263 thoughts to “GoM July Production Update”

1. The exploration agreement you mention above is actually between Chevron and Total, not Texaco (Texaco was acquired by Chevron in 2001). Chevron’s Ballymore well is a Norphlet test – if successful it will probably be the southernmost Norphlet oil discovery. Shell’s Appomattox, a Norphlet project Shell plans to bring online in about 2020 or so, is about 20-30 miles north.
   There have been a fair number of Wilcox discoveries that, as of now, don’t appear to be on track to be developed, including Kaskida, Sicily, Gila, Leon, Moccasin, and, most notably, the Shenandoah complex. The decisions to not develop these discoveries were made either because of disappointing appraisal, or low oil prices, or a combination the two.

   1. Fixed it, thanks (showing my age). Dennis asked me to publish this and it’s somehow taken up the whole page rather than an extract. I don’t know how to fix that but he might when he returns. It will be interesting to see if there is an oil price at which those fields you mention do get taken up again. I get the impression that there might be quite a lot of oil in place but the recovery ratio is terrible, so I guess technology could play a role as well.

      1. Hi George,

         Check out the edit I made, there is a continue reading separator in the editor that is easily added wherever you wish, if you ever don’t like the position I have chosen, feel free to change it as it is your post.

         Thanks as always for your fine work.

   2. The decisions to not develop these discoveries were made either because of disappointing appraisal, or low oil prices, or a combination the two.

      Wonder if that might have something to do with this as well?
      http://money.cnn.com/2017/10/12/investing/shell-oil-buys-electric-car-charging/index.html

      Oil giant Shell bets on electric cars

      One of the world’s largest fossil fuel companies is betting on electric cars.
      Royal Dutch Shell (RDSA) revealed a deal on Thursday to acquire NewMotion, one of Europe’s largest electric vehicle charging providers. NewMotion specializes in converting parking spots into electric charging stations. The Dutch firm has more than 30,000 electric charge points in Europe.
      The acquisition, Shell’s first in this space, shows how Big Oil is being forced to confront the long-term threat posed by electric cars and efforts to phase out gasoline and diesel vehicles.

      1. Or maybe the other way round – there’s no oil left to develop so they have to find something else to do – or both supply and demand influences, which is the reality of all economic decisions, not one or the other however much the media feels it has to simplify things to that level.

         1. For what its worth:
            “Deepwater is going to be playing a much-reduced role on the global oil-supply stage relative to what the industry expected as recently as three years ago.”
            -Thomas Curran, an analyst at FBR Capital Markets in New York.

         2. Or maybe the other way round – there’s no oil left to develop so they have to find something else to do

            I’m sure you are right, George. I haven’t followed your namesake, George Kopits recently but as I’m sure you are aware he had a pretty good talk a couple years back on why Shell and other oil majors were shelving projects, reducing capex, and having fire sales on assets in order to keep paying shareholders… sooner or later they would have to find other ways to make an honest living.

            Who knows, instead of investing in electric vehicle charging stations, at this point they might as well invest in producing orange Halloween themed MAGA hats. Charlie Brown would certainly approve!

            Re: “however much the media feels it has to simplify things to that level.”

            Given the general lack of capacity for digesting complex topics, of most consumers of MSM, it is not all that evident, (to me at least), that the media has much choice other than to produce one page reports with lots of pretty pictures and smiley faces…

            Oh, never mind, those are actually intelligence briefings for the Orange Hat Wearing Executive in Chief …

            1. Yep – that arsehole and the other ones that pop up to lend us their expert opinions on climate change on the other thread really make you wonder whether Kowalski had it right at the end (if the best thing they can come up with is that they never went on welfare what kind of a fucking life have they had?).

               https://www.youtube.com/watch?v=cX8szNPgrEs

            2. Hi Fred,

               Did you mean Steven Kopits?

         3. I think most of it had to do with the concept that large corporations have to make a wider definition of the business that they are in, or not get the interest in their stock, they should have. Had many a long argument with college professors, some years ago, over this. The oil company must indicate that they are sufficiently in the energy business, and not just the oil business. Like the argument I had with DuPont being a chemical company. No, the professors, stated. DuPont has been re-branded to be a conglomerate, because they are calling themselves a conglomerate. No more “better living through chemistry” for them, even though almost all they sell are chemical products. So big oil, is no longer big oil, they are in the energy business. In twenty years, that will make a difference. As for now, hogwash.

            1. Apologies for being a bit off the ‘OIL’ topic, though still relevant to expanding corporate identities, generally speaking 😉

               Perhaps paying dividends to shareholders needs to be looked at as a secondary or even tertiary goal of corporations. Yes investors of capital obviously deserve a seat at the table. But they are only one of three equally important legs of the stool.

               Google just has to grow. It has to keep growing. But Google grows at its own peril. Google grew so much that what happened? It outgrew Google. Google had to become what? Alphabet. Now what is Alphabet? Alphabet is not Google. Alphabet is a holding company. So Google’s new business as Alphabet is to do what? It’s to buy and sell technology companies. So, once a company becomes just too big to flip anymore, it becomes a flipper of other companies.
               Douglas Rushkoff
               http://opentranscripts.org/transcript/douglas-rushkoff-webvisions-portland-keynote/

               If you have never heard him speak, he has some interesting insights that apply to any modern business and corporation.

               In a nutshell: “It’s the OS stupid!”

   3. George Kaplan,

      Interesting article. I believe we are going to see a more rapid disintegration of the Ultra-Deepwater Drilling Industry when the markets finally correct by 20-50%. The notion that the Ultra-Deepwater Drilling Industry will recover by 2020 or 2024 doesn’t take into account that the broader U.S. Stock markets have experienced a 230% increase from the lows without a typical 15-20% correction.

      Hell, I believe the S&P 500 just hit a record of not experiencing a 3% correction for more than 453 days.

      Regardless… I just posted a new article titled U.S. DEEPWATER OFFSHORE OIL INDUSTRY TRAINWRECK APPROACHING: https://srsroccoreport.com/u-s-deep-water-offshore-oil-industry-trainwreck-approaching/

      Transocean drilling rig utilization fell from a peak of 95% in 1H 2013 to 37% in the 1H 2017. Of the 17 Ultra-Deepwater rigs currently drilling for oil in the GoM (source: Baker Hughes), one leased by Chevron was terminated early. So, the total will be down to 16 in November.

      Again, the wild card of much higher oil prices will only occur if the Fed and Central banks start up the printing press BIG TIME. When the Fed’s QE3 program ended, the price of oil plummeted.

      However, when the Central banks print like crazy, this won’t last long. Thus, it won’t be enough to allow the Ultra-Deepwater Drilling Industry to recover.

      Steve

      1. Here is a link to the Chart I could not post in the comment above:

         https://dj0s31cxqi9ot.cloudfront.net/wp-content/uploads/2017/10/TRANSOCEAN-Ultra-Deepwater-Rigs-Utilization-768×545.png?x65756

      2. You highlighted TransOcean but they might be the ones doing the least bad at the moment. I think all the deep water drillers around the GoM are hoping the activity in the Mexican side will save them in the long run. I don’t now if it will, I think Art Berman has said it tends to be gas prone and some areas are highly compartmentalized (partly as a result of the Chicxulub meteor).

         The EROI of a play is relevant but I don’t think it’s impact is fully understood or can be applied in the same way on all developments, especially in the short term investment decisions.

   4. I was asked to review an Eocene discovery in the Gulf of Mexico, my impression was that although oil in place was very high, the rocks were very risky. I suggested they emphasize long term pilots with a couple of wells to see how they performed.

2. Great post. Do you have any idea of the oil price that may bring back a higher level of exploration effort?

   1. No idea – I don’t do the oil price prediction thing because I’m pretty sure nobody in history has ever got it right for the right reason. For real ‘frontier’ type exploration to start again then there would have to be a pick up in lease sales and really they have been tailing off even in the high price years (I think I put some charts in a previous post on the GoM showing how the percentage of offered leases taken up has been falling off. I doubt if shallow a lot of the deep lease areas will pick up again though, there’s little left.

      1. Yeah, whatever it would have to be, would have to be more stable and higher than current. So, probably no big bidders on the 97 million acres in 2018.

      2. In my opinion, exploration will not pick up too much regardless of oil price because of the maturity of the basin, as George suggests above. (Actually, exploration may pick up a fair bit with higher oil prices, but significant successes probably won’t).
         Now there certainly are those that would disagree with that, and, since I’m still in the industry, I often hear the message about the tremendous remaining potential in the northern deepwater GOM coming from those in the ra-ra corner.

         1. The ra ra corner is still vociferous in the shale end. Still a lot of empty heads talking about how the shale will double output, in the future. Give it a break, people, it was peaking in 2014, when capex was astronomical. You couldn’t high enough people to double the output. Nor, could you high enough people to keep up with EIA estimates. Offshore pays some pretty good money, but it’s not an easy life that millenials would prefer. Most that lost their jobs, are not coming back.

            1. Hi GuyM,

               Yes lots of optimism for tight oil output. I think the peak for US tight oil will be no higher than 6.7 Mb/d, probably around 2022 or 2023, this will only happen with Brent Crude prices above $80/b, but by 2020 we may have reached that price level and possibly far higher ($120/b) if oil supply growth falls behind oil demand growth. That scenario seems relatively likely (67% chance or higher in my view).

               1. Agree. I bought conservative leaps for 2019, and far less conservative leaps for 2020. With the intent to roll the 2019 over into conservative leaps for 2020, or 2021.If I am going to do all this research, I am hoping it will pay off.

               2. If oil prices rise quickly by 2 dollars per month we might see 7.5 mb/d in 2023. So not double but more than 50% increase.

               3. I think that much is there if the price is right.

         2. Also even if they wanted to explore there might not be the latest generation deep water DP rigs available or the crews for them; a lot have gone elsewhere, a few are in companies that have gone bust, some are in long term cold stacking.

            1. Hi George,

               Does any of this change your previous GoM forecasts significantly?

               Also does the EIA’s Short Term Energy Outlook (STEO) for the GoM look reasonable ? Everyone can chime in here.

               Chart below with STEO for GoM.

               

               1. Geeze. Just based upon George’s discussion, those numbers look extremely high. Of course, EIA doesn’t use much in the way of decline rates.

               2. Not much and no. I think, if anything, the future GoM production will be a bit less than I expected about six months ago. As far as STEO goes I think they come up with a future profile once a year and then just bias it up and down to meet this month’s production number – I think a new profile must be due soon. There is about a 10% decline per year, which might increase a bit now, so about 170,000 bpd is needed to maintain a plateau, but the STEO has another 100,000 per year of growth. Next year there is only Stampede early on, which has topsides nameplate of 60,000, but only 50,000 planned with the rest available for tie backs and probably only about 70% availability in the first year; plus Constellation – which has maybe 30,000 but depends on decline in the rest of the Caesar-Tonga field to allow capacity for some of it, so not all of that is net gain; the LLOG fields I described above; and Big Foot at the end which won’t contribute much in 2018. So from July 2017 to Dec. 2018 they lose maybe 230,000 and add about 90,000 to 110,000 maybe with a bit of brownfield as well. There’s also Atlantis North but I think that only maintains a plateau against fast declines from their other wells. But EIA are saying the GoM adds 330,000. Also in 2019 Big Foot isn’t going to ramp up fast, contrary to what I previously thought. It has dry trees, only two have been fully predrilled, the others have the top two conductor sections drilled but the on-platform rig will have to complete them. I think the oil is pretty heavy so not huge production from a single well, therefore even with a 70,000 nominal topsides nameplate, the wells and the usual low availability in the first year will be limiting.

               3. EIA’s monthly production data to end of July says US production vs 2016 is averaging about 3.4 million barrels per month higher. divided by 30 is 114K bpd increase over last year averaged month by month. (not month to month)

                  For Texas it’s 90K bpd increase over last year, as of end of July, averaged month by month. That’s most of the 114K.

                  Don’t know if that’s far enough back in months for the correction we get here to have moderated.

               4. Thanks George,

                  For reference George’s projection for GoM from July 2017 is at link below.

                  http://peakoilbarrel.com/gulf-of-mexico-discoveries-reserves-and-production/

                  In that post from 3 months ago George projected about 1450 kb/d from the GoM at the end of 2018. The updated estimate is about 1620 kb/d in Dec 2018 vs 1850 kb/d from the most recent STEO.

               5. So in that projection I assumed about 20% decline rates, which is more likely based on R/P numbers, and I think I described it as a guess. I also had assumed a few fields would be larger developments – e.g. I think I had Crown and Anchor at 80 kbpd, and therefore a few years out – in fact it has been bought forward to next year with a much smaller production. Also I’m not sure when I had Atlantis North. And in discussing the EIA numbers I was conservative in order to show, even with these, I can’t see where they get the production. As I said higher decline rates than 10% might well be seen and then production would be lower. In the longer term a lot of projects I had as stand alone will be shorter term but smaller (i.e. maybe a gain next year but lower longer term). The earlier projection didn’t include new discoveries either and there have been a couple of those that have been tied in directly.

               6. Looks like I got the Crown and Anchor mixed up with Anchor above – but it has been bought forward compared to where I had it, also Mahogany and a couple of the LLOG recent discoveries I didn’t have at all which are same but add a bit. The biggest difference is the assumed decline rate – currently the mature deep and shallow wells are at about 20%, it’s a question of whether the new fields plus the BP fields join them now that their are no real big tie-backs except the Atlantis North and Constellation.

               7. Thanks George,

                  I forgot about the 20% decline rate vs 10% decline rate sorry. Maybe 15% is a good guess (between conservative and optimistic).

                  That would put decline at about 370 kb/d, new field additions at around 100 kb/d for a net GoM decline of about 270 kb/d by Dec 2018 and output of 1430 kb/d.

                  This coincides with your suggestion that your current projection would be “lower if anything”.

                  Of course using your original 20% decline assumption, it would be lower still (about 1320 kb/d) if we assume all current output (about 1700 kb/d) declines at an annual rate of 20%. This would be more of an apples to apples comparison with your July 2017 projection.

               8. Could be – but the 20% decline rate fits with P50 reserve estimates and current production, so if they manage to hold at lower rates next year then there’s likely to be a bigger drop later on. There may be a bit of upward reserve revision on the newer fields, but not much I think, and none on the older ones unless EOR is used (and I’ve seen no mention of any).

               9. If prices go up there may be a tendency to bring projects forward in time, which could reduce decline rates in the short term, so possibly 15% for the next 5 years followed by higher decline rates later (maybe 25 or 30% over years 6 to 10 ). Or maybe 20% decline will be correct, you would know better than me, I have not looked closely at the data.

                  You mentioned 10% in one place and 20% in another, so I was just taking the average.

               10. I like wide margins, your arse is always covered then. With the new discoveries being tied in (which I think I specifically said I hadn’t made any allowance for in the previous post), and Crown&Anchor and Mahogany bought forward there would be, say, 40 to 60 kbpd on top of my estimates anyway. Whether that will all be net on the exit rate I doubt, I think all these small depletion drive fields will show immediate decline rather than holding a plateau.

               11. Hi George,

                   I guess I was thinking a rough guess going forward would be to assume x +/-5%, decline of existing production along with the new field additions you know about, where I am guessing x=15%. This might cover future changes in new field additions plus any future discoveries and your guess for x might be 20% as it fits the data better.

         3. Hi SLG,

            When you describe the Northern Deepwater area, what area subdivisions are you referring to? Is it in the Eastern GOM planning area?

            1. John,
               I include the Western and Central planning areas, and those portions of the Eastern GOM planning area that have been open for leasing recently, which would include western Desoto Canyon and Lloyd protraction areas.
               The prospective plays types in this portion of the Eastern planning area that is open to industry include the Norphlet to the north and amplitude associated Miocene gas to the south.
               The gas play is pretty mature. A bunch of gas discoveries were made in that trend 10-12+ years ago, and they were all tied into the Independence Hub that Anadarko operated – total gas production was probably a tcf or so. I think the Independence Hub has since been decommissioned.
               The Norphlet play has been explored to the north. Shell made a discovery at Appomattox, and a few offsets. To date, I don’t think anyone else other than Shell has made a Norphlet discovery – though industry is still waiting on Chevron’s Ballymore test.
               You have to go further east, into areas that are currently not open for leasing, to get into potential Cretaceous carbonate play types, and perhaps some other plays.

               1. Thanks SLG,

                  I worked Mobile Bay back in the 80’s as I recall the Norphlet was around 18,000 ‘ TVD.

                  What size unrisked reserves would it take to drill a Norphlet WC assuming a decent gas price say $6 mcf?

               2. Some of those Mobile Bay Norphlet wells were pretty prolific gas wells as I remember – over 50 mmcfpd rates were not unusual at all.
                  While the Norphlet play in Mobile Bay is a gas play, in deepwater it’s an oil play. Reservoir depths are around 25000-30000′. Unrisked reserves are probably 150-200 mmbo in order to get a wildcat drilled though they could be less if you’re expecting to tie it back to an existing facility – which may be Chevron’s plan with Ballymore, if successful they could tie it back to Blind Faith.

