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 #7 – two must-read articles

Here are two major, must-read articles on oil production and pricing for your consideration. One I’ve been holding a while and the other ran just this week.

First a few quick tidbits to keep in mind – 12/23 – Dickinson Press – Oil prices will affect fringe areas most: Break-even mark lower in heart of Bakken – Drilling at the margins of Bakken will be sharply reduced. In the four core counties, not so much.

For active wells, a price of $15 a barrel is sufficient to keep operating. Ponder that – $15 a barrel.

Keep that in the back of your mind as you read of Saudi officials who want to see current production in Bakken and Eagle Ford drop far enough to balance supply and demand of world oil.

The first big article:

12-22 – Wall Street Journal – Behind OPEC Decision, A Saudi Fear of U.S. Shale

Saudi Arabia’s surprise move to maintain production and let oil prices collapse

… is a story of a budding rivalry, driven by what Saudi Arabia views as a threat posed by American energy firm …

according to the deeply reported article.

This is a major, must-read article if you are actually following my blog. Check it out.

The article says the Saudi officials perceived they would have to take all the production cut necessary to maintain prices. Early feelers to Venezuela and then Russia & Iran confirmed their guess. Their fear of U.S. shale oil drove them to let prices fall to try forcing all the production drop to come out of U.S. fields.

Good luck with that.

There is an internal debate inside the Saudi government on just how long they can handle low prices.

Guesses by the Saudis are that around 2 million BOPD needs to come off the market.

Soooo, essentially all Bakken wells and most Eagle Ford wells need to turn off. Like that’s going to happen. Remember $15 a barrel. The only thing the Saudis may accomplish, other than cratering their national income (90% of Saudi national revenue there comes from oil), is reduce the new wells in Bakken in 2015 from 1,900 to maybe 1,000 or 1,200. Output may only increase 100K bopd instead of 200K bopd.

I doubt any Bakken wells will get closed in. Once the well is in place and pumping, costs to operate are really low compared to total cost and market value of oil. (Remember, $15 breakeven for producing wells.)

Article closes with a quote:

“All OPEC and non-OPEC officials are in a state of shock,” said Muhammad al-Sabban, a former adviser to Mr. Naimi, …

In shock? Yeah, I bet they are.

I just paid $2.52 at the pump, down from $4 this past spring.

Here’s the other must-read, which I’ve been saving for a while:

11/30 – Daniel Yergin in Wall Street Journal – The Global Shakeout from Plunging Oil – It isn’t demand for oil that is driving the market. Instead, it is the huge surge in U.S. production.

Since the high point of Peak Oil foolishness in 2008, U.S. oil output has increased 80% to currently 9M bopd. Mr. Yergin says the increase here is greater than all OPEC countries other than the Saudis.

Surging US production offset the drops in Libya and elsewhere over the last 3 years. When Libya’s production recently came back on-line, the supply imbalance appeared.

Mr. Yergin says maintaining output to drive down prices is driven by the ‘have’ members of OPEC. They think they can ride this out. The ‘have-not’ OPEC members will be hurt.

Russia, Venezuela, Iran, and Iraq will be hit harder.

Worst hit will be the countries with marginal plays that had hoped to draw drillers interested in investing in high cost, hard to drill locations with sketchy legal systems.

Drilling in the US will slow, he thinks, but it takes time to change drilling plans. He sees production in the US rising in 2015.

His company foresees 80% of new wells in 2015 will be profitable at $50 to $69.

My guess is drilling in the US will slow but won’t collapse. There won’t be any 2M bopd taken off the table in the US.

Hope the OPEC oil ministers are ready for a rough ride.

Remember, they started the price war.

12/21 – Bakken.com – Saudi Arabia says won’t cut oil output even if non-OPEC nations do – The Saudi oil minister said the country and OPEC will maintain their production levels even if other countries make cuts. This is presumably in response to hints from Russia that they and OPEC reduce output levels to increase prices. The oil minister said he thinks prices will recover. This is the second comment in a few days making the point about maintaining production.

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