Eagle Ford, Permian Basin, and Bakken and Eagle Ford Scenarios

335 thoughts to “Eagle Ford, Permian Basin, and Bakken and Eagle Ford Scenarios”

1. The only thing I can guarantee in future performance, is that oil prices will not move in flat or smooth curves.

   1. Hi Brainpimp,

      The oil price curve can be thought of as a trend line. Nobody can predict that, let alone the wiggles above and below as market conditions change. Think of the oil price shown in the Bakken Scenario as a minimum price. We could also create a maximum price scenario and have oil prices fluctuate randomly between the maximum and minimum prices. I have done that for average annual prices with the Maximum oil price scenario arbitrarily set at a 6% annual increase. Nobody can predict the oil price precisely. Chart below.

      

      1. Dennis, great work. Could you model this with a low oil price of not rising above $100 due to serious reduction in demand over time?

         1. Hi Allan H,

            If you are more specific I would do it. When would you like to see oil hit $100/b?

            Do you think oil prices will then fall? If so when and how fast will they fall. I am happy to do it, but don’t want to do it and have you say, no I wanted it this or that way. If you are specific, I will do it. As an example, you might want prices to rise 5% annually from $55/b to $100/b, remain at $100/b for 11 years and then decrease by 3%/year until reaching $50/b and then remaining at that level.

            1. Hi Dennis
               I would think that a price rise to $100 by 2020, then running level until 2030 and falling to $50 by 2040 would simulate a decreasing demand in light of decreasing availability of oil forcing prices to remain high despite decreasing demand.

               1. Hi Allan H,

                  Can you explain why $100/b will lead to decreasing demand for oil, so far this has not been the case. Oil demand continued to increase when oil was $100/b, it was supply growing faster than demand that led to excess supply and a fall in oil prices.

                  Do you expect that oil supply will continue to grow faster than demand? I doubt this will happen at $100/b in 2015$. Or if it does, it will not continue beyond 2018.

               2. I would not expect an immediate decrease in demand for oil for several reasons.

                  1 Even at $100 oil isn’t really expensive. For example the price of gas at the pump in Germany is higher now than it was in America when the oil price was $100+ Germans still drive. There is a huge gap between what oil costs to produce and what consumers are willing to pay. The limit to consumption is based on other issues, like good ideas why you should burn the stuff.

                  2 Demand is “sticky”. There are several subreasons.

                  2a. You don’t go out and by a new car just because the price goes up.

                  2b. Infrastructure needs radical changed to allow new modes of transportation.

                  2c. Technological change is relatively slow, but ticking along anyway.

                  2d. In some places there is strong political opposition to conservation.

                  3 The economy continues to grow. In addition, the number of middle class people worldwide is growing quite quickly.

               3. Yes, short-term responses to high prices are different from long-term.

                  On the other hand, a few thoughts:

                  European personal transportation consumption of oil is only 18% of that of the US.

                  $100, in the long term, is much more expensive then the alternatives.

                  Elasticity of demand isn’t linear, either in terms of price or terms of time. Consumption declines will accelerate with high prices and over the long-term.

                  Prices matter.

               4. Hi Nick G,

                  I agree that long term price elasticity of demand for oil is higher than in the short term and that oil prices matter.

                  It is not clear to me that a real oil price of $100/b in 2015$ will be enough by itself to reduce demand for oil. I also see no reason why $100/b (2015$) would be the limit on oil prices, I think by 2025 (or sooner) we will see $150/b (2015$) or maybe higher. This may crash the economy or it may lead to widespread substitution of EVs, light rail, rail, and other forms of transport for internal combustion engine driven transport in trucks and cars. It is not clear to me which of these will occur perhaps a bit of both.

               5. Dennis,

                  This is a complicated discussion, and it’s hard to be clear on the definitions of terms. In this case, it may be helpful to define demand not as consumption, but the way economists use it which is a certain relationship between price and consumption – a demand curve. If prices rise consumption will be lower than it would otherwise have been. That doesn’t necessarily mean the absolute level of consumption has declined. See what I mean?

                  About half of US fuel consumption is for personal transportation, and it’s the single largest component of consumption for the world.

                  As far as I can tell, the cost of electric vehicles and liquid fuel vehicles is about the same when oil is at about $75. I think that’s also roughly the point where all consumers (household, industrial, commercial) start to look at alternatives, starting with greater efficiency. Conveniently, it also is roughly the price at which LTO can grow. So, that looks like roughly the equilibrium price of oil: the number around which the price will fluctuate/ oscillate. Prices can go below that and above that but not for that long. The longer they go above or below that in one direction, the longer and higher or lower the next swing will be.

               6. Hi Nick,

                  There is the demand curve, which gives the quantity of oil demand at different prices, and the quantity of oil demanded at any specific price and unfortunately I used demand where I should have said the quantity of oil demanded. At a higher oil price, if all else is held equal, there will be a smaller quantity of oil demand.

                  What matters is the total quantity of oil demanded by the World at $100/b. At that price I do not think oil supplied will be able to meet demand and oil prices will need to rise. GDP growth will cause the demand curve to shift to the right and while substitution may shift the demand curve to the left to some degree, I doubt that $100/b results in a very strong substitution of EVs and public transport for cars and trucks.

                  There is a convenience factor to an internal combustion engine and its relatively unlimited range which will require a greater price differential than you believe.

               7. One factor that is seldom emphasized but that I think will really help battery electric car sales take off is that there is a huge huge fleet of late model ice cars out there.

                  Once electrics start making real inroads into new car sales there will be PLENTY of cheap conventional cars that are maybe just a tad hard on gas.

                  As a matter of fact the typical person who buys a battery electric car probably owns a conventional car and may very well keep it to drive on occasions where range or a recharging station might be a problem.

                  When the owner of such a conventional car leaves it in the driveway or at the curb and drives his or her electric to work and to run errands the conventional car can reasonably be expected to last at least two to three times as long before it gives problems.

                  The net effect is that the two or three car household with one electric used for commuting and errands is going to save a substantial amount of money.

                  If gasoline goes to five or six bucks – which it will eventually – the owner of a conventional car who drives it only occasionally will be able to pay for gasoline far more economically than he could trade a gas hog for a more efficient car.

                  I once knew a man who habitually drove his ten wheel dump truck to go grocery shopping and to church and every where else his personal business took him. This was actually substantially cheaper for him than owning a car given that his ” commuter car” was that same truck.

                  Driven gently without a load it he could have been getting seven to nine miles per gallon. He could drive it fifty miles a week on personal errands for twenty bucks or so for fuel. Just tags and insurance and taxes on a car would have cost him that much, never mind depreciation , repairs and maintenance. An extra ten or twenty thousand miles on such a truck at the end of ten years hardly matters at all when it you trade it or sell it.

                  If you have an electric daily driver you can afford do drive an antique v8 hot rod to grandmas house once in a while.

               8. “What matters is the total quantity of oil demanded by the World at $100/b. At that price I do not think oil supplied will be able to meet demand and oil prices will need to rise.”

                  Dennis,
                  the IEA reports that supply now is higher than demand. With oilprices much lower than $ 100/b. Which years you were writing about ? After 2020 ?

               9. Conveniently, it ($ 75) also is roughly the price at which LTO can grow. So, that looks like roughly the equilibrium price of oil: the number around which the price will fluctuate/ oscillate. Prices can go below that and above that but not for that long. The longer they go above or below that in one direction, the longer and higher or lower the next swing will be.”

                  Nick, that might well be the case for this and the next few years.

               10. Hi Han,

                   The reason that oil prices are low is that supply grew faster than demand at $100/b over the 2011 to June 2014 period.

                   We could assume that this will continue to be the case, but I do not think LTO supplies will continue to grow at $75/b and demand for oil (quantity) will grow faster than quantity supplied at that price.
                   In fact the oil supplied may not be able meet growth in demand at $100/b as the sweet spots become fully drilled in the LTO plays and supply stops growing even at $100/b.

                   Nick is arguing that $75/b is enough to get people to switch to EVs and public transport, I disagree and think $150/b will be needed. Time will tell.

               11. “Nick is arguing that $75/b is enough to get people to switch to EVs and public transport, I disagree and think $150/b will be needed. Time will tell.”

                   Dennis, I also think $75 is too low, but maybe $100-120 is enough. I seriously doubt that the world economy can stand prices of $ 150/b for more than 1-2 years.

               12. Dennis, Han,

                   I wouldn’t describe it as a simple binary thing.

                   There is a fundamental movement to EVs based on external costs: pollution and security of supply.

                   But, out of pocket costs of EVs are less than ICEs at around $75/bbl, so the transition to EVs will accelerate as the price rises above that point. But, it’s not binary/OffOn: $80 won’t accelerate things that much. OTOH, it’s not linear: the higher the price, the greater the pressure and the sooner we’ll reach another non-linear tipping point, when both industry and public opinion will seem to flip.

                   We see this in other places, like marijuana legalization and gay marriage: things reach a tipping point and change accelerates.

                   The same thing applies to Climate Change preparations.

               13. We see this in other places, like marijuana legalization and gay marriage: things reach a tipping point and change accelerates.

                   While I am not sure about EVs specifically, I think there will be a point at which enough people have lived with renewable energy, hybrid cars, EVs, energy efficiency, pollution controls, public transportation, and the like that it will become a minority position to fight against them.

                   Marijuana and gay marriage trends are an apt comparison because as older people opposed to them die out and younger people familiar with them move into the majority, opinions shift.

               14. I just saw this. It shows how quickly opinions and policy can change once a tipping point is reached.

                   This Is How Fast America Changes Its Mind

               15. I tried to explain earlier but my comments are not being published due to technical problems. $100/barrel oil equates to about $4/gallon gasoline in the US which reduced demand somewhat. The major factor for decline will be the intrusion of hybrid and full electric vehicles which with declining prices and increasing range become more than competitive those fuel prices. Electric cars will be superior in both performance and cost within three years to five years.
                   Also heating fuel oil costs will go above $4 a gallon and force changes in fuel for heating and increases in housing insulation. Railroads are already experimenting with alternative fuel and electric battery operation (they could also implement more electric powered rail lines). If fuel costs stay up, they will shift away from diesel.
                   By 2030 I expect more than half the vehicles on the road to be electric vehicles of some sort. I also expect railroads to have converted to have significantly converted to power other than diesel fuel. Also expect the number of vehicles to start falling rather than increasing.

               16. Hi Allan H,

                   I think some of that may occur, but whether the effects of the demand reductions you suggest can offset increased demand fro the developing world is by no means clear. I doubt that overall World demand for oil will fall at a real oil price of $100/b. Higher prices will be needed in my opinion.

                   I do not doubt that some of the effects you mention will not occur, but I do not think the change will be as rapid as you foresee.

               17. The transition won’t happen right away, but with prices over $100 the move to alternatives would accelerate. In any case, we’ll soon reach a tipping point where there is a very wide selection of electric vehicles and everyone perceives them as clearly better. There will be a rush to the exits from ICE vehicles.

                   We’re already seeing that in the luxury vehicle market: the physics and economics of ICE engines vs electric motors means that ICEs simply can’t compete. The Tesla is clearly better, in almost every way, compared to it’s price competitors. Tesla (in large part due to Elon Musk) is determined to push the change to EVs, and the economics of large scale production are going to have a very big impact in the next few years. Tesla will move down-market: that’s always been their plan. Competitors like BMW are moving fast to stay competitive. That means big change in the car market.

                   Of course, the Nissan Leaf is already the cheapest car on the market to own and operate, but it has limited range, so it’s niche is limited. The Chevy Volt has no range limitations, but it’s a bit smaller than it’s price competitors, so it’s niche is also a bit limited. These niche limitations will expand and disappear, just as hybrids are expanding and moving into every vehicle category.

                   Change is coming…

               18. I am curious to see what the US Congress does about the bankruptcy of the Highway Fund. It’s important because cities are figuring out that they can’t afford their car infrastructure. If the Federal government doesn’t step in, a lot of cities may be forced to start catering to more efficient (and affordable) forms of transportation.

                   Even then, then change will be gradual.

               19. I am curious to see what the US Congress does about the bankruptcy of the Highway Fund.

                   Where I am, new toll roads and/or toll lanes are being created and sold to foreign companies that are running those roads.

                   I suppose it’s fair that the people who use those roads have to pay for them with each trip. Of course, it doesn’t work well for those without much money. There continue to be non-toll alternate routes so you can still get around, but those routes do tend to much slower because of traffic.

            2. Hi Allan H,

               I created a scenario with the oil price assumptions you gave, oil prices rise from today’s price of $57/b to $100/b by Sept 2020, then remain at $100/b until August 2030, then fall to $50/b by August 2040.
               I changed the scenario slightly to add 14o new wells per month and the maximum EUR decrease is 8% per year with same start date (June 2015) and 12 months to reach the maximum annual rate of decrease.
               Total wells added are 26,500 wells and no wells are added after March 2025, ERR= 8.5 Gb, maximum flow rate is 1290 kb/d in 2019.

               

      2. Dennis,

         There are few new oil sources that will be developed with prices below $90 – even Kuwait is looking at heavy oil costing $4.3 billion for 60,000 bpd and the Saudi minister has recently highlighted tight gas development (and then only 500 mmscfd – about 2.5% of USA production) rather than any major new oil projects.

         When the oil price started to fall, and especially around the last OPEC meeting in November, there were a few articles indicating that most major exporting companies in OPEC and Russia need $100+ to balance the books – you don’t have this being achieved until 2027 to 2030. It seems unlikely that even current stability would be maintained in this scenario and increasing instability is unlikely to be lead to anything but falling production (e.g. see Yemen, Libya, Syria, Iraq several times). Even with high prices the current unrest all over the Middle East looks something like an analogue of the 30 years war – i.e nominally about religious differences in a common faith but really a power struggle between two major players, dragging in various other parties with confusing and changing loyalty boundaries and ultimately escalating to enormous death and destruction.

         So how do yo arrive at your price assumptions?

         1. Hi A Yeats,

            The prices are based on the price needed to make a Bakken well marginally profitable (a 7% real IRR) based on the assumptions I laid out in the piece.

            I agree that oil prices are likely to be higher than this, once demand begins to outstrip supply prices will rise. I think a 7% annual rate of increase in real oil prices is probably more reasonable at least until prices get to $100/b and then they would slow down their rate of increase to 4% or so, but this is speculation on my part, it is impossible to predict oil prices.

      3. Great work Dennis. What would happen if the price of oil never went over $100 a barrel, say due to diminishing demand?

         1. Hi Allan H,

            The short answer, less oil. The range from 75 to 100, probably works well.

   2. It seems to me the American energy consumer has had more good news of late than anytime in more than a decade.

      Price of oil down
      Price of Natural Gas down
      Price of solar down
      Record oil inventories
      40 year record America production
      More efficient new vehicles for sale
      Even more efficient new vehicles on the horizon
      More American oil production available if prices rise
      The least American Middle East war involvement since 911

      What’s not to like except Climate Change?

      1. An accelerating rate of depletion in remaining recoverable US and global crude oil reserves and an accelerating rate of depletion in the remaining volume of Global CNE (Cumulative Net Exports of oil)?

         1. True from day one. Yet today we sit at record world production.

            So what’s your point ?

            1. Granted, the conventional wisdom solution to finite resource constraints is to accelerate the rate of depletion of our remaining resources. So, let the good times roll.

               But some cautionary data.

               Six major net oil exporting countries hit an all time record high combined production level circa 1998/1999. So, production was at all time high circa 1998/1999, and life was good. However, from 1996 to 1999 inclusive they had already shipped 54% of their combined post-1995 CNE (Cumulative Net Exports).

               The following chart shows the Six Country normalized values for their production, net exports, ECI Ratio (ratio of production to consumption) and remaining post-1995 CNE by year. So, should net oil importers focus on the top line production number, or the bottom line CNE depletion rate?

               Globally, I estimate that we have already consumed, through, 2014 (in only nine years), about 30% of post-2005 Global CNE, as China & India have consumed an increasing share of a post-2005 declining volume of Global Net Exports of oil.

               

            2. “So what’s your point ?”
               We are here now since our ancestors planted seed and prepped for Winter. My Pups enjoy life in the NOW since I am able to feed and shelter them. Unclear weather possible in a Liquid fuels constrained future. Carbon based liquid sunshine has temporally checked Entropy. Plan for a volatile future, hope for perfect landings.

               

               1. Those of us who strapped on a parachute, will drive around in our new EV’s and accept them. The rest will continue their sorry existence of BAU.

                  It’s really that simple. The choice is yours.

               2. People, take a look at current issue of Harvard magazine. Says what I have been saying, but by a prof of physics, meaning “Knows what it’s all about”.

                  That is, we are “on the cusp of an energy revolution”, meaning so-called renewables are about to bite your (oil guys) lunch.

                  Laugh if you will, but what gets published in Harvard mag gets read, and if by a physics prof, probably has some truth in it.

                  Unlike anything I might mumble from time to time.

               3. That is, we are “on the cusp of an energy revolution”, meaning so-called renewables are about to bite your (oil guys) lunch.

                  My point to the naysayers is that it has to happen. We need alternative sources to fossil fuels. Life with renewables won’t be like life with fossil fuels, and that will have its pluses and minuses. But there will have to be a life of some sort and renewables will be part of that mix.

               4. No, it won’t be the same, with any luck at all, it’l be a hell of a lot better. Reason, will get rid of the shit we pour out today on the tide of oil, oil oil.

                  BTW, notice how fast, eyeblink- off subject of energy and on to something else, anything else, rather than talk about demise of beloved oil, oil, oil. Maybe population will do it this time- quick!

                  Ah well.

               5. http://www.theworldcounts.com/stories/How-Many-Babies-Are-Born-Each-Day

               6. I think we need a ” miracle ” with 350 thousand babys born per day .

               7. Mother Nature might still have a trick or two up her sleeve to control the population…

                  http://www.nature.com/nature/journal/v482/n7384/full/nature10884.html

               8. Hi billd,

                  Total Fertility ratios have fallen from 5 births per woman in 1965 to 2.5 births per women in 2005, once it gets to 1.75 for the World and remains at this level or falls further, then population will begin to fall.

                  

               9. http://www.sciencedaily.com/releases/2015/04/150427211644.htm

               10. Seems like claims about decline of the west are exaggerated…its a lot less then your saying

               11. Actually, that sciencedaily article supports the argument that world fertility rates are falling. Look what it says about China, India, Brazil, Iran, etc.

               12. LG wrote:
                   “Those of us who strapped on a parachute, will drive around in our new EV’s and accept them.”

                   LOL! that’s not a parachute, its a dead albatross. Your still Dependant on Fossil fuel since ~ 60% of electricity is produced from fossil fuels (Coal and NatGas), with some fossil fuel derivative added (Hydro – Cement produced from fossil fuels), Nuclear (mined and refined by fossil fuels), Solar panels (using fossil fuels for manufacturing), Wind turbines (smelted metal ore, hydrocarbon resins, etc) Not to mention the roads are paved with fossil fuels (asphalt and concrete).

                   When fossil fuel become constrained (shortages) to become too expensive, the majority of the middle class (whats left) will see their job vanish.

               13. TuffGuy, If your looking for a perfect world, dream on. But when the ship is sailing in the wrong direction. It’s important to correct course. The world will never be 100% renewable. Just the goal.

               14. Never say never.

                   Kids hundred years from now are likely to read their history books and be astonished that we were using this incredibly dirty expensive and risky fuel.

               15. I’m guessing books will be history before fossil fuel. They will absorb the information though their I-implant. GoodWork.

               16. The first coal mines and oil wells were done with horses.

            3. “Yet today we sit at record world production.”

               And that means ‘accelerating rate of depletion’.

               1. The sooner we run out, the better.

                  We need to either walk or travel fossil free. The goal should be nothing less.

               2. Easy. Electricity turns wheels just fine. Electricity can come from solar, wind, biomass biogas, carbon-negative pyrolysis of any carbon based life forms, like algae, etc etc etc.

                  Don’t know how to do it? No problem, just get out of the way of those who do.

                  We can use that daily income to make NECESSARY things move around, and, if we stay within that budget we get along just fine.

                  As for all those unnecessary things we move around right now on all that oil- if we don’t bother waste the effort to move them around, we have lots of wherewithall left over to make the necessary things move around- well within our daily budget of renewable forever solar energy.

                  So- get on with it.

               3. “As for all those unnecessary things we move around right now on all that oil- ….”

                  Those things keep the economy running and growing.

               4. Those things keep the economy running and growing.

                  We don’t need to transport stuff around the world to keep the economy running.

                  You can have a variety of goods and services provided locally.

               5. Water shipping is less than 5% of overall oil consumption. The largest new container ships cut fuel consumption by 50% over typical current container ships. In the short term, personal transportation will be outbid by commercial shipping.

                  In the long term, synthetic fuel at $2 per liter would be very affordable for water shipping. Synthetic fuel would be convenient, but probably the most expensive option. The tech for it is conventional and available, so that’s the outside limit on shipping costs.

                  I wouldn’t worry about global trade being killed by PO, though it might shift the economics a bit towards localization.

                  On the other hand, bunker fuel for water shipping is incredibly dirty – we should shift away from oil ASAP with improved efficiency, onboard wind and solar (think enormous kites, and PV on top of containers – also useful on trains and trucks), batteries (swappable at ports like shipping containers) and alternative low carbon synthetic fuels: H2, ammonia, etc.