3. There was a tight oil spending drought in Q2 & Q3 compared to Q1 2017
   Chart on Twitter https://pbs.twimg.com/media/DM7CyhWUIAAnRN6.jpg
   Macro Energy Insights – WoodMackenzie https://twitter.com/WMEdRawle

   Cash required per barrel for major shale companies – Bloomberg & Al Rajhi Capital
   cost including interest + taxes: https://pbs.twimg.com/media/DM_VzOnVwAAhOyX.jpg
   operational cost: https://pbs.twimg.com/media/DM_VEYHVoAANSEj.jpg

   Saxo Bank do a good summary of the weekly US Petroleum Balance Sheet
   Gasoline imports hit a low for the year (not shown in charts)
   https://pbs.twimg.com/media/DM_a1hGWAAACizI.jpg
   https://pbs.twimg.com/media/DM_bVaiX0AEjlCS.jpg

   

   1. Distillates stocks at 129mb updated to Oct 20th

      

   2. Good grief! That’s not a drought, it’s the Sahara desert! Especially when you consider most of that spending was to feed the DUCs. Makes me wonder why it took so long for Schlumberger to predict a drop in production.

      1. if any of you actually follow individual companies you would have understood that many allocated their forecasted capex early in the year and were notifying the market they were not increasing their budget as early as June/July. I expect the same pattern to follow next year. old news to some. on this subject:
         http://www.worldoil.com/news/2017/10/23/oil-patch-gets-frugal-as-investors-urge-profits-over-boom
         http://www.worldoil.com/news/2017/10/25/major-oil-companies-set-to-make-facebook-level-cash-even-with-50-crude

         1. Yeah, I have. Except with my accounting background, I translate a distinct difference between “allocate” and “spend”, except when dealing with governmental accounting. Allocate is budgeting, spend is financial (it goes out the door). Could be the article did not perceive a difference. I posted similar articles as you just did on the last postings.

4. https://seekingalpha.com/amp/article/4116190-perfect-storm-oil-prices-will-rise

   Not quite all the ingredients that are simmering, but the article lists more than most.

   1. Hi Guym,

      I agree, a good post in your link above.

      Perhaps we are correct about oil prices.

      What do you think about an average annual Brent oil price in 2020 of $100+/-20 per barrel in 2017 constant dollars? I would guess there may be a 50% chance this is correct.

      1. I am more concerned about WTI, but I think they will start converging next year, so say oil at 80-120. You are asking about 2020, so I would say 95%, unless severe economic recession, huge tech breakthrough, absolute war, or some other extreme black swan event.
         I look first at inventory, as this caused the drop in price starting in 2014. The US contains the majority of the over supply. Quite obviously demand exceeds supply, or we would not be experiencing drawdowns. Drawdowns in the US have not reported to be rapid, but an increasing level of exports have basically taken away big builds we may have had lately. Exports will continue to increase, as new export points are scheduled to come online in early 2018. More exports, bigger draws. We are already exporting close to the daily production of the Permian. The big build was over time, and due to the reluctance of refineries to re-tool. That is not a big factor, anymore. Refineries will be the ultimate losers, eventually. So, I really look for inventories to clear out in the US by sometime 2018. I am not buying into the theory that US exports will cause an increase to world inventories. The rest of the world’s inventories were deleted pretty fast.
         Next, what will demand be? Who really knows what it is now? I’ve heard it said, that IEA makes up demand amounts based upon production, which is probably not too far off reality. Let’s assume it continues upon the 1.4% increase range. I am not going to attempt to put real numbers to that, we will just need a bunch of additional barrels.
         Now, turn to production. OPEC is no more of a wildcard than US shale is. They can pump more oil, but there will be some lead time. US can pump some more, but it will take some lead time. Russia can pump some more, but it will take some lead time. Lead time is roughly equivalent to two years. So that’s three years out, approximately, with 4? million in demand to cover. Remember, we are short supply now, or we wouldn’t be drawing down inventories. As far as US production goes, I’m going with Schlumberger’s assessment. Flat through 2017, and basically flat in 2018. Any increase in Permian, would offset by declines, elsewhere. To me, that makes 2018 and 2019 look good. 2020? That’s a wrap. That doesn’t even consider the wild cards of Venezuela or Iran, and leaves a lot of wiggle room, otherwise.

         1. My interest in oil, is primarily from a small royalty percentage in about 3000 acres in Southwest Atascosa County. They have drilled only five wells all the way up the fairly rectangular shape to prove it has a very decent quantity of oil, but have delayed further production, because of the price. I am really OK with that.
            The longer EIA keeps their head up their arse, and pundits keep running around in circles screaming, “we are swimming in oil”, and “the US will produce double what they are making”, the longer it will take them to realize how stupid they are. It will make the spike sooner, and bigger. The original problem started with the reluctance of refineries to re-tool to utilize shale oil, and the original prohibition on exports. The buildup in the US really was the primary cause of the drop, because it was so visible. The price is determined by its final “spot price”. The logical place of such prices is at the refinery level. Here is to WTI backwardation, and may it not occur too soon. I think OPEC is on to this, and is their primary thought for a “cut” extension, as they are happily playing along. It, probably, would have arrived without their “help”, anyway. Conservative financial management by US upstream is a brilliant move.
            It really would make no difference on OPEC cuts, as far as US inventory is concerned, because a lot of the US production is “trapped” because of refinery decisions. The savior is US exports, but nobody is concentrating on that.

         2. Hi Guym,

            The guess was conservative because I have been wrong on the future rise in oil prices since 2015. My guess is that prices will go up by at least 2020, potentially OPEC has cut back production by choking some wells and perhaps Russia and the other non-OPEC nations joining the production cut.

            Perhaps with rising oil prices these producers will be able to respond with higher output more quickly than you envision, there may also be an increase in tight oil output and onshore conventional over a 6 to 12 month period.

            If prices start rising gradually starting now and increase by $2/month over the next 24 months then Brent is at $105 in Oct 2019 and this gradual oil price increase will gradually bring on more capital spending in the oil sector.

            Perhaps this eventually results in oversupply. I don’t think so, but have been wrong in the past. For that reason I stick with 50% probability of $100+/-20 per barrel in 2017$ for Brent crude spot price (FOB) as the annual average for 2020, 25% chance prices will be lower than $80/b and 25% chance they will be higher than $120/b (Brent spot annual average in 2017$ in 2020).

            1. It was just the way, I envisioned it. Either way, it will be a lot higher, probably. As far as track records go, mine is not without fault?

               1. Jeeze, today is brain fog day. Re-reading your comment makes it 75% probability over $80. Ok, pretty close.

5. So, appears Trump and the Republicans are going to eliminate percentage depletion, a deduction which applies to producers and royalty owners who sell 1,000 BOEPD or less.

   I suspect over 90% of the independent producers who benefit from this deduction voted Trump and Republican in US House and Senate races.

   Wonder why they are sticking it to one of their core constituencies?

   1. Shallow,

      Rick Perry may get his Texas Passport revoked. What an idiot move!

      1. It’s ok, he probably forgot where Texas was. He’s too busy inanely running a Department of the government he wanted to get rid of, but couldn’t remember which one.

         1. now thats funny, even in texas? lets wait and see if it survives

6. ConocoPhillips earnings out. Earned 16 cents a share if gain from asset sales is excluded.

   The company has gotten a lot smaller through asset sales. Production is down 355,000 BOEPD from one year ago to 1.2 million. BOEPD.

   I noticed Hess also is selling significant production after once again losing over $1 per share.

   1. Sales of “non-core” assets makes a lot of sense, if your leaving a lot of DUCs on the balance sheet. DUCs still affect cash flows, sales of “non-core” assets offsets it.

      1. Guym. What do you think about the Rs and Trump eliminating percentage depletion?

         I agree it is a tax break, but one for the “little guy”

         I am sure no real estate tax breaks will be eliminated. Lol.

         After eight years of fighting President Obama on this issue, the R’s are going to stab their number one constituency in the back, being small independent oil producers.

         Look at the stripper well counties in this country and see the percentage that voted for Trump. Most over 80%.

         Interesting the zero media coverage of this irony.

         1. It’s a rip. However, remember they are planning on increasing the standard deduction by about 2X. So, most royalty owners won’t get the same benefit as others, but it should not be a pain to most. Some of the legislatures who vote for it, may not have a job next year. There are more that are getting some kind of royalties in Texas, than you can imagine. So, you may have the Republicans in Texas and some other states balking on this point.

            1. It will affect royalty owners for sure, but the mom and pop oil producer (who overwhelmingly voted Trump and Republican more than likely any other occupational demographic) get waylaid.

               Here is an example, which is all too common in the stripper well USA:

               Annual oil sales: 10,000 BO x $45 = $450,000
               Operating expenses at $30 per BO $300,000
               Percentage depletion – 15% 67,500

               Net schedule C income 82,500

               Net schedule C income without percentage depletion 150,000

               In 2017, the social security phase out is $127,000. So mom and pop will pay an additional $5,173 in social security taxes, assuming the schedule C is just in pop’s name. If not, mom and pop will pay an additional $7,847 in social security taxes.

               With regard to medicare taxes, mom and pop will pay an additional $1,835.

               With regard to federal income taxes, mom and pop, using 2017 brackets would pay an additional $16,875, assuming a federal tax rate of 25%.

               If mom and pop live in a state with state income tax, there will be an additional hit. If we assume a 5% state income tax rate, an additional $3.375.

               So, in my example of mom and pop, small business, stripper well producers, who likely 95+% voted for Trump and Republicans in the house and Senate, it appears the total tax bill will be going up by around $28,000 – $30,000 annually.

               I selected two counties each in five states where I think there is a very large number of stripper well operators, to see how each county voted in 2016. Here are the percentages Trump received in each of the following:

               Eddy Co., NM 66.9%
               Lea Co., NM 70.6%
               Archer Co., TX 88.4%
               Shackelford Co., TX 91.6%
               Nowata Co., OK 78.4%
               Washington Co., OK 71.2%
               Russell Co., KS 79.8%
               Barton Co., KS 76.3%
               White Co., IL 76.9%
               Wayne Co., IL 83.9%

               Has there every been another example of a President and party willing to stick it this hard to a core constituency?

               Yes, we can debate whether there should be the percentage depletion deduction, I will agree with that. However, living in an area with a large number of stripper well operators, I listened to what they said about Hillary and the Dems. I am sure they never imagined Trump and the Republicans would be the ones to hit them with a 2′ x 4′.

               1. As the limitation is on the first 1000 barrels on a property by property amount, that is possible in those that have multiple properties of stripper wells.

               2. The limitation is 1,000 BOE per day.

                  The largest oil company in our field sells about 750 BOPD. It is a small business, family owned.

                  At $45 oil, their taxable income will go up by about $1.7 million per year. At a 35% federal income tax rate, they will pay approximately $600,000 more in federal income tax per year assuming percentage depletion is eliminated.

                  The caveat to this is that if the oil producer is set up as an LLC or S corp., which many are, there will likely be a reduction in income tax rate. However, that will only apply to the business income portion, and not the service or labor portion of the income.

                  The pass through tax rate reduction benefits investment income, not income derived by labor or services. Thus, the owner of the apartments gets the lower tax rate, the accountant who sets up his business as an LLC does not.

                  BTW, Trump allegedly owns an interest in about 550 real estate pass through entities, all which would presumably qualify for the lower rate.

                  Add on elimination of federal estate tax on all estates, this is going to be one heck of a windfall for the Trump family, which will be paid for in small part by stripper well operators who overwhelmingly voted for him.

               3. So it is 1000 per day, sorry, wasn’t thinking. Vacation does that to me.

               4. Hi shallow sand,

                  Only Democrats should pay taxes. 🙂

                  They love taxes.

                  Maybe all tax deductions should be eliminated, just a progressive tax on income with all income (wages, interest, dividends, and capital gains) taxed at exactly the same rate. Corporate tax rates could also be reduced to prevailing international rates for developed nations.

                  It would simplify the tax code.

               5. Dennis: I agree that there are many things to debate with regard to deductions.

                  I am just pointing out what is an extreme irony in my view. After 8 years of President Obama threatening to do away with small business oil deductions, and being fought by the right every step of the way, the right is now going to eliminate said deductions anyway. And that I presume those who will pay much more income tax resulting from the deduction elimination overwhelmingly voted for those who are raising their taxes.

               6. I assume you would agree business expenses should be deductible?

                  Or should a farmer with $500,000 of income and $450,000 of expenses such as seed, fertilizer, fuel, etc., pay income tax on the $500,000.

                  I always loved the blah blah about filing your tax return on a postcard. We already have that, it is called the 1040EZ.

                  Sound bite media is destroying the ability of our populace to think critically?

               7. Hi Shallow sand,

                  Of course business expenses would be deductible.

                  I am more familiar with personal income tax than business income tax.

                  For business taxes we would be talking about profit or loss and profits for a small business would be taxed at the same rate as any other form of income (wages, interest, dividends, capital gains, etc.)

                  The idea is to get rid of various ways wealthy people can reduce their tax rates. About the only deduction worth keeping would be charitable contributions, in my view.

               8. A gross receipts tax that’s progressive? Maybe. However, there will still be a lot of questions as to what is income, capital gains, passive income, etc. Is gross income from a business taxable? The last big simplification was in 1986. It was the most complicated piece of tax legislation ever produced.
                  SS- the more I think about it, it may run many stripper well companies out of business. They are on a low margin, anyway. It’s counterproductive to the argument that we are here to help you. So, if we could probably put removing percentage depletion into the black swan category. That’s about 16% of the US production.
                  http://nswa.us/page_images/1421334497.pdf

               9. Hi Guym,

                  I imagine an accountant could figure out ways to simplify the tax code. For businesses net income would be taxed. I am not an accountant so I am not familiar with all of the nitty gritty on passive income.

               10. Probably could, but not without taking things away, like the 15% depletion. You have to weigh the pros and cons of those takeaways. Probably, many need to stay, they were put there for a reason. Some, just because of the votes. Some, would damage the economy, like percentage depletion, it’s been part of the tax code since 1926. In Texas, minerals are defined as part of the property. So, you are removing part of your property, on each barrel you sell. More importantly, it promotes production. So, if you want to lower GNP, by all means include the removal of percentage depletion. If I had a stripper well, and profit was determined by percentage depletion, then I would not run it, if that profit were taken away.
                   You say business should be able to deduct things, well the 15% depletion is a business deduction, whether it goes on schedule E or schedule C. So, to stimulate the economy, we take away business deductions? That’s so unRepublican.
                   Passive income rules were put into the tax code in 1986, because of passive losses. Losses from operations that were not conducted by the taxpayer, that were set up by others so that if the taxpayer invested in it, they could take losses.

               11. Hi Guym,

                   I am suggesting simplification of the tax code. I suppose one can find reasons that the depletion allowance makes sense.

                   A conservative free market person would see it as a tax subsidy.

               12. Hi Guym,

                   The argument that “they were put there for a reason”, is simply an argument for not changing the tax code.

                   Does it make more sense, in your view, to just leave things as they are?

                   Some stuff probably will not be changed, certainly what I have proposed would never pass.

                   In reality the “simplification” of the tax code will probably lead to a more complicated tax code.

                   Aside from normal business expense deductions, health care, retirement contributions, and charitable contributions would be the only deductions that seem worth allowing. Dump all the other special tax breaks.

               13. Wages are generally guaranteed, even in bankruptcy. In general, a wage earner cannot “lose” money. You do not work all day and have the boss come up and say “you need to pay me, the company lost money today.”

                   For the most part, when you invest capital, you can lose some or all of it. And, sometimes very quickly. But, unless you have capital gains from other sources, your loss deductions are severely limited, i.e., a $3,000 per year maximum, and the rest is carried forward.

                   So, if all income were taxed the same, a rational person would not want to invest. In fact, most people will not invest even with the rules as they are.

                   And, in order for “all income” to be taxed the same [where “all” means “all”], you would be taxed on: Gain on sale of house; company fringe benefits such as employer contributions to your medical insurance and to retirement plans, such as a profit sharing plan; disability income; life insurance proceeds; inheritance received; gifts received; damages received from a lawsuit; VA benefits; churches would be taxed on donations received, as would all other charities such as the salvation army; all people would be taxed regardless of status, so being below some arbritrary poverty level would not count for anything; etc., etc.

                   So, now you will say “I did not mean “all” income.” So, your tax code starts to get more complicated on day one, and in a few years we are back to where we are now.

               14. I mentioned charitable contributions. Retirement and health benefits could also be treated differently.

                   As I said probably not easy.

                   Also if one is going to argue that depletion is like depreciation, it would seem this deduction should go to the land owner rather than the producer.

                   If I lease a car used 100% for business can I claim a depreciation expense for the car?

                   I don’t know the tax rules, but it seems that depletion of an oil field should be treated this way. Most producers lease rather than own.

               15. Hi Clueless,

                   When a small business earns a profit, isn’t it taxed at ordinary income rates?

                   Haven’t those small businesses “invested”.

                   Many people “invest” in CDs and the interest payments are taxed at ordinary rates, people also invest in Bonds and if they are not municipal bonds those not in retirement accounts would be taxed at ordinary rates for interest received.

                   Stock dividends and capital gains currently get special treatment, but those saving extra for retirement beyond what can be contributed to 401k or IRAs will still find it worthwhile to invest in a diversified stock portfolio due to the higher long term rate of return relative to bonds (which already must pay the higher tax rate on interest received for a non-retirement portfolio.

