Here I am again reporting on out of date US February oil production from the EIA April report after the world oil environment has been turned on its head. Fortunately the EIA also has some forward looking reports that make use of more current data to provide projections for a few months out. Also the EIA has a guesstimate for weekly oil output which certainly provides an indication of the direction of production over the next month. Also there are reports on rig counts that indicate activity in oil basins and provide clues on where oil output is going. Down, Down, Down.
Preparing this March post has been a surrealistic exercise. Here I am providing a January US production update when at a time, January, the world had no clue that it was going to be hit with a double Black Swan event in early March . There was a hint in January on the coming pandemic for those who were listening. However, there was no clue of the Shock and Awe attack that would be launched by SA after Putin and his Oily Oligarch friend Sechin made the wrong move in the world’s Oil Chess Game. Russia thought that they had SA in Check, instead Russia and the rest of world were End Played. Now, a way must be found out of this mess. Reports are circulating that Trump and Putin have been talking and that an OPEC + meeting will be convened shortly. Let’s hope adult’s come to the table.
The silver lining, if there is one, is that the world will need lower oil prices to come out of the current economic slowdown. The question is, if an agreement can be brokered between US, Russia and OPEC, “What will be the right price for oil for both the producers and the economy?
The irony here is that Trump will be holding meetings with oil company executives shortly to see how the US can help. In the meantime the NOPEC (No Oil Producing and Exporting Cartels Act) bill keeps circulating within Congress. Interesting how the world, US positions and thinking, can be flipped upside down over night.
In the discussion here I use the term net volume to refer to
the volume of prospective rock that might be developed to produce tight
oil. For each bench of a prospective
tight oil play (Wolfcamp A would be one example of a bench) there is an area
estimate (5733 thousand acres for Wolfcamp A of Delaware) and a success ratio
(%) = 94.7, in the case of Wolfcamp A.
Net acres are the total acres times the success ratio, for Wolfcamp A,
5429 thousand net acres. On average the
Wolfcamp A of the Delaware basin is about 400 feet thick, so the net volume
would be net acres times thickness or 2172 million acre-feet. An acre-foot is a volume that is one acre
(44,000 square feet) by one foot thick or 44,000 cubic feet (or a box that is
1000 ft long by 44 feet wide by 1 foot high.)
An interesting analysis was recently published by BNP Paribas (one of the top 10 banks in the World by assets) entitled Wells, Wires, and Wheels… . In that analysis they argue that long term oil prices will fall to $20/b or less in order for oil used for personal land transport to compete with EVs powered by wind and solar at current cost levels.
I reworked my oil price assumptions, first with a simple scenario that follows the EIA’s AEO 2018 reference oil price scenario up to $70/b in 2017$ and then remains at that level long term. Second I noticed that a scenario with such an oil price assumption sees tight oil output fall in 2022 so the scenario was revised with oil prices rising from 70 to 80 per barrel from 2022 to 2024 and then remaining at that level until 2028. The BNP Paribus analysis suggests that EVs will have cut significantly into oil demand by 2022 to 2025 so I assume oil prices fall to $20/b over the next 10 years.
Scenarios below.
