Monthly Archives: July 2015

The Slow Train Wreck of Oil & Gas Drilling

7-22-2008_005 (Medium)

The notion that the pain will end soon, and prices will not so much stabilize as to see costs go down is a pipe dream floated by true “believers” not serious students of the oil business. There is an idea that you will see the cost of frac’cing and drilling go down to meet the prices imposed upon oil by Wall Street’s energy traders. But it is obvious that banks are laying back reserves to cover losses they expect from failing oil companies. There is no lender of last resort for oil. It has to crash. It is taking down company after company as we speak.

This week people still think the drillers are finding ever increasing reserves. In truth, they are merely developing the thousands of wells that had not been completed. As those diminish, reserves will stabilize and start to fall. The current fleet of rigs are not laying down as many but half the rigs are mothballed.

So the process of completing those wells and seeing their reserves fall (50% will be produced in the first two years) while the remaining reserves will take from six to perhaps 30 years to be produced. So it is not an overnight process. When we reach that stable point – perhaps in 2016 or 2017, then prices will probably not rebound much unless we are allowed to export oil. But costs while down, are going to remain high. The shale revolution forgot to tell people that the process is costly and is much higher than most people realize. Some people in the business have privately said that they have yet to recoup their investment in the Mississippian or in the Niobrara. The Bakken, for smaller operators, probably even less so. And even Continental Resources may be “going down” either to fold up, downsize and sell off assets at fire sale prices, or be acquired by the likes of ConocoPhillips or ExxonMobil.

The drillers have been laid off. The less than ideal worker, or those who are greenhorns are gone. And now the junior staffers at the companies – engineers, geologists, and others – well, they are going day by day as companies close satellite offices, and shorten staff. And we recycle the joke about the desperate engineer applying for a job in McDonalds and being turned down with, “Sorry, all our engineers have master’s degrees.”

My beautiful picture

My beautiful picture

Long Term Oil Bust – Deja Vu All Over Again

Pretty clearly, the Iran deal means more crude is coming on line. That is going only rile up the Middle East as it cuts into Iraq, Kuwait, and Saudi Arabian incomes…not to mention Russia. And as such it seems that we are on course for a multi year, if not decade long process of deflationary oil prices and nat gas so cheap as to render gas well prospects worthless. You cannot break even on 1 of 5 wells at this point.

I am constantly amazed at the short term viewpoint of the media. It’s like jumping off the top of the Empire State Building and half way down saying, “So far, so good”. Harping about how production levels have not declined is laughable. The decline will come slowly. After all, thousands of wells are still waiting on pipeline hookups or completion.

Meanwhile, some make a very stupid argument that service companies were gouging thus, the cost of a well will go down dramatically. I disagree. There will be some cuts obviously, and some companies desperate to keep cash flow of any kind coming in will bid below or at their cost. That won’t last long as companies down size or go under. Under the ideal circumstances, $80 cost to find, lease, drill and produce oil will likely degenerate into $65-70 but cannot go further down for long because companies are folding up like a wet cardboard suitcase.

Re Fraccing, from what I see in decline curves only increases the flow slightly, and it begins to decline at the same or faster rate than before. Adds very little to the value of the property. Frac sand – maybe a little cheaper. Day rates on rigs lower, offers to turnkey will start up quickly. The Arkoma Basin is dead. Southwest owns the Fayetteville Shale, and everywhere else they have been, they seem to be losing money.

Continental and a number of moves and shakers are likely to merge. Penny stocks like Sand Ridge – don’t see how they survive, and the big banks who bankrolled a bunch of the high rollers are packing cash reserves to swallow the losses that they now expect to run into the Billions.

Recovery? Years and Years away. We do this cycle repeatedly, and consumers reaction accordingly by buying the biggest, gas guzzling cars they can finance (repeat finance, not “afford”)… and the beat goes on…SWN 43_Faulkner CO (Medium)