      2. Norway Asset sale (incl. mainly Valhall) for Hess does not sound like non-core. It sounds like desperation

         1. You noticed I put quotes around non-core, right? It’s all desperation, at this point. Non-core is usually what is put into the companies reports to not indicate they are desperate.

         2. I think Hess are looking for the Liza project with Exxon to solve all their problems, and they need the money now to be able to fund it and stay in the game.

7. IEA Oil Market Report, dated October 12th – the free version was released today.
   Download from here https://www.iea.org/oilmarketreport/omrpublic/currentreport/
   https://pbs.twimg.com/media/DNFeB5iX4AA4Jw5.jpg

   

   1. Th US will be the largest contributor to growth in both 2017 and 2018, adding 470 kb/d and 1.1 mb/d, respectively.

      EIA should be finding out who IEA’s supplier is, their dope sounds stronger.

8. Cost depletion vs percentage depletion. None of the curren jive is indicating that cost depletion is eliminated. Test of fairness:
   In 2018, Joe Blow has oil discovered in his land that he owns 50% of the mineral rights. The recoverable reserve is estimated to be 6 million. He has 60 acres he paid $10 an acre for in 1945, so he has a cost of 6000 less the value of the land, or zero. Glenda Nobody just inherited the other 50% mineral rights when it was appraised, so her cost is 3,000,000. Joe Blow can’t take any depletion, because congress just eliminated it. Glenda can use cost depletion. So, Congress has just, again, leveled the playing field.

   1. True, cost depletion will still be available.

      I like your example, where the person who inherited gets a big deduction and the person who bought cheap and held gets none.

      Again, we can debate about percentage depletion, my point is more that Trump and the R’s will be sticking it to a part of their base if they eliminate percentage depletion.

      It is not as hot button as some other issues, but to some producers I know, it would be akin to the Republicans taking away their guns.

      Seriously, this will raises taxes on stripper well producers big time. And Donald Trump, Paul Ryan, et al are behind it. And no media about it of any significance.

      1. They have an association, surely it is making noise.
         More information, when it was created in 1924, the original depletion rate was 27.5%. A useful life (of any significance) for a horizontal oil well is about seven years, or equal to about 15% a year, so by then a well would be fully depreciated (depleted). Or be creative, sell to your own Corp. at full value on a note, and use cost depletion.

         1. Hi Guym,

            I think shallowsand is talking about stripper wells which can produce for 20 years or more. Could someone get a mortgage on their land and then use cost depletion, the money could be taken out and immediately repaid to the bank to reduce interest cost? How much does land sell for if it has 1000 b/d of average production? I imagine quite a bit, so cost depletion could be used if the land was revalued through a mortgage transaction (for land that is already mortgage free), or perhaps the land could just be appraised.

            1. Mortgage would not increase cost for tax purposes. Appraisal wouldn’t help. Cost is cost, it’s what you paid for it, or have put into it. That’s why it is unfair to people who bought and held, vs the newly acquired (which includes inheritance with a stepped up basis, like my example). You could do stuff, like I talked about. That is transfer to a Corp, with a note, for current value to try to get cost depletion. Unfortunately, you would probably pay the price later, when the IRS calls it a sham transaction.
               To be fair, you could eliminate percentage depletion, and allow everyone who owns old land to use the higher of cost or a current appraisal on that property for tax purposes. Then everyone is on an equal basis with cost depletion. That would be kind of a full employment incentive for tax accountants, appraisers, attorney, and IRS agent addendum. I think that may be one reason they went with a simplified percentage depletion in 1924.

               1. Or, we could delete the percentage depletion, and require cost depletion, which may add on considerably to the dollar amount of tax accountants, petroleum appraisers, tax attorneys and IRS agents who specialize in that area. We gain 3 billion in taxes, lose over 10 billion in oil income to the GNP (which increases our net imports), which is offset by unknown millions or billions in amounts spent to justify taking cost depletion. Doesn’t sound like a win win situation to me.
                  Remember that percentage depletion applies to other industries such as mining and timber. They can’t just take off oil, without the other, it’s in the same code, and it is basically the same thing. Plus, you end up affecting more states and industry organizations that are both Republican and Democratic, which gives the proposal zero chance of surviving. Mining is a broad spectrum, from coal to lithium. Trees are all over the US.
                  It is not a well thought out proposal. It just affects a lot more than they have thought out, yet. It will receive a lot of discussion, and eventually be dropped, because of the above reasoning.

               2. So, that same “subsidy” that the eco-people are crying about has a higher “subsidy” percentage (22%)to their lithium production than oil at 15%. Even though lithium mining is more like evaporation than “mining”. Why do you think the Democrats never followed through with their inane statements? So, now we have Republicans making the same statements.

               3. Wow that’s quite the tax giveaway to all extractive industries. I didn’t realize how third world our tax code was. Maybe all businesses should be able to use percentage depreciation to make it fair for those in non extractive industries.

                  Or we could take it a step further and only have people that don’t own a business pay taxes.

                  Yeah that’s the ticket, accountants might have to find a new line of work though. 🙂

               4. Lol. Then everyone would demand a 1099 instead of W2, open up a company, and watch the government choke.
                  I could always be a Wal Mart greeter, and invest in oil.
                  We were the original third world. Parts of it never got over, probably never will.

               5. May really irk you that we are subsidizing Christmas decorations every year with those stupid trees. However, you may find comfort that some of these minerals have fallen out of favor, such as radio grade quartz crystals. Someday, oil might be there.

               6. Hi Guym,

                  Just don’t see a reason for special treatment for extraction. Note that timber must use cost depletion, only mineral properties and other extractive industries can use percentage depletion and that rates vary from 5 % to 22% (uranium and sulfur at the high end).

      2. Shallow, thank you for standing up. Loss of depletion allowance will hurt families, cause the loss of jobs, greatly increase the the likelihood that all of America’s remaining hydrocarbon resources will NOT be produced and ultimately cause the price of energy to increase for all American’s. Its pretty much a no-brainer that only the anti-oil crowd will not grasp. If the oil industry can write off toilet paper on a location, they will call it a subsidy. Its all part of the: we have no plan B, lets get rid of fossil fuels anyway plan.

         The ‘gentleman’ referenced was essentially elected by middle America under the belief that he would do something different. In reality, and this from a conservative Republican, he is not doing much of anything differently other than making a buffoon of himself tweeting. He never had a connection to middle America, has never gotten his hands dirty in his entire, urban life and is, and will abandon middle American entirely in favor of the ultra rich in a New York minute.

         As an oil and gas operator I have received no regulatory relief from this fella, as promised. None. The EPA matter of methane emissions he failed at, miserably, and I am sure he is utterly baffled why he has not been able to make the world price of oil go up so that he and Ricky boy can “unleash” American oil on the rest of the world. Pffttttttt. I think, actually, the single best thing he can do for his buds, Harold and Scott, guys that cannot pay their bills, is hire a new Fed Chair in a few months that will keep the low interest stimulus money headed their direction. Gawd knows, they need it. And trust me, they are on their knees begging for it. $30T in national debt, here we come.

         OPEC no longer considers the US shale oil phenomena a threat; Google it. After observing it for a decade they are laughing at it now. The plan worked. We are being led by the blind and the rest of the world is just waiting for the US domestic oil industry to shoot itself in the other foot, or the same one four times. Then they will have us right where they want us. Giddy up, America !

         1. Sports fans. As regard borrowing and interest rates and 30 Trillion :

            Today the ECB led by Super Mario Draghi announced a taper of their ongoing QE program. They will reduce bond purchases from 60 billion euros monthly to 30 billion extending at least to September 2018 and with the door explicitly left open to continue longer and to resume 60 billion per month.

            This is the European Central Bank. They create the money to purchase these bonds from nothingness. They are independent of all governments. They have no restraints at all.

            30B X 12 is 360 billion Euros.

            They have been buying 60B per month since March 2015. That’s about 30 months. 60B X 30 is 1.8 Trillion Euros they created to date.

            What’s the mechanism? Buying bonds. When you buy a bond (maybe you’ve bought a US savings bond at some point), you were lending money to the US gov’t. Mario buys government debt from the constituent members of the EU (note the Fed has never bought state bonds in the US, only US federal Treasuries) but it must be bonds of good quality. Most of the countries only marginally qualified, but Germany entirely qualified.

            Something never really discussed by the ECB or the Fed was what price they paid for what they bought. Since the money paid is created from nothingness, there’s no real reason to bargain a low price, is there? So the ECB bought a lot of German bonds at price unknown. The Fed bought US bonds AND Mortgage Backed Securities. We kind of wave a hand at those, but no one really knows what they were priced at either.

            The ECB created a CSPP — Corporate Sector Purchase Program to . . .. to . . . oh hell just admit it, to acknowledge that there simply weren’t enough good quality European bonds to buy and inject the trillion plus he wanted to inject. He could have increased the price he paid, but that probably would have been just too visible. The CSPP is exactly what it looks like. Create money from nothingness and lend it to private corporations.

            Some of the companies mentioned are Volkswagen, EDF Energy (a UK electricity utility), Telefonica (Spain based phone company). It’s hard to find the to-date portfolio to look for possible lendings to Royal Dutch Shell and Total. So can’t say it’s happened. Might have, didn’t feel like digging.

            It would be pretty cool and oh my what a precedent that would be.

            1. EDF = Électricité de France. It’s French. They bought British Energy (a UK utility) in 2008.

               1. Thanx, I looked it up and the webpage talked about British facilities, but maybe that was a subsidiary.

         2. Hi Mike,

            I imagine oil prices will increase and the oil will be produced. Cost depletion will be allowed, just like depreciation for any other business, percentage depletion (beyond the point that capital costs for land expense are recovered) is a tax break, at least in my view. Though such a view is anti-oil from your perspective, I would call it pro-reality. 🙂

         3. Mike,

            I may be wrong now but when I started in this business every single extractive industry, even the timber industry had the benefit of a depletion allowance. Gravel pit operators and caliche operators had or have a depletion allowance.

            But the only industry that gets attacked is oil and gas because some envious M*$)@#F %+&kers think we get an unfair subsidy

            Here is what no one understands about out business. The oil and gas business that you, I and Shallow participate in is an extremely high risk investment.

            In the event of a dry hole (which is never drilled by the unconventional madoffs) our capital expenses have no salvage value!

            The $5 million we spent in land, title and legal costs, the $3 million in geological and geophysical expense, more in permitting and regulatory, the $1o million in dry hole cost , sidetracking, logging, dsts, and completion expenses are GONE!

            There is nothing left! The only way to recapture that expense is by depletion allowance IF you are fortunate enough to have some other production to recoup it from.

            You so so-called free market SOB’s are so worried that we might make some money and you never ever would spend a single nickel of your own money in this business.

            I am actually sick to my stomach reading some of these comments.

            Mike, Shallow and I work for ourselves. We are not company pukes with 5 weeks of paid vacation There is no safety net for us. We make it work or we go broke.

            You should be ashamed.

            1. Thanks, John. Before the onslaught of the shale phenomena in America most people now analyzing or predicting the oil industry could barely spell oil. Because of the shale business, and the internet, those people believe it simply a matter of jabbing a hole in the ground, stuffing it full of sand & water, making up some wild ass EUR and… bingo. They cannot comprehend the expense, the risks of exploration nor the totality of financial loss in a dry hole, as you so correctly point out.

               There is, as you say, an automatic bias toward the oil and gas industry that circumvents rational comprehension of the financial complexity of it. Welfare “subsidies,” for instance does not have near the same affect on folks.

               Depletion allowance played a significant role in my exploration career over the past 40 years. Depletion allowance played a primary role in the development of America’s vast conventional oil resources, the oil that made America the industrial power it is for the past 100 years, not unconventional oil.

               I once determined that for the risks I take I am able to keep about 30 cents for every dollar I make. My industry pays some of the highest taxes, fees and regulatory compliance costs in corporate America. Personally, I have always looked at the current 15% depletion allowance as a means of offsetting the 15% tax “penalty” I must pay for simply being self employed in America. I provide jobs and security for families and am essentially punished for the privilege thru a self employment tax.

               It is the little guy, the families of middle America that produce marginal oil that benefit from depletion allowance, not the Harold Hamms, or the Chevrons of our country. Pity those that cannot differentiate between the distinctly different types of producers.

               1. Hi Mike,

                  Lots of other people own small businesses and do not get a 15% depletion allowance on their capital spending. They pay the same self employment tax that you do, not much of an argument there.

                  All small businesses are high risk.

                  The depletion allowance can lead to overproduction of a scarce resource, not a good policy in my opinion.

            2. You’ve convinced me! I would advise you to get out of that high-risk business while you can! No, you just want to bitch because it’s your ox that’s getting gored. If it don’t pay, get the fuck out! That’s what I did when the car-hauling business took a shit in ’09, parked my rig. I don’t suppose you believe that burning fossil fuels has anything at all to do with fucking up the climate. That includes all that diesel fuel I ran through that Cat. You probably got into the oil business for the same reasons I drove a truck, started a machine-shop, and worked in a chemical plant. Because it was what you saw around you, and it was available where you lived, and you thought you might make a little money at it. I have no problem with that, and if I had been raised in oil country I could very well have done the same, because we live in the world we have. Oh yeah, and until I was about 40 years old I was one of those “company pukes” you seem to look down your oily nose at. Though I didn’t get 5 weeks vacation. What the hell makes you think you’re any better than someone working for some company? You have employees? Is that what you call them?
               Maybe you’re just pissed off and releasing some steam. I can understand that.

               By the way, ’bout a week ago I clicked the link to Mike’s blog and read most every bit of it. My thoughts afterward were that he seems to have had a very enjoyable working life, and probably made some real money doing so. I could have enjoyed that myself if my circumstances had been different, ’cause I’m just a working guy myself and always worked hard and tried to be the best at my job.

               So, now that I’ve stuck my neck out, you guys have at it.

               1. Thank you for your comment, Mr. Walls. A few things, please: I operate a company and have employees, the same ones for the past 40 years; I am penalized for that in various taxes I must pay. You will of course understand that I am defensive of increased tax rates, or the loss of certain tax benefits that offset the enormous risks I must take, as well as regulations and laws that otherwise pose a threat to my industry. I am protective of my ability to keep the families I am responsible for, fed. I am quite certain as a working man yourself you have, and would do exactly the same thing. It is the American thing to do; its only because I am in the oil business that people like yourself think it is “un-America.”

                  I don’t think I am better than anyone else, I am not sure where you got that. If one sticks up for oneself these days the ‘in-thing’ now is to be accused of being “angry.” I get a big kick out of that.

                  I just find and produce oil and gas. You, me and everyone else in the world uses the stuff of their own free will. Its not a drug, oil and gas, and I am not a dealer. Hydrocarbons are a necessity. If you want to change the climate, don’t use hydrocarbons.

                  Your comment to me is indicative of the anger and literal hate that people feel for my industry. It is quite common on POB; every time I post I feel like I am going to get shot at by the anti-oil crowd. I find most people have already made up their minds about my industry and don’t want to be bothered with facts or other perspectives. They most definitely do not want to learn anything about it.

                  Thank you for looking at my blog and your comments about it. It is meant to be fun and kind of a celebration of a half century of survival.

               2. Hi Mike,

                  With regards to your penultimate paragraph, I’d like to share my two cents.

                  Before 2008 I never really thought much about oil but, somewhere around 2007, I saw the term Peak Oil at a couple of the “green” car sites I used to frequent (autobloggreen.com and evworld.com). I took sciences in high school so I also don’t find it difficult to believe the science that drives the idea of Anthropogenic Climate Change (Global Warming for all the bits and trolls out there). So, between Peak Oil and climate change, I thought it would a good thing if the global dependence on oil (and other fossil fuels) could be reduced and maybe eventually eliminated.

                  At the same time I have much respect for many people involved in the oil business and deep gratitude for all the producers. You have enabled a lifestyle for millions of people on this planet that was once reserved for royalty and the very wealthy. I do not kid myself about being able to survive without affordable hydrocarbons. The world needs them and life could turn out to be quite unpleasant for many of us if supplies suddenly declined and prices shot up like they did in 08.

                  My training in the field of electrical engineering has afforded me the luxury of being able to get involved in the area of alternative energy, specifically solar PV. I also am interested in EVs in a way that borders on obsession but, all this interest is driven by a deep concern for what will eventually happen when Peak Oil is in the rear view mirror.

                  My hope is that you guys can keep the lights on while us guys work on new ways of keeping the lights on when oil is no longer up to it and reduce carbon emissions in the process. The longer you guys keep things going, the better our chances of pulling through this debacle without massive amounts of mayhem and dislocation are.

                  So, rather than hate you, I am eternally grateful to you. Hopefully, one day the likes of me will be able to help create a better future for you as you did for us.

               3. Island, thank you. I had to look up the word, penultimate to make sure I wasn’t getting hammered again, hee hee.

                  Please do not be too surprised to hear me say I am actually very much on your side; we need to be moving toward alternative fuel sources as soon as possible. I encourage you, and support others like you, to get us there as soon as possible. My experience and understanding of hydrocarbon decline, and the true costs of finding and extracting the stuff, tells me we need to hurry.

