A Long-Term Bet Against Gasoline

fool.com ^ | July 11, 2013 | Wes Patoka

[ckilmer]

Pound for pound, there is NO replacement for fossil fuels that offer the same energy for a given amount of fuel.
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You’re right that right now the electric car is not as good as the internal combustion engine.

Elon musk himself would likely not disagree with you. Battery prices are too high and their performance is still too low.That’s why a 30k tesla motors car won’t be available for another 4 years. Musk likely figures it’ll take Tesla that long to get a battery that’s cheap enough —yet still performs to spec.

[thackney]

In 5 years, the Eagle Ford has climbed to ~536,000 Barrels per day.

http://www.rrc.state.tx.us/eagleford/EagleFordOilProduction.pdf

We currently import, even after all the recent increase, ~7,700,000 Barrels per Day

http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_epc0_im0_mbblpd_m.htm

How much oil do you think the Cline Shale will be producing in 4 years? How many wells do you think it would take to reach that point? Before you answer, do you understand how fast the drop off in oil production is in tight formations with long horizontals such as shale?

Do you know how many drill rigs that would take given the time it takes to drill a well? Do you understand what it would take to transport that much oil and how long it would take to build all of it?

We won't be a net oil exporter in 25 years, let alone 4.

[thackney]

I think the following is a really good article on the recent data on the Cline Shale. Does this look comparable to what you have read?

Future Looks Bright for Cline Shale Potential
http://www.rigzone.com/news/oil_gas/a/127338/Future_Looks_Bright_for_Cline_Shale_Potential/?all=HG2
June 26, 2013

Our estimated ultimate recovery (EUR) type curves for the Cline shale is roughly at 420,000 barrels of oil equivalent (boe) per well, so the economics work all day long,” Faulkner added.

Initial Cline production results for a number of relatively large wells – 400 to 800 barrels of oil per day

[ckilmer]

Yeah, this is about what I’ve read as well. Not mentioned here is are new pipelines from the Permian basin completed and about to be completed.
http://www.pipelineandgasjournal.com/plains-all-american-nears-completion-permian-basin-projects
http://www.fool.com/investing/general/2013/02/27/a-look-at-upcoming-pipeline-projects-serving-the-p.aspx

http://www.reuters.com/article/2013/05/09/column-campbell-idUSL2N0DQ1NS20130509

[thackney]

No doubt the area is going to grow and take-away capacity is already growing.

But half a dozen 100~300 thousand BPD pipelines don’t come close to 7 million in 4 years.

The time frame doesn’t have any credibility beyond wishful thinking.

[ckilmer]

7 million in 4 years.
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no its five more million in five years or 1 million additional barrels@ day a year—if you don’t count canada.(7 million if you do.)

The numbers are already showing growth rates of 1 million barrels@ day for 2013. that’s mainly from eagle ford and the baaken—but also from other shale oil plays. their production will continue to grow over the next five years.

What the permian basin’s cline shale formation’s initial high growth rates will allow the eagle ford and baaken formations to do....-— is slow their growth rates while oil production for all of the USA continues to rise at 1 million barrels@day.

The added pipelines in the permian basin are set up for additional capacity in the next year or two or say an extra million barrels @ day. they can pretty easily add more capacity two years from now. judging by current completion rates —it would take under a year to add capacity.

anyhow that’s a plausible scenario for the US to get to net oil independence (excluding canada) in 5 years by raising oil production by 1 million barrels a day every year for the next five years.

[thackney]

2017 - 2013 = 4 not 5

[Lazamataz]

On the upside, you have job security. LOL

[ckilmer]

2017 - 2013 = 4 not 5

true but only if you don’t count 2013 or you don’t count 2017.

[ckilmer]

do you understand how fast the drop off in oil production is in tight formations with long horizontals such as shale?
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Yeah I’ve seen those drop off rates.

Given that the drop off rates are so large—why is production rising so rapidly?

The answer has to be that they’re bringing new reserves online much faster than the drop off rates—and accelerating the rate at which they do so.

But maybe you have a different answer.

[bigfootbob]

Yes. Everyone gets dinged.

[ckilmer]

How much oil do you think the Cline Shale will be producing in 4 years? How many wells do you think it would take to reach that point?
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Take a look at the chart on this page. Its shows two phenomenal things. First that, US oil production peaked in 1970, or a couple years before the US went off the gold standard—(which coincided/caused the vertical ascent of gold from roughly 1973-79. The second thing the graph shows is that US oil production currently is going straight up and each leap upward is greater than anything here to for seen historically on the US charts.

What I’m trying to point out is that something very very different is going on.
http://seekingalpha.com/article/1538602-chart-of-the-week-u-s-oil-supply-growth-exceeds-growth-in-global-demand?source=google_news

[thackney]

I’ve worked in the oil/gas industry for more than a couple decades. I have a pretty good understanding what is going on and what it takes to reach a level of independence.

I also understand how different the tight formation decline rates are from the traditional formations.

[thackney]

The answer has to be that they’re bringing new reserves online much faster than the drop off rates—and accelerating the rate at which they do so.

Absolutely correct. Do you think the accelerating rate of the number wells being drilled will continue to accelerate without end and constantly overcome an exponential decline rate?

[thackney]

Sorry for the multiple reply posts going backwards from your responses, I got behind.

I didn’t think you wanted to measure from last year, I was measuring from today. Five years from today will be 2018, not 2017.

