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 articles on impact of low oil prices

[youtube:https://youtu.be/c9nnsAGyQ2k%5D

Here are two of the more interesting articles I’ve seen recently about the impact of low oil prices on drilling and production. Also another article speculating there will be no change in policy coming out of the OPEC meeting later this week.

11/19 – Wall Street Journal – Oil Producer Bankruptcies Keep Piling Up the severe pressure of oil dropping from the average $93 in 2014 to something in the range of $50 this year is creating severe pressure. As you would fully expect, a number of weaker players have already filed for bankruptcy. More are expected.

According to a law firm cited in the article there have been 36 producers file Chapter 11 this year.

One of the errors in this article matches erroneous thinking I have seen quite a few times in recent months. There is a concept in play that when an oil and gas producer goes bankrupt oil production will drop. It is as if wells owned by the producer and the land rights they have just disappear. The wells instantly stop producing. The lease rights vaporize. The oil underground becomes unrecoverable.

Actually, the assets of the driller will be bought up by a stronger player for a nickel or dime on the dollar. Creditors will receive a fraction of what they were due. The new owner will have land leases, equipment, producing wells, and research on how each section of land looks. All those producing assets will continue producing and the assets on the shelf will go into play when it makes economic sense to do so.

11/20 – Wall Street Journal – Low Crude Prices Catch Up With the US Oil Patch – Article suggests oil drillers having cut a quarter million jobs across the industry have reached the limit of what can be done with layoffs. Tremendous productivity improvements this year have about been tapped out as well.

If correct, that points towards even more pressure on firms that otherwise are thought to be healthy now.

Article doesn’t say much of site in terms of prices increasing with Saudi Arabia continuing to push for maximum output and Iraq increasing their production. As the remaining oil was back on the market that will create additional downward pressure on prices.

Estimates from IEA are for US production to drop 5% in 2016, which will be about half 1 million bopd.

Massive-scale new projects around the globe have been postponed.

Here are a few tidbits and what the industry is accomplished in the last year:

  • Number of rigs running in the US has dropped 60% this year which so far has only resulted in a 3% drop in production.
  • Days to drill has dropped by half.
  • Cost to drill wells is followed by up to one-third, primarily due to supplier concessions.
  • Oil production per rig has gone up by 60% this year.

Another round of speculation in advance of the OPEC meeting later this week:

11/29 – Wall Street Journal – OPEC is Ready to Rumble Over Saudi Output – Venezuela, Algeria, Angola, and especially Iran will be pushing Saudi Arabia to curtail production in order for prices to rise.

Speculation in the article is the Saudis will resist the pressure and won’t budge on their output until at least summer 2016.

Further speculation from unnamed sources is many OPEC members would like to see a price in the $60 to $80 range, but without a spike that would spur producers (you can read Bakken, Eagle Ford, and Permian Basin in that comment!).

Article says average prices were $97 in 2014 and $56 in 2015.

A few of the production changes in the last year, according to the article citing IEA as the source:

  • +860k bopd – Iraq
  • +570k bopd – Saudi Arabia
  • +120K bopd – Iran
  • -80k bopd – Venezuela
  • -85k bopd – Kuwait
  • -440k bopd – Libya

Net change in the last year for the 12 listed members of OPEC is increase of 1,130k bopd, or up over a million barrels a day. That is the often cited guess on the daily oversupply in the world market.

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