                  Unfortunately, however, it is going to take some time to move away from fossil fuels. The transition will be difficult and tenuous for many throughout the world. So, my industry needs to carry on doing what it is doing with equal encouragement and support from society. Blaming the oil and gas industry for climate change I simply do not comprehend. Terminating plan A without plan B fully implemented is based on emotions, not reality.

                  I have always enjoyed your posts and your comments and I respect your opinions a great deal. Do what you can to get us where we need to be and I too, on behalf of my kids and grandkids, will be eternally grateful to you and others like you.

                  Mike

               4. Hi Mike,

                  I am pretty sure Stanley’s response was to JohnS.

                  I did not realize all extractive industries get the percentage depletion allowance. This seems unfair to those businesses in non-extractive industries who are limited in their depreciation allowance to the amount of capital they spend.

                  I know you like to get the tax breaks you are allowed, everyone does. I think the percentage depletion allowance is a bad idea for all extractive industries. The market price should determine if one invests in the oil business along with costs, and the geology of prospective property, rather than tax breaks from the government.

                  Note that I am proposing an elimination of many tax breaks which I receive such as mortgage interest and state and local taxes, the aim is simplification and fairness.

                  It is not fair that a homeowner receives these tax breaks, but those who rent do not just as it is not fair that a carpenter or mason does not get a percentage depletion allowance for their capital expenditures, but those in extractive industries get a tax benefit (break) unavailable to others.

                  It is a question of fairness. Not anti-oil, pro fairness.

               5. Mike,
                  I wrote a reply to you this morning explaining that my previous reply was directed to John S, not you. I thought I saw that reply here before I went out to work, but now I see it’s not here. I don’t really care to re-write the whole thing again, so I’ll just leave it at that. Sorry that I caused you to think I’m angry at the awl bidness, I’m not. I intend to use some more of it myself.

                  Thanks

               6. Thanks, Mr. Walls; try not to be upset with John either. After decades of having rocks thrown at you every day of your life, simply because of what you do for a living, it wares on you. You’d think instead of finding and producing something our country CANNOT do without, oil men were dealing in child slavery or something equally deplorable.

                  Thanks again, and good luck, sir.

            3. Hi John S,

               Does everyone get the percentage depletion allowance?

               If so, then that’s fine, my impression was that everyone gets cost depletion, but not everyone gets the percentage depletion where the depletion allowance can be greater than capital spend.

               Yes oil and gas is high risk and it is also high reward, that is the game and those in the business choose to play that game.

               If you don’t like it, make other choices.

               So you think free markets are a bad thing, I assume you are a Democrat. 🙂

               1. Thousands of small operators or able to take advantage of the percentage depletion allowance. It benefits the very marginal barrel in America.

                  You and I agree the goal for America should be to conserve its hydrocarbon resources for the future; why then not comment on how low interest stimulus money, and debt, IS playing a role in overproducing scare resources?

                  Why do you think that oil and gas is always high reward, Dennis? Because that is the impression you have from reading the internet, that everyone in the oil business drives Cadillac’s with steer horns on the hood . Use the internet then and familiarize yourself please with tens of thousands of stripper wells in America that account for over 700,000 BOPD of domestic production…and the folks that operate them. Ask Shallow if its always “high reward.”

                  “Make other choices,” I’m sorry, is a flippant remark made without regard for career choices, a lifetime of work, responsibility to families, working interest and royalty owners, and a host of other things that you have closed your mind to. Small business is under attack in America; hell, working for a living is under attack in America. Where would you like for us to work once we quit the oil business and who then is going to keep gasoline in your Mazda?

                  Universities across the country receive enormous subsidies from the federal government. Young minds are brainwashed into believing the only hope they have for success in life is thru higher education so these universities spew forth their hype about the kinds of high paying jobs you will receive, only if you borrow federal student loan money, another enormous subsidy, and give it to the university for a diploma. But there are few high paying jobs, almost no jobs at all anymore, and these kids end up living at home in the basement, starting out in life with $150K in debt, like an anchor around their necks. Those loans will never will never get paid back, over a $1T of student loans, of federal handouts, lost. Its a racket, all of it. Shall we do away with those “subsidies” too?

               2. Mike, what I find incredible is that our politicians are always looking to cut taxes on unearned income.

                  If I own a small business, bust my butt and am lucky enough to make $125,000, I pay federal income taxes at the highest rate, plus pay 15.3% FICA tax on dollar one.

                  OTOH, if I am lucky enough to inherit a portfolio which generates $125K of dividends, I get to pay taxes at the lowest rate, no FICA either.

                  For some reason, a country built by hard working, high risk taking Pioneers now taxes income from inherited wealth at the lowest rate.

                  And, despite the populist uprising of 2016, we will see complete elimination of the federal estate tax. This means those with estates of $5.5 million+ will now pay no estate taxes.

                  To keep on oil, Mike’s investors, assuming they own their interests in an S corp, LP or LLC, will get a tax break to offset the loss of percentage depletion. Their highest tax rate will drop to 25%.

                  Mike, however, is the operator and is producing oil as his occupation. Therefore, Mike, who mind you, is actually doing the work, will lose the depletion deduction, but will still pay taxes the highest rate, plus FICA.

                  Mike, what do you get to do re: deducting health insurance premiums? This is a huge area that is taken for granted by W2 wage earners who have company provided health insurance.

                  That health insurance paid for by the company really is wages or compensation to the employee, and should be taxed. But, due to one of those dad burn tax loopholes, it is not.

                  I’d like to see the howling from the masses if we took the health insurance loop hole away! Many would be paying taxes on and additional $15-20K per year, at the highest rates, and FICA on top.

               3. Shallow, I’ll get with you on a few days on this; thank you very much. Posting here is fruitless, and most of the time ugly. Its not a place for oily folks, even the few of us who are concerned about our energy future and can, like you, offer real life, insight into the process.

                  Thanks too about the lease signs. I want to see that museum someday very much. We love old lease signs around our place; I have one that I think is circ. 1921.

                  You are spot on, by the way, about health insurance and a host of other similar examples that would cause everyone hateful of the oil business to squeal like pigs. But to heck with it; enjoy the weekend, jump in that G5600 I know you own, because you are in the oil business, go have dinner tonight in San Fran or someplace nice. Wear your rhino-skin boots with the solid silver tips and your diamond, gold Rolex.

               4. Hi Mike.

                  Annoying the place can be but we need you here.

               5. Hi Mike,

                  I do not hate the oil business. If depletion allowance is important we can keep it, just don’t claim that extractive industries (oil, natural, gas, coal, timber, metals, etc) don’t get special tax breaks that are not available to other industries that are required to use cost depreciation of their capital investment.

                  Is the EPA regulating methane too much too little, not sure where you stand on this.

                  I thought you liked the regulations in Texas, is the EPA doing too much to regulate the oil and natural gas industry?

               6. Hi Shallow sand,

                  I agree earned and unearned income should be treated the same, this is just a tax break for the wealthy, not fair at all.

                  It seems to me the tax break for health and retirement and charitable contributions should remain and equivalent deductions by small businesses and people who buy their own insurance should be allowed. Also it seems individuals should be able to set up their own 401k through mutual fund companies, if they do not have access to one through their employer.

                  Any contributions should be tax deductible to the same extent as those through employers are.

                  The bottom line, level the playing field as much as is practical.

                  If depletion allowance is important, it should be kept, just don’t pretend it is not a tax break that is not available to non-extractive industries.

               7. Hi Mike,

                  Not sure how much subsidy for education there is from the Federal Government, if the country thinks the federal loans to students are a bad idea, they can be eliminated. My guess is the default rate on student loans is not very high.

                  Again my comment was to John S who was complaining about the risks of the oil business, if he thinks it is too risky, he should choose something else.

                  Yes I am aware not all oil producers are wealthy and that the business is hard work.

                  Do you disagree that the percentage depletion allowance is a tax break for those in extractive industries?

                  Why should those in extractive industries get this tax break, but those in other industries can only depreciate their capital up to the cost of that capital?

                  I suppose we could extend this tax break to all businesses, or even reduce business taxes to zero, so that only people that don’t own a business would have to pay taxes (unless they get other income from interest, dividends, or capital gains).

                  Raising interest rates would be fine with me, what rate would you like, the Fed has already started to move in this direction.

               8. Dennis.

                  I think there is some confusion.

                  As far as I am aware, percentage depletion for oil and gas is limited to those taxpayers owning 1000 BOEPD or less. It is truly a small business break.

                  I really believe the rationale behind percentage depletion, prior to the shale boom, at least, was to encourage marginal wells to continue in production in the US. Maybe this was not the case from the 1920’s thru the 1970’s, but I think it was since.

                  Prior to shale, if I am not mistaken, the average BOPD per oil well for onshore, US lower 48 was around 5. This is a guess, assuming around 700,000 onshore lower 48 oil wells. The remainder came from Alaska and GOM.

                  As you know, low volume wells cost a lot to operate. The percentage depletion deduction helped keep more of these low volume wells from being abandoned. However, it was limited, and not for “big oil” despite President Obama claiming so several hundred times. (For as much as I admire him for some things, this claim of his really stuck in my craw, as he either didn’t take the time to read the rules on percentage depletion, or just generally wanted to mislead the US public).

                  From 1986-2003, this deduction likely kept a lot of wells in US marginal fields producing.

                  Maybe there should be a limitation on percentage depletion, depending on the price of oil? Thus, in times of low prices, less wells are abandoned?

                  I don’t know what the answer is on this. I do expect the US will need every last BO it can produce, as the shale boom won’t last forever and the transition away from oil will take decades IMO, plus petroleum will still be necessary for many non-transport uses.

                  I have wondered about a hybrid consumption/income tax, with some basic necessities excluded.

               9. Hi Shallow sands,

                  If we assume your 700,000 wells with 5 bo/d average output is correct, then if oil is $50/b and the average tax rate of the producers is 25%, then the total tax break is about 2.4 billion dollars.

                  As Texas Tea suggested a small increase in the Federal fuel tax (about 1.5 cents per gallon) would be enough to offset the percentage depletion allowance, if we raised the Federal fuel tax by about 32 cents per gallon on gasoline and diesel we would be close to the same percentage tax rate as when the Federal fuel tax was last increased 24 years ago.

                  This would have the added benefit of allowing fuel taxes to pay for a larger share of road maintenance as well as moving us gradually away from liquid fuels as the peak arrives and they become scarce, in fact it would be better if the Federal fuel tax was a fixed percentage (at the 1993 rate) of pre-tax fuel cost so that as fuel prices increase, the tax increases as well. If there were excess funds, the federal deficit could be reduced, or some could be spent for public transportation to reduce road congestion at rush hour.

               10. Those loans will never will never get paid back, over a $1T of student loans, of federal handouts, lost. Its a racket, all of it. Shall we do away with those “subsidies” too?

                   Yes, many of those loans should be eliminated.

                   Schools are allowed to lie to students about their prospects: this should be a high crime. Schools are allowed to lie to students about the likelihood that they’ll graduate – for many schools, the great majority of their students don’t graduate, yet they end up with enormous debts. Schools are also allowed to lie about job prospects after they graduate: many schools are low quality and their graduates have little chance of success.

                   It’s an enormous con game, and government regulators have been captured by the industry.

               11. Whether it’s a con game or not, if a person intends to be an employee, it is usually a big advantage to have a college diploma. Many businesses are requiring or giving preference to college degrees even for simple lower level type jobs.

               12. That’s true. A lot of jobs are being “up-skilled” even if the job hasn’t really changed.

                   But…the important point is that some schools and professions are far, far better than others. Some schools are simply scams.

                   Students should be able see honest numbers for graduation and employment rates before they choose a school and a vocation/profession.

               13. Dennis,

                   I don’t think that I complained about the oil and gas business. I spent my life here and its been a good one. Had my share of wins and losses. More losses than wins but the wins have kept me in the game.

                   Perhaps my words were poorly chosen. I’m primarily in the exploration part of this business. I was trying to point out that in my business, the capital expense in a venture have no salvage value if the well is a dry hole or even worse just barely productive because sometimes its hard to know when to stop. Do you buy more data, sidetrack, deepen, run another log, work over, drill another well, buy the adjacent lease? What do your partners want to do? Will they force to go along or force you out of the project? There are a lot of decisions.

                   And in my world, I don’t issue stock, I don’t use private equity. The money comes out of my pocket. Its money that I have to earn. In fairness and in full disclosure, I have not made these types of investment decision for several years. I cant compete with those who can pay $5-10,000/acre and I can’t keep up with an operator drilling multiple wells horizontal wells so Dennis, I’m out of that part of the business for the time being. But I still actively try to keep several thousands of acre leased. So, I’m still here in a small way.

                   If I spent my money on a machine shop, or a office building or a hotel, or a factory those businesses can be re-purposed in many different ways if one venture didn’t work out successfully. That is to say there is a tangible salvage value in those objects.

                   Unsuccessful projects in my business most often don’t have a tangible salvage value. Its what Mike and I and Shallow would call a LOSS! That is why cost depreciation doesn’t work. But If I have percentage depletion available from other ventures that have been successful, then I can better weather the losses that sometimes happen and live to invest in another project.

                   I hate it when my industry/profession is unfairly attacked (Lord knows there is plenty of reason to fairly attack it). Which is why I pointed out yesterday that every extractive industry has the benefit of a depletion allowance even in the timber industry and gravel and caliche industries (where I have some experience) and which I would consider not nearly as important as oil or gas. Yet no one seems to complain about those industries or the money made there.

                   Most everyone on POB is a heck of a lot smarter than me and probably a whole lot more successful in their profession than I have been with my choices. So I certainly don’t claim any high ground in expertise or knowledge. There is a whole lot of stuff written here that is way over my head and most of what you write Dennis is way, way over my head. but I’m trying to understand where your positions are coming from.

                   Dennis, it seems to me from your posts that you never seem to object in principle to taxation and you seem to believe that society, as a whole, is best served if tax policy determines or guides investment decisions and or personal behavior. Am I correct?

                   By the way, I’m not a democrat nor a republican and I believe in free markets and free trade. I’m an independent from top to bottom and from side to side.

                   Also, I would just like to say that those people who work for corporations, government agencies, or NGOs and their savings or personal investments are limited to employer savings plans or defined pension plans probably will never understand risk, loss or PAYOUT as experienced by myself, Mike or Shallow.

                   And yes, I will admit to a certain level of contempt for company pukes, Not all the time but very often, they have lousy work ethics, a huge sense of entitlement and an over inflated sense of self worth and they have a HUGE resentment for any success that a self employed person achieves (but some might say the same about me). Also, I would like to say that most independents in this industry have to out work and out think the company men by a country mile.

                   That’s not a complaint. That’s why we are independent. And with that I will bid POB a fond adieu!

               14. Dennis, I know John. He is an oil and gas explorationist from way back and as knowledgeable as they come. I believe the fella’s comments were addressed in my direction, not John’s. But now John’s gone (I am sure based in part on the ‘go find something else to do’ brain fart you had) and you’ve lost another oily guy trying to help out around here with something other than bold predictions about future oil prices and stupid models.

                   I am telling you, pardnor; you need to change the name of your blog. Something like, My Anti-Oil Way Or the Highway. Or, I know, Peak Civics in America. You can get the “intellectually elite” gang, like Nick and Fred to ram rod it for you.

                   Hold up, John; I am coming with you. I know a joint we can go to in Andrews and get us some cold ones; watch the Stros manufacture runs like fake shale oil EURs.

               15. Mike,
                   I just posted upstream. My comments were directed to John S. If you follow the indentions of the replies it shows who the reply is to. That can get tricky when there are lots of replies. I should have made it more clear. I don’t know where my reply of this morning went, maybe the hogs ate it.
                   John’s comments were smart-ass and hateful, so my reply to him was the same.
                   Again, I apologize to you for the misunderstanding.

               16. Needed-Oil pros to post their knowledge
                   Any level of skills desired
                   Needed to improve knowledge of accountant, who was born into a family who was heavily into the oil business but went astray. Family members are no longer around to coddle the accountant. No pay, just a challenge, and very mild amusement. Previous posters who left are very much needed. Thanks

               17. Hi Mike,

                   I do not think I said find something else to do. I intended to say yes the business is high risk and I am assuming John S entered it with his eyes wide open, by choice.

                   With the high risk comes the potential for high reward, and it is a gamble there is no doubt, which many of us are unwilling to take.

                   Yes many other businesses have salvage value is they become bankrupt, but there are undoubtedly huge losses in an small enterprise that goes bankrupt.

                   The question that neither you or John S has answered is why should mining and oil and gas receive special tax treatment through the percentage depletion allowance.

                   Also the 1000 BOE/d producer may be “small” in the oil industry, but even at $45/b I think income would be pretty high (maybe $5.5 million per year if all 1000 barrels were oil and net was $15/b).

                   Up to 65% of this income would be tax free at the Federal level with the percentage depletion allowance, a very nice deal. Note that there would be state and local taxed that were paid (this comes out of the assumed $45/b wellhead price, part of the $30/b in taxes royalties and capital and production costs).

