Long Term Oil Bust – Deja Vu All Over Again

By | July 22, 2015

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)