               6. “We don’t need to transport stuff around the world to keep the economy running.”

                  And keep the world economy growing ? Without growth the current system falls apart.

                  “You can have a variety of goods and services provided locally.”

                  Yes, but if you realize from how many continents the raw materials from simple things like bread and cell.phones come from. Because of the globalisation almost everything is interconnected with ‘just in time’ deliveries. What is the weak part in the chain ?
                  Very difficult to go back 50-100 years in time, going local again.

               7. See my comment above – water shipping isn’t really threatened by PO.

               8. Some of us think moving from a growth-based world economy to a sustainable economy would be a good thing. Maintaining growth for fear of the consequences of not maintaining growth isn’t necessarily the only course of action.

               9. “– water shipping isn’t really threatened by PO.”

                  Water production is threatened by PO and climate change.

               10. What do you mean by “water production”? And why is it threatened by PO?

               11. I do NOT mean water production by factories that convert seawater in drinking water. I was referring to water from f.i. aquifers and rivers.
                   It is threatened by PO because shale-oil production waste a lot of water.

               12. The amount of water used by fraccing is really very very small compared to the water used by its primary consumer, agriculture

               13. Nick, I would say small, not ‘very very small’ like you write. But agriculture has problems already, so this is adding to it.

                   “Chesapeake Energy’s Eagle Ford fact sheet estimates a single well may use as much as 125,000+ barrels (6 million gallons) of water. CHK reports that is the same volume that:
                   Flows by the city of Laredo in the Rio Grande every 4.5 minutes
                   Is used to irrigate over 14 acres of vegetables
                   Used by the city of San Antonio every 22 minutes
                   The usage reported by Chesapeake was commonplace early in the development of the play, but the drought and cost of water has motivated companies to rein in their use.
                   ConocoPhillips has brought water usage in each well down to 85,000 barrels or less (3.57 million gallons) in 2011. That’s a 30% drop in consumption per well and we haven’t quite hit full stride in development of the play. Conoco also estimates that at its peak the Eagle Ford will account for 5-7% of total water consumption across the 16 county area studied.”

               14. Han,

                   Conoco’s estimate is just for the 16 county area. The better comparison is a much larger area, as oil production is geographically very concentrated, while agriculture is much more widely distributed.

                   Think of it this way: a well that uses 85k barrels of water will produce at least that much oil. Farmers value water in the range of 1 cent per barrel, while oil goes for 5,000 cents per barrel.

                   Think of it this way: oil producers measure water in barrels. Farmers measure it in Acre-Feet: there are about 8,000 barrels per acre-foot. So, one well uses about 10 acre-feet.

                   Texas used about 16,012,545 acre-feet in 2012. There were about 11,000 oil wells drilled in Texas that year, so that’s roughly 2/3 of one percent of overall water consumption, assuming they’re all LTO (which they’re not).

                   And that’s in relatively desert-like Texas – it would be much lower for the country as a whole, which used about 400M acre-feet. There were about 50,000 wells drilled in 2012. If 30k were LTO, then that’s less than one tenth of one percent of overall water consumption.

            4. California Gov. Jerry Brown issued an executive order Wednesday directing the state to cut is greenhouse gas emissions 40 percent below 1990 levels by 2030, the toughest proposed cuts of any state in the nation.

               The 2030 target will ensure that California can meet its emissions target for the middle of this century, which calls for an 80 percent cut by 2050, Brown said. The state is already on pace to meet its goal of bringing heat-trapping emissions down to 1990 levels by 2020, a target set under a 2006 state law.

               http://www.huffingtonpost.com/2015/04/29/california-greenhouse-gas-cuts_n_7171580.html#comments

               1. The advantage of California doing this is that the market there is sizable enough to jump start it elsewhere.

               2. It will force innovation for a better future

               3. another press release and a copy of the Executive Order….

                  http://cert1.mail-west.com/rmnDyjaQ/anmc7/9o431nDgtmyuzj/nqnDtbz9gs77b2/appp431nDqv/vd9dv/fuwcdg?_c=d|ze7pzanwmhlzgt|134cccniq9qijhs&_ce=1430312590.adfc35b006ccd7e6ce4f3e320ccd24d4

               4. wow what an ugly looking link. sorry about that

               5. I just saw the UAH troposphere temperature data released yesterday in version 6 Beta, open for comments. This beta version matches RSS Goddard, and shows no surface temperature increase since January 2001. This is a great relief for me. It looks like the global warming problem isn’t going to be as bad as expected.

               6. Roy, are you Fernando?

               7. Oh Fernando, if your going to sit in your car with the motor running inside the closed garage. Then after one minute say, “See it’s safe”. I would advise you buy an EV.

                  Change is coming

               8. I know, we are running out of oil.

   3. I agree, Brainpimp. Oilprices over $ 100 we will see much quicker IMHO, and the fragile economic recovery cannot manage that. That will send oilprices much lower again, taking shale-oil production down with it.

      1. Hi Han,

         There is certainly the possibility of volatility. The path that oil prices will take is difficult to predict, on that we surely agree. The oil producers that get burned by low oil prices are likely to be more careful about how quickly they run up their debt levels and lenders will be less likely to lend or will demand higher rates of interest. This will tend to moderate how fast LTO producers will ramp up production as oil prices rise.
         The rise in oil prices will hurt the economy eventually depending upon how fast oil prices rise and how high they rise. The World economy muddled along for a few years with 2 to 3% real GDP per capita growth with Brent at 100 to 120 dollars per barrel (in 2014$), it can probably manage slightly higher prices as economies substitute more public transport, ride sharing, EVs, and people moving to denser urban areas that are designed for people rather than autos. Higher oil prices are what will drive such a transition. possibly $120 to $150/b or higher prices may be needed.

         1. “The oil producers that get burned by low oil prices are likely to be more careful about how quickly they run up their debt levels and lenders will be less likely to lend or will demand higher rates of interest. ”

            Dennis, and there is this:

            ‘The fiscal breakeven: The oil price necessary for a government to avoid running a budget deficit.’

            Most oil exporting countries, also SA and Russia, need a Brent price of more than $ 100/barrel for that.
            Saudi Arabia government has the highest asset buffer, but with current Brent oil price that is gone within 6 years.

            1. Hi Han,

               The oil exporting countries can control oil prices, they choose not to.

               If they really need the higher prices they will agree to cuts in output, it is not that complicated in theory, in practice the exporters don’t like each other very much so it is more complicated.

               1. ”They don’t like each other very much” probably qualifies for the understatement of the year in terms of the relations between some oil exporters.

                  Beyond that the Saudis have a rock solid defacto treaty with the USA involving using the price of oil as a weapon when it suits Uncle Sam .

                  It suits him VERY well at the moment for oil to be dirt cheap.

               2. A lot of comments say that OPEC, or mainly SA, tries to hurt shale-oil production in the first place. It makes sense, because then oilprices will rise in a natural manner (without OPEC having to cut output).

               3. Hi Han,

                  The motivations of the Saudis are complex. Some have argued that the main reason there were no cuts is that all OPEC members could not agree on cuts, sometimes in the past, the Saudis have taken action on their own (while most other OPEC members ignored the output quotas.) This time they refused, we can only speculate about the reason, there is probably more than one.

               4. One possible thing that is different this time might be that the Saudis know they are running out of spare capacity so this was the last chance they had to control the market. If they know they might start declining in production in the next 2-3 years then it would be smart to take out competition now, maybe then overtly cut production but keep the possibility of bringing it back on line as a threat to deter new (expensive) developments elsewhere (even though there ability to do so would actually become limited over time). Maybe too much of a conspiracy theory though.

2. Bakken Oil Production Is Already Declining, But Is It About To Crash?

   The current rig count in North Dakota is now all the way down to 88. We have seen a decline in North Dakota production with rig counts of twice that level. Even in January the rig count still averaged 188.

   If North Dakota production was declining with 188 rigs in action doesn’t it make sense that the rate of decline is going to increase further with the rig count and number of wells at less than half that level?

   What is happening in the Bakken and North Dakota is not unique to that area. The same trends are being seen in the Eagle Ford and the Permian. The Permian rig count was slower than the Bakken to drop, so the impact there may be a little later.

   The flattening of U.S. production was enough to get a bid under WTI prices (a bigger bid than I expected this fast). If the market gets a whiff of these shale plays heading into actual decline already the price of WTI could really catch a bid.

   Check out the spud count for March in the chart below.

   

   1. Hi Ron,

      We estimate that bankruptcies need to happen for a collapse in ND production – not an unlikely prospect given the financial state of the industry. Absent this, March is flat month on month and there is an upturn (much to my surprise) in April’s figures rising to a peak mid-year. This year’s average bpd production figure would beat last year’s slightly, though not overcoming December’s peak – essentially a plateau this year. This is because even though the spud and rig counts have collapsed, this lower rate of drilling combined with the backlog of uncompleted wells is enough to see them through 18 months or more of completions. So the effect will be on the backlog not the completed wells absent financial events (which, frankly, we should expect).

      The data we have from the ND dataset don’t show a slowing of completions – while Jan was 50% of Dec, Feb was down very little year on year and up month on month, according to our analysis of the ND well database (Lynn Helms’ completions number is way off, as Mason Inman has already suggested). Helms says EOG hold the biggest backlog – if everyone is holding off, Continental/Whiting should surely be number one as they outdrill EOG 2 or 3 to 1 and much of the backlog dates from before the price collapse. My theory: EOG aren’t broke, so can afford to wait.

      So takeaway is that if they can keep being lent money, they are capable of plateau-ing production this year in North Dakota – the collapse comes when the money dries up for completions, not the rig count.

      1. Thanks Gwalke, your input is appreciated. I am also surprised at the upturn in April, though not all that much surprised. I know there is a huge backlog of wells awaiting completion. So everything right now depends on how many wells get fracked, not on how many wells get drilled.

         About bankruptcies, I have no idea. I am shocked that people like Continental can keep on drilling while losing a pile of money. I simply don’t understand how that is possible. But they keep doing it so I just throw up my hands and make no further effort to figure it out.

         Thanks again for the input and please post anything else you may come up with further down the line.

         1. I’m reading articles that say that there’s a lot of money sloshing around looking for a decent ROI, and a lot of people think they see it in the oil industry. They’re thinking that low prices are temporary, so there’s a chance to buy stuff cheap.

            Apparently previous investors are taking the hit for current losses, and new money is taking senior positions so that they’re positioned to make money from a recovery.

            This suggests that oil companies will only go bankrupt when there is a general consensus that prices will stay low for a very long time.

      2. Much of this depends on magnitude.

         If shale is Too Big To Fail, then it will not be allowed to fail. Period. That’s the decisive reality of the world post 2008. The only question is what measure is taken to make that true. The less overt it is, the more protection of the normalcy narrative there is.

         1. Watcher, the shale oil, or light tight oil industry is not the banking industry. Not by a country mile. Harold Hamm and all those other big spenders are simply not going to be bailed out. End of story. If the frackers were bailed out by the government it would cause the largest voter revolution in history. A lot of people are still pissed off about the bailouts on 2008. Imagine their reaction if someone proposed bailing out the shale oil frackers.

            You are so far off on this one Watcher that it really makes you look foolish.

            1. Ron – Your lack of understanding just how manipulated the entire global markets and economies are makes you look very foolish indeed.

               It is a game of last one standing and yes those with a vested interest in seeing that we are that will do ANYTHING it takes.

               No Conspiracy Needed.

               1. Jef, if you have something to say about me then do it in a separate thread and explain exactly what it is. Tell me who are the culprits who are manipulating the global markets and tell me exactly how they are doing it. Do not sling out accusations with no content or explanation, they make you look like a fool.

                  What the hell do you mean, those with vested interest will do anything? That makes no goddamn sense whatsoever. That statement is so vague it could apply to any thug in the street.

            2. Hi Ron, hope you are feeling better

               Farmers are not allowed to fail in the US, not en masse. The most recent farm bill took a dated corn support price from 2ish up to 3.75 ish

               We all make fun of ethanol and Iowa primary timing and the politicians falling over themselves to promise support

               But in the end farming is important and some sort of program may have more underlying sense than it seems

               Oil is more important. Why is establishment of some sort of domestic support price inconceivable ?

               And yea I know trade laws etc gets into issues, but they solved them for corn

               1. Wake, the debate is about a bailout of the shale oil industry, similar to the bank bailout of 2008. It has absolutely nothing to do with farm price supports or price supports for anything. For the life of me I cannot figure out how you made that connection.

               2. I am saying we currently bail out farmers to the tune of billions a year and that bailing out oil should not be so inconceivable

                  I am saying a support price for oil, perhaps as one example structured as the farm bill used to be with a fairly complex government loan rate at which you can borrow against your production would be one way

                  Straight price guarantee would be another, though further down the road

                  Though I agree some sort of fed purchase or guarantee of debt is more likely

                  Though I do not think it could go unnoticed. They also have student debt from all the for profit university schemes to worry about. Maybe wrap it all into one big new set of collateral

               3. Wake, farmers are one thing, a publicly held oil company is something altogether different. Price supports for corn or cotton is one thing, price supports for oil is something totally unrelated.

                  Oil is a globally traded fungible commodity. The US government could not possibly offer price supports for a globally traded fungible commodity. That is totally inconceivable.

                  People, this is not the first oil bust that has come down the pike. I well remember the oil price collapse of the late 80s. Hell it ain’t half as bad now as it was then. And it is extremely unlikely that it will get as bad as it was beginning in about 1986. Houston almost went bust. Texas was a disaster area. But I don’t remember anyone even talking about a government bailout then. Where the hell is this silly noise coming from now?

               4. You may well be right

                  I response I say corn and beans are both globally traded fungible commodities, which is why I picked the analogy

                  And as to what is different, and I claim no expertise beyond what I read (here) tight oil and oil sands are the only sources of growth in oil production

                  I do not know if the global economy will grow without oil growth, though most economists I suppose think so

                  And I do not know if the global financial system would react well to the idea that the global economy won’t grow assuming the first point is correct

                  So that I think is what is different

                  Of course you may be right that I am too concerned about a normally volatile business and making more of it than I should

               5. Hi Ron , Got my fingers crossed that you are feeling better.

                  My first impression or quick reaction to talk of an oil industry bailout is the same as yours.

                  But I try really hard to put myself in the other guys shoes for purposes of understanding his arguments and when I do this in the case of oil I must conclude that a bail out is not entirely out of the question.

                  WHY ?

                  For one thing this country is not the place it used to be. In some ways this is good , other ways not good at all. Three or four decades ago we expected people and industries to either make it on their own to a FAR greater extent than we do today – or else starve or go broke.

                  States and localities weren’t tripping over their own feet to offer incentives to businesses to move within their borders back then the way we do now.

                  In my opinion you are correct that the oil industry will not get a bail out JUST BECAUSE a lot of little folks are going broke.

                  Guv’Ment Motors etc got bailouts because the big labor unions involved were able to put a hell of a lot of pressure on the government – big labor is a very powerful force at election time.

                  The big banks got their bailouts because well, they have more or less OWN large enough factions of both parties to get just about anything they want.

                  BUT – and this is a BIG BUTT indeed- IF we were to get into a situation where oil is simply not available in sufficient quantity to keep the wheels of BAU turning freely -IF we were looking at shortages of heating oil and diesel and gasoline due to a lack of crude —–

                  Well , given current day political realities, a subsidy of some sort or another paid directly to the oil producers is not out of the question. This could come at first in the form of lower taxes and relaxed environmental regulation and progress to actual cash subsidies.

                  Remember the ad ” This isn’t your grandfathers Oldsmobile ”?

                  Oldsmobile is gone.

                  So is our grandfathers America.

                  I do not however think we are going to be dealing with a serious shortage of crude oil within the next two or three years given the state of the economy —-unless things go to hell in some place like Iran or Iraq taking a few million barrels off the market.

               6. Hi Ron,
                  I agree with you that a direct bailout of oil companies would be
                  politically untenable, however I also agree with Watcher that some form of
                  bailout may be on the cards. Nobody outside the direct investors really care if
                  the likes of Continental, EOG or Chesapeake etc al go bankrupt, but the blow-up of
                  the high yield bond market has systemic implications. So I would imagine that
                  some form of financial entity analogous to say Fannie Mae might Hoover up the
                  bonds about to default & perhaps take a few of those bad loans to shale
                  companies off the bank’s books.

               7. I am saying we currently bail out farmers to the tune of billions a year and that bailing out oil should not be so inconceivable

                  But the problem is that even if there is a way to raise the price of oil or create a price support, that doesn’t create more oil when the wells decline.

                  And between environmental issues, water issues, and conflicts with agriculture and housing in some areas, some communities don’t want fracking. So it isn’t like there are going to be lots of new places to frack around the country.

               8. It might shift the timing point of decline from financial to geological, or it might be enough to keep close to flat for a few years, as opposed to the risk increasing swings we see from 147 to 50 to xx

            3. Which is why overt is so delicate.

               A nice quiet measure would be a change to SEC valuation of reserves methodology. Inside baseball details that would not even make it onto the wire services. But

               If the reserves don’t revalue down from the price fall, their role as collateral remains in place and banks or bond sellers have ass coverage mechanism . . . “we’re just following the ratio rules, the reserves are valuable collateral and so these companies qualify for loans”.

               Very quiet little bailout. It would be a very long time before even we would notice it happened.

               1. But don’t you think some folks in this forum would figure it out? And don’t you think some of that info would make its way to the media?

                  The media hasn’t been very smart about fracking and has in recent years pretty much published what it has been fed. However, I notice that very recently more articles are coming out about renewables picking up speed, oil economics maybe not looking so good, and problems with fracking like earthquakes and water issues. So maybe the media has finally moved away from the “energy independence” meme that it willingly promoted until the price of oil dropped.

               2. Well obviously something like an SEC valuation regulation change doesn’t protect any banks or HY paper from insolvency, but it does give them cover to earn commissions selling it while the sun shines.

                  And if they start to go bankrupt, the lenders I mean, then as Ron has pointed out, there is precedent for bailing THEM out. Tracing it to fracking would be on page 5. Bailing out banks, page 1.

               3. Seems, though, that if the US government has to bail out bankers every five to ten years, someone should be questioning the banking industry.

                  Now given the way politics works in the US, it’s more likely that the politicians will find ways to funnel even more money into the pockets of bankers. But if the argument is always that the banks need help (not the housing industry or the ag industry or the oil industry or the auto industry), then someone should be asking more questions.

                  And it seems like we should have another round of Occupy Wall Street.

               4. I am not saying I agree with watcher, or even understand what the h*ll he is implying half the time, but the media storm does not necessarily have to be bad.

                  Sorry to belabor the farm bill, but did you notice all the headlines back last January when the farm bill passed, raising the support price for corn and establishing a new floor more than 40% over the average price for the past 10-20 years? A floor near break-even for US farmers, ensuring profits on average over time? No?

                  Did you notice they passed it after two years of dithering, right as corn prices began to fall to the new support price, which if they had delayed longer might have made the bill cost billions and need funding instead of being free?

                  Well, free as of January 2014 with spot corn where it was. As of now, it will cost some number a year, possibly billions a year if the harvest is good.

                  This particular legislation has tremendous history behind it in every way, and most of it negotiated carefully domestically and internationally with all the right balances and words. I do not think it would be easy to replicate. It has been done though, and with less public understanding of it than is warranted, even though it is all right there out in the open, with no conspiracies or anything.

                  All you have to do is google 2014 farm bill and look at the changes in the new version. Let me look some relevant sections up for us:

                  SEC. 1113. PAYMENT YIELDS.
                  (a) ESTABLISHMENT AND PURPOSE.—For the purpose of making price loss coverage payments under section 1116, the Secretary shall provide for the establishment of a yield for each farm for any designated oilseed for which a payment yield was not estab- lished under section 1102 of the Food, Conservation, and Energy Act of 2008 (7 U.S.C. 8712) in accordance with this section.

                  SEC. 1114. PAYMENT ACRES.
                  (a) DETERMINATION OF PAYMENT ACRES.—
                  (1) GENERAL RULE.—For the purpose of price loss coverage
                  and agriculture risk coverage when county coverage has been selected under section 1115(b)(1), but subject to subsection (e), the payment acres for each covered commodity on a farm shall be equal to …

                  COVERAGE OPTIONS.—In the election under subsection (a), the producers on a farm that elect under paragraph (2) of such subsection to obtain agriculture risk coverage under section 1117 shall unanimously select whether to receive agriculture risk coverage or….

                  All you have to do is read it, trace all the subsections back and forth through a thousand pages and three or four other bills, then cross reference with some of the insurance programs and you’ve got it.

                  And if you are a reporter write it up with the giant subsidy headline, and you win.

                  Though you better get it all right or you could get fired. Call it a subsidy for instance, and all the decades of international trade negotiators along with all the farm consultants and farmers will call you on it since it is a reference price not a subsidy.

                  Ron please delete if too long, I was trying to find an example that would be relevant

               5. As to this forum or the media figuring it out, how many of the nitty gritty details of the TARP money made it into this forum (arguably not the right place anyway) or the media?

                  Over $2 trillion went out, and the Fed wouldn’t reveal anything about it, until they were forced to. By that time most of us had moved on. We either didn’t get the details, or didn’t care.