               18. But, you are a recipient of some of the benefit of extractive minerals and timber percentage depletion. We all are. The roads we drive on, the furniture we sit on, the houses we live in, the iPhones we use, etc. If the 22% depletion was not in effect prices of most everything would be higher.

               19. prices of most everything would be higher

                   That’s ok. Some things would cost more, and that would send the proper price signals to consumers. And…other taxes would be lower, so things even out.

                   I don’t know whether depletion allowances make sense or not, but…we should be careful to only give subsidies or tax breaks where they really make sense.

               20. Roger Stone suggests that Texas oil men may have been in on JFK’s demise because he was going to remove their oil depletion allowance. Judging from the sentiment of ‘big oil’ here, Trump better be careful travelling in Texan motorcades. Mike may be polishing his old six shooters.
                   https://youtu.be/1ViAm-sFGI8?t=1918

               21. Oh, it was, no doubt, a Texan, but probably had little to do with oil depletion. Probably political power, mostly. That story will never be told, but many Texans feel pretty confident who was responsible.

            4. Hi John S,

               Yes many extractive industries receive a percentage depletion allowance, but only uranium and sulfur are allowed a higher percentage than oil and natural gas.

               Mostly I think simplifying the tax code is a good idea, if we are going to leave the tax breaks in, why bother. Hey it’s Trump that wants to do this along with most Republicans, most oil guys are pretty conservative and usually favor the Republican point of view.

               Trraditionally this has meant freed trade and free markets and minimal governmental interference in the economy.

               Tax breaks of any kind would constitute government meddling in the economy which according to free market orthodoxy leads to sub-optimal outcomes and an inefficient allocation of capital and other scarce resources.

               Note also that I don’t think free market orthodoxy is correct, but economists are sharply divided on this point.

               The majority view is free markets with a minimum of government regulation is best.

            5. Hi John,

               Typically the loss from a dry hole would be a business expense, all of the loss can be written off against any gains over several years.

               Lot’s of small businesses suffer losses, those that aren’t in extractive industries do not get the benefit of a percentage depletion allowance.

               For fairness all capital should be treated the same, either every small business (under $10 million per year in gross sales) gets a 15% percentage depreciation allowance for their capital or nobody does, that would be fair.

               1. Dennis. Some producers argue that elimination of percentage depletion and intangible drilling expensing would decrease production such that oil prices would increase, offsetting the loss of the tax deduction for producers, generating more revenue for federal and states where there are income taxes, and increase costs to consumers.

                  Once again, I brought it up because percentage depletion for oil and gas is something D’s so badly wanted to eliminate, R’s fought so strongly against, and now R’s want to eliminate.

                  Plus R’s turning on an industry where they have overwhelming support.

      3. Hi Shallow sand,

         You know this, but many others may not at link below they describe depletion.

         http://www.mineralweb.com/owners-guide/leased-and-producing/royalty-taxes/depletion-allowance/

         I don’t know if the information is accurate, but they say this (bold added by me):

         Under percentage depletion, the deduction for the recovery of one’s capital investment is a fixed percentage of the gross income (sales revenue) from the sale of the oil or gas. For oil and gas royalty owners, percentage depletion is calculated using a rate of 15% of the gross income based on your average daily production of crude oil or natural gas, up to your depletable oil or natural gas quantity. An attractive element of percentage depletion is that the cumulative depletion deductions may be greater than the capital amount spent by the taxpayer to acquire the property.

         Why do oil and gas producers get this tax break?

         Maybe in 1926 when the oil and gas industry was less mature, this break was necessary.

         Note that I would also argue that subsidies for solar wind and EVs should also be eliminated from a conservative free market perspective.

         Cost depletion (which is essentially no different from depreciation) would not be changed, that is the same as for any other business.

         I agree it is ironic that Trump and the Republicans would propose this.

         Note that for a land owner who has already received depletion allowances equal to the capital cost of their land investment a continued 15% depletion allowance is clearly a tax break.

         Let’s take your example of 750 b/d and $15/b net income, that’s about $4 million per year and a tax break of $600,000.

         Personally I don’t see why this tax giveaway exists for oil and natural gas producers, but not for other hardworking people, say a homebuilder or other small business owner.

         Can you think of a logical reason why this tax break exists?

         Note that just because a bad decision was made in 1926, does not mean it should continue.

         Edit: On re-reading the quote from that web page it says 15% of gross sales revenue. So if the 750 b/d sold at $45/b and one gets a 15% tax break then it would be a $1.8 million tax break rather than the $600,000 I calculated initially.

         1. Like I said before, you have to look at the value of the deduction. From a study I read in 1954 on the history, they could come up with no legislative history to determine the exact reasoning other than it stimulated drilling. I would add it levels the playing field for mineral holders who have low cost to those that have high cost, for cost depletion. Like the example I gave previously. Property tax deductions, interest on mortgages, and investment expenses, all have similar reasoning. They stimulate that part of the economy. Take it further, and that is the exact same reasoning for charitable contributions. Why should you get an economic benefit from contributing to your church, when the reasoning for doing this is supposed to be above economic benefit. Why should we give accelerated depreciation to a company? Destroy all these, and I would have no issue of fairness, just an issue of whether it is smart.

            1. The tax code is filled with tax breaks meant to stimulate certain parts of the economy. We are a net importer of oil. Do we still need to stimulate oil production? We both expect there to be a world supply shortage in the fairly near future. Isn’t that a national interest concern, as we are a net importer? Remember the Arab oil embargo? Russia has all but joined OPEC. That is more than half of the oil produced, and most of the exports. We are just going to feel comfortable that any of these countries will not take advantage of our oil weakness? At least we should have concern until oil demand has subsided. I have the same problem with eliminating SPR, the idea is pretty dangerous. Yeah, Russia is really a country to be friendly with. Just ask the Ukraine.

               1. Saying “just ask the Ukraine” is like saying “just ask Georgia” after the civil war. Russia had states secede, just like we did.

               2. Dude, Russia just invaded the Ukraine and annexed the Crimea. Lots of difference.
                  The Ukraine including the Crimea had been independent countries for years after the breakup of the USSR. That was part of the AGREED breakup of the USSR.

               3. Hi Guym,

                  Did we import oil in 1924? No.

                  Does it make sense to increase our dependence on oil and natural gas, when they are likely to peak within 10 years. Tax breaks for the oil industry will tend to reduce costs and increase output, higher output will tend to lead to lower prices which leads to higher use of oil and increases US dependence on oil.

                  Tax breaks for the oil industry are the opposite of good policy, and it it is not good policy from the conservative perspective.

               4. Guym : “We are just going to feel comfortable that any of these countries will not take advantage of our oil weakness? “

                  So slow down a bit with drilling. Exercise of extracting all available oil in shortest possible time frame is not Olympic sport ?

            2. “The future of an allowance known as “percentage depletion,” which favors how smaller producers depreciate their assets, is uncertain. The exception is large, costing the U.S. government about $1.3 billion of lost revenue per year. The proposed tax plan is sparse on details, but could allow “special tax regimes” for certain industries, meaning even percentage depletion might survive. A statement from the Independent Petroleum Association of America suggests exemptions like the percentage depletion allowance are important and “will be crucial to evaluating this tax reform plan.””
               https://www.texasmonthly.com/energy/trumps-tax-proposal-affect-oil-gas/

               I would also note the way and means committee is well represented by oil and gas producing stares at least on the R side which is of course all that is important in how they vote. While not a sure thing I bet the depletion allowance survives.

               even better:
               “Notably, renewables like wind and solar appear less advantaged under the new plan. The proposal leaves out tax credits for renewables and electric vehicles that are currently phasing out and might also eliminate tax exceptions pertaining to clean-fuel vehicles, carbon capture, renewable energy bonds and more. Concurrently, two recent initiatives from the current administration could harm the market for renewables. The first would prop up the domestic solar industry by introducing tariffs on foreign-made solar panels to make them more expensive. The second would assist coal and nuclear power plants by guaranteeing cost recovery, potentially reducing the opportunity for renewables.”

               back to the future?

               1. Hi Texas Tea,

                  So you think the government should interfere in the operation of free markets?

                  That is what a subsidy to fossil fuel power producers will do.

                  Eliminate all subsidies and tax breaks, let freedom ring. 🙂

               2. I will try a serious answer. To the extent that investment decisions have been made based on current law, the changes should not negatively impact those decisions. However if they are going to make changes in order to lower rates, spur new investment, whatever, they at least should phase out the deduction or grandfather existing production. SS is quite right, in times like the oil and gas industry has seen in the last 2 years and in several previous cycles, a great deal of production has been saved from permanent loss because of the depletion allowance. Another alternative would be to phase it over a certain price level. Of course I would be in favor of raising gasoline tax at the pump in lieu of losing the depletion allowance. While this does impact me personally and several of my companies the greater good is served by keeping the lower volume higher cost well producing, that could be even more important in the future as the LTO wells become ” stripper” wells. I expect some type of allowance to be maintained, again for the greater good it serves.

               3. Hi Texas Tea,

                  How about basing it on individual wells, so if a well has output of 10 b/d or less, it is allowed percentage depletion, but wells with higher output must use cost depletion? I agree with the grandfather idea.

               4. the problem as pointed out up thread is that type of solution would lead to full employment for tax agencies and accountants and it would also lead operators to manipulate their production to keep the allowance. Dennis, respectfully if you can get past the carbon aspect/anti fossil fuel agenda, it really becomes a choice. Simple put, if the depletion allowance is lost and commodity prices stay low or plunge for a multiple year period like we just experience, a great deal of long life, low volume but significant reserves of both oil and nat gas will be forever lost. With that loss you will see higher prices at the pump and in home heating and electric bills. I don’t have the math at my finger tips but the Texas Monthly article pointed out the allowance “cost” the US treasury 1.3Billion a year, that number almost certainly is a fraction of the cost consumers would pay in increased fuel and electric bills if that production is lost. Again if they need to find money to offset that rather relative small number I would favor a increase in the gas tax. keeps it simple which seem to be the selling point of this effort.

               5. Hi Texas Tea,

                  Fair enough. Your solution sounds much more practical. In 2016 there were 198 billion gallons of gasoline and distallate consumed in the US so if the 1.3 billion dollar estimate is accurate a 1 cent per gallon increase in the tax on gasoline and diesel covers the depletion allowance almost 2 times over (a 0.6 cent per gallon increase in the Federal fuel tax would cover it).

                  Works for me.

                  I agree with your other idea that the depletion allowance could kick in at low oil prices, but probably would over complicate things. Just leave it as is and perhaps raise fuel taxes a bit, maybe put an extractive industry tax on all extractive industries to offset the percentage depletion allowance loss of revenue. This would have the effect of not singling out the oil and gas industry, so coal, timber, metals, and other extractive industries would also have some equivalent tax on their end product.

            3. Hi Guym,

               Those who believe in free markets also believe that government interference in the economy should be minimized. Most people would probably agree that charitable contributions should be tax deductible, or I would in any case, you may not agree.

               Accelerated depreciation, etc seem an unnecessary complication to the tax code, if someone thinks this is a good idea, as long as it is applied uniformly to all businesses, it seems fair, but it would still qualify as government meddling in free markets (by means of the tax code).

               Here is how a tax code that artificially stimulates drilling can backfire.

               You get overproduction relative to an efficient allocation of resources and produce and sell your oil at a lower price (during times of oversupply). Let the market allocate resources and oil is produced and sold at an optimum price (according to conservative economic theorists’ orthodoxy).

               Do you believe in free markets or do you prefer government interference?

               1. Absolute free markets, No! That would involve no banking regulation, investment regulations, and so forth.
                  I don’t agree with were the Republicans are headed. We need to subsidize alternate energy to help us survive in the future. Leaving percentage depletion in that costs us a few billion, that adds many more billions for current energy needs is good, too. How do you define free market? As in no government interference?

               2. Hi Guym,

                  A free market would be as free as is practical, though some might argue that no regulations of any kind are needed, most conservative economists would probably not argue for no regulation, just that it should be minimized as far as possible (less is better).

                  Generally government involvement in the economy will result in market distortions, such as tax breaks due to the percentage depletion allowance leading to overproduction of oil. If oil is overproduced, oil prices fall and demand increases which increases the US economy’s dependence on oil. Not a good policy if we want to reduce our dependence on fossil fuel.

                  I would trade all subsidies for renewable energy for the equivalent of a 50 cent increase in the tax on gasoline and diesel fuel and an equivalent tax (in terms of $ per kg of CO2 emissions from all other liquid, solid, or gaseous fossil fuel sold in the US).

                  Unfortunately this will never happen.

                  Note that the revenue from such a tax could be returned to every citizen as a monthly check from the government (total revenue collected divided by total citizens and each household receives a check for the number of people in the household each month).

                  It could also be used to reduce the national debt, for those concerned with this, or to reduce income tax rates, there are many options.

                  A tax rather than a subsidy results in less government interference in the economy because the government will not be choosing winners. In this case we want to reduce our dependence on fossil fuels, reduce pollution, and reduce carbon dioxide emissions and this policy accomplishes all three with minimal government interference in the economy.

               3. I am kind of on the same wave link. Except the percentage depletion has been in effect since 1924. You aren’t taking candy from a baby here, you are repossessing false teeth. And believe me, if you raise taxes, it will never, ever, make it back to the people, or reduce public debt. What would be fair about someone who drives a lot of miles subsidizing someone who won’t work? Oh yeah, we are doing that now, and that is far from the free market concept. Reduce spending would eventually do it, also. Remember, the guys we elected to reduce spending are now in office. The last time they were, the debt skyrocketed. That tell you anything?

               4. Hi Guym,

                  During the Clinton administration debt was reduced after an increase in taxes (debt to GDP was reduced).

                  If the law is written so that carbon taxes collected are returned to citizens, then it will be done. Generally in the US the laws are enforced.

                  Yes under Reagan especially debt skyrocketed and during the Great Recession due to deficit spending to reduce the impact of the financial crisis.

                  See

                  https://fred.stlouisfed.org/series/QUSGAN770A

                  US Central govt Debt to GDP

                  1951, 69%
                  1979, 36.5%
                  1992, 64%
                  2000, 48.5%
                  2008, 66%
                  2016, 99%

                  Note that Trump’s proposals are likely to increase the deficit further.

                  Note that Japan passed 100% debt to GDP in 2000 and was at 198% in 2015, the EU in 2015 was at about 90% debt to GDP for the central government.

                  For mortgage lending typically about 280% debt to income is considered the limit for a borrower with a good credit rating.

                  It would be better in my view to raise taxes to reduce the deficit, though this is never a popular option, we could also reduce spending and raise taxes, though spending has been pretty steady for a number of years (in relation to GDP). There has been little increase in US central government debt from 2012 (95% debt/GDP) to 2016 (100% debt/GDP).

         2. Dennis

            I beleive that there is at least one major problem with eliminating % depletion. Many of the properties receiving % depletion have been bought and sold. For example, I do not know what SS’s situation is, but I will speculate that he did not drill the original wells that he is now operating. Most likely he purchased them. So, when he was computing what a fair price would be, both he and the seller took into account the available % depletion. So, if you now take it away from him, he overpaid for the wells and he and his family will suffer a loss because the proceeds from the wells, as well as the wells themselves, are now worth less than before.

            If you changed the law on a prospective basis to any new property acquired by an owner, I do not think that would be a good thing, but it would be better. But, even then, if SS becomes incapable of operating the properties, he would suffer a reduction in value when he sold. So, probably the best thing would be to say that % depletion can never apply to oil pumped from a well that was originally spudded after, say 2017, in order to have a clean cutoff.

            People like SS can contact their trade associations like the API or IPAA, to make sure that their voices are heard.

            And remember, the large oil companies that are always getting rid of their marginal properties, know that they are more valuable to small producers, who can get % depletion, when they sell them.

            1. Hi Clueless,

               There will always be people affected by changes in tax laws and always someone who can claim they have been treated unfairly.

               My understanding is that the only limit to percentage depletion is that it is not more than 1000 BOE/d. There is no dollar limit!

               So lets say I have a piece of property that produces 1000 bo/d and that the wells decline on average 7% annually for 2017 to 2040 and further that the price of oil (gross revenue) is $45/b over that entire period.

               The total depletion allowance over the 2017-2040 period would be 29 million dollars and it still would not have ended as the wells in 2040 would still be producing 188 b0/d. Its the gift that keeps on giving (over $450,000 in 2040.)

               I imagine the law could simply be that any property newly purchased after the law went into effect would not be allowed to use percentage depletion and those who already have been filing using the percentage depletion allowance will be allowed to continue for another 10 years.

               Most likely the law will not be changed and possibly a new tax law will not be passed as getting 50 senators to agree on anything is difficult at best.

         3. Dennis. See above on rationale, I think, for percentage depletion.

9. https://seekingalpha.com/amp/article/4116109-crude-oil-dips-buy-higher-prices-horizon

   $55 by year end? Not that far away, it’s almost $53, now.

   1. It went way over $53, today.

      1. Brent Dec 2017 future contract over $59/b, generally this is considered the “World” oil price and is now used as the main price by the EIA, WTI is less relevant for World oil supply.

         1. It’s relevant to me, for income? This blog is an excellent source of information for many of us who have income ties to oil, and for others who were in the business, and keep up for their interests. Brent price is of considerable amount of interest to me now, as the Brent/WTI spread helps determine the demand for exports.

