About those dropping oil prices – Be careful what you wish for – 5

So much news about energy and oil prices and the damage caused by wind and solar power lately. Will try to get caught up in commenting on the fascinating news around us. In the meantime, here are a few articles about energy. By the way, one ought to be really careful when choosing to start a price war…

11/30 – The Telegraph; Ambrose Evans-Pritchard – Saudis risk playing with fire in shale-price showdown as crude crashes – Crude prices dropped to $66 in the wake of OPEC decided to maintain production levels. Rumors are the OPEC and Saudi goal is to cut the growth rate of US shale production from another million bopd to only a 500K bopd increase.

Check out the differing expectations for where the pricing vulnerability is in the U.S:

The OPEC secretary-general thinks half of US shale is uneconomical when prices drop below $85.

Lots of US producers have derivative options already in place which lock in prices for a year or more. That means they can keep drilling and operating as if crude prices hadn’t dropped even a little.

Continental Resources can produce down to $50.

IEA thinks most Bakken wells are profitable at even $42 or lower.

Another factor is that a large part of the cost of oil is now a sunk cost. Land leases have all been acquired and infrastructure is either in place or coming on-line. One source says the incremental cost for bringing up more oil is in the high $30s.

Compare $66, or $50, or $42, or high $30s to these numbers for breakevens of national budgets:

  • $161 for Venezuela,
  • $160 for Yemen,
  • $132 for Algeria,
  • $131 for Iran,
  • $126 for Nigeria, and
  • $125 for Bahrain,
  • $111 for Iraq, and
  • $105 for Russia, and even
  • $98 for Saudi Arabia itself, according to Citigroup.

Those governments will be in extreme pain by mid 2015 when the number of active wells in Bakken drilling is dropping by one or three rigs a week.

Methinks that starting that game of chicken was not a smart move.

$66? How about we let $60 a barrel run for a year or two and see who is in the most pain? Let’s try $50.

Disruption in Bakken would be substantial, but I’ll guess that after a year at that level more than a few members of the House of Saud just might find themselves living in exile. They may have lots of neighbors-in-exile who they know from OPEC meetings.

12/6 – Reuters Media in Dickinson Press – Focus on top spots to boost US oil output even as well permits fall Articles says large producers are already relocating their wells from marginal locations to the sweetest locations. Example in the article is number of rigs in Divide county of ND dropped from 9 in September to 4 today. Keep in mind the number of rigs in North Dakota hovers in the 190s. A relocation of 5 rigs is rather small.

Guesses on breakeven prices:

  • $40 – price at which most producers start losing money – ND state regulators
  • $50 – Eagle Ford breakeven – Woods Mackenzie
  • $60 – Permian – top elected official in largest county of Permian

12/1 – World Oil – Harold Hamm: Activity will slow as oil price slides – Harold Hamm thinks drilling effort will drop as prices slide. When prices recover, so will drilling. He thinks the current price drop is due to Saudi rhetoric instead of supply and demand.

His ominous warning is that oil drillers can adjust easier than countries that are dependent on oil revenue to feed their people.

As the old saying goes:

Be careful what you wish for. You might get it.

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