                  The answer is, no you won’t know how the money is being channeled. Nor will the media. Ron, you disliked the idea of ‘vested interests’ because it strikes you as vague. But that is just shorthand for a power structure. Google Waterfall, Mack and Karches as one example. It’s a miracle we ever catch a glimpse of the workings of stuff like that.

                  The oil industry is vital to the USA, moreso than other areas that have already received assistance. The industry has clout, and shale production is crucial to the narrative of energy independence. How could we possibly doubt that the govt would consider assistance?

               6. Ron, you disliked the idea of ‘vested interests’ because it strikes you as vague. But that is just shorthand for a power structure.

                  Duane, the term “vested interest” is vague and it isn’t shorthand for anything. It’s like “a lot of money” or “a deep hole”. The term without explaining the context in which you are using it is totally meaningless. And that term sure as hell isn’t a shorthand for “a power structure”. People with a vested interest in something could very well be totally powerless.

                  Jeeessus guys, I know my English is bad but I still know a few simple rules. Two word terms mean nothing without context.

               7. TARP was mostly tax cuts, not money “going out”.

               8. ”But don’t you think some folks in this forum would figure it out? And don’t you think some of that info would make its way to the media?”

                  Without a doubt this would happen – but expecting the media to pay any more attention than usual to bad news on the resources front is naive.

                  The handful of people who are peak oil aware and concerned would pay attention. Hardly anybody else.

            4. “Watcher, the shale oil, or light tight oil industry is not the banking industry. Not by a country mile. Harold Hamm and all those other big spenders are simply not going to be bailed out. ”

               Consider bailouts for GM and Chrysler -> Not Banks. Insurance, AIG, MBIA, GE also bailed out and not banks. We also had bailouts for Airlines after 9/11.

               Your probably right, but it can’t be ruled out. Consider if the banks have hundreds of billions invested in US energy companies. Do they get bailed out.. Again? FWIW: if there is crash, its not going to just be shale oil drillers that go bust, a crash of Shale Oil drillers will spark a panic and a sell off in other energy companies. Any energy company that has too much debt or is leveraged is vulnerable.

               1. I am somewhat more intrigued with the juicy consequences.

                  You see, if lenders get bailed out of bad shale loans, hell, why not make more of them (loans)? And the drillers/frackers can essentially consider their costs per well zero — since they aren’t going to pay back the loan and the lender isn’t going to demand that they do, since they have a bailout backstop. Pretty much sweet spots lose meaning. All holes drilled are economical if costs are zero.

                  Isn’t that delightful?

               2. No Watcher,

                  completely wrong. Your understanding of economics is severely lacking. Resources are still scarce. Are you suggesting that resources are unlimited. Money does not create anything, it is a medium of exchange.

                  Your solution is guns or weapons. Those also fail to create any oil. It can be stolen, but only if it exists.

               3. Watcher ought to put the sarcasm light or a smiley face after most of his comments. They do make sense in a limited way.

                  Most of what he says does or can work , can be possible and is often real, but only for a little while.

                  A few shots of whiskey makes the aches and the worries go away – but only for an hour or two.

                  The things he talks about can result in postponing the day grave problems have to be dealt with for a little while -maybe even a year or two or even longer. But not very long in terms of the big picture.

                  I have just thought of of a good example. Suppose you are having a HUGE party and bought a truck load of beer at the best possible price – and your party is going GREAT but you find yourself running out of beer.

                  What do you do?

                  You can’t get a truck from the distributor on Saturday afternoon.

                  So you send a couple of flunkies to the nearest convenience stores and pay double for as much beer as they can haul back as fast as they can haul it.

                  The guests will not notice anything different.

                  But they will be wondering why the parties are getting smaller and fewer as ability to pay shrinks.

               4. You can’t pump it if it’s not there. But if it is there, and uneconomical, you can, if your costs are zero aka someone else is paying them — because it’s no longer uneconomical for you.

                  One more time, with feeling for all those who have declared themselves economically astute . . . how did 1930s Germany with a basketcase economy (in a global depression sportsfans) fund all those weapons?

               5. junk bonds, printing money, forced low wages, conscription and forced labor and then slave labor.

               6. I have studied the roots of WWII long and hard from my arm chair because there are more critical lessons to be learned from this time period than any other modern period.

                  There is plenty to be learned from older history but documentation is sorely lacking when it comes to finding out how business matters between buyers and sellers and citizens and governments were managed hundreds and thousands of years ago on the grand scale.

                  (Barter and coins worked on the micro scale of course.)

                  Money and credit are not necessary to economic activity. There are lots of examples of ancient civilizations that accomplished awesome things on a pay as you go basis.

                  As a matter of fact there is a very real case in terms of physics, in terms of the CONCRETE as opposed to abstract , world we live in that ALL economic activity is on a ”pay” as you go, real time basis.

                  CREDIT is simply the transfer of accumulated assets from a saver to a borrower in hopes that the assets will be returned with interest. These assets are in the form of money – gained by bartering goods and services for the money.

                  The money loaned in effect will be BARTERED right back for DIFFERENT goods and services.

                  Money may be thought of as the universal good you need when you go out in the world to barter for food housing health care energy or sex , lol. Worthless in and of itself except maybe for using gold to fill cavities etc. But accepted in exchange for anything.

                  As some famous courtesan said , my love is not for sale, but I might rent you some.

                  In other words money ain’t nothing but a lubricant used to facilitate the exchange of goods and services. It is almost magical in some respects of course in that it allows people to exchange things without ever coming face to face. It also works superbly in allowing lots of different people to pool their resources in order to accomplish a big job. Direct barter is extremely clumsy and not practical at all when it comes to big jobs – unless a powerful government is running the job.

                  I have hardly ever traded a bushel of apples for other physical goods or for labor but I barter the cash I get for my apples to the farm supply in exchange for fertilizer and the oil guy for diesel fuel and the grocer for coffee and sugar. I have never met a coffee farmer.

                  Printed money of any sort whatsoever is a defacto tax on every body who uses that sort of money.

                  Any idiot ought to be able to figure this out, it is about first grade level in terms of purchase power.

                  If there are only say five people in the world , all using the same money, and one learns how to counterfeit, and gets away with it, the other four get poorer as the counterfeiter gets richer. If the counterfeiter is the government then it is still in essence counterfeiting – the government gains purchasing power at the expense of the taxpaying or saving public. The supply of goods and services left to be consumed by the public is diminished.

                  Prices when money is freely counterfeited or printed ordinarily go up but in a deflationary environment they may not go down or go down as much so the effect is not obvious to dullards. The inflationary pressure can be overwhelmed by deflationary pressure.

                  The nazis figured out how to get people to go back to work, to put them back to work, for very low wages.

                  They put people on long hours.

                  They cut way the hell back on all frivolous production and cut the production of many things bordering on essential to the bone.

                  They whipped up the public so that just about everybody WANTED to work on the great new dream – and most of them were SATISFIED to be working and eating AT ALL considering the sorry state of affairs when Hitler took over.

                  He played the old rich families like a violin. They thought they were using HIM and he allowed them to so believe right up until the day he sent his personal army around to tell the industrialists and bankers who would be kissing whose ass from that day forward.

                  Slavery used to be very common. People with whips FORCED other people to work like hell. A sharp capitalist boss can motivate people to work like hell for very little money in relation to how much his company is earning.

                  Hitler was about as vile a human being as has ever lived but he was still a mad genius in some respects. He was probably as good as has ever lived with both the whip and the motivational speech.

                  If anybody has any trouble understanding what I mean when I say all economic activity is basically pay as you go real time
                  WHAT I MEAN IS THIS :

                  Farmers don’t necessarily borrow MONEY. They ”borrow ” EXISTING fuel and fertilizer. You cannot burn diesel or apply fertilizer unless they EXIST.

                  There is money and credit. And then there is the REAL PHYSICAL WORLD.

                  EXISTING diesel, EXISTING fertilizer.

                  Money and credit are hat tricks that motivate and allow people to behave in certain ways.

                  But there are other ways to make things happen, other ways to motivate people to work and other ways to FORCE them to work.

                  If credit were against the law, a viable society could exist using ownership shares in all business enterprises. If a business were to need to buy materials or equipment it could be arranged to give a share of ownership in exchange for the money needed rather than borrowing the money.

                  There is a furniture company near where I live , one of the few still operating in this country, that has not borrowed a DIME in decades.

                  The owner has often said if other people think money to buy machinery is worth say ten percent then he is satisfied to use his profits to buy machinery and have that ten percent for himself rather than chasing the possibility of earning more risking his money in some other investment.

                  Given that his family owns and manages the business competently the company has been able to finance itself right straight thru the last half century.

                  JUST WHY THE FXXK SHOULD the everliving banks defacto OWN just about everything in the world due to the owners of record having borrowed money using their property for collateral?

                  Why shouldn’t the people who manufacture steel own the mills and have enough money to run them without borrowing money?

                  I know a couple of heating and air guys who do one job at a time. They own their trucks and tools and pay cash for the systems they install. Their customers pay them when the job is finished. I just had them install a heat pump last summer. They charged me a good bit less than the big boys with full page ads in the phone book.

                  There is NO fundamental reason they should not have money enough of their own to do so.

                  And when the bottom fell out a few years back there were no bills due. Hardly any layoffs. With money in the bank the company bought for cash very nearly brand new machinery sold at auction when other local furniture companies went bankrupt.

                  Bought that machinery for ten or fifteen cents on the dollar , a lot of it only a year or two years old.

                  We built up a pretty nice little farm starting with one acre given as a gift to Daddy from his Daddy without ever borrowing a dime.

                  I NEVER use consumer credit. Lots of my acquaintances spend a thousand or more annually in interest on credit cards. That thousand – which I do NOT turn over to a bankster- buys MORE goods for me over the long run.

                  There are plenty of governments that are now so deep in debt that most of their revenues go to paying interests and pensions.

                  Never shoulda promised all those teachers and cops all those bennies. (I used to be a teacher myself .) Anybody with a semi functional brain had to understand that path is a wide smooth on. straight downhill to economic hell.

                  Why ? Because the people doing the promising have no realistic restraints on their incentive to promise promise promise and promise some more. They aren’t around when the bill comes due. They have either died or moved to Florida or Arizona or in rare cases to Vermont.

                  ALL four of my grandparents hit the lottery on social security. They were well into their middle years when they first started paying in and paid in peanuts.

                  And they averaged living to about ninety three. With a little luck I might break somewhere near even if I live to be about a hundred and ten. ASSUMING bau holds up of course. Lots of my relatives have broken the century mark so given modern medicine I have a shot.

                  The givers of gifts get elected and re elected while the debts pile up to the point that bankruptcy or a bail out is the only conceivable solution.

                  Eternal growth in a finite environment is an impossibility. But you can’t explain this to a politician interested in being a nice guy and staying in office.

                  The vast majority of all the debts piling up in the world are never going to be paid. The debtors will renege one way or another or the debts will be wiped out by inflation or the countries and governments that owe so them will cease to exist.

                  Neither the nazis nor anybody else has ever conjured physical resources out of a magic hat.

                  But human energy and human work CAN be so conjured – sometimes , when the right circumstances prevail and the charismatic leaders are in control.

                  Levianthan can work what LOOKS like miracles when it comes to getting people to work together. Sometimes.

                  Getting modern day yankees to work together would probably be harder than herding three hundred million CATS. Perhaps not absolutely impossible but so close to impossible as not to matter.

                  If people were forced to pay cash for whatever they buy they would not waste their money buying very much of the junk of the sort they buy today.

                  In the end an individual or family would be able to buy MUCH more than an individual or family that buys on credit and pays out good money in interest..

                  BUT BUT BUT you object .. there would be little or slow growth .

                  Well , look where fast growth has gotten us.

                  Slow growth would probably be a lot better in the long run.

               7. Hi Old Farmer Mac,

                  Your understanding of how money creation works is a little fuzzy. Try the link below for a short refresher.

                  http://en.wikipedia.org/wiki/Money_creation

         2. “Too big to fail” refers to individual organizations, not to business opportunities or business models.

            Remember the dotcom bust.

            1. Mark to Market was not abrogated to save any one bank.

   2. Hi Ron,

      There were 900 wells waiting on completion services at the end of February. Let’s say the average rig count for 2015 ends up at 60 rigs, about 70 wells per month could be drilled by that number of rigs or a total of 700 wells could be drilled from March to December, add the 900 wells waiting on completion services and we have 1600 wells from March to December or 160 wells per month, I have assumed only 120 wells per month will be completed on average from March through December 2015. The Bakken scenario presented is very conservative.

      1. Dennis – but if each completion costs about $4 to $5 million then to complete 1600 requires an extra $6 to $8 billion – this has to be mostly new debt as most of the smaller shale companies have negative cash flow, or from the operating budgets of the majors which must be taking quite a hit at the moment. New investors might be more wary of moving quite so rapidly to increase production, even on the basis of rising oil prices, having had the lesson of the last few months.

         1. Hi A Yeats,

            A lot depends on the oil price assumptions, if the oil price remains under $60/b forever, then the investment does not make sense. Note how slowly oil prices rise in my scenario, if most oil men believe oil prices will be that low, they are unlikely to invest, I contend that oil prices are likely to be higher than those prices and that will make the investment in the LTO wells profitable.
            If I am wrong, then supply decreases, drives up oil prices, and then the investment takes place. If the economy crashes, I will be wrong, but I don’t believe an economic crash or financial crisis is imminent, if oil prices rise too quickly (more than 50% per year) or to too high a level (above $150/b in 2015$ before 2018) an economic crash becomes more likely, I expect this will occur by 2025 when oil output is clearly declining and oil prices may be over $200/b.

            1. Dennis – OK, I think I’ve got it – thanks for the time you always take to reply. I’d agree with the V-shaped price rise you propose and it seems to be what a lot of investors are believing based on futures prices and investment decisions at the moment. I wonder how such a scenario will fit into the Saudi plans going forward. (Note I can understand this argument with a price rise following falling supply – the arguments here about a continuous falling price from now on I can’t get my head around at all and have given up reading).

               I’m not sure we have as long as you indicate until an economic correction – there seems to be another tech. bubble going on and oil prices have actually not fallen that much in Euro and GBP prices so a relatively small increase might have a big impact there. However I’m also no sure how much the oil price could or would fall following another recession: oil is really useful (one barrel equals between one and eleven man years effort by some calculations), a lot of fat in its use was taken out after the 2008 crash (especially in Europe), exports have fallen as a proportion of production and internal use might not all be subject to the same pressures (i.e. is subsidized or has to be used because of decreasing EROI). In 2009 OPEC cut (I think) 4000 kbpd as the price fell and this, with a load of QE, reversed the price fall – if we really are going through peak now for the world overall and the US tight oil production takes a reasonable hit over the next few months then we might have such a shortfall before the next economic decline really gets going anyway.

               Regards

               AY

               1. Hi A Yeats,

                  The World economy is in much better shape today than it was in 2008/9, so OPEC cuts are not as necessary. Output from LTO plays has stopped growing (or is slowly declining) and demand will pick up in the 3rd quarter.

                  In an earlier comment you mentioned that some oil companies may not be able to borrow, that is correct, but those that can borrow and are cashed strapped will try to complete enough wells to generate some cash flow. Stronger companies that have some financial resources may defer well completions and wait for higher prices. EOG had a slide on this in a recent investor presentation (link below), see slide 10.

                  http://www.eogresources.com/investors/slides/InvPres_0315.pdf

                  An economic correction can happen at any time, I am fairly certain that a correction will come within 5 years of sustained oil decline, which I define as the trailing 12 month average of oil output falling 2% below the trailing 12 month peak.

                  If the most recent EIA 12 month average for C+C of 77.8 Mb/d is the peak, then by my definition the trailing 12 month average of C+C would need to fall below 76.2 Mb/d for a sustained decline to be apparent.

      2. My analysis done I believe about three-four months ago showed it would be feasible to wait as long as the futures market showed higher prices and the service company contracts could be negotiated down say 20 %.

         So the question now would be, what’s the futures market showing? And what are the price reductions to this point? Do they have room to drop?

         Another issue I didn’t discuss before is oil marketing. Are they seeing a reduced differential between wellhead realization and the price marker?

         These are three issues I focus on given my technical and business experience. I realize you guys focus more on the loan issue. But a company facing a credit crunch will sell the property to one which has more running room if it has to. There’s value in waiting and that value should be captured.

         So I repeat my query, what’s the price forecast by the futures market for the next three years? And what are the fracking costs running like? What are the wellhead versus wti spreads?

         1. Hi Fernando,

            For WTI its about $66/b in Dec 2017. I do not have WTI to wellhead price differentials or fracking costs.

            1. Dennis, I did some sketching this morning and put a comment down at the bottom. I think we can refine some of the linking functions discussed in my comments, but we need a pretty good definition of the outlets coming out of North Dakota, by pipeline and by rail, so we can get an idea of how the oil price at the wellhead changes versus production rate. I assume the differentials will drop as production rate drops. But that´s just intuitive.

               Regarding market prices for services such as drilling and hydraulic fracturing, tubulars, etc, I think we can get people to chime in. I can write friends who are active, but I really hate to bother them for things like this, and they probably don´t like to discuss how they are squeezing down on contractors so I can put it down in a widely read blog.

3. Ron, Jeffrey & Members,

   I have been looking at the import oil data for the United States and came across a quite interesting statistic that needs some explaining. I don’t know if any of you have seen the most recent data, but something just doesn’t jive.

   According to the EIA, the United States imported 3.2 mbd of crude oil (not total products) from Canada in Jan 2015. Now as of October 2014, Canada produced 4.4 mbd of crude & condensate. While we are exporting some liquids to Canada, how is it that we are importing so much of their oil??

   Are we consuming this total amount or are we refining a lot of it and exporting it back?? I just find it quite interesting that we are importing 73% of their total crude production. Canada consumes about 2.4 mbd so, they must be importing petroleum products from the U.S.

   steve

   1. Canada imports a lot of crude oil on their East Coast (or at least they used to, I’m not sure what the current pipeline situation is from west to east).

      In any event, in terms of total petroleum liquids + other liquids, Canada’s net exports in 2013 were 1.7 mbpd in 2013. Assuming continued flat liquids consumption, their 2014 net exports were probably about 2.0 mbpd.

      Overall Western Hemisphere net exports from the seven major net oil exporters in 2004 fell from 6.0 mbpd in 2004 to 5.2 mbpd in 2013.

   2. The Canadian Pacific Railway has mainline track traversing North Dakota, there are oil loading facilities in North Dakota along those tracks. The Canadian Pacific forms oil trains at the loading facility. Since the tracks go to somewhere in Saskatchewan and west, the Bakken oil from North Dakota is going to be shipped through Canada too. Bakken oil has good ethane content and ethane is used at the tar sands, so Bakken oil ends up in Canada for industrial use, happens to be oil production in the Athabasca tar sands.

      CP Rail

      If you use the very first well drilled in North Dakota, Iverson #1, apply its total production over the 28 years it operated, multiply it by the current number of Bakken wells, 9200, you can get a picture in numbers of what the total production of the total number of wells to date will be.

      585,000 barrels total produced by Iverson #1 times 9200 equals 5,382,000,000 total barrels of oil. Looks in line with the estimates.

      An additional 30,000 wells will give an estimate of total production near the 20 billion barrels of oil mark.

      9200 wells at a cost of 10 million per well is 92,000,000,000 dollars.

      5,382,000,000 times 60 dollar oil is 322,920,000,000 dollars. Thirty dollar oil is half of that or 161,460,000,000 dollars. After 28 years, you’ll be broke and not have the 5.3 billion barrels of oil. Sie la vie say the old folks, it goes to show you never can tell.

      Less the 92 billion invested, you’ll have 230,000,000,000 dollars of worth for 5,382,000,000 barrels of oil. Not a 10 to 1 return for the dollars invested, just 3.5 dollars returned for each dollar invested.

      For every dollar in seed invested, you want a 400 to 1 return in dollars.

      Why do you think John D. Rockefeller considered returning to the produce business, his original line of work?

      Might as well throw in the towel and grow some food or something.

      1. Hi Ronald,

         There is a lot of variation in output from well to well. The average Bakken/Three Forks well drilled from 2008 to 2014 is approximated best by a hyperbolic function that has a cumulative output of 360 kb after 30 years. At that point output is down to under 5 b/d and the well is assumed to be abandoned. If we assume 10,000 wells at 360 kb per well we have 3.6 Gb of output, eventually the sweet spots will run out and the new well EUR will decrease, if we assume 20,000 more wells at the reduced EUR of 250 kb on average, that would add another 5 Gb for 8.6 Gb. It is possible that more wells than 30,000 will be drilled, if we assume the next 10,000 wells have an average EUR of 175 kb, then another 1.75 Gb might be added for a total of 10 Gb.

         Any more than 10 Gb is very optimistic, but might be accomplished if more than 40,000 Bakken/Three Forks wells are eventually drilled. The guess at future new well EUR is highly speculative.

4. Nice work, Dennis, interesting to see as an overall EUR figure.

   1. Hi gwalke,

      Thanks! I have been looking at UK data and realize that I may have not remembered Euan Mearns rule of thumb correctly for the ratio of 2P to 1P reserves. I had remembered 1.25 so that 5 Gb of 1P (proved reserves) would tend to suggest 6.25 Gb of 2P (proved plus probable) reserves, but that was incorrect. Looking at UK government data for C+C+NGL this ratio should be between 1.5 and 2, I will estimate 1.75. For the Bakken Three Forks the EIA estimates about 4.5 Gb of proven reserves at the end of 2013, so 2P reserves would be about 7.9 Gb and cumulative production at the end of 2013 was about 0.9 Gb.

