Monthly Archives: March 2016

With the supply of oil even higher than last spring, the recent price rally makes little sense. It is a hope for things unseen, and basically, unobtainable. The impetus is the notion that production is going to decline. So far it hasn’t.

There is no economic justification for a single rig to be running in the U. S. The cost is basically exceeding the imaginary future profit. The rare exception would be some shallow vertical test drilled cheap or to replace or re-enter an existing legacy well to up production. So why has production been so slow to fall? Surprisingly to many, including myself, is that these wells are holding up better than expected. The decline rates, while very high in the first months of production, have fell to as low as 10% or below annual decline in the out years. And put in perspective how many wells have been drilled.

The Arkoma Basin in Arkansas has been drilling gas wells since the depression and even earlier. Gas was dramatically ramped up in the 1950s as gas utilities expanded their network of consumer gas lines in both Northwest Arkansas (Rogers, Bentonville, Springdale, and Fayetteville) and in the Fort Smith area and down the Arkansas River Valley (ARV)…Clarksville, Ozark, Russellville, etc. 4,500 wells have been drilled in the past 55 years – around 100 wells per year average. But in the Fayetteville play, which basically started in 2006, just 10 years ago, there are already 5,500 wells. This is over 500 wells per year and at peak some 49 rigs were drilling for gas. Today neither the Arkoma fairway nor the Fayetteville Play have a single rig running. The supply of gas is large and no drilling is needed to supply current consumption, perhaps for another two or three years.

The problem however is that eventually that decline kicks in, big time. And in doing so, the question is how soon can one ramp back up and drill for new production with the ancillary question, do we have enough sense to balance the reserves drilled with the demand? The first issue may be very important. A 30 year old who has some 4 to 10 years of oilfield experience is now unemployed. They are not close to retirement, and many have already been caught with pants down…that is, they were in debt and in losing their job, they quickly had to try and sell out, get another job to make payments, and otherwise endure a lot of economic pain. Foreclosure already much higher than it was during the recent housing crisis in oil field towns. Once in a secure job, they are going to be reluctant to return to the field that burned them so badly regardless the salary. Therefore, where is the talent going to come from?

The “old heads” that trained the generation of the last decade and a half were the survivors from the crash in the 1980s, a double whammy that saw a price collapse in 1981, then a further decline when oil pricing wars (once again waged by Saudi Arabia) saw oil prices plunge to $8 ~circa March 1986. The survivors of that generation trained the hands of today. But the old timers are just that. They are between 55 and 70 years old…like myself. We are returning to room temperature soon. A ten year hiatus between this bust and the next boom will basically wipe us out. The young guys leave. The old timers are dead and because of the 1985-1999 bust there are no middle aged oilies to take over training that next generation. It may take a long time to rebuild the drilling fleet. Or, we may have to import Middle Eastern experts to do it for us. Think about that.

But even so, natural gas prices stayed relatively high during the 1980s as oil collapsed, and gas only followed into the pits around 1990. Even then, prices have not seen the lows that we have seen over the last couple of years, even worse, that we can expect in the next year or two when some gas was sold for $1 an MCF or less, just to get rid of it. The gas associated with oil production is glutting the market. Only time is going to cure this market. But as Keynes said so eloquently decades ago. The market can stay irrational longer than you can stay liquid.

Wow…what to think. Would Aubrey McClendon be so convinced he was going to jail that he would have committed suicide? That may not be the case. OKC folks I know, many with long histories with McClendon and Chesapeake Energy say that the charges against him were hokie. They basically revolve around companies who had joint operating ventures (thus a JOA or Joint Operating Agreement) and who agreed to not bid on certain tracts that their partners were bidding on. This is common practice in the oil business, and was the standard operating procedure in offshore concessions as well. You simply don’t bid against your own partners for the same tract. 90% of the companies who bid on government (be it local, state, Indian, BLM, etc.) leases do the same thing. It was not a charge that couldn’t be beaten and likely would have been beaten. It wasn’t like these were secret deals.

So if he had no reason to commit suicide and no suicide note is found, what happened? First, he was driving a CNG car. That was the cause of the fire first and foremost. The tank ruptured but apparently did not really explode nor any indication that a bomb ignited the auto. McClendon, according to long time associates, often drove without his seat belt. No issue there. He owned property near Lake Arcadia, so being on Midwest Blvd. wasn’t unusual. He was supposed to appear in court later that day but had plenty of time. Did he typically speed? Perhaps. Why did he not brake prior to striking the abutment?

There can be several explanations. Perhaps he was distracted. Perhaps he dropped his phone or something else and was attempting to retrieve it out of the floor board. Also, did he have a heart attack (perhaps the autopsy can clear that up) or simply faint, go into a diabetic coma, etc. The people who knew him well think Aubrey died accidentally and one expressed the opinion that perhaps it was a murder somehow. But they all agreed that suicide simply didn’t seem to be a possibility.

Last week, briefly, a rig appeared in South Arkansas and drilled a well with a single bit. Smoked it down in three days or so. It was the one and only well being drilled in the state and apparently the only operating rig in the entire month for the state. That has to be a record that surely has stood since the 1940s or earlier.

Nevertheless, the well was not a success at that. A vertical test, the operator has an opportunity to consider going back in, and “turning the corner” and attempting a horizontal completion. There is potential but the appeal was that the driller, who simply is going to park the rig on the location until the decision is made, has offered to drill such a horizontal rig “cheap”. So they may go back to the commission this month and see if they can re-enter the well and attempt a horizontal completion. It is a novel idea and if successful could offer a glimmer of hope for drilling a few wells in the Smackover trend.

The logging company from Louisiana actually had two logging trucks running (which is all they have) and said that it had been over a year since both were running. And all the crews were older people. The youngest was near 60. The industry is flat on its back.

This has to be the worst of the worst and the result is going to be a rise in prices eventually and virtually no response from a prostrate industry. So enjoy the cheap gas…I predict about 2 – 4 years of it. Then look for a sudden and unstoppable rise in prices.