Oil Prices To Remain Capped In The Short Term, Despite Fewer Shale Oil Barrels

Forbes ^ | 6/10/2015 | Trefis Team

[thackney]

The most recent Drilling Productivity Report from the U.S. Energy Information Administration reveals that the phased impact of lower oil prices on U.S. tight oil production growth, is finally starting to show up and is expected to increase in magnitude over the next couple of months. The agency estimates crude oil production from the seven key regions in the Lower 48 states to have declined by around 44,000 barrels per day, or 0.8% month-on-month in May, and expects the decline rate to increase to around 91,000 barrels per day, or 1.7% month-on-month by July of this year. According to the EIA, these seven regions accounted for almost 95% of the total domestic crude oil production growth between 2011 and 2013. Therefore, production growth trends in these regions are a good proxy of the overall growth in U.S. crude oil production.

What does this mean for global crude oil prices? Should we expect a sharp rebound in the Brent and WTI prices now that the primary cause of the supply glut is showing signs of abating? We do not think so. That’s because we are talking about a sequential month-on-month decline in U.S. crude oil production from these seven regions, which does not reflect the fact that it has already grown by more than 29% year-on-year during the first five months of the year. So even if the sequential rate of decline accelerates to around 5% by the end of this year, full-year average production from the region would still be around 630,000 barrels per day, or 13% higher than last year. This increase would easily offset almost 60% of the projected increase in global crude oil demand this year. To this, if you add the supply growth from other non-OPEC countries (assuming OPEC supply remains stable) such as Russia, Brazil...

[gingerbread]

My advise to all these shale oil driller, just hang tough because withing a year, the war in the Middle East will put the Middle East in such a disarray, that the biggest oil producers in the world will be the USA. You just wait and see if I’m not proven right.

[shove_it]

How is the horizontal rig infrastructure shut-down? Are the production employees laid off and the rig kept in place or is the whole rig removed and the well capped off?

[The Antiyuppie]

I believe that shale will (permanently) become a brake on oil prices. It’s my understanding that unlike conventional oil wells, they are fairly easy to “turn on and off”. Oil high = turn on; oil low = turn off. So, we may have $60-80/barrel oil for quite a while.

[thackney]

I may not understand your question.

Rigs are not related to shutting down flowing wells.

Drilling rigs are used to drill wells. Drilling rigs are not used to keep wells flowing.

When are drilling rig is taken out of service, the crew is typically laid off, or some moved to another rig and replace other people who get laid off.

There isn’t much in the way of infrastructure related to the rig, at least not infrastructure related to a flowing well.

[thackney]

It’s my understanding that unlike conventional oil wells, they are fairly easy to “turn on and off”.

Nobody spent 5~10 million dollars on putting in a new shale field well and shut it down because price fell to $50~60.

What is happening is far fewer wells are being drilled at this price.

[Sam Gamgee]

I was actually surprised to see that oil demand has continued to increase, 2008 being the only year it decreased. I would have thought with this bad economy we would see a dip.

[thackney]

Actually oil demand increased in 2014 overall. It was a slower growth, and significantly lower than the growth in supply, driving the price drop.

http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy/2014-in-review.html

Global primary energy consumption decelerated sharply in 2014, even though global economic growth was similar to 2013

Consumption increased for all fuels, reaching record levels for every fuel type except nuclear power; production increased for all fuels except coal. For oil and natural gas, global consumption growth was weaker than production.

[thackney]

2008 being the only year it decreased

Sorry, I misread your comment.

[shove_it]

OK, a drilling rig looks like this ...

and a producing well looks like this ...

My question has to do with the drilling rig which has extensive infrastructure on dry land including sand, chemicals and water storage, power generators, pumping equipment, etc. When the rig is "stacked" or "shut down" is the infrastructure typically removed from the site and stored somewhere else or left in place at the job-site? The best explanation I can find is as follows which refers to "cold stacking" and "warm stacking" ...

<"http://eaglefordtexas.com/news/id/142072/begins-rig-stacking/">

Is there anything you can add that helps me understand what affects the decision process of what to do when the price of the product goes up or down? Thanks for your patient responses to my dumb questions... Cheers, Otter

[thackney]

My question has to do with the drilling rig which has extensive infrastructure on dry land including sand, chemicals and water storage, power generators, pumping equipment, etc. When the rig is "stacked" or "shut down" is the infrastructure typically removed from the site and stored somewhere else or left in place at the job-site?

When the rig leaves the drilling site, when the drilling is done, regardless of the whether it goes to another well or to storage, the infrastructure leaves the well site. It is no longer needed for the well to continue to operate.

Sand, water, chemicals used for hydraulic fracturing are not used with the drilling rig. The hydro frac equipment and crew comes in after the drilling rig moves off the well. Once the completion is completed, they moves off the well site as well, regardless if the hydro crew and equipment have another job, or return to a storage yard.

Some areas, like Bakken, are beginning to follow what Alaska North Slope has done for decades. They drill multiple extended reach wells from one larger pad site. In that case, the crews may work in one area for many wells, even with different crews there at the same time. Is there anything you can add that helps me understand what affects the decision process of what to do when the price of the product goes up or down?

Keep in mind drilling crews, hydraulic fracturing crews, other completion works from cementing or acid treatment, etc, are not employees of the oil company. They work for a service company like Nabors, Halliburton, etc.

When an oil company want a new well they hire them. When the well is done they move on to a new well or don't go to work. More similar to a construction company building a factory or a warehouse. They are not part of operations or the final production of product.

So the decision process is the oil company decides if investing millions of dollars will generate enough cash flow to pay back the investment by selling the oil. What leases they own, expenses for that area, productivity of the part of the play they have, all part of the equation if they think they will make money. It is a gamble on the price of oil.

Did that help or am I missing your question?

[shove_it]

Yes thackney, thanks for your thoughtful reply. I’ve learned a lot from you about the energy business over the years.

Cheers,
Otter

[Sam Gamgee]

No problem. The oil consumption demand seems to fly in the fact of the claim the world is in recession. Is that what we can take away from continually increasing demand?

[thackney]

2014 was definitely a year that the demand growth greatly slowed down, even though it still grew some. From the same BP link:

Global primary energy consumption increased by just 0.9% in 2014, a marked deceleration over 2013 (+2.0%) and well below the 10-year average of 2.1%. Growth in 2014 slowed for every fuel other than nuclear power, which was also the only fuel to grow at an above-average rate. Growth was significantly below the 10-year average for Asia Pacific, Europe & Eurasia, and South & Central America. Oil remained the world’s leading fuel, with 32.6% of global energy consumption, but lost market share for the fifteenth consecutive year.

Although emerging economies continued to dominate the growth in global energy consumption, growth in these countries (+2.4%) was well below its 10-year average of 4.2%. China (+2.6%) and India (+7.1%) recorded the largest national increments to global energy consumption. OECD consumption fell by 0.9%, which was a larger fall than the recent historical average. A second consecutive year of robust US growth (+1.2%) was more than offset by declines in energy consumption in the EU (-3.9%) and Japan (-3.0%). The fall in EU energy consumption was the second-largest percentage decline on record (exceeded only in the aftermath of the financial crisis in 2009).

[Sam Gamgee]

Hmm. I guess I could either take away that what is unusual is not that oil consumption contracted, but that the rate of growth contracted. Although 0.9% is more in line with 1.1% population growth than 2%.

The other way to look at it is China and India continue to show impressive oil demand, which means the China story is not over, as I had originally thought. China's economy continues to boom.