      This suggests with no further discoveries or reserve growth after 2013, that the economically recoverable resource (ERR) from the North Dakota Bakken/Three Forks should be at least 8.8 Gb.

      UK reserves at link below:
      https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/326985/Appendix_2_Historic_UK_Oil_and_Gas_Reserves_and_Production_2014.pdf

      

5. Dennis:

   Your work apparently ignores two vital factors: rig count and tight oil/shale decline rates. The rig counts keep declining to now below 50% of their peak roughly 1/2 a year ago and the LTO/shale decline rate is ~72% in year 1. The Bakken and Texas are well into declining production and at the continued low oil prices, the declines will grow exponentially. Ron has already well documented this. There is no way that oil prices will rise slowly as depicted in your chart.

   The CEO of Core Labs knows the industry as well as anyone. On Cramer’s show last week, he said to expect a V shaped recovery, not your flat line recovery. He concluded this based on the 2 key metrics: extraordinarily high decline rates and the massive US rig count fall.

   1. Hi Coolreit,

      My scenarios include the high decline rates, the decline in rigs is offset by the increase in wells waiting to be fracked, so in the short term the decline in rig count is a non-issue.

      It is possible that these scenarios are too conservative, if more wells are drilled than I have assumed then output will be higher and if fewer wells are completed than I have assumed, output will be lower. There are an infinite number of scenarios that could be created and every one in the oil business has a different opinion on how this will play out. A lot will depend on oil prices and I expect oil prices will rise as Jeffrey Brown and Steven Kopits have predicted. If that is correct the scenarios presented can be thought of as the minimum amount of oil that will be produced. If the number of new wells per month added are higher there will be a higher peak and a steeper decline so the shape of the output curve would be different.

      If people are interested they can suggest different number of wells added per month than what I have assumed(120 wells per month in the Bakken and 150 wells per month in the Eagle Ford).

      Whenever I have asked people to do this in the past, nobody responds. It would be particularly interesting to hear the guesses of industry pros who know far more than me, having lived through these cycles in the past.

      1. Hi Coolreit,

         To give you a feel for the field decline rate for the Bakken/Three Forks of North Dakota, I have assumed no wells are added after Feb 2015. The maximum annual decline rate in April 2015 is about 51%, the decline rate becomes slower over time reaching 25% by 2016 and 12% by 2020. There are 9600 total wells in this scenario and ERR is 3.5 Gb.

         

         1. Dennis:

            Your latest chart is helpful, but would be more helpful if you only went out 3-5 years. I would like to see the effect of the collapsing rig count up close over the next few years. Does that latest chart account for deferred completions?

            Thanks!

            1. Hi Coolreit,

               The latest chart assumes no wells are completed, so yes it assumed the wells in the frack log are deferred forever (not a very realistic assumption.)

               

               1. Dennis:

                  Awesome data and awesome responsiveness!

                  Thanks!

                  Now, if you factor in similar declines for Texas (EF and Permian), what would the supply loss look like at year-end 2015?

               2. Hi Cool Reit,

                  The declines in the Eagle Ford are very similar (already included), it is likely there are similar declines in the Permian for the LTO part of the play, but there is a lot of conventional production in the Permaian which declines relatively slowly (probably about 9% per year with no new wells completed). What you fail to realize it that very few wells are needed to keep output flat, these wells are likely to be drilled even at $57/b. As oil prices rise in May and June, more wells will be drilled and will make up for any decline (which will be minimal) which occurs from March through May. There is a huge inventory of wells waiting for completion services and not all of these wells will be deferred, enough will be completed to keep output flat or only minimal decreases (perhaps 200 kb/d at the most from the Bakken and Eagle Ford combined).

                  How low do people think the number of completions will go? If people throw out numbers for the Bakken or Eagle Ford I can put it into the models. So far nobody has suggested anything. I think zero wells completed in the Bakken and Eagle Ford is not a good guess, some seem to think that 150 new wells/month in the Eagle Ford and 120 wells/month in the Bakken is too high.
                  In a wider section below I will post an alternative “low” scenario.

               3. What you fail to realize it that very few wells are needed to keep output flat,…

                  And what is your latest estimate of what that number is for the Bakken, of Eagle Ford?

               4. These scenarios are pretty close to flat, for the Bakken it is probably about 115 to 120 new wells per month and for the Eagle Ford about 140 new wells per month.

               5. Hi Coolreit,

                  Do you think that it is realistic to expect that there will be no wells completed in the Bakken and Eagle Ford from March 2015 to March 2016?

                  If the answer is no, what numbers of new wells do you think are realistic?

                  If anyone else has a guess I would love to hear it.

               6. See my comment above about the futures market and the well costs, spreads, etc. if somebody volunteers the data we can crunch some numbers.

               7. Hi Fernando,

                  I don’t have the data you need. How about a WAG based on what you already know?

                  When oil prices were high the completion rate for the Bakken was about 200 wells/month and for the Eagle Ford was about 225 wells per month.

                  I have proposed a best guess scenario of 120 wells per month for the Bakken and 150 wells per month for the Eagle Ford.
                  This is about a 63% reduction in the number of new wells added each month.

                  A low secanario was also presented with 75 wells/mo in the Eagle Ford and 60 wells/mo for the Bakken. or 32% of the rate when oil prices were around $100/b.

                  Do either of these scenarios seem reasonable, or do you think they present a realistic range with reality somewhere between?

                  The futures curve has WTI at $61/b in Dec 2015 and Brent at $68/b in Dec 2015. I do not have the other data you need.

               8. Dennis, all scenarios depend on oil price assumptions. Did you check to see if the wells drilled in any given month could achieve a 10 % irr?

               9. Hi Fernando,

                  Using the economic assumptions in my post, the wells have a real irr of at least 7%, if we assume 3% inflation (the long term average rate), this is equivalent to a 10% irr. When the real irr falls below 7%, no more wells are added.

               10. Dennis, I will two pictures at the bottom with a little bit of text

      2. “It would be particularly interesting to hear the guesses of industry pros who know far more than me, having lived through these cycles in the past.”

         Dennis, on the website peakoil.com I read a comment (about two weeks ago) from Rockman, who used to write comments on TOD. He wrote that ‘the shale-oil industry’ is in a state of panic now. So how many wells are going to be completed with current low oilprices now is anyone’s guess. Might well be that many players will wait for oilprices to stay a while above $ 80/barrel.

         1. I don’t think anyone else has commented on this before but it’s interesting that the Eagle Ford production seemed to be flattening in June last year when oil was still around $110, which would mean drilling and fracking was being cut through the first half of the year (or the wells were becoming less productive). This may have been a temporary upset that would have been corrected had the oil price stayed high, or maybe the industry saw overproduction already.

            1. Hi A Yeats,

               That is an excellent observation. My Eagle Ford Scenario assumes the Eagle Ford new well EUR does not start to decrease until 2016, based on your observation this does not seem to be a good guess so I modified the Eagle Ford scenario slightly. New well EUR starts to decrease earlier in August 2015 and the maximum rate of EUR decrease is reached in July 2016. The maximum annual rate of EUR decrease is 5.84% (a little lower than the original model). The total number of wells drilled and completed is 26,200 wells and 150 new wells per month are added from Aug 2014 to March 2024.

               For the combined Bakken and EF scenarios (Bakken is unchanged) the peak is about 2600 kb/d in Jan 2015 and Aug 2017 and the total ERR remains close to 13.5 Gb through 2030. Chart below.

               

   2. I find it odd that the media is focusing purely on the rig count. All that matters RIGHT NOW is wells waiting to be completed, of which there are over 900.

      At least according to Dennis’ wonderful work here 120 completions per month keeps the Red Queen at bay (until she makes us run faster of course).

      Those 900 wells waiting to be completed are going to be mostly run through this Summer and Fall. Rig count could go to 0, and producers could still maintain production levels this year.

      However, 2016 will be very interesting as the Red Queen will cause higher production losses, the backlog of wells will be significantly reduced, and the delayed impact of these rig counts will cause the Jan-April production declines that will really move oil markets.

      Combine the end of this U.S. oil glut with a world economy that found its footing with a pleasant blend of lower oil prices, QE to the max from Europe and Japan, and interest rate cuts from every OTHER country in the world (besides the U.S.), and what do we set ourselves up for? An event much like 2007-2008.

      Tepid growth led to stably high prices since 2010, and said prices maintained the tepid growth; it was not a happy equilibrium, but it was equilibrium. I suspect that by Summer 2016 we will be at the beginning stages of a volatile oil market where this years low oil prices mixed with global Central Bank stimulus will have created enough economic momentum to have demand increasing at a brisk rate. This demand will meet stagnant supply and we’ll see $100 oil again.

      I see 2016 as the setup to the big event – much like 2007 set up for the financial crisis in 2008.

      U.S. GDP growth and stock markets both peaked in Q3 2007. Oil hit its all time high 9 months LATER on July 7, 2008, and the world was unraveling by September 2008.

      We seem to be setting up for a growth and stock market peak in 2016 as oil prices steadily rise, but don’t violently spike (much like 2007). Coming into the Spring-Summer 2017 we’ll see a violent spike in oil prices (like 2008), and soon after the weakest link in the global economic chain will break.

      In 2008 the “weakest link” was the U.S. Housing Crisis as bad loans depleted capital reserves and money vanished into thin air. People saw that link break, and so, to this day, they blame it for the global financial crisis. What people seem incapable of understanding is that oil prices were going to keep rising until “the weakest link” broke.

      SOMETHING was going to break because economies must obey the Laws of Physics and Thermodynamics. It just so happened that the combination of the repeal of Glass-Steagall, low interest rates, predatory lending, securitization of subprime mortgages, and CDS’ made the U.S. housing market and the banking institutions that owned housing securities the “weakest link”.

      What will the weakest link be next time? Well all you need for a crisis is money/assets/capital disappearing at rapid rates, which generally means either a bunch of little players defaulting on obligations (like mortgages) or few large players (countries or multinational corporations). As assets evaporate close to the source other assets are cashed in. At critical mass the vanishing of capital, and consequent money grab snowballs as everyone tries to cash out and markets receive no bid. This causes prices to collapse, meaning you now need to cash in even more, which makes prices fall even further.

      Next thing you know the financial system is freezing up, stock markets are collapsing as institutions try to free up cash, and the Federal Reserve has to say “screw it; I’ll buy it all at 100% of the original price”. This puts a bid under the market, and, at least last time, stabilized capital markets.

      1. With the ongoing contraction in the oil service industry, I would assume that the volume of wells that the industry can complete per month is declining significantly. Of course, given higher demand, completion capacity can be increased, but it will take some time.

         1. Hi Jeffrey,

            How much is “some” time? 3 months, 6 months, a year?

            1. I have never seen an oil rig but I have not heard any are being exported the way furniture manufacturing machinery was exported when the furniture business collapsed a few years back.

               There doesn’t seem to be much call for drilling rigs and no call at all for the specialized equipment used for Fracking these days – at least not overseas.

               So the equipment will be there.

               Getting the men back might not be that hard. I am guessing it takes only a few EXPERIENCED lead men or supervisors, maybe as few as half a dozen, to run a Fracking crew. The rest are probably drivers, mechanics, equipment operators etc that can get up to speed in a few days.

               Jobs that pay well are scarce and are apt to remain scarce. I am not broke but if I weren’t looking after my old Daddy I wouldn’t mind driving a truck a few months for top dollar- especially a truck that would probably be sitting in a line most of the day rather than rolling down the highway. I could get half a dozen drivers together locally in a heartbeat who would gladly live in a camper and work seven twelves for six months for a decent wage.

            2. It depends on how much capacity increase you want, pay me $20,000 a day and I’ll put up a fracking crew, including a couple of guards to keep an eye out for protesters, in 10 days.

      2. Only oil scarcity will take it all down. There is no question of collapse from any other mechanism. It won’t be allowed. The only question remains how overt are the measures in that the less so such things are overt, the more easy it is to pretend normalcy reigns.

         You don’t have to go to 0 bpd to get upheaval. You just have to have decline. You won’t see it in price. Price can be decreed. You’ll see it only in lines at the gas station.

         When those appear, the deaths begin.

6. Dennis:

   Have you factored in deferred completions as well as collapsing rig counts?

   1. Hi Coolreit,

      I only know what I see in the data so far. The Bakken/Three Forks had about 149 completions in Jan 2015 and 159 completions in Feb 2015, the Eagle Ford had 132 oil well completions in March 2015. Oil prices are rising and I am forecasting the completions in the Bakken to fall to 120 and the Eagle Ford to increase back to a little less than the Jan and Feb level (160 wells per month).

      The scenarios are pretty conservative, there will be many who think they are too conservative.

7. Question: The sudden increased production figures from Saudi Arabia of 347,000 barrels?

   An article Ron published on April 22, noted a sudden increase in Saudi production numbers, but none of us know whether these barrels are coming from actual drilling results or perhaps a decision to release these additional barrels from inventory storage for strategic reasons. It seems an impossible question to answer, and only time will tell. I am just suggesting the possibility that these barrels might have come from inventory draw downs rather than increased production results.

8. Great work as usual Dennis. Fantastic the way you get into these models and get out the numbers. Personally I don’t think oil price is going up until supply drops though. If anyone is interested in why I think that oil prices will remain low until production declines, I have posted my reasoning here: http://www.math.univ-toulouse.fr/~schindle/articles/2015_4_debate/.

   1. Thanks Shinzy,

      My scenario only has real oil prices rising at a 4.65% annual rate, which is pretty close to the futures curve for WTI (only $59/b by the end of the year assuming $57/b for April), the current futures market has WTI at $61/b by Dec 2015 and $64/b by Dec 2016, my scenario matches this pretty well through Dec 2016.

      I tend to agree with Steven Kopits that prices will rebound due to an increase in demand due to low oil prices.

      You mention that oil prices will remain low, but what you mean by high or low prices in your analysis is unclear, is $60/b a low oil price? It is more than $48/b (the near term WTI low), but less than $80/b, which is a level where most LTO producers can make a profit.

      So whether I agree with your analysis depends on your definition of a “low”oil price.

      On your assertion that LTO producers have never generated any free cash flow, I believe that Rune Likvern’s analysis suggests that on a cumulative basis you are correct, but that over some periods when prices were high, that in the Bakken/ Three Forks there were a few periods where cash flow was positive.

      http://fractionalflow.com/2015/03/21/is-the-red-queen-outrunning-bakken-lto-extraction/

      See figure 2 in the link above, net cash flow was positive from Nov 2013 to Nov 2014.

      If high oil prices return, LTO production will grow, but more slowly because credit will be less available, this will help to reduce volatility.

      1. Excellent comments as usual Dennis. I love the way you force people to be explicit. I waffled on prices because I don’t have a model, it just sort of seems right. What I will say is that I think prices will stay below production prices for a significant proportion of LTO plays until production falls. That is, I think the dynamics have changed and that hence forth, low prices are a sign that production must fall rather than that consumption will rise.

         With respect to the free cash flow of LTO producers you are of course right. I wanted to keep it simple. I have submitted the post to the Toulouse School of Economics debate forum because I want to force economists to be aware of all sides of the debate surrounding peak oil. Most economists do not follow this debate closely and I would be thrilled if an economist were to make the same comment.

      2. Dennis,

         Thank you for your interesting article. The future market predicts until December 2020 low oil prices not much going over 60 USD per barrel. However, from December 2020 on oil prices will be rising to 80 USD per barrel. Secondly, there is a time lag of at least one year between rig count and oil production. So, oil production will be falling in earnest by beginning of 2016. This year most oil companies have hedged production and deliver into their contracts. By next year the production is hedged at much lower prices – if at all. If prices do not recover until 2016, production will be falling by at least 1 million barrel per day in 2016. This trend will be exceptionally for natural gas as the US production consists of two third by shale gas and legacy decline will be nearly one third of production this year. The trend for natural gas runs three years ahead of oil as the US natural has limited capacity to export or import natural gas. I expect already very high prices for natgas in 2016/2017.

         1. Hi Heinrich,

            A fair amount of Bakken oil goes to the east coast and is competing with Brent crude, which has a higher futures curve ($73/b in 2017 and $75/b in 2020). WTI futures are about $8/b less than Brent. I question your time lag between rig count and oil production, in the LTO plays where the infrastructure is in place the number of wells drilled and fracked can change very quickly and has in the past, so I would put the lag at 3 to 6 months, there is a considerable back log of unfracked wells, if demand increases or supply decreases, oil prices will increase, wells will be completed, and new wells will be spudded.

            How low do you expect the completions will go in the Bakken/Three Forks and Eagle Ford?

            1. Dennis,

               I expect the duration of completion around half a year as companies have to deliver into their future contract obligations. So here are we again for a one year time lag. 6 months for drilling and another six months for completion of the backlog of wells. In 2016 it depends very much on new supply in Mideast, Russia and Kasachstan. There are at least five million barrels per day of new supply in the pipeline for these countries. The ruble has fallen so Russia gets the same price for oil in rubels than last year. There will be no letup for new supply in Russia. New supply from Kuweit, Irak and Saudi Arabia is coming to the market at low costs and will not be stopped. The supply from Kasachstan is anyway long overdue and will be finally arriving in 2016/17. So I think the future market is right by believing that oil prices will rise again in 2020. Hopefully the US has not depleted its resource until 2020 at low oil prices.

               1. Heinrich,

                  Do companies really have to fulfill their futures obligations?

                  Why wouldn’t they just sell the contract, take a profit, and then decide whether to produce oil based on current prices?

               2. Nick G,

                  Of course they can sell the contracts immediately. However, the risk is that prices will fall even lower and they will lose out on revenue. This happened to CLR which has sold its contracts far too early and has lost therefore billions in profits. It is the safe bet to deliver into contracts and wait for prices to recover and issue new contracts and finance new production when prices are higher.

               3. But, as you say, you’re betting.

                  It seems to me that you make your current production decisions based on current futures prices, not what you hedged at in the past. If oil prices are too low to justify completion, then you sell your contracts (and get your revenue while not incurring more expenses) and wait for prices to rise (if they do). If prices rise, you proceed with drilling or completion, while hedging your production.

                  It sounds like CLR bet that prices had bottomed out, and decided to go un-hedged. That’s a risky way to make drilling decisions.

                  hhm. Maybe we’re saying the same thing.

               4. Is anybody able to say or willing to guess about what percentage of wells being drilled and completed currently are being brought into production because it is NECESSARY to meet the terms of the leases?

               5. OFM,
                  very few, if any, wells are being drilled to honor their lease agreements, with the possible exception being OXY’s wells (very few in number).
                  The so-called ‘land grab’ phase pretty much concluded at the end of 2012, start if 2013.(That is why the number of rigs and wells was so high in 2012).

               6. Heinrich,

                  At low oil prices, there will not be a lot of sustained output coming online and the low prices will tend to boost the World economy and increase demand. I think the futures market has this wrong (prices are too low). In Sept 2014, the Jan 2015 WTI futures contract had an average price of $91/b , the WTI spot price in Jan 2015 was $47/b, so the futures market can be very wrong on future oil prices.

                  Oil prices (WTI) will be above $75/b before November 2015 and Brent will be at least $80/b by Nov 2015.

               7. Dennis,

                  ok. I will keep your forecast in my mind and remind you later in the fall. There are many factors out what could change the forecast. Currently I have the feeling that many traders and spinmasters are hoping for a political fallout in the Mideast. However, this is also a risky game as oil could then rise much higher, which would be good for shale investors, yet overall the US economy will also suffer from high inflation and a low dollar.

               8. Hi Heinrich,

                  So far inflation in the US has not been a problem when oil prices were $100/b or more from 2010 to 2014, if inflation becomes a problem (more than 3%), then the Fed will raise interest rates to cool down the economy, unless unemployment rises above 6.5% and we have stagflation, in that case they may wait for inflation to rise above 4% before raising interest rates. The low dollar actually helps the economy as it makes US exports cheaper in relative terms.

               9. Dennis,

                  Oil price rises are just a problem for the first year when oil rises. The next year inflation will be even when the oil price is high. In other word only a rising oil price matters and not a high oil price. A low dollar fuels the World economy and is therefore inflationary. Again a falling dollar matters and not a low dollar. This is why the US economy needs its own oil production as the trade deficit is a permanent pressure for a falling dollar. So far, the fall of the dollar has been stopped over the last three years due to the lower trade deficit mostly from shrinking oil imports. However the jury is out how much oil is really in the caverns of the US soil. One of the first pitfalls of the shale concept has been the high API grade for shale oil which makes it an unsuitable source for destillate. For this reason oil imports are actually rising again in the US – despite high inventories. The solution would be that US refineries produce mostly gasoline- export the surplus and import destillate. However this would last a few years as refineries have to retool.