10. Unfunded liabilities are now about 11% of a quadrillion dollars. A trillion here, a trillion there, and you are soon talking real money. http://www.usdebtclock.org (bottom line)

11. FRom Staoil Q3 earnings:
    The largest impairment of $0.85 billion is specifically on Eagle Ford. This was triggered by lower than expected production volumes, but the impairment in itself is calculated based on our market valuation.

    As you would know, there is volatility and uncertainty in a valuation and we have, therefore, used an independent third party in this case. Remember, we have made impairments and reversals. In fact, since fourth quarter 2015, on Eagle Ford, we have made reversals of $0.6 billion. We are working hard on an improvement plan for the asset. Our other U.S. onshore assets are not affected.

    Hi, thanks for taking my question. It was on the Eagle Ford. Could you just give some more details on the impairment and some more color around that asset? Is this a localized issue in certain acreage that you have or is it an asset level issue? And could you talk a little bit about recovery rates and how things have changed against your expectations because it does look like quite a significant shift? Thank you.

    Hans Jakob Hegge – Statoil ASA

    So thank you Biraj. So the history we’re coming from is that both in this quarter and in previous quarters, we’ve had impairments and reversals. And the largest one in this quarter is Eagle Ford. So, this is due to the trigger of reduced production rates. As part of the industry, we started a year ago to do tighter well spacing 200 feet to 250 feet. We had great faith in this measure of course, so we actually reversed based on the plans and the indicative results, that didn’t turn out to be as favorable as we hoped for. So we have, of course, stopped that practice and are changing it.
    This is an Eagle Ford issue as it has been for the industry with tighter well spacing. So based on that, we did a valuation, third-party market assessment and we have started working out an improvement plan. So, we have moved from 200 feet to 250 feet well spacing to 500 feet. Very early days, too early to conclude, but the indicative result so far is in the positive direction. So, this is something we will come back to. So, as I said, there is uncertainty in valuation and reserves. So that’s why we have these changes.

    1. The well spacing is very interesting. When companies announced the 200 foot well spacing attempt, I was pretty skeptical. Curious that they expanded their valuation prior to long enough research. When they talk about 200 foot well spacing, that is on a two dimensional basis, and not based upon the walking distance of 200 feet. Walking distance is much closer, depending on the depth of the field, and where they drill in it. They could end up with a lot smaller spacing than 40 acres, depending on what’s left over that they can’t drill on. 40 acre spacing is pushing the limit.

    2. Daniel. Thanks for the post.

       IMO even 500′ is very tight for very long, high volume frac hz wells.

    3. Thanks that is really interesting. As most wells in Bakken are 10000 feet long, 500 feet well spacing would translate into about 5 wells per section in Bakken. As I mentioned some time ago, the Grail area in McKensey has close to 5 wells per section now. The 2016 wells there had worse production than previous years and they have almost stopped drilling new wells there. As there are maybe 1500 well locations left in the sweet spot area of McKensey (assuming 5 wells per section) and they are adding perhaps 40 wells per month now, it means that there are only some 3 years of new wells left. But it’s not like they will add 40 wells per month and then suddenly stop. So more and more wells need to come from outside the sweet spots the coming years. Because of the red queen phenomena, if new wells start to produce less, then more wells are needed just to keep total production flat. So perhaps Bakken oil production peaked in 2015. But that depends on how many new wells will be added the coming years.

       1. Freddy

          One needs to remember the Three Forks formation when doing those kind of calculations.
          Some of the higher producing wells in North Dakota these past 2 years targeted the second bench of the TF.
          There have been very few third bench TF wells and, I believe, only a couple targeting the fourth bench so far.

          Regarding downspacing, it has been a real crapshoot throughout all the shale plays.
          Operators had been purposefully drilling closer and closer and monitoring results.
          The biggest influencing factors (among many) seems to be the permeability and brittleness of the rock.
          Utica operators are back to 1,000 foot spacing while Marcellus operators continue to drill 500′ or less.
          Again, the thickness of these formations plays a big role as 3 dimension, not 2, come into play.
          80% production in offset wells is the commonly quoted figure from several operators, and they seem to be okay with that.

          BTW, I appreciate the charts you regularly post here.
          Be advised, Bakken operators have recently changed their flowback procedures and early month produced water numbers have skyrocketed.
          New wells now show 150/200 thousand barrels produced water their first few months online.

          This will skew historical WOR computations.

          1. Hi Coffeguyz,

             I agree, the Three Forks should allow at least one other layer of wells and perhaps a couple of layers in the sweet spots.

          2. Yes of course, it depends geology and how completion is done. But I find it interesting that the numbers are similar. When it comes to three forks layers, they are only 80 to 250 feet bellow middle bakken (from drilling deeper) and as I remember they are closer in the McKensey area. So any well will for sure drain oil from more than one layer. But yes it should allow for at least a bit closer well spacing. Then on the other hand, the operators appear to use more water and proppants than before. I don´t know how it is in Eagle ford, but if they use more in Bakken then it should even out as it would give longer cracks.

             Thanks for the water information, I will keep that in mind. However I have seen that older wells also has got increased water cut and it does not seem to go back. So I think more water and proppants when completing is a big cause of that increased water production as the cracks reach further down where there is more water.

             1. Freddy
                The operators generally do not divulge specific details in their completion (fracturing) processes, but much of what is occurring can be found or deduced, in large measure, from various sources – especially many of the supporting companies attempting to market their wares.

                When you mention lengthening fractures – vertical as well as horizontal – you seem to be overlooking the inroads of the diversion techniques and processes that have been implemented these past few years.
                In a nutshell, the near wellbore diversion material temporarily blocks the larger fissures, thus enabling pressure buildup so more fractures occur.
                Historically, only 65% or so of entry points would produce much hydrocarbons.
                Now, it is close to 100%.

                The far field diversion products essentially block the continuance of fissures from forming 300/500 feet laterally from the wellbore. (And also vertically as well as between stages. This is the reason perf clusters and stage count have increased these past few years.
                As the spread of fissures has been blocked, pressure buildup once again occurs and this is where the recently introduced micro proppants can enter and enlarge the microscopic cracks and allow #100 mesh proppant to enter.

                All these innovations lie behind much of the increase in output these past few years.

                The restricted choke is also being mentioned by operators as boosting overall production which seems counterintuitive.
                However, the hundreds of thousands of barrels of produced water now showing in the early months (WAY higher than historical norm) is leading to speculation that the induced, elevated formation pressure is assisting in increase output.

                At some point in the future, these technical points may be more publiclylly explained.

                1. Hi Coffee Guyz,

                   Not much change lately in Bakken average well output.

                   See shaleprofile.com.

                2. I agree with Dennis. Initial water cut has not changed much. But later years have higher water cuter after a few months of production and it increases over time.

12. Not gonna scroll. Found some ECB corporate bond buys. Specific companies.

    Daimler
    Deutsche Bahn no idea what that is
    BMW
    Eni (!!!!!)
    Air Liquide
    Schlumberger (!!!!!)
    Total (!!!!!)

    The specific bond serial number (in the US it would be called CUSIP-like) of each purchase is known. The buy takes place on the secondary market. Much the same way the Fed never bought Treasury issuance direct from Treasury. There was always a go between — which essentially means nothing. This was never discussed about Mort. Backed Securities. Bought them from who had them — at about 1000X market price.

    And this is cool. As of July of last year, 35% of all ECB bond buys (aka lending to private companies with money from nothingness) were of individual bonds with — get this — negative yields. They not only loaned money to the company, they paid the company interest for holding the bond.

    And y’all think money is a meaningful metric for the overall circumstance of oil flow. hahahahahhaah How can it be? Schlumberger!!! Hell, they are funding US shale flow with money from nothingness.

13. DUCs in a row. Just don’t know how many are dead DUCs.

    

    1. https://www.linkedin.com/pulse/when-duc-hunting-season-begin-chris-chia

       Dead DUC analysis estimates about 3,700 dead DUCs per the article. Old article, it may have been posted before.

14. Ven made their debt payment today. Rumors of Oct 27 default prove bogus.

    1. They still have lots to pay in the next few weeks. Their gold reserves have already been sold via swaps.

       They’re done.

       1. Another big payment due next week. If you know you’re not going to make that one, seems odd they would make the one today. Why bother?

          Next six months after these two look light, and the new refinery is due to come online in June. Suspicious about all demonization.

          1. Amusing item. There is talk that US sanctions can prevent US banks who hold Venezuela bonds from accepting payments Ven might attempt to make.

             Smells a bit like the Arlington National Cemetery history. Look it up sometime. That land belonged to a family that held it for generations. A daughter of that family happened to have married Robert E. Lee. The Union, during the war, refused to accept her attempts to pay property tax on that land. She even sent bags of gold to the relevant offices. They refused the money. Then they confiscated the land for non payment of property tax.

             The cemetery was started. Lawsuits were brought after the war. US Supreme Court ruled in favor of the Lee descendants and they got the equivalent of billions in present day dollars.

          2. Probably game over when the new Chinese Refinery comes online.
             So essentially, the US has 10 months to torpedo Ven.

15. Baker Hughes US Rig Count: -4 to 909
    Oil Rigs: +1 to 737
    Gas Rigs: -5 to 172
    ———————-
    Canada -11 to 191

16. FT – Oct 27th – ExxonMobil and Chevron, the two largest US oil and gas groups, are continuing to lose money on oil and gas production in their home country, in spite of the rise in commodity prices since last year.
    Reporting earnings for the third quarter, Exxon said it lost $238m on oil and gas production in the US, while Chevron lost $26m. The losses were reduced from the equivalent period of 2016, but came as both companies made healthy profits on their international operations.
    (pay wall but one free) https://www.ft.com/content/c43b55c4-bb2d-11e7-8c12-5661783e5589

17. RIO DE JANEIRO (Reuters) – Oil major Royal Dutch Shell Plc won half the blocks awarded in Brazil’s deepwater oil auction on Friday, while rival BP took two blocks and Exxon Mobil Corp one in a historic opening of the pre-salt play to foreign operators. Two blocks got no bids.
    Oct 27th: https://www.reuters.com/article/us-brazil-oil-auction/shell-bets-big-on-brazil-as-oil-majors-snap-up-offshore-blocks-idUSKBN1CW12W

18. A lot of depletion discussion upthread.

    Yes, cost depletion is available to oil and gas producers and almost all other types of miners, including gravel pits.

    Yes, small producers, 1,000 BOEPD and less, are permitted to elect percentage depletion over cost depletion if percentage depletion is greater. Further, this election can be taken in excess of the tax payer’s basis in the lease. It is clearly a tax preference not allowed other industries.

    In 2012, the deduction was limited, not noticed by anyone except those if affected. Marginal producers were permitted to take percentage depletion in an amount greater than 100% of the net income from the lease. That was ended in 2012.

    Clueless brings up some good points.

    Maybe it should be eliminated and the plugging and abandonment of marginal oil production encouraged?

    My primary point really is to note that those proposing elimination (Trump and Congressional Republican’s) are whacking their own supporters, by and large in making this proposal.

    Secondarily, the “tax break” is for the little guy, not “big oil” as President Obama repeatedly falsely claimed. Big oil likely is in favor of elimination, so as to shut in as much of the stripper well production as possible.

    Percentage depletion is on the chopping block to pay for cutting C corp tax rates, pass through entity tax rates, and elimination of estate taxes.

    Just think it is very interesting that the Republican Party would increase taxes willingly on a very “core” constituency.

    As guym and TT mention, OK and TX legislators who vote in favor will take some heat for sure.

    I guess we shall see what happens.

    1. Hi shallow sand,

       Is percentage depletion allowed for all extractive industries? There seem to be conflicting claims on this point.

       Texas Tea points out the Tax revenue lost by the government is only 1.3 billion dollars per year (no source for this I assume he is correct). This might be covered by a small (1 cent per gallon) increase in Federal fuel taxes (in 2016 4725 million barrels of gasoline and diesel fuel were supplied, 4725 times 42 is about 198 billion gallons of fuel). So only 0.6 cents per gallon is enough, I was off by 100 in a comment up thread as I forgot there’s 100 cents to the dollar).

       So 1 cent per gallon is roughly two times higher than needed rather than 200 times as I mistakenly claimed earlier.

       1. Dennis.

          Yes, percentage depletion is allowed for other mining activities, and I believe oil and gas is the only product where the deduction is limited to marginal producers.

          I am sure you have also heard of the domestic production credit? Guess what, everyone who produces anything and pays wages gets that, but oil and gas producers were singled out to get less than all other businesses.

    2. you can put me down as somewhat cynical, floating these ideas may be nothing more than shaking the money tree as the lobbyist money falls into the coffers of the lawmakers like fall pecans. in truth this whole debate is nothing more than a charade to keep the public thinking that the dollar actually has value. contrast this with the ideas floated about a universal income to everyone, free health, care free education.

       1. I think they are trying to find anything to offset the three big items that R’s and Trump want, which are:

          Lower C corp rates.

          Lower pass through entity rates on “non-labor” income

          Elimination of estate tax.

          Percentage depletion for oil and gas constituents are almost all R. However, they are small in number.

          Farmers just received some cash earlier this month. Direct payments. There are a lot more farmers than small oil producers, I assume.

          1. I actually think small oil and gas operators are similar to farmers. In fact, some farmers here operate oil wells too.

             When oil hit $8 in 1998-1999, some operators went BK. Shut down leases. Some farmers wanted the wells plugged, others wanted to take over the wells on their land.

             Until 2015-17, I think those that took over the wells made out pretty good.

             I have had one tell me he even made money last year at $35 oil, because he owns all the WI and RI, he and his hired hand pump the wells and do all repairs except rig work. Claims his LOE runs $15 per barrel, and I don’t doubt it.

19. How true is that there are vast amounts of gas and oil under public lands?

    https://www.thenation.com/article/interior-department-scrubs-climate-change-from-its-strategic-plan/

20. ExxonMobil and Chevron again posted losses in US upstream (for Q3, 2017).

    1. Their production decline (or failure to grow) trends look as if they are starting to worry the investors, who were of course the ones insisting they do the things to maintain dividends that now mean the declines are likely to accelerate.

       Exxon churned out the equivalent of 3.97 MMbpd, short of the 4-million average estimate from analysts. Chevron’s tally was 2.717 MMbpd, underperforming its 2.777-million average estimate. In both cases, the figures rattled investors, even as the U.S. oil giants easily beat estimates on their overall earnings.

       Since 2014, when crude prices crashed, major oil companies have prioritized one thing — conserving cash. They’ve engaged in mass layoffs, canceled marquee projects and put intense pressure on suppliers and contractors to cut prices. Despite a recent recovery, prices are still about half the level seen three years ago, so there’s little sign that this focus is shifting. One victim of that strategy for the two big majors may be production.

       Exxon declined 1% in New York trading at 9:58, while Chevron lost 3.7%.

       http://www.worldoil.com/news/2017/10/27/disappointing-output-betrays-exxon-chevron-profit-victories.

       Neither of them has many major projects coming due in the next couple of years (Hebron, Odooptu, Big Foot and a couple of production sharing thins in the Middle East). They used up a lot of the opportunities for brownfield expansion work on their older facilities when the price was high and they might both be seeing big drops in those coming soon, with nothing left to ameliorate them – e.g. their offshore facilities in Nigeria and Angola, some in the GoM for Chevron, Hibernia for both. They are both in Tengiz and Kashagan I think but a lot of that production is just going towards maintaining a plateau. So they are both increasingly reliant on Permian

21. Brent is now at $60, which I seem to remember was talked of as a target when OPEC cuts started, and yet Saudi are backing longer cuts through next year (possibly until Khurais expansion is finished would be my guess).

    1. Any guess as to how much extra production that will provide? From what I have read, it wasn’t as big as originally estimated.
       And you really don’t think that is the ultimate target for OPEC, do you??

       1. 300 kbpd. I’m not sure what your last sentence is asking. OPEC members say and act according to their own self interests not for the general good of OPEC, so Saudi would want the cuts to hold as long as they have no production to add, no matter what the oil price, and I don’t think they have any until Khurais comes on line.

          1. Khurais is what I was asking about. Sorry, I am pretty cryptic. You answered the question, thanks. Of course, the Saudis would like it a lot higher than $60.

22. As also smaller companies reported q3 earnings, the results show an interesting trend: production did not go up year over year, despite higher capex and secondly cash flow from operating activites declined strongly even at comparable production rate and product prices.

    Take Whiting Petroleum WLL, which had basically the same production and a little bit higher revenue due to higher prices, yet operating cash fell from 159 mill last year to 99 mill. This is in my view due to the sharply rising decline rate, which plagues now the whole industry and makes funding of more drilling very difficult. However, this is good news for prices, which can now go up – not only for oil, but also for natgas.

23. This post just posted on oilprice.com. Congratulations George on another super effort. I haven’t read anything for awhile that compares to the level of detail, smoothly putting together all the parts in a composition that is easy to read, as the contributions you give us.

