Bakken was astoundingly profitable when oil was $50 a barrel. That was the price that created crazy growth in drilling. Production costs have gone down since then.

Second, shale production is getting more efficient. Prices of drilling a well have declined while output per well has climbed. That must have created stratospheric returns at near $100 which will be merely mind-boggling returns at $80 and likely somewhere in the range of best-you-ever-seen-in-your-life at $70 or $60. Just my wild guess to expand on the first two points.

What do you think those two factors mean for profitability at $80 or $70 or $60?

Third, there is a host of new drilling technologies that have not been employed because they would disrupt current production. A few he mentions:

automated drilling, micro drilling … new types of drills … big-data analytics …nanotechnology … new classes of high-resolution subsurface imaging

Innovative drillers will put those to use in order to maintain current returns when prices drop enough.

His medium term prediction is another surprise in the expanded production from shale:

In a few years, as new technologies are adopted, journalists will be writing again about the “surprise” that U.S. production expanded by another three million barrels per day on top of that much growth over the past few years.

One more comment caught my eye:

The U.S. has dozens of world-class fields, thousands of production companies, tens of thousands of related businesses

Think about the depth and range of the energy available in the U.S. I’m gaining a bit of knowledge about Bakken. There are multiple other oil fields I know little about.

While visiting Williston in mid-October, I was amazed with the number of different names I saw on trucks around town. I don’t know enough to place more than a couple of big names. I’m slowly gaining an appreciation for the humongous number of companies needed to provide the narrowly focused specialty knowledge and equipment to drill one well.

The breadth and power of the energy sector is amazing.

To illustrate that productivity growth, check out:

10/31 – Yahoo Finance – Oil prices are dropping but the fracking revolution rolls on – Greg Zuckerman, author of The Frackers (a superb book that I heartily recommend by the way) is quoted as saying the drop in oil prices may slow a few developers, but the fracking revolution will continue. He thinks prices of $75/barrel will slow production in Bakken and it will take $60 to slow Permian and Eagle Ford. He thinks Saudi Arabia is targeting the US to slow down our fracking development. He thinks they are also targeting Russia and Iran. Energy is a complex game.

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