9. Dennis, thank you very much for your article. And, I know that everyone would have different price predictions, so it is kind of meaningless to ask anyone how they came up with theirs – after all, it is their final guess, based on many smaller guesses. And I know that I am not better at guessing than probably anyone else. With that being said, I try to work with each scenario as presented.
   With respect to the Bakken, if I were running an oil company, and your projection was also our projection, I think that I would have a hard time drilling a well currently. I used your estimates for well costs, lifting costs, EUR of 430,000 bbl, and added MY assumptions of: interest expense of 7%; a 7 year production profile; with 300,000 bbls recovered in the first 3 years; and a weighted average price of $60 over the 7 years. So, I would earn $24.10 a bbl profit, and after 3 years, assuming all profit goes to pay down an $8 million debt, I would still owe over $1 million. Not enough reward for the risk for ME. Remember, I could put $8 million in a tax exempt municipal bond yielding 4% and I would earn $2,240,000, tax free, after 7 years of sitting on my ass and clipping coupons (actually somewhat more if I reinvested the annual income).

   1. Except the Fed is not authorized to buy munis. There really is no backstop on those.

      1. http://www.federalreserve.gov/aboutthefed/section14.htm

         1. Excellent find.

            Note the limit is 6 mos.

            The muni wiki says this:

            The issuer of a municipal bond receives a cash payment at the time of issuance in exchange for a promise to repay the investors who provide the cash payment (the bond holder) over time. Repayment periods can be as short as a few months (although this is rare) to 20, 30, or 40 years, or even longer.

            Jerry Brown must have asked about longer term paper and counsel said no for good reason. “Bonds” vs Notes vs Bills. Bonds are long term. Muni bonds are not backstopped, by law.

            Until things are serious and it is changed.

   2. Hi clueless,

      A 4% muni has a real rate of return of 1% at 3% inflation. Also the munis with 4% interest rates are not highly rated so there is still some risk of default. The real rate of return on AAA munis is negative at 3% inflation for a 30 year bond, shorter term paper pays lower rates.

10. Dennis. Thank you for your work! I appreciate it very much.

    One thing I would point out is that I believe your OPEX number is too low.

    Whiting and Oasis both have OPEX of over $10 per BOE in their 2014 10K’s, and as the number of completions drop, I believe OPEX per BOE will increase. OPEX per BOE from a flowing well in its first 90 days production should be much less per BOE than a 5 year old, sub-50 BOE per day well being produced with at 640,000 lb Lufkin unit, 10,000+ ft. of rods, down hole pump, or alternatively an electric submersible pump. Keeping OPEX constant over a long period of time really skews results and is likely not going to be the reality.

    For a real world example, our OPEX (which we call LOE or ‘lifting”) has increased almost four fold since 1999. This is on wells that decline at the rate of 2-4% per year.

    One further matter I note is the bankruptcy issue. I have no clue what banks/investors are thinking but they must generally believe prices are heading back up. I looked at CLR April investor presentation. They were able to increase their LOC to $2.5 billion. As of 12/31/14 they had drawn $165 million. As of 2/17/15 they had drawn $605 million, or $440 million in just 48 days. At that rate, they will have borrowed over $3.345 billion dollars in 2015 alone. Surprisingly, the LOC does not come due until 2019.

    There may reasonable explanations for CLR’s massive short term borrowing in the first 48 days of 2015, so if someone has information in that regard, please share it. Maybe the “!@#$%” will hit the fan in the next two weeks when first quarter results are released.

    At this point, the continued loose credit afforded shale after an over 50% drop in crude prices (and persistent very low natural gas prices) continues to baffle me.

    1. Thanks Shallow Sands for the input.

       No doubt the OPEX is too low. When you look at the 10k’s what are “all costs” on a per barrel basis?

       When you say costs have risen by a factor of 4 is the “real” inflation adjusted costs? I work in real terms. If we assume 3% inflation on average since 1999 then we would expect costs should have risen by 60% just due to inflation. Your lifting cost has risen by a factor of 4 on a per barrel basis?
       Wow, its a good thing that oil prices went up by a factor of 4 as well. It is not clear how to model the rising OPEX as I really don’t know the business. Increased water cut as the well ages will also be a factor. The model is far from perfect, of that I have no doubt.

       1. Hi Shallow sands,

          Looking at the 10-k for CLR it looks like costs are about $8/b, before including natural gas sales, which amount to $5/b after expenses. I have OPEX plus other costs at $8/b, so there is another $5/b of revenue which could cover the increasing OPEX of older wells for lifting extra water and so forth. Another point is that costs that will occur many years down the road are less important than early costs due to discounting. So increased OPEX of older wells may not affect the net present value very much.

    2. Shallow, that is a good and relevant point.

       Let me point to something else. Assume a company put in a LTO well and due to cash flow limitations borrows $3M at 7% p.a. (interest paid monthly) for it and this well has a productivity which is exactly the same as the average of the 2013/2014 wells.

       The company activates their loan 2 months before (to pay for completion) the well starts to flow and will not be able, due to cash flow constraints, to start paying down the loan before after 24 months (which is very much what is happening now). Interest costs are paid from the flow of the well and during the first month they pay interest for 3 months, then monthly.

       This well is defined as a cost – income center
       Assume the interest is accrued monthly on a per barrel basis during the 24 month period.
       What this results in is a specific interest cost ($/b) that looks like,

       Month 1: $5.97/b
       Month 2: $1.46/b
       .
       Month 12: $3.86/b
       .
       Month 24: $6.15/b

       The specific interest costs go for the sky the longer it takes for the company to start paying back its loan on the well.

       (The weighted average specific interest cost is $3.50 during the 24 months).
       The point being that for companies that are cash flow negative and the longer they stay cash flow negative, the longer it takes for them to start reducing debts, the higher the specific interest costs become.
       Several years with present oil prices and cash flow negative, eats very fast into any well profitability.
       The more is borrowed for each well and the longer it takes before the debt is reduced, the worse it gets.

       1. Rune. Very good point. At some point in time these companies must be cash flow positive.

          Dennis. I am making no inflation adjustment, so that is part of the reason OPEX increased.

          The second reason is what I mentioned above. More wells to make the same barrels as you fight the decline will increase OPEX per barrel.

          Finally, costs went up due to the massive rise in oil prices over that time. That factor could work the other way, and is somewhat now as service rates fall. But it doesn’t fall as much as the oil price, nor as fast.

          I agree that many producers worldwide would be in serious trouble had prices stayed in the 20s. But that is also the point, there would be far less bopd world wide if it had.

          1. Dennis. I think if you look at 10k for most public oil companies you will find OPEX increasing per boe.

             An example would be XOM. I own a small number of shares and received the annual report in the mail today.

             BOE per day:
             2012. 4,239,000
             2013. 4,175,000
             2014. 3,969,000

             Annual production costs, excluding taxes :
             2012. $15,375,000,000
             2013. $17,498,000,000
             2014. $18,174,000,000

             It is not just the stripper wells that have experienced increasing OPEX year over year.

             Furthermore, looking at CAPEX, XOM has reported 2010 to 2014 for upstream.

             2010. 27,319,000,000
             2011. 33,091,000,000
             2012. 36,084,000,000
             2013. 38,231,000,000
             2014. 32,727,000,000

             Looks like they saw the price crash coming. I believe it was reported many times that the majors were cutting before the collapse began.

             Interesting how much CAPEX imcreased, yet BOEPD fell from 4.447 million in 2010 to 3.969 million in 2014.

             This is from the largest market cap publicly traded IOC in the world. I presume they are at the top in every category, from personnel, to technology to assets/reserves.

             That their OPEX is climbing, CAPEX until last year was climbing, yet BOEPD is falling, I think is the point of Ron’s blog.

             Given that CAPEX for 2015-2016 has been cut
             drastically by almost all major producers world wide, except the Middle Eastern Petro states, one would expect Ron’s peak thesis has much merit.

             I wonder what exactly these low current prices are setting up in 2017 and beyond??

             1. One could probably find Exxon’s production costs from 1999. I’ll try. I bet comparing them to 2014 would be telling.

                Maybe I’m overstating this. Would be interested to know Mike’s thoughts.

                1. Found 1998 Exxon 10K online. This was pre-merger with Mobil.

                   All figures are my calculations per BOE, so feel free to check them. I am capable of mistakes.

                   Year. OPEX. CAPEX. Total
                   1997. $3.16. $5.47. $8.63
                   1998. $3.17. $6.27. $9.44
                   2012. $9.93. $23.32. $33.25
                   2013. $11.48. $25.09. $36.57
                   2014. $12.55. $22.59. $35.14

                   Keep in mind there are no taxes nor G&A in the above. Also, in 1997 and 1998, Exxon was more oil weighted. Now oil to gas ratio is closer to 50/50.

                   I have no idea if costs from 2015 to 2033 will escalate like the above shows. Just making the point that you should consider that OPEX per BOE should not be assumed constant into the future.

                   Again, the above are actual numbers, no inflation adjustments.

                2. Hi Shallow sands,

                   Does your 10k show what interest rate Exxon Mobil pays for any debt it holds? Using OPEX from 1998 and 2014 (I did not check your numbers) and assuming 3% annual inflation, the real rate of increase in OPEX is about 6% per year on average over that period (9%-3% inflation).

                   For XTO most debt is around 6% in nominal terms, if we assume a 3% rate of inflation the real rate of interest is 3%, note that the discount rate I use is a real discount rate of 7% which is equivalent to a 10% nominal discount rate at a 3% rate of inflation. Exxon-Mobil borrows at negative real rates of interest (2 to 3%).

                   For continental in 2014 a crude price of $60/b (with natural gas prices unchanged and everything else unchanged) would have resulted in a net income of zero.

                3. Dennis. You are correct re interest rates. XTO ranges from 5 to 6.375%. XOM ranges from .921 to 3.176%.

                4. Dennis. You are correct re interest rates. XTO ranges from 5 to 6.375%. XOM ranges from .921 to 3.176%. For some perspective, long term debt totals $11 billion. This is for a company with about 4 million BOE per day, refining, chemicals, etc.

                   Compare smaller US producers debt.

                5. Hi Shallow sands,

                   Yes it gives XTO a lot of flexibility. When other smaller oil companies go bankrupt, the larger fish will pick up the good stuff and some of the financially strong smaller players will also look for deals.

                   My understanding is that this is the SOP for busts in the oil industry.

                6. Yes. I should point out in large companies we are asked to stay above the cost of capital. This includes satisfying shareholder expectations for dividends. We don’t use the financing cost (that’s pretty low), but the bond rate weighted at say 20 %. So a simple way to look at it is that we have to beat 80 % of 8 % plus 20 % of 6 %. 6.4 plus 1.2 or 7.6 %. A low oil price scenario run should have a minimum 7.6 % irr for this hypothetical company.

                7. Hi Fernando,

                   So a 7.6% nominal irr? That would only be 4.6% in real irr terms (assuming an inflation rate of 3%). I use a real irr of 7%(10% nominal irr).

                8. Dennis, that was only an example for a large company, and I suggest it´s healthy to use it for the LOW price scenario (whatever people use). The 10 % is reasonable, but that´s because we usually forget to account properly for OPEX and overheads (including the cost of the CEO who uses a helicopter to go buy BBQ at Strack Farms). Some use it to cover risk a little bit.

                   My preference is to use 10 % and make sure risk is treated separately because there are tax issues involved (for example, a dry exploration well doesn´t hurt that much in some countries because the tax system is structured to encourage exploration).

                   Anyway, I just wanted to mention how I was taught to work out the discount factors, and why we needed to hike the internal IRR hurdles (so we take care of the owners).

                9. Hi Fernando,

                   For the Bakken I include royalties, taxes, transport costs, OPEX, and interest and G+A expenses. I also do not include natural gas sales which at about $3/b of produced oil can be used to offset well costs. Tthe total for OPEX, other costs and these natural gas sales is $11/b in my model, based on most 10k’s for the Bakken producers I have seen, the OPEX plus G+A is about $8/b and the $3/b should cover interest expense.

                   All of these costs are deducted from refinery gate revenue and then discounted at the real rate of 7% (10%nominal rate) to find the net present value of future cash flows.

11. Just testing to see if my posts work now. Been showing up in the spam file. Not taking it personal though 🙂

12. Watcher,

    Excellent point! I work for a local government that is in pretty good shape financially, but it won’t take much of the 2008 type of reduction in property taxes and other revenue to push most local governments back to cutting services. Since the reserves were eaten down to the bare minimums last time, there is less resiliency now, and fewer tax payers to spread the pain. I could see muni defaults ahead.

    On another note, I noticed today that the retail price spread between regular unleaded gasoline ($2.489) and diesel has fallen to 31 cents per gallon, compared to more than 60 cents a few months ago (central Florida, USA).

    Jim

    Jim

    1. Cracker,

       If I may, I’d like to ask a few questions:

       Roughly how large is your budget?

       How much has your budget grown over the last 10 years, compared to inflation and the local economy, and,

       What keeps you from raising taxes? Have you really exceeded a reasonable ratio of taxes to tax base, or is it just fear of business and taxpayers complaining about rising taxes?

       I ask because I see a lot of local governments that have shrunk over the years compared to inflation and the local economy, and yet are still starved for revenue because of political pressure.

       1. Hi Nick,

          In many cases local governments keep taxes as low as possible, people hate taxes and local government officials will not be re-elected if they raise taxes too much.

          1. Yes, that’s what I’m seeing.

             But….just because local government is operating on a shoestring, doesn’t mean that it’s “run out of money”. AFAICT, it looks like they’re just being starved by local business and individual taxpayers. That means they really do have the means to raise taxes if needed to avoid bankruptcy. It also means that those deteriorating local streets aren’t a sign of economic decline, they’re just caused by politics.

             1. Maybe they’re caused by pension payments.

                1. Only partly and indirectly.

                   Illinois is a case in point. They’re trying to reduce pension benefits (and blaming much of their problems on pension payments), at the same time they’re cutting income taxes!

       2. Nick,

          I’m sorry but I don’t have the numbers you request easily available, but the link below may help. Our demographics guy who prepares our Statistical Abstract is out today, so I can’t ask for a quick answer.

          We are a caught in limbo having characteristics of a rural county, and lots of low density residential sprawl (mostly less than four dwelling units per acre) which demands urban type services. The low density means our cost per unit of service can be higher than more compact urban locations, meaning we have some inefficiency challenges. But don’t tell our citizens we are low density. They think it is high enough. That strikes me as ironic because research I did fourteen years ago indicated an urban density of about 35 dwelling units per acre was required for the critical mass needed to support public transit, I presume based on economics. I’m sure that number is no longer good, but higher density than here is probably needed.

          I do remember that until about 2008, our budget was pretty much a straight line per capita, with budget growth directly reflecting population increase. Budget issues have resulted in some functions (animal control, jail management, code enforcement) being shifted to other entities that are part of the whole of county government, but separate, such as the Sheriff’s Department, which assumed some functions and taxes for them separately, so it isn’t as simple as it may seem at first glance, not apples to oranges each year. Have fun sorting it out.

          I think both politics and ability to pay are issues. We lost about 5000 population from 165,000, IIRC, the housing market had a heart attack, and the tax delinquencies increased a lot, reducing revenues that were expected for THAT year’s budget. The population that went away seemed to mostly be folks from south and central America who went home when the construction work stopped. The least costly housing where they lived is still mostly for rent.

          Government functions that handled growth, like building and zoning, had inadequate revenues to maintain a basic skeleton staff. Overall county staff was reduced more than half, and many services and functions just went away. There has been little recovery.

          Political calls for ever more dire cuts continued for awhile, but the local citizenry let the elected officials know they would rather pay more for quality government than do with less. Legally, we could raise taxes to higher levels as we are under the statutory caps.

          As an example of the impacts, our first class parks system declined and has not recovered (IMO) due to cuts in staff and budget that have not been restored, while public use for organized recreation leagues has continued at near the same level. Condition and maintenance has suffered. We trundle along making do the best we can, and putting out fires when someone complains.

          The sense I have is that we are less resilient, easier to break, and others around us are even more fragile. Again, I think we are in decent shape, compared to some others.

          Perhaps this link will help you find your answers:

          http://www.hernandocounty.us/plan/PlanningStatAbs.htm

          You can probably pick out what you want quicker than I can. There are numbers for each year back to 2001, I think, so you should be able to ferret out the metric you want.

          By the way, we managed to keep our fledgling public transit system running, due to popular demand, encouragement from the business community who value it in recruiting quality labor, and money from the Feds. I consider transit a measure of the quality of a community, an indication that it cares about its less fortunate citizens. I’m glad we have it, although I have yet to find a way to use it, and I’ve tried. The schedules and stop locations are tough, primarily the risk to life and limb to walk or bike to a bus stop on a busy two lane road with no shoulder to get out of traffic. That is what I get for not living in a dense urban area, where the stop would be within safe walking distance.

          Our service standard is that when we upgrade our collector roads, we add paved shoulders to provide bike lanes and reduce maintenance costs because the paved shoulder moves the pavement edge away from traffic and reduces wear and tear at the edge. I doubt our economic future will allow upgrading that road as it will be costly, with right of way acquisition and new drainage on a clay hill, and we chose not to collect impact fees that could pay for it. If there is less traffic someday, I may be able to walk to the bus stop.

          Sorry this got so long. I guess maybe Nick will be the only one to read it.

          Jim

          1. I looked at the lates statistical abstract.

             It looks like population and employment are still growing. There’s no good reason for the County government’s staff to be cut at all, let alone by half.

             1. Nick,

                To a point, I agree. It could have been addressed differently.

                But that is what happened from about 2009-2012, jobs eliminated, and vacated positions were eliminated when people retired, died, or otherwise left their positions voluntarily. Good reason or not, revenues declined, it was tough balancing the budget, and staff took much of the hit. As I wrote above, some things we used to do for our citizens just are not done anymore.

                We also lost growth management staff. We were growing rapidly, building 5000 new (mostly single family) dwelling units per year in our peak year (2007, I think), now on pace for about 250 this fiscal year. That kind of activity required quite a few jobs to process, permit, and inspect, not only the buildings, but the land development to put them on, roads and utilities to service them, and all kinds of ancillary duties. Lots of those jobs went away, too.

                Maybe you want to tell our elected officials there was no good reason for them to do what they did to balance the budget and face their constituents? I’m afraid your thoughtful observation and idealism won’t carry much weight in the real world, where politics is very short term, and good reasons often fall by the wayside, and lack of a good reason is not necessarily important.

                Part of the budget cutting was driven by politics, seemingly a desire by some to destroy all government from the inside out, by eliminating staff with experience, expertise, and knowledge, and by minimizing funding, and rendering what is left ineffective.

                The next step down for us will likely affect important functions that were spared last time, like fire/rescue and law enforcement. Many communities have already reduced these services, meaning they cut staff, one of the largest components of cost.

                More of that to come, I’m afraid, for lots of communities. I appreciate your indefatigable expectations of a possible rosy future, but like your no good reason observation above, I must admit your outlook seems a bit naive from here. The world is not that nice.

                Jim

                1. I never suggested that the politics of funding government were nice. I agree absolutely – much of these cuts come from special interests that are determined to destroy government.

                   It’s just helpful to be clear that cuts in government are due to politics, not due to a real lack of resources.

                2. You missed the main point.

                   Both were factors. The resources issue came first. The funding crunch was real, an expected decline in revenues for the next several years.

                   It helps to understand that when citizens and businesses get crunched financially, they expect local governments to share the pain by reducing tax burdens (much as Fernando mentions oil producers will expect tax concessions when oil prices go low). The money shortage was real, the budget had to balance, and decisions had to be made as to what to cut. That’s where the politics got interesting.

                   The politicos were opportunists taking advantage of a financially strapped organization that was not allowed to defend itself. The facts you noted were pertinent, but not important to the job of reducing the cost of government.

                   The causes and impacts were real, not just political noise to be so callously dismissed.

                3. Well, my main point was that the overall tax base didn’t shrink: your statistical abstract shows population never falling, and employment continuously increasing. Housing construction and prices may have fallen, but I suspect that the overall local economy did not shrink year-over-year even at the worst of things, and certainly not as measured over the last five years. This is relevant to this blog, as people often perceive problems with local government taxes or services as due to fundamental limitations on resources. This is unrealistic.

                   Now, it sounds like the revenues that were dedicated to your unit declined. I think you stated that you felt that the cuts to your area were excessive. Even if you sympathise with taxpayers who wanted lower taxes, the reality is that the cuts were too great. I’d say that the callousness was the reductions in staffing, which probably resulted in layoffs. The people who were laidoff are real people too, and to lay them off unnecessarily is sad.

                   As to the question of perception: there has been a systematic campaign over the last 45 years to vilify government. That’s happened all over the country, and it’s no surprise that local voters will be happy to cut government when they’ve been told for 45 years that it’s the problem, not the solution.

                4. Enough of this.

                   Nick, you just don’t have a clue about any of this, or maybe don’t want to. Your conclusions are incorrect, you don’t comprehend what is written, you inject your views as if others wrote them.

                   Now I remember why I normally skip your posts. I’m sorry I replied to you in the first place. My apologies to everyone else who wasted their time reading any of this.

                   Jim

                5. Jim,

                   I’m sorry I upset you. I have to confess, I’m not sure exactly what you disagreed with.

                   You work for County government, right? I’d think you’d be happy to have someone defend the value of your work and job.

                   It sounds like some of your revenues declined: permit fees and property taxes, perhaps. On the other hand, your statistical abstract shows that population and employment grew continually: that means that the local economy didn’t shrink, just the specific revenue sources that your county happens to depend on. And, of course, politics prevented you from substituting more stable revenue sources, because that was perceived as a “new tax”, or tax increase.