24. think we can file this under “i told you so”

    http://www.tulsaworld.com/business/oklahoma-s-cana-woodford-now-second-most-active-oil-field/article_9ec19aad-1332-52ef-9172-8d38e37046c9.htm

25. For anyone interested, ”World Crud Oil Supplies per July 2017” just posted on FF.
    Closer look at OPEC (13), OECD petroleum consumption and OECD stock levels.
    https://fractionalflow.com/2017/10/29/world-crude-oil-supplies-per-july-2017/

    1. That’s a good summary thanks. You mentioned $60 as a threshold for new developments – we are now there and from what I see the opposite is happening. Usually quarterly releases include a few new project and new discovery announcements but not so far this year (though still early – a lot are due on Wednesday). What we do see is even more of the “responsible investing” talk – i.e not spending for the long term future – that has grown up over the last two years.

       I think your 2-4 years for projects FID to first oil might be changing a bit. We are seeing more very short term projects now where small discoveries are immediately tied in as (fast declining) producers – these don’t add much to overall production. The two year developments were shallow stand alone shallow fields and subsea template tie ins – the death of discoveries mean there aren’t many of these left. There may be some growth in shorter term projects using repurposed FPSOs, but the bigger deep water projects and (if they come back) oil sands projects look like they are getting longer – maybe because the developments that are left over or the few new discoveries are more difficult.

       Angola and Nigeria might be interesting to watch in the next couple of years – that both had good few projects start up in the mid 2000s which might all be coming off plateau at the same time and just as they run out of new projects.

       When oil does get to a point, and for long enough, that the investors allow the companies to start investing long term again the cupboard might be a bit bare for available projects, at least for oil.

    2. George and Rune: thank you for interesting posts on what has happened and your view on what may happen.

       Rune wrote: “It appears, from looking at the number of oil rigs in Saudi Arabia, that it takes a high(er) number of rigs to sustain and grow oil production, and the number of oil rigs remained high as OPEC(13), led by Saudi Arabia increased its supplies with about 1 Mbo/d over a 2 year period post the oil price collapse.”

       Not many seem to take an interest in this. I think it is _very_ interesting.

       1. The phrase that can destroy everything is “save it for our grandchildren”.

26. Another great article, George!

27. https://oilprice.com/Energy/Energy-General/Analysts-Raise-Oil-Price-Forecasts.html

    Chuckle. They aren’t finished, yet. Lower for longer is dead.
    At least this article doesn’t say that oil will start billowing from the shale patch, now that prices are slightly higher.
    Next year it will be, what oil price will get the damn shale patch to pump faster.
    Exports should pick up the first of 2018 by 300k a day. The LOOP in Louisiana should be able to load VLCC tankers by then. US inventory draws will pick up, as a consequence. By 2019, we will be reading stories about US refiners re-tooling to take more shale oil. Read, somewhere, that backwardation of WTI is already happening to a limited extent.
    Actually, analyst have half way pulled their heads out, already. Let the games begin!

28. Commodity traders pay for best data. But I was wondering if the IEA or EIA use these estimates?

    ClipperData and Ursa Partner to Monitor China Refinery Demand
    New York City, October 24, 2017: ClipperData LLC, the global leader in crude oil and petroleum product cargo tracking, and Ursa Space Systems, the innovator in accurate and comprehensive global oil storage inventories, today announced a partnership to measure, track and report China’s crude oil demand on a weekly basis.
    October 26, 2017 by Zack Downey – http://ursaspace.com/2017/10/26/clipperdata-ursa-partner-monitor-china-refinery-demand/

    Longyuan Zhenhua 3 – China’s new wind turbine installation vessel takes to water in Nantong. The vessel, with a lifting capacity of 2,000 tons, is believed to have broken several world records.
    30 Oct 2017 promotional video https://www.youtube.com/watch?v=Vd6KA_y8dcY

    China General Administration of Customs – crude oil imports for September

    

    1. Good info. China imports looking pretty strong. No, I think the only data the EIA uses is from their own internal anal ysts. Walking into that room will get you high, for sure.

    2. Reuters – Oct 20, 2017 – India imported a record 4.83 million barrels per day – ship-tracking data from industry sources and Thomson Reuters Analytics showed.
       https://timesofindia.indiatimes.com/business/india-business/indias-oil-imports-hit-record-high-in-september/articleshow/61156182.cms?

       But India’s Petroleum Planning & Analysis Cell numbers say that crude oil imports were flat and product exports were at highs

       

       1. Last year’s Indian consumption growth was 8%.

29. Brent up at $60 while WTI is $6 cheaper at $54 leads to U.S. crude exports at 2 million barrels a day…

    Reuters – U.S. crude exports have boomed since the decades-old ban was lifted less than two years ago, with shipments recently hitting a record of 2 million barrels a day.
    How much crude the United States can export is a mystery. Most terminal operators and companies will not disclose capacity, and federal agencies like the U.S. Energy Department do not track it.
    Analysts believe operators will start to run into bottlenecks if exports rise to 3.5 million to 4 million barrels a day. RBC Capital analysts put the figure lower, around 3.2 million bpd.
    The United States has not come close to that yet. A total of the highest loading days across Houston, Port Arthur, Corpus Christi and St. James/New Orleans – the primary places where crude can be exported – comes to about 3.2 million bpd, according to Kpler, a cargo tracking service.
    https://www.reuters.com/article/us-usa-oil-exports/u-s-oil-exports-boom-putting-infrastructure-to-the-test-idUSKBN1CZ0CI

    1. Good info. The last I read, they had it capped at 2.2 million. Doesn’t count Loop coming online the first of 2018. Significant variation, although Kpler should know. Though, that may be best case, scenario. We all know best case scenarios never work.

    2. Do the author think that the WTI-discount will persist if US export 3mbd for any length of time?

       I don’t know exactly how much above the 5y average US stock is but I think it is aprox. 100mb(?). US oil export has increased more than import and demand is up too. The current level of export (~2mbd) should drain stocks pretty fast and the WTI-Brent differential should narrow, i.e. reducing the arbitrage (exports).

       1. Definitely unchartered waters. If the US refineries continue to eschew the majority of shale oil, I could only guess that WTI/Brent spread would yo yo, depending on shale production. I read that current long term spreads should keep the gap open until Oct of next year, but it’s uncharted. So on some maps you may see, “in these waters, there be monsters”.

       2. Yes as you say a wide spread can only be short term for the reason you give, arbitrage. The Brent-WTI spread only needs to be over $2.5 to make exporting worth while for Permian producers – CEO Pioneer.

          Looking at the commitment of traders weekly numbers it made me think that when the Brent-WTI spread narrows it could be due to Brent falling more than WTI. Traders have bought more Brent than WTI paper barrels.
          Saxo Bank https://pbs.twimg.com/media/DNYC7RyXcAEyLBW.jpg

          Brent – North Sea maintenance and world demand has been drawing barrels from expensive floating storage
          WTI – I keep wondering how high will WTI have to be for completions to increase? Traders not buying WTI due to fear of DUCs?

          US imports likely to increase as anchored barrels decrease: https://pbs.twimg.com/media/DNOD2pYX4AA1Om1.jpg

          1. “US imports likely to increase as anchored barrels decrease”. Likely to abort some draws in inventory. Last weeks EIA showed about a 4 million a week increase, but not for long. Exports will soon take care of that problem.
             I really appreciate your posts, Energy News.

30. https://www.nytimes.com/2017/10/29/business/energy-environment/russia-venezula-oil-rosneft.html

    This is pretty good, but the reporter seemed to have some sort of agenda and made his phone calls to get quotes he wanted to hear. There is sometimes that impression in articles like this. The reporter made a call, he didn’t hear what he wanted, so he made another call and got the quote that he puts in the article.

    Synopsis is Rosneft is keeping Venezuela operating and solvent. They own 49% of CITGO and are in the process of trading that holding back to Ven in return for interest in the Ven oil fields themselves. The reporter doesn’t delve deeper into that.

    There is mention that few refineries outside the US can refine Ven heavy oil. No mention of the Ven refinery coming online that is capable of refining that heavy oil.

    Overarching theme: Rosneft is the instrument being used to extend Russian power. nuance nuance blah blah but that’s the overall point. Rosneft is the mechanism.

    He doesn’t really look at what he is saying. 1) The US made noises about national security when Rosneft took 49% of CITGO’s refinery in the US. The article quotes something like 4% of total US refining capacity. Rosneft trading that 49% for oil field geography itself escapes potential US confiscation–no mention by the reporter. 2) Also no mention of what would seem to be the elephant in the room — US sanctions on Russia are doing nothing. They are taking Ven oil to sell it. They are using the Rosneft mechanism to assert power. What are the sanctions doing?

    1. Russia imports very little, and the sanctions have been a failure.
       They seem to be able to sell everything they pump.
       I’m real interested to see what happens in June 2018 when that refinery comes into production.
       The worlds largest oil reserves may be in the hands of the people who own it—- with of course, Russia and China included at the party.

       1. OTOH nothing ever completes on time.

          1. True—-

31. EIA US crude production at 9,203 kb/day in August down 31 kb/day from 9,234 kb/day in July (July revised down from 9,238 kb/day)
    Harvey: Texas lower by -108 kb/day & Federal Offshore Gulf of Mexico lower by -66 kb/day
    https://www.eia.gov/petroleum/production/#oil-tab

    Reuters survey suggests that OPEC production fell by 80K bpd to 32.78mln bpd in Oct, pointing to 92% compliance (86% in Sep)
    Reuters Sources say that Russian oil production stood at 10.93mln bpd in October (prev. 10.91mln bpd)

    1. The difference between EIA weekly estimates and the monthly production reports continues to grow. Total USA August production of 9.203 million bpd is 292,750 bopd less than the average of 9.49575 million bpd per the 4 weekly reports for August. Comparable numbers for July was monthly production of 9.4165 million bpd compared to average weekly of 9.4165 million a difference of 182,500 bopd.

       There continues to be a stream of reports talking about USA production of 9.5 million bpd, even though monthly eia production hasn’t been over 9.25 since 2015.

32. A mismatch between EIA – the US agency for publishing US oil and gas data – and the RRC – the Texan agency for oil and gas data – must be resolved during the next few weeks. EIA weekly supply estimates are way higher than the published RRC data (see below chart). Although the data converge for most of the time, a massive gap over the latest months emerged nonetheless. RRC data will be revised upwards, yet this is usally just 0.2 mill bbl per day, which still leaves a gap of 0.5 mill bbl per day. Should the EIA really revise down the production forecast by half a million barrels per day, companies have produced the same amount of oil as last year, despite 100% more capex and drilling rigs. However, this would confirm my view that decline rates have increased rapidly and thus increased the cost per produced barrel, which also shows up in the latest q3 earning releases of oil and gas companies as cash from operating activities fell steeply. In that sense shale just took out an involuntary cut of half a mill barrels per day. In my view this is also the reason for the recent strength for the oil price.

    

    1. If the Bakken is any indicator, it’s Texas that has the problem. Bakken output has risen about 15 percent since last December.

       1. Yet Bakken is relatively small and GOM as well as Alaska and other producers were stable.Bakken alone cannot explain the difference.

          1. The difference may not be real, data problem.

             1. The EIA weekly numbers are at odds with their own monthly numbers by 300 k b/dd (see comment above). EIA weekly numbers suggest production is up by 1.1 mill bbl per day, RRC says Texas production is far below last year. In my opinion, this cannot be just statistical noise.

    2. “Should the EIA really revise down the production forecast by half a million barrels per day, companies have produced the same amount of oil as last year, despite 100% more capex and drilling rigs.In my view this is also the reason for the recent strength for the oil price.”

       Heinrich,
       That could be one of the reasons but hard to know for sure in real time. But there are other reasons that are little bit more transparent and explain recent strength for the oil price:
       – Discipline that OPEC and participating non-Opec countries have displayed.
       – Fall in stocks of importing countries in the last 6 months
       – Significant rise in oil demand in US & China in last year.
       – Probably there is some resumption in long term speculation on oil market
       – There is also some uncertainty in Kurdistan that involved stoppage in oil exports from Kirkuk in the last month (~300k bpd)

       Upward trend should continue in the next few months.

       1. Ves, agree with you that there is not just one reason. However, the disappointing production numbers of shale companies, who have invested heavily and doubled rig count from last year- and then ended up with no growth at all – has been the trigger for the recent rise in oil prices. The latest earnings tell us that companies have to double rig count again, just to keep production stable by next year – which makes it very difficult for shale companies to expand supply further.In my view shale is going into an cost upward spiral, which restricts supply increases, thus make way further oil price advances.

          1. Heinrich,
             From the end of 2014 Shale ended up, using the chess term zugzwang ([from German, “compulsion to move”]. When a player is put at a disadvantage by having to make a move; where any legal move weakens the position.

             Shale “move” was more drilling in 2014-2017 during the price downturn. But as you correctly point out with more drilling it weakens their position.
             If they don’t drill they die, or if they drill they will die little bit later with prolong suffering for all oil producers. I think this is unfortunate waste of the valuable resources due to “logic” in the Department of Energy, Wall Street etc.
             Using just logic always have unintended consequences.

    3. Hi Heinrich,

       There has always been a big difference between RRC data and EIA data especially for the most recent 12 to 18 months. It has always been the case that the EIA monthly estimates are far more accurate than the reported RRC data, especially for the most recent 12 months reported.

       The weekly EIA numbers for output are garbage and should always be ignored.

       I have been saying this for about 3 years, maybe more.

       Dean Fantazinni’s estimates (based on RRC data over the past 2 years (using every data set reported for every month for the most recent 24 months reported for all 24 months (576 data points of RRC C+C reported output used to produce an estimate for the most recent 24 months of Texas C+C output.) Suggest the last few months the EIA monthly estimate may be too high by about 200 kb/d (July and August) for Texas C+C output, thus the US estimate for C+C output may also be too high by roughly this amount (if we assume all other state estimates are fairly close).

       Chart below is based on Dean Fantazzini’s correction factors from the most recent 17 months, there was a shift in the correction factors to lower values in April 2016 so the data sets from April 2016 to August 2017 are used for the “corrected” Texas RRC estimate. The August estimate for Texas C+C is 3176 kb/d, 190 kb/d lower than the EIA estimate.

       

       1. Dennis, you have met exactly my point: Texas production is slightly lower than last year. How can total US production be higher by 1 mill bbl per day. Who has produced this one million? Texas did not, neither did Alaska, GOM or Bakken. My only answer is that the EIA has ‘produced’ this number.

          1. Hi Heinrich,

             Simply look at the EIA data, the US estimate is roughly 200 kb/d too high as I suggested. So compared to August 2016 the “adjusted output” after subtracting 200 kb/d is 9000 kb/d about 300 kb/d higher than 12 months ago.

             Bakken has increased 90 kb/d, GoM by 70 kb/d, Colorado by 50 kb/d, Wyoming by 20 kb/d, Oklahoma by 45 kb/d, and New Mexico by 70 kb/d for a total of 345 kb/d since Aug 2016. Declines elsewhere probably add up to about 45 kb/d. See

             https://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbblpd_m.htm

             and download series history.

33. MEXICO’S PEMEX POSTS $5.6 BLN LOSS IN QUARTER ON LOWER OUTPUT

    Read more: http://www.dailymail.co.uk/wires/reuters/article-5024825/Mexicos-Pemex-posts-5-6-bln-3rd-qtr-loss-lower-output.html#ixzz4x7Fmy6jr
    Follow us: @MailOnline on Twitter | DailyMail on Facebook

    http://www.dailymail.co.uk/wires/reuters/article-5024825/Mexicos-Pemex-posts-5-6-bln-3rd-qtr-loss-lower-output.html

    The quarterly loss of 101.8 billion pesos ($5.6 billion) was about 14 percent lower than the 118 billion-peso figure the company posted in the same period last year.
    The third-quarter loss broke a streak of three quarters in the black for the Mexican oil company.
    Crude production averaged 1.884 million barrels per day (bpd), down nearly 12 percent compared with the July-September period last year and marking three consecutive months of output below 2 million bpd for the first time in decades.
    Natural gas output was down some 14 percent to total 4.091 million cubic feet per day.
    Pemex attributed the fall in oil and gas output largely to natural disasters that struck Mexico during the quarter, including storms and two major earthquakes in September that forced production at some facilities to shut down temporarily.

    The Pemex target for this year is 1.944 mmbpd, so they expect continued decline, and that must continue next year and into 2019 until the Abkatun replacement rig (60 bpd) comes on line.

    

34. BP Launches Share Buyback As Q3 Profit Beats Estimates https://oilprice.com/Latest-Energy-News/World-News/BP-Launches-Share-Buyback-As-Q3-Profit-Beats-Estimates.html
    This news is in itself insignificant, but I think we will see more of this going forward. It just makes more sense for the oil companies to buy back shares rather than spend the money on high risk-low reward exploration. This financial discipline is good for shareholders but will off course result in less responsive supply when the price heads north.

    1. Bloomberg elaborates a bit more (https://www.bloomberg.com/news/articles/2017-11-01/bp-leads-oil-slump-survivors-back-to-normality-as-earnings-surge):
       “The deep cost cuts, mass layoffs and project cancellations that enabled the majors to live a little easier with prices closer to $50 remain in place, clouding the outlook for production growth years from now…
       For the moment, an end to share dilution looks to be about as far as the oil majors are willing to go in loosening their purse-strings. BP will not allow annual capital spending to surpass its “hard ceiling” of $17 billion until 2021, Gilvary said. It could even be under $15 billion — $10 billion less than spending in 2013 — if crude drops below $50, he said.
       Shell CEO Ben Van Beurden, who will present his company’s third-quarter results on Thursday, has said he’s setting the company up to be profitable with oil prices “lower forever.””

