OPEC Cannot Kill U.S. Shale Oil Boom with Low Crude Prices

exchangegoldforcash ^ | Chriss Street

[ckilmer]

I’m not sure that I understand it either.

Some wells will be more costly and produce less oil.

So its likely that the oil companies will focus all their investment dollars on wells that produce more and cost less.

A lot of wells have multiple wells drilled from one pad. If the cost of each new well drilled is $75@ barrel —then its likely that no new wells will be spudded from that pad. They’ll just wind down the ones already in operation.

And put new money into more profitable wells.

[Cen-Tejas]

Exactly! And, you are not exaggerating just in case u think u might be.

I once was involved in a settlement of well over 5 million for $88,000.

1% or less settlements happen every day.

[spokeshave]

Usually on such speculative ventures, and oil well drilling is highly speculative

Not quite...in the old established major fracking areas such as in ND and TX the geology is so well known that drillers are not only decreasing the horizontal spacing , but are also tapping into similar layers further down.

They know the oil is there and how to get it out....so it's not like a "wildcat" single hole that may or not produce.

[Sherman Logan]

Another factor, entirely positive, is that the lower price greatly increases incentive for drilers to find ways to drill at lower cost.

[Smokin' Joe]

Temporarily closing down production at a vertical oil well usually results in substantial "stoppage of the pores of the oil-bearing rock." This reduces “bottomhole pressure” that force oil up through the well tube to the surface and limits the future production capability of the well. But since U.S. horizontal drilling injects water and solvents to free oil from shale and creates its own pressure to push oil up through a cement-lined casing to the surface, shale oil wells can be closed and reopened with virtually no future production capability lost.

Nope.

First off, vertical wells are commonly pumped after IP (as are horizontal wells, from the vertical part of the well). Flowing vertical wells are wonderful, but many do not flow to surface from day 1.

Both types of wells have the potential for moveable solids to clog pore spaces in the rock. The rock is still laid out underground, the formation properties remain much the same

Just because fractures have been induced which serve as permeability corridors along which that production can be channeled, does not mean that the rock itself is any less subject to the same reservoir problems that the rock would be subject to in a vertical well (which was likely hydraulically fractured also).

Production in horizontal wells falls off steeply to about 20-25% over the first 1-2 years, and beyond that consider any pressure enhancement in the reservoir from the frac expended.

Stopping production in either type of well leads to complications, and may necessitate a re-frac of the well, adding another 30% or more to a horizontal well's total cost.

[Smokin' Joe]

One of the chief attractions of the Bakken play, especially initially, was the short time until payout (where the well had produced as much as it cost).

While costs are higher, wells deeper, and with reduced oil prices the rate of return will be less, early on, the cost to drill and put a well on line was being recovered in 6-8 months. Even smaller operators were rolling that over into more drilling and increased budgets for the next year. That is how the boom in ND and MT got started.

I do not think you will find so many oil companies heavily leveraged as you will find the service and support companies who bought equipment, vehicles, etc. to put in the production infrastructure, haul water, materials, rigs, and supplies for the oil patch and perform a multitude of service tasks.

If there is a bloodbath in the industry, that is where it will likely happen, not with the oil companies themselves who will be in a position to negotiate lower service rates, lower freight and hauling fees, etc.

Some of the smaller service companies will survive, others will be consumed by those in a position to do so, and some will die on the vine.

Rig moving services have already gone through this crunch when the transition to pad wells and walking rigs cut the number of rig moves by as much as two thirds. The services were not needed as much and some hearty competition ensued.

Now directional drilling, mud suppliers, and other service companies will feel the crunch, and the costs of drilling and fraccing a well will decrease, resetting the price needed for break-even oil.

[ckilmer]

Now directional drilling, mud suppliers, and other service companies will feel the crunch, and the costs of drilling and fraccing a well will decrease, resetting the price needed for break-even oil.
.............
Amazing how that works.

[ckilmer]

I do not think you will find so many oil companies heavily leveraged as you will find the service and support companies who bought equipment, vehicles, etc. to put in the production infrastructure, haul water, materials, rigs, and supplies for the oil patch and perform a multitude of service tasks.
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I’m reading elsewhere that most of the oil drillers borrowed money for drilling on the condition that they buy price insurance (in the form of puts or related derivatives—on oil prices) so that investors had pretty much a guaranteed return on their money—even if prices fell dramatically.

When WTI oil was at 73 for example Continental announced that they had cashed in on all their hedges so they profited something like 300 million dollars.

[tanknetter]

Additionally (to what Tennessean said) in a surplus situation, as exists, the oil you pull up from the ground has to be stored somewhere. The question is whether it makes financial sense to store that oil above ground until it is needed, or leave it in the ground until it’s needed,

JIT (Just In Time) principles apply to oil production just like they do to other manufacturing areas. You don’t want excess inventory (surplus) because that reduces efficiency and costs you money. You want the product (oil) flowing efficiently through the process (extraction, transport, refinement, transport, sale, to simplify) to get to the consumer (sale) at the exact moment the customer wants it. With as few stops inbetween as possible.

[Sherman Logan]

I think you’re talking about general principles of economic efficiency for a society or industry, not those faced by a particular individual.

If I own a well, presumably I have loans I need to pay down that come in every month. If I pump oil instead of leaving it in the ground, I don’t have to store it, since there is a price at which somebody will buy it from me to store themselves.

That gives me SOME cashflow this month to pay this month’s bills.

Now, presumably, I would get more money at some future point for that some volume of oil if I waited to sell. But I don’t have that option, since I have to sell now in order to pay this month’s bills.

It comes down to, as usual, SOME income being a whole lot better than NO income, this month.

If I’ve got a lot of capital, or can borrow it, then my situation is different. I can afford to wait till prices rise. But there are lots of people for whom that is not a realistic option.