    2. The politics of raising revenue vs cutting spending is what it is, and the solution at the national level has been for rather a long time to borrow the difference from anyone who will lend it (including your Central Bank).

       But my only point was before California rammed through tax increases they faced this debacle and had occasion to write an explicit letter to Bernanke asking if the Fed could buy California bonds. (aka print up some money from nothingness and lend it to them, at presumably 0% interest rate)

       The answer was no, from the Fed’s legal counsel. That sort of closed a very important door.

    3. Or lots of muni defaults, anywhere the tax revenue from the private sector in no way, shape, or form supports the public infrastructure as built. Especially come maintenance time.

       http://granolashotgun.com/2015/04/21/municipal-solvency-how-to-not-go-broke/

       Now, maybe if there’s enough wealth and the wealthy don’t just skip to greener pastures when their suburb veers Walmartwards instead of Whole Foodish, something might be done to save that particular neighborhood. Others? Perhaps not so lucky.

       1. I find the article interesting, but there’s no actual data in it, of any kind. It’s all speculation, with no data about transportation costs, infrastructural costs, where revenues come from and where they go…

          I’d love to see actual data.

13. Re: valuation
    Slide show page 6
    http://www.enercominc.com/downloads_TOSC_2015/Netherland-Sewell-and-Associates.pdf

    (22)(v)Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined.The price shall be the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.

    Page 8
    Average 1st day of month prices 2015 Mar 31 $83, down from $95 Dec 31. If 2015 remains $55, June 30 will be $72, and Sep 30 $61. Down 40ish% from Dec 31.

    Pretty funny stuff from these guys.

    1. To be sure that is understood, that’s the reserves collateral valuation falling. Stressing covenants.

14. Hi all,

    If we assume that 120 new wells per month in the Bakken and 150 new wells per month in the Eagle Ford is too optimistic, which I think is what Coolreit believes, we can try half that number in each play. That is 60 new wells per month in the Bakken and 75 new wells per month in the Eagle Ford. Output falls by about 700 kb/d, but I don’t think this is realistic. Economically recoverable resource (ERR) to 2030 is 11.7Gb for both plays combined.

    

15. FYR (For your reading) or perhaps FYE (for your entertainment):

    http://www.telegraph.co.uk/finance/newsbysector/energy/11563761/US-to-launch-blitz-of-gas-exports-eyes-global-energy-dominance.html

    “The United States is poised to flood world markets with once-unthinkable quantities of liquefied natural gas as soon as this year, profoundly changing the geo-politics of global energy and posing a major threat to Russian gas dominance in Europe.”

    1. Tech guy,
       If the florid, dramatic prose of the author – Evans-Pritchard – is the cause of entertainment, I’m with ya on that. However, to view with scepticism the underlying numbers/projections out of the Marcellus and Utica plays would be, IMHO, a huge mistake.
       The gas guys have been well under the radar as the oil guys seem to get the attention. When one sees what has already been accomplished – more easily grasped, perhaps, if expressed in oil-familiar terms (boe), the projections in your cited article may seem eminently plausible.
       6’000 cubic feet of gas is the energy equivalent of one barrel of oil. To take the daily output of the Marcellus/Utica (18 billion CFD) gives us 3,000,000 barrels/day … which is more than the Bak and EF COMBINED. Five years ago the output was squat.
       One of the ‘monster’ wells – Rice’s Bigfoot 9H – is a few weeks from first 12 months production, which will be well over 5 billion cf. At 17 million cfd, this one well is producing for the past seven months, nearly 3,000 boe/d, totalling almost one million barrels oil equivalent. There are several wells with similar profiles.
       The Bakken is said to cover 14,000 sq. miles. The EIA just described the Marcellus play at 72,000 sq. miles … an area larger than the entire state of North Dakota.
       A shallower formation – the Upper Devonian – covers much of the Marcellus.
       The largely unexplored Utica formation is much larger in area and thicker than the Marcellus. The folks at Penn State University have a site – Marcellus Outreach – that has some recent, highly informative maps showing both the Utica and Marcellus, as well as a time line for the drilling activity.

       1. coffeeguyzz,

          However, the legacy decline for natural gas stands at 20 bcf/d this year and will go over 30 bcf/d next year. This is nearly half of total US production. Secondly, natural gas futures declined for the first time below 3 USD per mmcf. So far companies could deliver into very high future contracts, despite low spot prices. So financing over the futures market is completely drying up. Thirdly, much of the natgas came from liquid rich wells. Last year Chesapeake had two thirds of revenue from liquids, yet liquid production has been just one third. With low oil prices, the finance of gas production through high liquid revenues is running out. In my view natural gas production in the US will be much lower and prices will go to unbelievable heights.

          1. Heinrich, just wondering do you know the rough natural gas production vs. consumption figures for the US?

             1. Annual US Dry Gas Production:
                http://www.eia.gov/dnav/ng/hist/n9070us1A.htm

                Annual Total US Gas Consumption* (from US production & imports):
                http://www.eia.gov/dnav/ng/hist/n9140us2a.htm

                *Year over year changes in gas storage can have an impact on consumption numbers

                1. Thank you Jeffery. So eyeballing the linked charts I’m struggling to see where this huge export capacity is coming from. What am I missing?

                2. You’re not grasping the “New math.”

                   Here’s a simple explanation* of how the US, a net crude oil importer, can help Western Europe reduce its reliance on Russian crude oil (the math would work the same way for gas, as long as we are a net importer):

                   The US increases its crude oil imports from Russia by 2 mbpd.

                   The US exports 2 mbpd of crude oil to Western Europe, allowing Western Europe to reduce their crude oil imports from Russia by 2 mbpd.

                   Problem solved!

                   *Last year, the CEO of Continental Resources stated that Western Europe could reduce its reliance on Russian oil, if the US immediately started exporting crude oil to Europe

             2. Marcus,

                You have probably found already the numbers fro the EIA. However if you are going to bentekenergy.com you will get the daiy production and consumption rates.

                Currently production is at even with consumption of around 72 bcf per day. However this changes considerably during winter nd summertime.

          2. Mr. Leopold,
             Wow. Just logged back on and see umpteen comments following your post. I think it is great that, although this blog is oil-focused, the related gas sector gets a bit more ‘sunshine’ info-wise as it is becoming a major force in energy-related matters.
             Re legacy decline … in 2010, the Marcellus produced less than 2 Bcfd. Currently it is over 16Bcfd. Naturally the legacy decline would grow with increased production.
             Your posted comments not only capture the crucial nexus of price/production, an observer may get a sense of what is to come based upon recent, demonstrated price to activity. Specifically, as you pointed out, with hedges in the $4/$5 MmBtu range, robust production occurred. Absent that price protection, drilling activity is faltering.
             With a recognized resource measured in the hundreds of trillions of cubic feet, the future direction of the Marcellus and Utica plays should become more clear.

       2. The EIA is putting Marcellus gas production (I assume gross production) at around 16 to 17 BCF/day. Citi Research puts the underlying decline rate from US gas production at about 24%/year (see post below). The EIA shows US dry gas production at 70 BCF/day in 2014 (versus consumption of 73 BCF/day).

          Here’s the problem. Even if we go with the Citi estimate for the decline rate from existing gas production (which is lower than the estimates that Heinrich is using), in round numbers just to maintain current dry gas production, we need to put on line the current productive equivalent of the gas production from the Marcellus Play–every single year.

          1. Jeffrey,

             My numbers of 20 bcf per day for 2015 and 30 bcf per day for 2016 are future estimates. The EIA has past numbers. Legacy decline is at unbelievable growth and has a strong dynamic, especially as conventional production goes very fast to zero. In my view the dynamics of the substitution of conventional gas through shale gas has not been recognized. These are totally different times now. If prices are up, production will start again, yet with a time lag of at least six months. In my view shale gas will not bring permanent low gas prices, yet will throw the world into massive boom and bust cycles.

             1. I’m in the rather unusual position, for me, of using decline rate estimates that some consider to be too low.

                1. Hi Jeffrey,

                   I think Heinrich may be using the Drilling Productivity report for his legacy decline estimates. Those reports are not very good.
                   Also legacy decline rates fall as drilling slows down, sometimes people miss this fact. As natural gas supplies start to fall, prices will rise and the natural gas drillers will drill enough wells to keep us on the Red Queen treadmill for a while, output could plateau for a couple of years and then will decline when the sweet spots run out of room, when this will occur is best found by reading Drilling Deeper by David Hughes. His analysis suggests a peak in 2016 for the major shale plays that he analyzed.

                2. Jeffrey,

                   My decline rates are for total shale and conventional production and not for Marcellus alone. If you are going to the latest drilling report, you can see the legacy decline for all shale gas plays. Marcellus has currently a legacy decline of 7bcf per day which is double the amount from last year. It is very likely that legacy decline in the Marcellus area will be at least 12 bcf per day by next year. The numbers go up exponentionally – as production did over the last three years. What is working on the upside can also work on the downside. I consider my numbers also as conservative.

                3. I’m using the Citi Research estimate for an overall total legacy decline rate of 24%/year for US total existing gas production, from all sources, which would mean a volumetric decline of around 17 BCF/day per year, from existing wells. As noted elsewhere, this estimate seems reasonable, if not conservative, given the observed two year 20%/year net decline in Louisiana’s gas production (this was net, after new wells; the gross legacy decline rate would of course be even higher).

    2. Copy of comment I made on the Telegraph website:

       Re: “. . . poised to flood world markets with once-unthinkable quantities of liquefied natural gas”

       The EIA shows that US natural gas consumption exceeded US dry natural gas production by about 3 BCF/day in 2014 (excluding any year over year changes in inventory), i.e., the US was a net natural gas importer in 2014 (as well as a very large net crude oil importer).

       And a recent report by Citi Research estimated that the underlying decline rate from existing US natural gas production is about 24%/year. At this decline rate*, in order to maintain US production, the US would have to replace about 100% of current gas production over the next four years.

       The observed decline in Louisiana’s natural gas production supports this estimate. The EIA shows that Louisiana’s natural gas production fell at 20%/year from 2012 to 2014. This was the net decline rate, after new wells were added. The gross decline rate from existing wells in 2012 and 2013 would be even higher.

       *Of course, existing production would not decline by 100% in four years, since we would be declining against a declining production volume, but I am stipulating a “steady state” production scenario.

       1. A comment by a Telegraph reader that is a representative sampling of most of the comments:

          A great new weapon that nobody saw coming. Let’s exploit it to the fullest, we have UNLIMITED supplies of NG.

16. I’m curious: What’s the basis of the assumption about the total number of wells in each play and/or ERR for each play?

    Also, what’s assumed about the quality (or productivity) of future wells? Is it assumed that they are as good as average wells over the history of the play? Or average wells that have been drilled in the past year or two?

    1. Good point Mason. I believe that even before the price collapse the Bakken sweet spots had already began to peter out. McKenzie and Mountrail production were at or very close to their peak. There some very good spots that some companies were sitting on. You can tell them because of their low permit number. But now the number of these wells are declining.

       I just don’t see it. I think the number of wells required to keep production level in the Bakken is, right now, around 140. But that is not a hard number. Some months you may get fewer wells and more oil and some months you may get more than 140 wells and a decline in production.

       How fast production drops depends entirely on the price of oil. If the price of WTI stays below $60 then it is extremely likely that no new wells will be drilled in the Bakken after 2016. If oil goes to $80 then the Bakken will limp along on a bumpy plateau before starting a slow decline in a few years.

       Of course all this is just my wild ass guess. But I am firmly convinced that the Bakken’s glory days are over.

       1. Hi Ron,

          North Dakota Bakken/Three Forks average well productivity has not started to decrease yet. I plotted 6 month cumulative output for all Bakken/Three forks wells which started producing between Jan 2008 and Sept 2014 and added a 4th degree polynomial trendline, so far output has been increasing, but this may change in the future. We don’t know when this will occur. Chart below for 6 month cumulative Bakken well output

          

          1. Dennis,
             The basis for number of wells in the Bakken, as stated by Mr. Hughes on pages #61/#62 in Drilling g Deeper may merit a closer look. His stating of three wells per sq. mile is not clear (to me, anyway) as he seems to conflate one square mile with a ‘section’. Drilling Spacing Units (DSUs) in North Dakota are two square miles each. (Mr. Hughes accurately describes 10,000′ long laterals, so I do not know if his most probable prognosis of 31,000 wells is for 640 or 1,280 sq. acre units.
             The down spacing parameters that Mr. Hughes used are in the process of revision as fracturing operations are wilfully, with increasing success, extending no more than 500/600 feet laterally, thus allowing more wells per pad.
             A knowledgeable industry veteran who comments on this board, Fernando, has repeatedly stated that ExxonMobil’s actions bear monitoring as they have a well deserved reputation for expertise. Their subsidiary, XTO, just applied for permits for 650 Bakken wells with the bulk situated on 12 well pads.

             1. Isn’t a “section” a traditional term for a square mile (640 acres)?

                1. Nick
                   Exactly right, one square mile (640 sq. acres is one section.
                   Mr. Hughes referred several times to ‘wells per sq. mile’ and also per section.
                   However, in North Dakota, the defined spacing units are twice that size, so I do not why Mr. Hughes used the smaller area.
                   If you or anyone cared to take a look at Drilling Deeper, pages #61 and 62 and let me know what you think, I’d be much obliged because 32,000 wells versus 64,000 is a big difference … as well as each lateral length, obviously.
                   Dennis? What say you?

                2. Hi Coffeguyz,

                   I am confident that when David Hughes estimates 3 wells per square mile, that he means what he says. Note that this an average for the entire play. There will be sweet spots where there is closer spacing, but these areas are a small part of the entire play.

                   Often people seem to assume that if 6 wells per square mile (12 wells per DSU) can be drilled in the sweet spots, that this can be done in the entire play. That assumption is faulty.

                   As a simple example using round made up numbers, lets say a play has a total area of 4000 square miles (SM), 25% of the area is sweet spots and the rest is less productive. If we assume 6 wells per SM in the sweet spots and 2 wells per SM in the less productive area (75% of the total area), the average is 3 wells per SM.

                   I trust David Hughes analysis, it might be a tad conservative for the Bakken/Three Forks, perhaps more wells will be drilled than he has assumed, but he is definitely not off by a factor of 2.

                   I think the ERR will be between 7 and 10 Gb and the number of wells between 25k and 45k, but that is a very speculative estimate (at best).

                3. Dennis,
                   Thanks for the reply.
                   Mr. Hughes did thusly in determining well numbers for the Bakken:
                   1) Took an area of 12,700 sq miles as productive
                   2) Postulated 3 wells per sq mile to get bout 38,000 wells
                   3) Wacked off 20% as undrillable land, leaving bout 32,000
                   4) Subtracted the already-drilled 8,000 to give remaining . number of to-be-drilled wells at about 23,000

                   Of the few questionable parameters used here, the indisputable one is Mr. Hughes clearly using one mile long wells to determine the total. As he is aware of 10,000′ long laterals, (he described this in his formulation), the erroneous mathematical foundation (mile long wells) for his projection should call into play its validity.

                4. Hi Coffeeguyz,

                   I do not follow your objection. David Hughes is aware that the laterals are 10,000 feet, I assume that you are aware that if a DSU is 1 by 2 miles (2 square miles), that we could just as easily have made each DSU 1/2 mile by 2 miles (same length but half as wide) and then we would have 3 wells per “narrow” DSU vs 6 wells per “ND” DSU. Maybe you are thinking that a square mile must be square, rectangles work just fine 😉

                5. Hi Coffeguyz,

                   Let’s do it this way. 12,700 square miles is 6350 DSUs, assume 6 wells per DSU, that is
                   about 38,000 wells. Now assume that some of the 12,700 square miles is unavailable due to towns, parks, rivers, and lakes. If we use David Hughes 80% then 38,000 is reduced to 30,500 wells.

                   There is nothing questionable about David Hughes assumptions in my view, though they may be a bit on the conservative side. He has much more experience than me and likely his experience tells him that his methods lead to reliable estimates.

             2. I would definitely look at Exxon’s lateral length. I would be worried about well slugging in a very long lateral, plus the pressure drop if the liner is on the smallish side. But I haven’t run the figures and lately I hav worked more with heavy oil wells using 7 inch and 9 5/8 liners. It’s a different world.

             3. Coffee,

                His stating of three wells per sq. mile is not clear

                Just an opinion, a lot of the companies are planning on 6 wells in the MB per DSU. So 2 wells per 2 sq miles = 3 wells per square mile?

                That makes sense to me, but don’t ask me about the wells for the TF benches? smiles

                As for XTO and 12 wells per pad. It would be nice to now if they plan on having laterals going both north and south from this pad, or just in one direction? Potentially this 12 well pad could be 6 wells north and 6 south. That would take care of the MB at 880 ft spacing of the laterals?

                1. Push, Dennis

                   I’m not objecting or quibbling as much as trying to understand.
                   12,700 sq miles equates to bout 6 1/2 thousand DSUs. 10,000′ long laterals. six to a DSU, would, mathematically, give three wells/sq mile, but now we face down spacing issues that Mr. Hughes expressed skepticism and uncertainty about. A halving of actual number of wells drilled at 3/sq mile formulation is relevant to all analysis.
                   Push, wells are drilled in opposite directions, but my understanding is a row of many pads is laid out 4 miles away from the next row of pads. (The laterals being 10’000′ extending in opposite directions). These so-called ‘energy corridors’ contain gathering lines, roads, etc to service the pads. There are excellent aireal photos of this on ND’s DMR site in their August, 2014 presentation.

                2. Hi Coffeeguyz,

                   Note that the 3 wells/square mile estimate is an average for the entire play. In the sweet spots the wells will be more closely spaced, in the less productive areas there will be fewer wells per square mile.

                   What do you expect will be the number of wells drilled in the Bakken/Three Forks? In my models I start with 40,000 wells and a TRR of 10 Gb, then I apply the economic assumptions to find the ERR, this reduces the number of wells to 23,000 to 30,000 depending on the oil price scenario and the ERR is reduced to 7.5 to 8.5 Gb.

                3. This thread is almost gettin’ funny … but I am somewhat time constrained.
                   Take a one mile by two mile standard DSU …
                   Avoid each boundary line (east/west) by 200′ with your frac (I believe there are regs, do not know ’em).
                   Mr. Hughes described 1,000′ horizontal influence per frac (not clear to me if 1,000 each side of wellbore or 1,000′ total). Let’s say 500′ each side.
                   Now, starting at 5,280′, knock it back 400′ combined line avoidance, plus, 1,000′ outermost 2 fracs, leaves one with bout 3,800′ to place 6 wells on our DSU with all wells targeting Bakken Middle Bench. (Mr. Hughes indicated minimal production from TF as MB would drain the resource).
                   So, one has 6 mighty skinny wells to squeeze in there … especially with 1,000′ frac propagation.

                   Dunno, Dennis. Methinks sumptin’ may be amiss.

                   As for my own estimate? Probably a whole bunch … give or take. 😉

                4. Hi Coffeguyz,

                   I may not be following you, you seem to now be arguing that 6 wells per DSU is too many, do I have that right, I thought you were arguing that Hughes estimate for the number of wells was too low. Do you think that Hughes is too optimistic or pessimistic? I am confused by your comments.

                5. Dennis,
                   Akshually, for a whole host of reasons, I’m strongly inclined to think Mr. Hughes estimate of Bakken wells is way, way low.
                   Without desiring to ‘gum up’ the blog with picayune minutiae, my main purpose was to question Mr. Hughes’ method in arriving at his conclusions/estimates.
                   Unless my interpretation is inaccurate, I think Mr. Hughes did some abstract number crunching vis-à-vis total productive area divided by a seemingly reasonable well spacing of three wells across a mile wide unit.
                   Thing is, while that method gives a 3well/sq. mile model, the wells, as we know, cover 2 miles in length. To achieve the modeled 3 per, we need to either shorten the length (to one mile) or squeeze 6 wells into our one mile wide (by two long) DSU. In reading Mr. Hughes’ take on frac’ing interference between wells, I do not think he meant wells could be effectively spaced less than 700′ apart (which would be the case with 200′ avoidance distance from each DSU boundary.
                   His actual wording was being doubtful that wells could be spaced closer than 2,000′ without experiencing interference (p61).
                   Like you described yourself, I am poor at explaining, but the relevance and impact of Mr. Hughes’ work is significant, and I felt some clarity would be helpful.

                   Great work on your part, as always.
                   Gerard

                6. Using a practical approach one could lay out a ONE mile by FOUR mile rectangle and fit FIVE wells on each side of a pad, for a total of TEN wells. in a FOUR square mile pad influence area. If this is considered to be two SPACING UNITS, then we have five wells per spacing unit.

                   When I was supervising engineers who laid out wells and pads, we used a fork design 4000 feet (1200 meters) wide. The well length is variable, but I never got involved with anything with a step out longer than about a mile (1600 meters).

                   THe fork width is set in part by the design requirement to have a gentle turn on the directional section from the point of departure to the horizontal section. This turn has to allow the liner and tools to go through, and should allow for a future option to put a pump all the way down to the horizontal section. This requirement can be particularly painful (depends on the vertical depth to the horizontal leg).

                   Also note the area under the pad isn´t drained properly, so it can be useful to stagger pads. Drilling wells sideways into the area under an offset pad may work, but the frac job doesn´t yield the same results.