       1. BP is nearly a gas company, they should have that as the key price (although closely tied to oil – at the moment).

          How long before news from Bloomberg and Reuters starts mentioning the lack of discoveries – i.e. nothing to spend the money on even if they wanted to.

          I’m pretty sure the CEOs and upper management would go on debt fuelled spending sprees no matter what the price if allowed – E&P is what they’ve done all their careers, not penny pinching – it’s the shareholders through the chairman that are stopping them.

35. I had a look at BP’s Q3 production growth – the 4 mentioned as Q3 in their earnings report are all natural gas…

    BP’s total oil and gas production in Q3 averaged 3.6 million barrels of oil equivalent per day, up by 14 percent from Q3 2016.

    The Persephone gas field is offshore north-west coast of Australia – LNG
    Juniper is BP’s first subsea field development in Trinidad. It produces gas from the Corallita and Lantana fields via the new Juniper platform
    Khazzan tight gas development in Oman
    Egypt’s Zohr gas field is an offshore natural gas field in the Mediterranean Sea

    BP’s Q3 report 2017-10-31 https://www.bp.com/content/dam/bp/en/corporate/pdf/investors/bp-third-quarter-2017-results.pdf

36. API is reporting large draws in all three, crude , gasoline, and distillate. Adds up to around 15 million barrels

37. The shale patch is here to stay contrary to a number of “contributors” to this blog. And that is a good thing.

    “The ACC estimates that these projects represent $185 billion in new capital investment and will create 464,000 direct & indirect jobs by 2025, $310 billion in new economic output, and will bring in $26 billion in new tax revenue by 2025.”
    https://oilprice.com/Energy/Energy-General/How-The-Shale-Boom-Is-Boosting-US-Exports.html

    I hope Robert writes a article on the economic benefits stemming from the increased income to royalty owners and to the tax coffers of the local county and state tax authorities. Add in the direct benefit to companies employees, add in the reduced cost to consumer by the new supply and it really makes one wonder just how far ones head must be stuff up their butts to NOT see whats is really going on out here in the real world. ?

    1. I hope they don’t once again kill the oil rally, just like they did early 2017.

       If we look past Harvey effects, there was substantial month over month growth, in ND, OK and CO.

       Please don’t kill the golden goose like last time guys.

       1. I am not sure who “they” are but I think the mindset has changed somewhat for the domestic LTO companies, as I predicted they would, from production growth above all else, to a more balanced, longer term and sustainable model where profits and shareholders(dividends) become equally if not more of a priority. I suppose we will get more clarity as we begin to see the capex budgets announced for next year and how the market responds.

          1. They would be the shale CEO’s, who first kept claiming they could be profitable at lower and lower oil and gas prices, till we hit $20s WTI and $1s HH.

             They are the same CEO’s who, when WTI hit $50 in late 2016, went crazy with press releases about double digit growth.

             Maybe I shouldn’t blame them so much as their Wall Street masters, who told them to say those things to stay, “in favor?”

             Hopefully after three years, it has been determined the price LTO needs to be a successful endeavor is north of $50 WTI. I think in reality that number is my preferred $55-65 price band. 2017 quarterly earnings is proof of that.

             TT, you have to admit, the shale CEO’s and the Wall Street bankers financing them were on a hype machine almost to the level of Mr. Musk himself.

             These companies have years of locations to drill, I hope they develop them like it’s a business, not like the promoters they have acted like. You can’t deny this isssue after Mr. Walker of Anadarko begged Wall Street to stop requiring the “growth over all else motto.”

             1. SS, I think the reason why I see things a bit differently than you is that as a geologist i don’t look a plays or fields by reading balance sheets and government production numbers. I look at individual wells, I follow production well by well. I compare what I am seeing with what a company is saying. I do it the old fashion way, I earn it? having said that there can be no doubt that many a company bought leases they thought might have come commercial value that did not.

                “These companies have years of locations to drill, I hope they develop them like it’s a business, not like the promoters they have acted like.”

                I think they can do the math just like you and I. If they collectively keep production steady they sell their products at a higher price, perhaps much higher prices. If they flood the market they lose money. There may come a time when they can have growth and higher prices but that is 2-3 years in the future. I think most of them know that and in fact I am betting that they do.

                “TT, you have to admit, the shale CEO’s and the Wall Street bankers financing them were on a hype machine almost to the level of Mr. Musk himself.”
                https://finance.yahoo.com/quote/TSLA?p=TSLA

                http://www.zerohedge.com/news/2017-11-01/tesla-burns-record-16-million-day-q3-delays-model-3-delivery-stock-tumbles

                musk stands out as the biggest “promoter of our time” mainly because his product has NO market(no demand for his product), where at least oil and gas companies sell what they produce .

                1. I said almost.

                   I guess things are not going so good for TSLA this week.

                   What blows me away is the institutional ownership of TSLA. They own it like it is a decades old blue chip with years of earnings, dividend history, etc.

                   57% of TSLA shares are in mutual funds. Yes, those financial instruments that are in IRA, 401k, etc.

                   I unwittingly own an interest in TSLA through some mutual funds. Ugh.

                2. Dig deeper, shallow.

                   Institutional Holdings are not synonymous with mutual funds. They’re usually two different things.

                   A mutual fund family could qualify as an “institution”, but individual mutual funds probably are not going to be categorized as institutional holdings.

                   What sometimes happens, and has happened with Tesla, is a company will be included in an index. The whole passive versus active debate can mean whatever you like but the reality is companies get included in indices and when that happens mutual funds that are entirely passive and low cost like Vanguard’s many index funds will wind up owning the company. It’s not an active management choice on the part of some mutual fund money manager. It’s entirely passive and if they’re going to own the index then they’re going to own some of the company.

                   So just because the company has wide institutional ownership does not mean that institutional managers made a specific choice to own some of that stock.

                   Their number three mutual fund holder is Vanguard Total Stock Market Index fund. They are huge. Vanguard’s raison d’etre is entirely index investing. They could not exclude Tesla even if they wanted to. Note that because Tesla is in several indices, the Vanguard fund family is one of the largest institutional holders

                3. Watcher. I understand.

                   I am starting to think Tesla is a fraud. Or at least the CEO is losing it.

                   Mars, tunnels, solar roof tiles that have never been made. Building a camp fire on the roof of a factory, while drinking whisky and making s’mores?

                   Burned $2.5 billion in 180 days. A company making a fraction of the vehicles annually than one US Toyota plant makes.

                   Note. This is not an electric car rant. I see GM outsold Tesla re EV in October, 2017.

                4. Watcher – I think that you hve made it as clear as mud.
                   (1) Institutional Holdings are not synonymous with mutual funds. They’re usually two different things.
                   (2) A mutual fund family could qualify as an “institution”
                   (3) the Vanguard fund family “is” one of the largest institutional holders [my emphasis on the word “is”]

                   What does “could qualify” mean in 2 above, which makes the word “is” appropriate in 3 above?

    2. TT

       Today there are over 900 high paid union trades people working on Shell’s cracker just north of Pittsburgh.
       18 months out, that number will quintuple to over 6,000.

       The Building Council of Western Pennsylvania is PAYING up 5,000 apprentices a year over the next 5 years for their various 3 to 5 year programs en route to becoming journeymen.

       In a few weeks, a Thai petchem company, PTT, will make a FID on whether or not to build a second, 5 billion dollar cracker in that area, while a third, Brazillian based Braskem, mulls over their future plans.

       A 10 million barrel NGL underground storage proposal is receiving political support from many government officials.

       The planned 2 dozen massive CCGT power plants are just starting to come online, ensuring some of the cheapest electricity on the planet (sorry, South Australia and New England).
       The combination of rock bottom pricing for feedstock – ethylene and propylene especially – and cheap juice will continue to lure manufacturers from Asia and Europe for production.

       Appalachia Rising now, and for decades to come.

       Shallow, the near 7 buck spread between WTI and Brent should indicate strong upside potential for US hydrocarbons going forward.

       1. Yep, 600 permanent jobs at the Beaver County Cracker Plant. They will make 1.6 million tons of ethylene for plastics each year.
          Why in Pa? Near gas sources and a huge tax break, leaving Ohio and W. Virginia out of the picture.
          “Pennsylvania attracted Shell by granting the company a fifteen-year tax amnesty window. Former Governor Tom Corbett successfully pushed for an additional tax break that will grant Shell a $2.10 credit for every gallon of ethane it purchases from Pennsylvania-based natural gas drillers.

          Over a 25-year window, the credit has been valued at $1.65 billion, making it the largest tax break in state history.”
          Cost of the project has been stated as about $6 billion.

    3. Texas tea,
       Shale is a very important factor – this is unquestionable. However, the image of shale being a source of abandant cheap oil and gas – virtually produced at a few mouse clicks – looks more and more like a fairy tale. Shale has its limitations and risks – notably the fast rising decline rates. And this has also its benefits as this will save many jobs outside of the US. Shale has its benefits for the US, yet fortunately it does not have the ability to drive the rest of the world against a wall.

       1. Heinrich, I have followed your post and charts and would add a note of caution for you to consider. Much of the work you are doing related to early drilling and fracking methods across a number of plays. I would suggest you follow the trend in the Haynesville. Companies have increased production by re-fracking old wells, longer lateral and applying new fracking techniques at a time of relative low gas prices. The point is the industry is very good at “squeezing blood out of a turnip” when forced too and I for one would not bet against that trend to continue.

          I would also offer that the folks who are deploying the BILLIONS of $$$ into new factories and plants are not the ignorant poor shareholder who are getting ripped off by big oil as often portrayed here by a number of “authors”, they are sophisticated, intelligent, scientist and business professionals who are clearly taking a different view of the future resource potential than many here at the POB. just saying….

          1. texas tea,
             Myself, I am not an amateur, working in the engineering business since 30 years. I know what it means to plan, construct and start up factories in Canada, Germany, Finland and Austria. So, I know the business very well and I have seen a lot.

             However, the shale hype is going too far, and the people behind this will pay a price for their reckless propaganda, which has already destroyed the life of many peoples. I have a personal experience as my accountant retired early at 60 to ‘invest in the shale business’ five years ago. He is basically now broke and has to work as an accountant again at 65.

             So many companies went already bust and many more are in the pipeline. The whole shale hype looks very unprofessional to me as the architects simply forgot to consider that decline rates are probably not stable.

             It is even more concerning that government agencies present highly contradicting numbers, just to mask what is really going on. Virtual none of the big and mid term companies have reported any year over year growth and some (BHP) have reported steep declines during the latest quarter. Where does the 1.1 mill bbl/d of growth come from? Who has produced this million? Is this really professialism?

    4. Hi Texas Tea,

       Depending on oil prices I expect US tight oil output may rise to between 6 and 7.5 Mb/d between 2023 and 2030 (best guess around 2026-7), but will decline within 3 to 5 years of the peak (2026-2032) and the decline is likely to be fairly rapid, by 2045 output is likely to be close to 1 Mb/d or less.

       Those scenarios assume oil prices are over $100/b and perhaps as high as $130/b (Brent in 2017$) by 2019 (annual average price) and remain at those high levels until 2050.

       This is despite my supposed “anti-oil agenda”, even if I knew nothing about climate change, I would be concerned that we will need to find other sources of energy when fossil fuels peak. Many experts expect this will occur before 2035 for world fossil fuel output (oil, natural gas and coal).

38. Frac Sand, Hi-Crush report a 16% sequential growth in volumes sold (not had time to check other companies)

    Hi-Crush Partners LP Reports Third Quarter 2017 Results – Tue October 31, 2017
    Our sales volumes improved to approximately 2.5 million tons for the third quarter, in-line with guidance, and marking the highest quarterly volumes recorded in Hi-Crush history.
    For the fourth quarter of 2017, the Partnership expects sales volumes to increase to 2.7 – 2.9 million tons.
    https://seekingalpha.com/pr/16985996-hi-crush-partners-lp-reports-third-quarter-2017-results

39. US crude exports were at 2.133 million b/day last week, a new record high
    Saxo Banks chart summary: https://pbs.twimg.com/media/DNjd905WsAENlpK.jpg

    

    1. Holy shit! I must have been asleep for the past few weeks. Didn’t know it had fallen that mutch and so fast. Do you know which countries the increased export is destined to?

       1. Exports from the monthly figures

          U.S. exported 772k b/d of crude oil in August – 33% went to Canada.
          China, UK, South Korea, and India were other top destinations.
          https://pbs.twimg.com/media/DNfaadGWkAY7KNB.jpg

          U.S. exported 636k b/d of gasoline in August – Mexico, like usual, was the primary destination.
          https://pbs.twimg.com/media/DNflU7VXUAAlnSA.jpg

          The U.S. exported 1.39 million b/d of distillate in August – Brazil, Mexico, and Chile were the top 3 destinations.
          https://pbs.twimg.com/media/DNfcwa_XkAEl9if.jpg
          https://twitter.com/T_Mason_H

          1. Propane/propylene also over 1 million barrels/day export.
             Ethane/ethylene over 200,000 bbld. Due to increase sharply when Mariner East 2 comes online next few weeks out of Marcus Hook.

40. US crude oil inventories

    

    1. Maybe the inventory is close to reality, or maybe it isn’t. I think it probably isn’t. I have spent a little time perusing the weekly reports, and I have little confidence on any of the numbers, except Alaska production and oil exports. You start off with production numbers that are 300 to 600 barrels a day high, and most of the rest is highly suspect. Even after adding non-existent production, you still have to add a plug figure of another 500+ barrels, just to make the summaries total. The data comes from multiple sources, including the inventory and production data that come from hundreds of sources, with about 10% estimated. If you have about 10% of the report in error that is staring back at you, the numbers are far worse than 10% off. Classic case of garbage in, garbage out.

       1. It says here that the EIA doesn’t collect weekly production data. Although since this was posted they do now get export data weekly from U.S. Customs and Border Protection…

          EIA – JUNE 2, 2015 – Crude oil adjustment balances independently developed supply and disposition components
          Each week, EIA collects survey data for imports, refinery inputs, and stocks. Currently, EIA does not collect weekly production or export data, so estimates are developed based on monthly data and information regarding seasonal and industry trends.
          https://www.eia.gov/todayinenergy/detail.php?id=21472

       2. Hi Guym,

          The weekly production numbers should always be ignored. The EIA’s monthly production numbers for August 2017 may be about 200 kb/d too high.

          1. I ignore it, you ignore it, but it is still the wart hog in the room. However, in combination with their horrible short term energy report, it tells a story that is a complete opposite with what is actually happening. If oil price rose to $100 tomorrow, the US shale could not reach the point to which they are projecting, due to the dearth of frac crews, and other supporting services. Those stories are used by IEA for predicting what is happening, most journalists use it, and probably many, not so informed, investors use it. It should come with a warning label.
             I am not going to comment on August or September production numbers, due to the Hurricane Harvey effects. But, the monthly EIA figures for July were off that much, or more, so it makes sense that August numbers are similarly off. That means the weekly production numbers are continuing to be off by, at least, 500k barrels a day too high. That is what the world sees, along with the short term energy report. The last I read on IEA projections, I guess they assumed EIA was being conservative, and added in some additional barrels for next year.
             Unlike Texas Tea, I don’t have a geology background, so there is still much I don’t understand when I look at individual well’s MWD reports, Completion Reports, and individual well production. However, like him, that is where I obtained a lot of my understanding of shale production, by looking at a lot of those. Especially, in the Eagle Ford, but some Permian. There is a lot left in the Eagle Ford, but will take higher prices to get it out. Same is true with the other shale fields. EOG is mainly drilling in areas that will produce 200k in the first year at $40, so the can ensure the well produces enough to pay for next year’s capex. At $100 a barrel, you could produce in areas that only have 75k barrel expectation. There are a lot of those.

41. Chesapeake CHK has just announced its Q3 results and confirms exactly my view on what is going on in the shale patch: despite massive increase in drilling and completion expenses (from USD 332 mill to over 600 mill), production declined to 540k from 638k boe/d.Rigs increased from 11 to 17 this year.
    CHK is one of the giants in the shale gas patch. If they cannot increase production despite a massive capex increase, who else will fullfill the miraculous predictions of a new flood of cheap and abundant natural gas?

    1. CHK is a disaster. They’ve drilled up or sold their best acreage. The remaining assets can’t pay off the debt. If the stock goes below $3, management will be incentivized to drive it into bankruptcy to eliminate debt. Coming out of bankruptcy management will own 10% of the new company. With so much debt, management will say they had no choice but to restructure.

42. Hi all,

    This week we have an Open Thread- Petroleum

    http://peakoilbarrel.com/open-thread-petroleum-november-2-2017/

    and a new Electric Power Monthly post by Island boy where non-Petroleum comments should be placed.

    http://peakoilbarrel.com/eias-electric-power-monthly-october-2017-edition-with-data-for-august/

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