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 on the revolution in energy, specifically shale oil

It is astounding to watch what is happening in the energy arena. U.S. petroprenuers have kicked off an energy revolution.

The staggering idea is this whole shale thing could just be getting started. Consider the following:

5/26 – Mark Perry at Investors Business Daily – Saudis’ Drive to Kill U.S. Shale Has Backfired – Prof. Perry points out the Saudis have now acknowledged their goal was to take out shale production. They think they have substantially succeeded based on the drop in recount.

I think the conceptual error is to assume there is a direct correlation between rig count and production. There are so many fallacies in that concept.

The ironic thing is there is a huge fracklog of wells drilled but are awaiting completion. As soon as prices come up a bit (exact point we may soon find out) there are a lot of wells for which it will be economic to finish. In North Dakota there are around 800 wells that just need to be fracked and they can come on the market. For context that’s just under half a years worth of new drilling.

One of the highly unintended consequences is to accelerate efficiencies and technological innovation. The article calls attention to those factors.

At an overall level, the common consensus a year ago was most wells had a breakeven around $80 a barrel. The consensus seems to be the breakeven is now $60 a barrel. Expectations are the breakeven could drop to $50 in the near term.

Not exactly what the Saudis had in mind.

That fracklog could be worked off quickly. Rigs could be brought back in operation as soon as all the laid-off workers can drive back to North Dakota. Production can ramp up quickly and output would rise fast when prices get to the level where it makes sense to do so.

Another entertaining factor the Saudis don’t seem to have considered is the 10,000+ wells that have been drilled in North Dakota over the last several years may have a rapid drop off in production, they will still be producing at significant levels for several more years and will still have some production for several decades. The wells are not going to be turned off.

Conclusion of the article:

It’s been tempting to think the shale boom is over, that a fall in the rig count and a small dip in U.S. crude production signify that the high-water mark of U.S. shale oil has come and gone.

But, as the Saudis are finding out, we are just in the early innings of a new revolution — “Shale 2.0” as Manhattan Institute fellow Mark Mills calls it. A strong, increasingly efficient and productive U.S. shale industry — powered by American ingenuity and “Made in the USA” drilling and extraction technologies — is here to stay.

As Prof. Perry has often said, don’t bet against American innovation.

To make the point yet again, check out:

5/27 – Mark Mills at Forbes – Oil Glut Part 2: We Are At The End Of The Beginning Of The Young U.S. Shale Oil Boom – Mr. Mills has labeled this Shale 2.0. He points out annual revenue from U.S. shale oil has grown from essentially zero to over $70B in just a decade.

Mr. Mills agrees with John Shaw who says:

“It’s fair to say we’re not at the end of this [shale] era, we’re at the very beginning.”

Mr. Mills thinks that eventually the breakeven point for shale could drop to something in the range of $5  up to $20 a barrel I can’t get my head around that price range, but now that I think about it the factors that have dropped breakeven from $80 a year ago to $60 now to $50 in near-term will not stop at $50.

5/15 – Jaime at American Interest – Strap in for a Long Oil Price War – Since Saudi Arabia kicked off the price war in crude oil, worldwide production not only has not dropped, but it looks like the surplus has grown from 1.0M bopd to 1.5M bopd.

Article cites sources saying the non-Saudi OPEC members of increased production. Production in Bakken is essentially flat. I have previously read that Saudi Arabia has slightly increased their production.

Article points out what I’ve read elsewhere that producers are innovating on their technology use in order to be profitable at $65 a barrel.

Article says the IEA expects the price war has just begun.

5/14 – John Kemp at Reuters – Who wants to be a swing producer? No one: Kemp – Swing producer is actually a very uncomfortable role. That’s the player or sector that is forced to adjust production to balance the market.

Article points out in the ‘70s it was Texas, with the state regulator telling producers how much they could produce. That role shifted to Saudi Arabia, who has absorbed the increases and decreases. Now that Saudi Arabia has refused to adjust their production, market prices have forced US shale producers into the swing role. The disruption we see in Bakken and Eagle Ford is the penalty of being the swing producer.

Article also discusses, or rather speculates, that we may now be at the point where prices will stabilize for a while and will also draw out increases in drilling and production. If that’s the case, the implication is that production will now slowly increase, prices will drop, new drilling cut back, prices will settle. Then repeat.

Left out of the article is whether Saudi Arabia’s role facilitated the oligopoly powers of OPEC. Continued implication of that idea would lead to a discussion of whether that manipulation maintained prices at an artificially high level, which seems to be the case in the 70s and 80s.

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