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.

More good stuff on the open frontier of energy – 2/25

New frontiers are rough and tumble places. The energy revolution is proving to be no exception.

A few recent articles about crude oil and natural gas which I found interesting:

2/19 – Nature – Study finds relatively low emissions of methane from major US gas fields / After a series of alarming reports, scientists estimate leak rate of about 1% for three major US gas formations – Study by team from University of Colorado Boulder estimates that methane emissions in three major gas fields, (Haynesville, Fayetteville, and Marcellus) averages about 1% of gas that is produced. Range is from 0.18%-0.41% in Marcellus to 2.1% in Haynesville and 2.8% in Fayetteville. Average of 1% is in line with industry and EPA estimates and dramatically less than the 1.5% many critics claim.

2/9 – Wall Street Journal – Oil-Price rebound PredictedThe International Energy Agency is expecting oil prices to recover in the second half of 2015. Since that will generate increased drilling in the US, IEA expects the price rise will be limited by that extra output.

I don’t understand the commodities markets. I’m just along for the ride. As I look at the trend on crude oil prices, which you can find here, what I see in the last several weeks is volatility around something that might be a floor. Of course it is only floor if prices go up. If prices go down it is called a pause. So those are the after-the-fact rationalizations.

What I saw in the first week of February is down 2, up 3, down 1, up 2, down 1, up 1.50, flat, down 1.50. That is in contrast to the last six months trading showing down, down, down, flat, down, and down. On 2/26, the last week of Nymex prices show flat, down 4, slow rise of 1.50, down 1.50, up 3.50, down 2.5. Looks like a trading range to me. Maybe the floor everyone has been looking for?

What will happen in a month, in July, and in December? I don’t have a clue. I’ll make a completely wild guess that we are at a floor and prices will be higher in 6 months and a year from now.

2/20 – John Kemp at Reuters carried by Bakken.com – Shale producers postpone oil well completions – By my calculation, the number of oil wells that had been drilled but were waiting on fracking to complete the well averaged 478 a month in 2013. An average of the state’s data for 2014 through September was 620.  In October, November, and December, the count was 650, 775, and 750.

Drillers are obviously holding off on completion for more wells as a part of coping with the drop in crude. Why?

The article points out two reasons. First, a majority of the cost in a well is fracking (perhaps up to 2/3rd of total costs from the article), so holding off on completion conserves cash.

Second, the fast depletion rate in a Bakken well means that somewhere around a third of total production is in the first year with about half in the first three years. If prices are higher a few months or six months out, that produces far higher returns than starting to pull oil out now.

So, a lot of companies will hold off on bringing in the frack crews.

2/25 – John Kemp at Reuters carried by Bakken.com – Bakken oil driller retreat to the core – Article says number of rigs in North Dakota has dropped to 121, down from 165 on 12/12, and down from 190 a year ago.  Of the 121, 115 are in the four core counties, with only 6 outside the prime area.

The 121 count is below the estimate from Mr. Lynn Helms, who has long said the number of wells needed to sustain production is 130.

Mr. Kemp expects output will climb for another two or three months. My guess is he is referring to months from now, which would be April or May as the high point in output. That is consistent with the guesses I’ve read elsewhere.

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