                7. Hi Coffeeguyz,

                   Thanks for the discussion. I could be missing something, but Hughes analysis looks solid to me. The layout that Hughes envisions is denser wells in the sweet spots and sparser well spacing in less productive areas. In the sweet spots there might be 12 wells per DSU and in the non-sweet spots 4 wells per DSU, if the ratio of sweet to non-sweet areas is 1 to 3, this would give an average of 6 wells per DSU.

                   I think that Hughes thinks these estimates are optimistic because there will likely be some well interference when wells are spaced at 12 wells per DSU.

                   How much higher is “a lot” higher?

                   Do you believe the 30 Gb ERR estimates being hyped in some investor presentations?

                   I would focus on actual reserves in the 10k rather than talking points in investor presentations.

                8. Dennis,
                   Setting aside Mr. Hughes’ work for the moment, I focus intensely on operations – particularly forward biased activities and research.
                   Some salient points:
                   About 90% of the resource in these shale plays remains unrecovered.
                   The decline rate is well recognized as pretty dramatic.
                   The issues surrounding water useage in fracturing are immensely problematic

                   Operations currently occurring, recently done, or in the planning stages include:
                   Statoil doing a frac in a few weeks in the Bakken using liquid/emusified CO2.
                   Chesapeake currently frac’ing a well in the oil-window in Ohio using the now-bankrupt Gasfrac’s liquified/gelled propane.
                   Little known Canadian outfit Terrace Energy (?) successfully producing two wells in shallow, oil window of Eagle Ford 18 months ago using Gasfrac’s process.
                   Canadian outfit Deethree successfully re-injecting field gas to greatly boost production in Upper Bakken silt.
                   Praxair recently entering field and heavily touting CO2 to perform fracs.
                   The stunning speed and – of much greater significance – the effectiveness of coiled tubing conveyed bottom hole tools that fracture one stage at a time through a single entry point. (The huge importance of this is the widely recognized fact that 30%/40% of ALL entry points of every horizontal ever drilled produces little to no hydrocarbons.
                   This summer there are several EOR tests scheduled to be carried out in numerous plays. If you spent a few minutes checking out the work of the EERC folks in North Dakota in this regard, you may see some stunning test results.

                   I am unquestionably an uber-cornucopian and proud of it …
                   but, ya know what, Dennis, a quick glance backwards in the cyber archives may show the accuracy – or lack thereof – of those who felt otherwise.

                   Still in the very early innings of this game.

    2. Hi Mason,

       The basis for the number of wells is David Hughes analysis, I just cut off the total number of wells at around his most likely scenarios (or if the numbers don’t match I usually was a little more conservative, and made an arbitrary guess). The well profile for the Bakken is not fixed it remains the same from 2008 to Dec 2012 and then rises gradually to reflect the improved average well productivity in 2013 and 2014.

       As stated on the Bakken scenario chart, it is assumed that new well EUR starts to decrease in June 2015 (an arbitrary choice, when this will begin is clearly unknown) and the rate of decrease gradually increases to a 7% annual rate of decrease a year later and then continues to decline at this rate until 2023.

       For the Eagle Ford I do not have as good well data, I pulled a sample of 500 single lease wells about 2 years ago to estimate the average Eagle Ford well profile(EUR30=212 kb) as a starting point and used the data on the number of oil wells at the RRC’s Eagle Ford page and my Eagle Ford output estimate to create a model for the Eagle Ford. In this case the well profile was assumed to improve (as was the case in the Bakken) in order to get the model to match the output and number of wells (from RRC and EIA data). EUR30 of average well increased to 285 kb by Jan 2015.

       Again it is assumed that new well EUR will decrease as the sweet spots become fully drilled, for the Eagle Ford I assumed this begins in Oct 2016 at 10,650 wells drilled and gradually increases reaching a maximum rate of 7.3% per year 12 months later and continues to decrease at this rate until 2024.

       The ERR matches roughly with David Hughes scenarios, though the Bakken is a little higher than Hughes estimate and is based on the mean USGS estimate (in 2013) for TRR of about 10 Gb for the North Dakota Bakken/Three Forks. Proven reserves in the Bakken/Thee Forks are about 4.5 Gb at the end of 2013, 2P reserves are likely 1.75 times proven reserves, so 2P=7.9 Gb, cumulative output to the end of 2013 is about 0.9 Gb so an ERR of 8.8 Gb seems reasonable for the Bakken (my scenario at 8.1 Gb is conservative).

       Hope that helps.

       1. Thanks for explaining, Dennis. Sorry I missed the explanation of the assumed decline in EURs that you had put in the article. It’s good to know, as well, your basis for the total number of wells.

          I’m curious: Have you delved into the work by Scott Tinker and colleagues at the University of Texas Austin? They haven’t yet published studies on tight oil plays (although they are working on Eagle Ford, last I heard). But their work on various shale gas plays is very interesting and informative for modeling tight oil.

          1. Hi Mason,

             I have looked at some of the slide presentations and their work is outstanding.

             I appreciate any input or questions you may have, your work is amazing as well.

             I often do not explain things clearly so your questions are much appreciated, if you cannot follow what I am saying, there are likely to be many others.

          2. Hi Mason,

             I just ran through the daily activity reports for March and it looks like about 180 new wells were completed in the Bakken/Three Forks in March. I have assumed all confidential wells except 5 are in the Bakken/Three Forks.

             If this is a correct estimate, my model has about 1170 kb/d for March 2015 from the Bakken/Three Forks, but the model has been running about 40 kb/d too high (in Feb 2015) so output is likely to be between 1130 and 1170 kb/d for March in the North Dakota Bakken/Three Forks with my best guess at 1150kb/d.

             Using Allan H’s price scenario(real prices, 2015$) with prices rising from $57/b in August 2015 to $101/b in August 2020, remaining at this level until Aug 2030 and then falling to $50/b by Aug 2040, and assuming 140 new wells per month and a maximum annual EUR decrease of 10% with same timing as the original model, I get the scenario below. The number of wells is lower due to profit constraints under this price scenario (I believe prices will be able to go to $140/b and are likely to remain at that level for 20 years or until an economic crash).

             

             1. Below is the same scenario as above except that prices are higher.

                Real oil prices(2015$) in this scenario rise from $57/b in Sept 2015 to $141/b in Sept 2020, remain fixed thereafter. More wells can be drilled profitably so there are 30,000 wells in this scenario and the ERR increases to 8.5 Gb. Chart below.

                

             2. Hi Dennis,

                I just examined the daily reports, and also those for April. If there are 180 or so completions in March it will mean 1.18 million b/d, and 138 in April (according to daily reports minus todays) make 1.2 million b/d in April – a quicker uptick than I had expected. EOG completed a single well in these two months, and it was confidential (so may be plugged). Meanwhile Contres and Whiting carried on regardless, making Whiting in particular a candidate for bankruptcy some time soon, IMO.

                1. Hi Gwalke,

                   My guess is that most of the confidential wells in the big 5 counties are producing rather than plugged, but we won’t really know until the next monthly report is out.

                   My model suggests about 1.17 Mb/d for March (I recently revised it), but it has been over predicting for the last couple of months (36 kb/d too high in Feb 2015), so 1.15 Mb/d is my guess for March 2015, if I am within 20 kb/d that is close enough so my range is 1.13 to 1.17 kb/d.

17. Hi Mason and FWIIW

    Looking at Bakken(ND) as one unit, my model estimates it takes on average the addition 120 wells with similar characteristic of the average for 2013 (all wells for 2013 have flowed for 12 months or more since started) to sustain the level from February 2015 for the remaining of 2015. (The number of monthly additions actually varies between 140 and 110).

    Looking at the distribution of the productivity of the wells, around 10% of the wells (started in 2013) makes commercial sense at present oil price (WTI).
    These 10% of the wells represent about 30% of the flow (production).
    How well quality will change with time will now be educated guesses.

    Even if I have several estimates of the ERR, I am reluctant to go public with them, as these now are products from curve fitting.
    What matters is FLOW!

    What makes it challenging for the companies in the present price environment is to get it right with regard to what wells to bring in that is profitable as the profitability for LTO wells are heavily front end loaded.
    Bakken and other LTO plays are now in a flux caused by the financial dynamics and it will be the financial capabilities of the oil companies (and this varies widely among the individual companies) that will direct future developments.

    So where is the oil price headed?
    So far I have not been explicit about this, but in an upcoming article/post I have phrased this as:
    “…I now hold it probable that oil prices will remain subdued for some time and I am somewhat biased towards a further downside.”

    1. Hi Rune,

       I agree it is flow that matters not ERR. If your belief that oil prices will remain close to current levels (I am interpreting “subdued” as close to current price levels) or lower is correct, even the low scenario I presented is likely to be too high. LTO output would most likely be quite low.

       If oil price remains fixed at $60/b (2015$), using the other assumptions from the original scenario, output falls to 800 kb/d until no more wells are profitable after 2020 and output falls rapidly to 200 kb/d by 2030. ERR is 5 Gb to 2040 in this scenario, flow is as shown on the chart.

       

18. Just a test to see if my comments are showing.

19. Drudge headline.

    Iran seizes U.S. ship, 34 sailors
    tp://english.alarabiya.net/en/News/middle-east/2015/04/28/Iran-holds-U-S-ship-34-sailors-.html

    Iran has fired at a U.S. cargo ship and has directed it to Bandar Abbas port on the southern coast of Iran, Al Arabiya News Channel has reported on Tuesday.

    Up to 34 American sailors are believed to be onboard the ship, Al Arabiya reported.

    I think that there are very few US flagged cargo ships. I wonder, if the story is accurate, if this is a US navy ship, or a ship under contract to the US military.

    Update: BBC reports that US denies that the ship is a US flagged ship.

    1. Marshall Islands flagged.
       Clearly much more going on than has been told.
       I suggest PressTV for the other side of the coin.

       1. Iran must have know something.
          Possibly smuggling arms.

20. NYT: Uncertainty Over Impact of a Default by Greece

    http://www.nytimes.com/2015/04/28/business/dealbook/uncertainty-over-impact-of-a-default-by-greece.html?hpw&rref=business&action=click&pgtype=Homepage&module=well-region&region=bottom-well&WT.nav=bottom-well&_r=0

    When it comes to assessing the consequences of a messy Greek default on global markets, two views have vied for supremacy in the minds of investors.

    First, there was the chaos theory of imploding European banks and a spreading bond market panic. Then, after aggressive action from the European Central Bank, a calamity in Greece — be it a default or an exit from the euro — came to be seen as manageable. Investors, hungry for yield, in turn piled into European stocks and bonds.

    Now, with Greece nearly out of cash and talks with the country’s creditors at an impasse, regulators, investors and economists are coming around to a view that after five years of endless analysis and speculation, no one really knows how the markets will react.

    And that may be the scariest thought of all.

    “There is just no playbook for this,” said Atul Lele, chief investment officer at the Deltec International Group, a Bahamas-based investment company. “That is what concerns me.”

    1. A tad extreme.

       There is no default for countries. There is no bankruptcy court. A country that announces it is not going to pay debt (service) can be ignored. Creditors will keep sending bills and keep confiscating assets outside the country. And keep compounding the interest.

       Not sure why this guy thinks Euro banks would be at huge risk in pure form, meaning because they hold Greek debt. The private holdings were erased some years ago. All the debt is now held by IMF, EU and ECB, the troika. It is they who would be stiffed, and one of them has infinite money.

       There is the ongoing question of swaps, of course, but if those are a threat they will not be allowed to trigger.

       As for Greece itself, they were alleged to run a primary surplus — meaning could pay all their salary and pension bills, but not debt service. This should mean no starving in the streets, other than the problem of capital flight.

       The looming issue is . . . if they “default” and there is no video of starving in the streets, then Spain’s opposition party is going to win in September and follow the Greek model and escape their very much larger debt. Ditto Italy.

       But the only real threat is to the narrative. If the debt is “defaulted”, the ECB can always backstop any banks damaged.

       1. The latest polling shows the opposition will win in Spain, but it won’t be the stealth communists financed by Venezuela who are allied with the Greek commies.

          The polling suggests a four way split with the Socialists (center left) coming in first, second the current ruling party, Populares, which is center right, third would be Citizens, a center right party running on an anti corruption platform, and then comes Podemos, the stealth communists.

          Given economic growth, increasing tourism, excellent weather, and the weak euro the economy should start generating more employment. Events in Venezuela also have an impact, people here realize the Podemos leadership is communist and closely tied to the chavistas. The Maduro regime is in bad shape, now to add to their misery they are having power blackouts caused by lack of power generation capacity.

          http://www.theguardian.com/world/2015/apr/29/venezuela-rations-electricity-as-demand-soars-amid-hot-weather#comment-51208302

          The Guardian, being a typical leftist paper, doesn’t tell the full story. Hot weather is common in April and May when there’s an El Niño, and this climate event was foreseeable. The real problem is government corruption and incompetence.

          What happens in Greece is also going to have an impact here. People don’t want to be out of the euro, so that pretty much seals the next elections. The communist threat will always be there, they are very focused on brainwashing new generations, but I think the risk is manageable.

21. Interesting discussion of Peak Oil and Green Energy at Milkin Conference Videos 2015, recorded yesterday.

    Peak Oil and Green Energy: Both Fossil Fuels?

    http://www.milkeninstitute.org/videos

    1. The correct title is “Peak Oil and Green Energy: Both Fossils?”. The word Fuel isn’t there.

       The program says that the video is about the effect of low oil prices on renewables.

22. Color Wavelength Frequency Photon energy
    green 495–570 nm 526–606 THz 2.17–2.50 eV

23. 2 articles from The Guardian today, wonder if they are linked….

    The UK installed more new solar power capacity than any other European country last year and is on track to retain its top-ranking position this year, due to a rush to complete projects ahead of deep cuts to subsidies at the start of this month.

    However, the strong performance from the UK comes in the midst of a challenging period for the European solar sector.
    …..
    The EPIA blames the fall in installation rates on a range of policy challenges, including some governments retroactively cutting subsidies and the introduction of import tariffs on low cost Chinese solar panels.

    http://www.theguardian.com/environment/2015/apr/28/uk-installed-more-solar-power-than-any-other-european-country-in-2014

    Shell successfully lobbied to undermine European renewable energy targets ahead of a key agreement on emissions cuts reached in October last year, newly released documents reveal.

    http://www.theguardian.com/environment/2015/apr/27/shell-lobbied-to-undermine-eu-renewables-targets-documents-reveal?CMP=ema_565

    1. Shell’s idea of a single CO2 emissions target (instead of a separate target for wind and solar) is fine, as long as you make the target ambitious enough. As it is, you’re settling for natural gas (which is, of course, what Shell wants, as that’s where they’re investing).

24. Well worth cogitating upon:
    http://www.telegraph.co.uk/finance/comment/jeremy-warner/11569329/Jeremy…

    ”We live in an “extend and pretend” world in which economies pathetically fight between themselves for any scraps of demand. One burst of money printing is met by another in an ultimately futile, zero-sum game of competitive currency devaluation.”’

    1. The link didn’t work for me. Perhaps the Illuminati struck…

    2. That quote is definitive of the world post 2008.

       Competitive money printing and devaluation. It’s why extreme presentations of consequence seem at the same time bizarre and entirely in keeping with recent precedent. You can backstop banks lending money to produce shale oil and render all those projects profitable. Who Would Complain? — if you were obscure and indirect — only Russia and KSA, who will be declared disgruntled competitors whose points are invalid.

       The Fed has printed money in amounts of about 25% of GDP in just 6 yrs. The BOJ much more. The ECB is doing their 1 Trillion Euros by Sept 2016 right now. This money comes from nothingness. It gets enshrouded in lexicon that is supposed to make it seem in some way carefully arranged and an integral part of normalcy — while carefully ignoring the reality that QE didn’t even exist in the language until 2008ish.

       And so, only oil will take it all down, and soon. Anything else can be erased on the screen.

       1. Watcher wrote:
          “The Fed has printed money in amounts of about 25% of GDP in just 6 yrs. The BOJ much more. The ECB is doing their 1 Trillion Euros by Sept 2016 right now. This money comes from nothingness. It gets enshrouded in lexicon that is supposed to make it seem in some way carefully arranged and an integral part of normalcy — while carefully ignoring the reality that QE didn’t even exist in the language until 2008ish.”

          Well the money printing is to delay defaults, not to avoid energy depletion. Once global oil production is in decline for a few years, its going to be very difficult or impossible to sustain a global scale of QE. Prices for consumables start rising and force a permanent global recession. QE will just fuel inflation in a stagnated global economy. Even if QE was directed at energy it would result in sourcing prices for other consumables. Currently, QE is directed at Sovereign debt and the banks that finance sovereign debt, which allows gov’t to stay in power, and that is likely to remain unchanged.

          The World is facing a perfect economic storm that can’t be prevented. Besides pending energy depletion, the world has a aging workforce with 100’s of trillions of promised entitlements that can never be paid without forcing the younger generations into forced labor camps. For instance, in the US to pay for the boomer entitlements the Payroll tax would need to be increased to about 39% (from the current 15.3% rate)
          Most of the industrialize buried itself in debt to pay for higher living standards that were beyond our means.

          We also face the end of the road for antibiotics and 20th century vaccines as the diseases have evolved/mutated to be drug resistant. The World is much more ever dependent of global trade, and JIT Just in time distribution. Pretty much all of the puzzle pieces that came together to in the 20th century are now coming apart (pension/entitlements, industrialization, education, medicine, abundant energy & cheap energy resources, etc). They are all slipping away faster than the world can effectively mitigate from them. One individual problem is challenging, putting the all together at the same time, is a death sentence. I would also remind that the 20th century was pretty chaotic: two World Wars, and a few major pandemics (1918-flu, 1957-Asian-flue, 1968-hong-kong-flu)

          Also consider, that despite the global ZIRP and QE, the global economy never fully recovered from the 2008-2009 crisis. Unemployment/underemployment remains high, and the debt bubble was never fixed. The bubble merely shifted from the middle class (stocks, housing) to sovereign, corporate and student debt. The debt bubble never really stopped growing, it just mutated.

          Once one leg goes, the entire system will crash. It could be triggered by a energy crunch, or some other shortage of a strategy resource (water for instance), another economic crisis, or a major pandemic, or a major natural disaster (ie Big earthquake in California). Our modern economy is now being held up with duct tape (ie financial gimmicks), and it won’t take much to breach a tipping point.

          1. “We also face the end of the road for antibiotics and 20th century vaccines as the diseases have evolved/mutated to be drug resistant. ”

             Constantly new antibiotics are in development.

             “…., or a major pandemic,….”

             That would solve almost all other problems, like energy and water shortage, at once.

          2. Once one leg goes, the entire system will crash. It could be triggered by a energy crunch, or some other shortage of a strategy resource (water for instance), another economic crisis, or a major pandemic, or a major natural disaster (ie Big earthquake in California). Our modern economy is now being held up with duct tape (ie financial gimmicks), and it won’t take much to breach a tipping point.

             I wonder, though, how long until people realize it is/has happened. There have been troubling signs for awhile now, at least as far back as 2008, and a lot of policy and even economists’ proposals have been based on the idea that a tweak here and a tweak there and we’ll be back on course.

             There are other trends besides looming peak oil. Automation of jobs, for example. Some people have pointed out that a lot of jobs have permanently gone away, but others look to history and believe that as some jobs disappear, others are created. I am not as optimistic. I think increasing economic inequality is a sign that the uber-wealthy are looking for ways to dispense with much of human labor altogether.

             Politicians aren’t mentally equipped to deal with long-term changes because they are focused on the next election. Power brokers like the Kochs don’t want to deal with changes because they have made their money with the status quo.

             Now some speculate that there will be some incident and then we’ll have mass riots. I am more inclined to believe life as we know it will continue to slip away and people will get frustrated, but they won’t direct their frustrations to the wealthy and they won’t change their lifestyles until they are forced to financially.

             So I see more of a steady erosion of business as usual than a precipitous crash. Yes, things will continue to be propped up, but I don’t see people hitting a point where today everything is propped up, and tomorrow it isn’t. If that were the case, the current bubble should have popped already.

          3. ”For instance, in the US to pay for the boomer entitlements the Payroll tax would need to be increased to about 39% (from the current 15.3% rate)”

             This is the sort of fundamental truth that it is almost impossible to get most people to face up to. It is why in large part why so many conservatively inclined people tend to say government is not the answer.

             (Government is of course the only practical answer to a lot of grave problems.)

             Good sense dictates not making promises that cannot be kept.

             The nanny state played out very very well for my grandparents – the first generation to benefit from it on the grand scale – and for my parents. Most of the working people of my generation have put in more than they can ever hope to get back out -had they put the part of their tax bills that went to the welfare state into any sort of long term investment that paid even a very modest return.

             I have heard it said that there are more young people who believe in Santa Claus than there are that believe they will collect a meaningful social security benefit.

             Personally I don’t know any body older than about six who believes in Santa.

             We live in interesting times , unfortunately.

             1. ”For instance, in the US to pay for the boomer entitlements the Payroll tax would need to be increased to about 39% (from the current 15.3% rate)”

                Except that this isn’t even remotely true. If absolutely nothing is done to reduce Social Security benefits, in very roughly 20 years you’d have to raise the rate to roughly 17%.