[ckilmer]

Do you think the accelerating rate of the number wells being drilled will continue to accelerate without end and constantly overcome an exponential decline rate?
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No. But at the very least you want to see a year or two of declining growth rates before you predict a top in production.

We’re not even seeing that yet.

Consider the points made in this recently published article.
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July 02, 2013
Harvard has a new US Shale Oil Study forecasts US as world number one oil producer with 16 million barrels per day of all liquid oil in 2017

In a paper titled “The Shale Oil Boom: A U.S. Phenomenon,” [64 pages] Maugeri wrote that the unique characteristics of shale oil production are ideal for the United States — and unlikely to be mirrored elsewhere in the world. These factors include the availability of drilling rigs, and the entrepreneurial nature of the American exploration and production industry, both critical for the thousands of wells required for shale oil exploitation.

Maugeri, author of a 2012 report forecasting rapid growth of global oil production and belying the notion that oil output has “peaked,” argues in his new paper that the boom in U.S. shale oil production is central to the overall U.S. oil surge. If oil prices remain close to today’s levels, total U.S. production of all forms of oil [all liquids includes natural gas liquids and ethanol] could grow from 11.3 million barrels per day to 16 million barrels per day by 2017.
http://nextbigfuture.com/2013/07/harvard-has-new-us-shale-oil-study.html

You’ll want to read his details as well.

[ckilmer]

I’ve worked in the oil/gas industry for more than a couple decades. I have a pretty good understanding what is going on and what it takes to reach a level of independence.

I also understand how different the tight formation decline rates are from the traditional formations.
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I believe you.

Heck everything you say makes perfect sense.

Its just that the data reflect a wild thing going on.

Its not just that production is going straight up—but also addressable reserves are going straight up as well. Same thing as happened with natural gas.

So what will shut down the drilling?

From the look of things, you’ll need to get oil prices down below $80@ barrel to start to put a crimp on drilling.

That fall in prices is what stopped the wild drilling for natural gas.

And even that price drop will have to come soon because likely the highest price baaken drillers at roughly $80@barrel are currently figuring out how to shave $10-$20 dollars @ barrel off their costs.

If the price drop holds off until 2015, then the baaken drillers will have got their costs down far enough to stay in business for the first leg down.

(and it will be the high cost Russian producers that have to throttle back their drilling.)

There’s a lot of moving parts going on here. I’m just trying to say that events look from the outside as momentous as the first oil wells in Pennsylvania or the first oil wells at spindletop in Texas.

Gravity does take over eventually. The question is when.

[ckilmer]

I’ve worked in the oil/gas industry for more than a couple decades.
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I don’t know anything about the oil/gas industry but what I’ve read online.

One thing that doesn’t make so much news—but has stuck out — is that the percentage of dry wells has been declining precipitously in the last decade or so because of advanced imaging and computer software analysis.

Also the number of wells per well head is going up in a big way.

Combine these two and likely the productivity economics and time to market of newer wells would likely advance dramatically.

Are you seeing these two technologies in action?

[thackney]

First, I want to say thanks for this discussion. This type of public conversations gets people informed and I learn from it.

But at the very least you want to see a year or two of declining growth rates before you predict a top in production.

I'm not predicting a top. I just disagree with your projects of incredible growth that would have to be combined with no rise in consumption in a few years.

Consider the points made in this recently published article.

They show a possible 10.4 MMBPD in crude oil by 2017. That is possible; I would say quite likely.

But you are claiming 16.19 MMBPD. I don't see any support for that. The numbers I started this discussion were not for total liquid fuels including Natural Gas Liquids, Biodiesel, ethanol, etc. Those are on top of 16.19 MMBPD, not included with it. See breakdown of current consumption linked below:

US Petroleum Product Supplied
http://www.eia.gov/dnav/pet/pet_cons_psup_dc_nus_mbblpd_m.htm

[thackney]

Its just that the data reflect a wild thing going on.

Yes, it has been and looks to stay a great time to be in the industry. Wage growth for experienced hands is through the roof.

Its not just that production is going straight up—but also addressable reserves are going straight up as well. Same thing as happened with natural gas.

Natural gas production shut down it's climb a few years ago with the drop in prices. Very few investors have been going after dry Nat Gas lately. It is also part of the climb in oil production, rigs moved from chasing gas to chasing oil.

That rate of rigs moving from gas to oil is not going to continue for two reasons:

First, gas prices have been climbing, slowly out of their bottom and will continue to climb. The growth in production has essentially stopped while new chemical plants are being built around the country. Most of them use Natural Gas liquids but a few are going to require Natural Gas as feedstock, in addition, all will grow the Natural Gas used for heat, the primary use of Nat Gas in Industrial Markets.

Second, there are relatively few dedicated Natural Gas Rigs left to move to oil. New construction of Horizontal Reach drilling rigs is expensive and slow compared to the re-purposing we have seen go on the last few years. 4 years ago, there were 370 rigs actively drilling for oil and 1,544 drilling for Nat Gas in the US.

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTkyMjQ3fENoaWxkSUQ9LTF8VHlwZT0z&t=1
See tab US Oil & Gas Split

This past week, there was 355 rigs actively drill for Nat Gas and 1,395 rigs drilling for oil. There are few rigs left available to continue the growth rate. New ones are on order, being built. Old rigs are getting some upgrades, but it takes far more time than what happened in the last 4 years.

So what will shut down the drilling?

I'm not talking about it shutting down. I'm not seeing it plausible to grow significantly faster as you suggested.