                Of course, the main reason Social Security costs have risen is that people are surviving until retirement, and then living longer. Those two effects have raised Social Security benefits by roughly hundred percent, compared to 1935.

                The obvious solution is to raise the retirement age.

                Medicare is more complex, but I got to ask: what’s more important than your health?

25. Try:
    http://www.telegraph.co.uk/finance/comment/jeremy-warner/11569329/Jeremy-Warner-Negative-interest-rates-put-world-on-course-for-biggest-mass-default-in-history.html

    1. Nominal negative interest rate (real interest rates are almost always negative) is fairly meaningless because money itself is meaningless. Fiat money is a symbolic construct. What gives the dollar value is oil being priced in dollars. All currencies worldwide derive their value from this link. Absent this, the dollar quite literally has no value.

       I have no doubt that zero to negative interest rates combined with restrictions or outright elimination of cash are in our future. And why not? We are dealing with something that has no value. Render unto Caesar.

       If we are honest about fighting back, about evolving, then we have to do so on our own terms which means physical items. If you lose currency by lending it (which you are by definition doing if you have any bank account), and if an infinite number of new currency units can be created, then it’s time to move away from currency.

       You quite simply have to acquire physical items and defend them. It sounds medieval, but those are the terms which we are being dealt.

       1. Or, you could kick the oil habit. There are better and cheaper alternatives.

          Oil has only been important in our economy for about 100 years. The dollar had value before oil was produced, and it will have value after.

          1. “Oil has only been important in our economy for about 100 years.”

             Sure, and we can always go back to the global population size and standards of living from 100 years ago, no problem there, right?

             1. Sure, and we can always go back to the global population size and standards of living from 100 years ago, no problem there, right?

                And what makes you think that couldn’t happen?

             2. I was addressing the question of usability: other forms of energy worked just fine before oil. Clearly, oil isn’t necessary for most transportation, right?

                Now, you seem to be addressing scalability: do you see any reason why wind, solar and nuclear (if you’re into that) can’t scale up?

26. OilPrice.com picked up this article but attributed it to me instead of Dennis. Sorry about that Dennis.

    No Steep Decline In U.S Oil Production Expected Anytime Soon

    Notice they changed the headline also.

    1. Same with Seeking Alpha.

    2. Hi Ron,

       Not a problem. It is your blog, so credit goes to you, nobody would read my stuff if your blog didn’t exist. I appreciate being able to post here, thanks!

27. I think that the key point in this article is the last paragraph.

    King Salman of Saudi Arabia Changes Line of Succession

    http://www.nytimes.com/2015/04/29/world/middleeast/king-salman-of-saudi-arabia-changes-line-of-succession.html?hp&action=click&pgtype=Homepage&module=second-column-region&region=top-news&WT.nav=top-news&_r=0

    BEIRUT — King Salman of Saudi Arabia issued a series of surprise royal decrees early Wednesday, shaking up the line of princes slated to succeed him to the throne, replacing a number of ministers and further enhancing the power of his own line.

    In moves announced on Saudi state television, Salman replaced Crown Prince Muqrin bin Abdulaziz and named the powerful interior minister, Prince Mohammed bin Nayef, as next in line. He also named his son, Prince Mohammed bin Salman, as deputy crown prince and relieved the long-serving foreign minister, Prince Saud al-Faisal, who has shaped the kingdom’s foreign policy for nearly four decades.

    The moves show Salman is shifting further away from the legacy of his predecessor, King Abdullah, who died in January.

    Saudi Arabia has joined a United States-led coalition that is bombing the militants of the Islamic State in Syria and Iraq. It is also leading a bombing campaign against Houthi rebels who have seized a large portion of territory in neighboring Yemen. The new appointments are unlikely to lead to big changes in these policies.

    Of all the changes, the reordering of the line to the throne is likely to draw the most scrutiny inside the kingdom because of competition between branches of the sprawling royal family for positions leading to the throne.

28. It is probably a good idea to limit the consumption of oil products, gasoline and diesel, in urban areas. One million gallons for every 100 million inhabitants in an urban environment would be plenty, renewables can make up the difference. Automobiles would be a thing of the past, which would be the better choice. Also, a half a gallon of water per inhabitant per day would suffice. It would reduce the consumption of fossil fuels to treat water, etc. You can go without a bath for a week, then a bathroom sink filled with one gallon of water can be enough to clean your body. Limit the calories for each inhabitant to 1000 per day. Reduce the delivery of foodstuffs to urban centers to one day per week. Saturdays and Sundays could be days of fasting, nobody can eat any food for two days. It would force people to realize how much they overeat all of the time. No food days would help reduce the consumption of fossil fuels too.

    Make people walk or ride bikes. It would reduce pollution, reduce carbon emissions, and everybody would be healthy, happy as larks. They wouldn’t be eating as much, a congressional mandate limiting food intake should become law.

    The rest of the world would breathe a sigh of relief, the other species that don’t matter any more would be relieved. The urban populations can reduce their consumption rates by half to 3/4ths with not much problem.

    In any event, forced reduction of the use of fossil fuels would be an answer to many problems, especially in urban areas. Fifty story buildings, four per block, would increase land area to be used for agriculture. Industrial use of land and land for housing can be reduced by fifty percent and increase the density of population centers by 200 percent. Land will be needed to re-populate other species that suffer due to man’s encroachment. People need to be corralled into cities to reduce land misuse.

    Why didn’t Micheal Bloomberg issue an order to have the maximum size of a Walmart limited to 10,000 square feet?

    Walmart super stores are too large and need to be downsized by 75 percent also. A comprehensive plan to raze 75 percent of all Walmarts would be a job for the A-Team. Hire Micheal Bloomberg to make it all happen.

    There are too many institutions of higher learning, the number of colleges and universities could be reduced by 90 percent and nobody would suffer. Congress can pass another mandate to limit those places. Outlaw any new construction of churches and cathedrals, humanity doesn’t need buildings for people to worship imaginary beings, just isn’t prudent.

    A worldwide plan to reduce daily consumption of oil to 50 million barrels and coal to five million tons should be implemented immediately.

    A commission to study reduction of fossil fuels should be funded to devise the plan.

    It’ll plunge humanity into darkness, but who cares? It’ll be a string of urban gulags worldwide, but it would be for the best and humans can adjust.

    Modern Monetary Theory can figure it out and all will be well.

    Or, we can continue the business as usual and everybody will be happy with that.

    1. Ronald – Do you flush?

       1. I thought somebody would notice the lack of plumbing, no flushing required in the Green City.

          Green outhouses on the streets, compost biffs for apartments, no plumbing required, a dispenser for fresh water down the hall on your floor, you’ll need a password to activate the water dispenser. One small 6 cubic foot refrigerator for your perishables, if you drink 48 ounces of water each day, you can accumulate 16 ounces daily from the 64 ounce ration, you can save the fresh water in the fridge for later use and at the end of the week you will have an extra 112 ounces of water that you can use for a transaction of some sort, a barter or you can drink it.

          Don’t expend any energy except for the walking or biking, just meditate and breathe. You can do it.

          If you fast for three days, you can have a calorie credit of 3000, which you can use for an additional transaction.

          Is it enough hyperbole to manifest the sarcasm?

          1. Ronald – give me some credit. I recognized that when you described exactly what the green people want, it reads like a surreal joke. If they get their way, and this is the future, we definitely need to legalize physician assisted suicide.

             1. I recognized that when you described exactly what the green people want, it reads like a surreal joke. If they get their way, and this is the future, we definitely need to legalize physician assisted suicide.

                I’m not sure it’s what they “want” so much as it is anticipation of a future with fewer resources and trying to prepare in a smooth transition rather than waiting until there are natural disaster-type conditions.

             2. What the green people want?

                

    2. ” Limit the calories for each inhabitant to 1000 per day.”

       Ronald, that doesn’t concur with:

       “Make people walk or ride bikes. ”

       A healthy lifestyle needs more calories. Much more.

    3. It is probably a good idea to limit the consumption of oil products, gasoline and diesel, in urban areas.

       Seriously, that’s a very good idea, and many cities are moving in that direction by moving towards allowing only EVs in city centers.

       1. Nick, the only one I know is Zermatt, Switzerland. That is a small city.

          1. An example, from London England:

             “Electric vehicles and PHEVs which meet the criteria are eligible for a 100% discount on the Congestion Charge. Some London boroughs offer free or reduced-charge parking for EVs.”

             1. So in the future, all parking is going to be free? Hooray for peak oil and parking cornucopians!

             2. Nick G,

                I know the situation in London very well. There has been the attempt to promote electric vehicles, yet after a short surge, EV disappeared from the streets again. Many vehicles got stuck in the traffic as drivers did not estimate the remaining battery load very well. This depends very much on the quality (age) of the battery, on the temperature… It is very embarassing to be stuck in the traffic in the middle of London and there is now way you can reload the battery on the street. In my view EV have been a complete failure in London. The loading stations which are included with the parking lots are always empty.

                1. London, like a lot of non-US cities, needs street chargers (loaders), but it looks like things haven’t been managed well:

                   ” London’s attempt to spread the use of electric cars has been hampered by a lack of working charging points and disputes over network maintenance, inconveniencing motorists who want to go green.

                   The capital has more than 1,300 public charging points spread over about 900 terminals on 300 sites. But surveys of the live network map by the Financial Times show that in central London, where the majority of on-street charging in the capital takes place, more than 40 per cent of the charging posts are out of service.”

                   http://www.ft.com/cms/s/0/ce705ad6-ad24-11e4-a5c1-00144feab7de.html#ixzz3Yo2TtSf5

29. Interesting video here from Christophe Mcglade (whose phd thesis was linked to from here a while ago) on “is peak oil dead”. Worth a watch I think.

    http://www.youtube.com/watch?v=2tlkAMJ9La8

30. Pick the low hanging fruit:

    25% of cars causing 90% of pollution. A second paper by Evans and colleagues, published in the March 2015 edition of Atmospheric Measurement Techniques, an interactive open-access journal of the European Geosciences Union, suggests that a small number of older or “badly-tuned” cars and trucks produce the majority of vehicle pollution.

    The study made on-the-spot measurements of 100,000 vehicles as they drove past air-sampling probes of the main laboratory on College Street, one of Toronto’s many major roadways.

    Evans and team found that one-quarter of the vehicles on the road produced:
    •95% of black carbon (or “soot”),
    •93% of carbon monoxide, and
    •76% of volatile organic compounds such as benzene, toluene, ethylbenzene and xylenes, some of which are known-carcinogens.

    The most surprising thing we found was how broad the range of emissions was. As we looked at the exhaust coming out of individual vehicles, we saw so many variations. How you drive, hard acceleration, age of the vehicle, how the car is maintained—these are things we can influence that can all have an effect on pollution.

    —Greg Evans

    http://www.greencarcongress.com/2015/04/20150428-evans.html

    1. Strange the places where the 80:20 rule pops up.

    2. Yeah, but don’t forget that every gasoline powered car produces roughly 20 lbs of CO2 for every gallon of gas that it burns.

       Do the math!

       1. http://www.slate.com/articles/news_and_politics/explainer/2006/11/how_gasoline_becomes_co2.html yea i had to 🙂

          1. Are you saying you are happy because the actual number is really about 19.5 lbs due to imperfect combustion?

31. BAU

    http://www.weather.com/science/environment/news/alarming-pollution-images-environment-live-green-life

32. Whiting Petroleum released first quarter results. Lost .63 per share.

    Dennis, I was in error re Whiting LOE, or at least not accurate. The $10+ per BOE is company wide, which includes older conventional production. They report LOE in the Williston Basin at $6.00 per BOE.

    One thing I noticed at the bottom of the first quarter 2015 results was the following:

    Net cash provided by operating activities: $202,139,000
    Net cash used in investing activities: ($1,021,610,000)
    Net cash provided by financing activities: $847,286,000

    A lot of interesting information contained in the first quarter report. It looks like they will run 11 rigs, 9 in Williston Basin and two in Colorado, the remainder of the year.

    From what I have read concerning both Whiting and Continental, they have quite a bit of borrowing capacity on their lines of credit. Banks did not “shut them off” as it seemed they might.

    I am beginning to believe that they and others will be loaned funds regardless of cash burn. The first quarter 2015 will likely be the worst, and both came through with the ability to keep on drilling and completing wells. It appears banks and investors continue to be “all in” concerning US “shale”.

    1. Hi Shallow sands,

       Thanks for the Update. I looked closely at Continental’s annual reports from 2009 to 2014 and OPEX plus G+A has actually decreased over time in per barrel terms. When companies stop growing their output, it may be difficult to keep these costs low, technology and improved knowledge over time may help a bit, but eventually these costs will rise, it is hard to estimate how much these costs will rise and how quickly it will happen. Do you have a WAG for how these might increase (an annual percentage rise) over time? I was thinking maybe 2 to 3% per year. I need to keep it simple to be able to model it.

       1. Dennis. I really don’t know. I assume as long as they keep drilling a lot of wells with high first year production, those costs will stay low.

          However, as the percentage of wells less than a year old decreases, I assume OPEX could rise quickly. A flowing well producing hundreds of barrels per day really helps drop OPEX.

          The only expense that might drop over time would be water disposal, if produced water drops as oil drops, as appears happens in Bakken.

          On another note, I see February EIA numbers are posted. I am sure a TX debate is in there.

          1. I guess I would think OPEX per barrel would increase substantially in the early years, then more gradually, maybe 2-4% after year 5. Just to many variables. To quote Mike, to many Murphy’s law scenarios.

             Maybe this helps?

             Average Bakken well 122 bopd gross, 100 net.

             36,500 x $6.00 = $219,000

             If 5 years later, well making 40 net.

             $219,000/14,600 barrels = $15.00 per barrel OPEX.

             However, well has to be pulled 3 times during year, at $75,000 per.

             $219,000 + $225,000 = $30.41 per BOE OPEX.

             Again, I would like to see some lease operating statements to get a better feel. Maybe some will come up for sale on an online auction.

             1. Hi shallow sands,

                If OPEX is not fixed in the model it would need to increase in some simple way, like 5% per year, the model is never going to reflect reality perfectly it is a simplification, probably the simple way to do it is just to raise the fixed OPEX a couple of dollars because trying to include rising OPEX over time (even a simple percentage rise) would be difficult.
                There are a lot of moving parts to the model already so I will have to think about it a bit. For now we will just say the model is probably too optimistic because it ignores the increased OPEX over time.

    2. Scroll up to the schedule of valuation. It’s not down that much March 31

33. Arabia Saudi project to install shale oil on the country. The fracking will come to Arabia Saudí in 2016. http://www.energia16.com/actualidad/mercados-petroleros/arabia-saudi-cree-que-el-mercado-petrolero-esta-en-excelente-condicion

    1. According to Wikipedia, Saudi Arabia oil reserves are 268.350 billions barrels, located I assume mostly in conventional reservoirs. With a depletion rate in the league of North Sea fields (around 6%), they should be able to produce 44 million barrels/day.

       So why the heck are they trying to produce horrifically expensive tight oil and pre-salt Red Sea oil? Maybe I should email the Saudi oil minister.

    2. No Oscar, it is about shale gas.

       “Arabia Saudí planea comenzar la producción de gas de esquisto en 2016, con una producción inicial de entre 20 y 50 millones de pies cúbicos al día, para elevarla a 500 millones en 2018 y 4.000 millones de pies cúbicos en 2025, apuntó Abdulaziz.”

34. BNSF week 16 report

    Total petroleum cars at 10,578, 115 lower than week 16 of 2014.

    Steady as she goes.

    1. Mr. Walter,
       That’s about one single unit train with over 100 still chugging along.
       I thought I saw an uptick in active rigs of one or two the other day in ND.
       Yes, 87 today, 86 yesterday.
       Turnaround time?

    2. Ronald Walter,

       Petroleum car load are roughly the same as last year. However, production was more than 1 mb/d lower last year. So we have either 1 mb/d more transported over piplines or a dramatic fall of oil production. The carload decline of 6% indicates also a dramatic slowdown of US industrial production. The numbers are also confirmed by the weekly AAR rail freight.

35. BAU’s ostensible last hurrah/last-ditch/last-minute attempts at ‘equipping the westernized world’ with so-called renewables looks suspiciously, and ironically, like a speed-up toward the cliff in the interest of a slowing down/smooth transition.

    That said, I wonder how straight our priorities are screwed on.

    ” ‘It would seem that [electricity] requires another level or more of complexity, but even so, I like the challenge of simplicity and local resilience, etc., which can nevertheless sometimes be less challenging, once implemented, than more inherently-complex, less local or resilient solutions.’ ~ Caelan MacIntyre

    ‘In spite of these significant improvements, hydropower installations today are actually less efficient than those from earlier centuries. The culprit is electricity. Not long after the introduction of the water turbine, another change occurred: Instead of using water-powered prime movers to run machinery directly (as had been the case for centuries), water turbines were (and still are) used to generate electricity. This modern approach has introduced an energy deficit that has nullified any progress behind hydropower design efficiency.’ ” ~ Kris De Decker, Resilience dot org

    “To truly avert catastrophe, if we are serious and ethical, is to collapse the current crony-capitalist plutarchy– the elite/1% modus operandi/status-quo/BAU.
    And I don’t see that happening, not willingly, nor smoothly.
    Smooth and willing mean real democratic handovers and stuff like across-the-board industrial democratic laterally-hierarchic cooperatives. Tomorrow, 9am sharp.
    I am optimistic that Mother Nature will do it for us if no one does, and that it’s going to hurt like hell.” ~ Caelan MacIntyre

    …Accelerations toward the precipice to avoid it, as oil declines accelerate…

    Beautiful tragedy.

36. Art Burman published his new article “production decline has begun” on his website . Interesting observation. I tend to agree With him.

    1. Link please.

37. Dennis:

    The following is a simple diagram showing the dynamic nature of drill —- produce —- look at results & impacts on market —- oil price reaction —-and all over again….

    

38. Dennis: This is the second part

    The following is a purely conceptual couple of graphs which show how the drilling activity runs in tandem with the oil price forecast. The two are related and act upon each other (this is similar to the way a mass distorts space time, but distorted space time tells the mass which way to go).

    I think it´s impossible to build a dynamic system model to predict how these curves evolve, simply because there are too many unknowns, we don´t know for sure how they relate to each other, and we have to throw in human reaction. It´s a typical economic model, but it shouldn´t be visualized as a spreadsheet, but as linear programs which, each time step, exchange information (in other words, a dynamic system).

    We can narrow down the problem by considering only the light tight oil plays and simplifying the heck out of the problem (for example we can ignore the price spread caused by transport bottlenecks, or the fact that refineries will bid up the price as the internal light crude supply drops).

    If we narrow the problem the trick is to set up time steps, and establish whether wells will be drilled or not given the price environment (price and forecast). Thus in the example oil price base case I drew an intuitive number of wells which would be drilled. I repeat this is purely intuitive. To understand whether that number of wells would be drilled we need to establish a well price function (the less wells drilled, the cheaper), and an oil rate/reserves function (the more wells are drilled the poorer the average results).

    The cost function is not only a result of the number of wells drilled, it´s also a result of the wells drilled elsewhere, learning curves, and technology improvements.

    The oil/reserves function should use the number of wells drilled, number of total locations which may available, perceived technology improvements, oil prices beyond 10 years (because they set the economic limit), and operating expenses (I want to keep this short, there are other items we may wish to include).

    This isn´t intended to be a paper describing how to set up a model, but I think you got the sense of how complicated it can get. As far as i can see the only thing that´s feasible is to test whether the wells assumed to be drilled at any given time are economic or not based on a given oil price environment.

    In a sense, you CAN set the number of wells, see what price justifies this level of activity, set that price for the next time step (use a one year lag), and if the price is higher increase the number of wells. As long as the wells can be drilled and the forecast is dampened (because the reaction outside the “shale world” is more subdued) I think you can get something that´s going to be pretty sophisticated. I guess. I´m not sure. We would need to feel our way through it.

    The sketch follows

39. Word Press won´t let me put in the jpg with the two graphs.

    1. Fernando I think you managed to break the internet with your last posted graphic >;-)

       There seems to be a problem with posting any images right now… probably a temporary glitch of some sort.

       1. I tried putting in the second graph 10 times. So I grabbed my comment, stuck the two figures and put them in a hidden page in my blog. The only way to get to it is by linking from here:

          http://21stcenturysocialcritic.blogspot.com.es/p/the-drilling-and-oil-price-curves-for.html

          Now you can see the two graphs I wanted to show you.

          1. Hi Fernando,

             My model is far less sophisticated, but I can do different cases for number of wells drilled and different price scenarios. The feedback between wells drilled and prices, however would not be included. It is also not clear to me that we know how these would be related (except in some very general way).

             In other words we might have a guess at whether a change in oil price would increase or decrease the number of wells drilled, but we can only speculate as to the magnitude of this effect. It would probably be simplest to take oil prices as exogenous to the model and we could guess at how big an effect oil prices would have on the number of wells drilled.

             In my model I find the profitability of each well by finding the net present value of future real cash flows (constant dollars) and subtracting the well cost. This could be used to determine the number of wells drilled, again we would have to guess at the coefficients.

             Thanks for sharing your ideas, very interesting.

    2. Hi Fernando,

       Sometimes charts don’t work, I haven’t figured out why.

40. Hi Ron, are you planning a post about the latest Petroleum Supply Monthly? Thanks, Dean

Comments are closed.