Musings On The Slump In The Price Of Oil -- Not Ready For Prime Time -- Will Be Edited -- October 15, 2014

Updates

October 25, 2014: Forbes provides their list.

October 17, 2014: the NY Times on the slump in oil prices.  My feelings, exactly, in general. 
 

Original Post

This is a note I sent a friend yesterday afternoon. The note has not been edited yet for the blog. It is not ready for prime time. But I see some stories coming out today in the mainstream media and I want to get my own "musings" posted so I have the time-date stamp.

Here are my thoughts on the slump in price of oil.

Some thoughts, random.

1. I think there may be a disconnect in price between WTI and Brent (OPEC/Europe/Asia).  WTI used to follow Brent. 

We now have a high-producing country that bans exports (the US) and a country (Saudi) that will try to corner the European/Asian market. It will be a dirty fight between Russia and Saudi for the EU and Asia. [Update: crashing oil prices could crush Putin; a trapped bear is something to fear.]

In the US, the Northeast and California are the places to watch. If the US no longer needs imports, the Northeast US and California will have to get their oil from somewhere else. It seems the Bakken has the inside track (CBR to Vancouver; ship to San Francisco) to California; there are NO pipelines into California. It used to be all ships -- Alaska or Saudi. Alaska is decreasing; Saudi is more expensive than Bakken.

In the Northeast: the CBR is now entrenched between the Bakken and the Northeast and the Enbridge pipelines are coming (some already in place).

Texas, by default takes most of the rest of the country.

2. If you were XOM, would you rather hassle with terrorists and Ebola overseas, or just move to Canada, Bakken, Texas?

3. My hunch is that deep sea drilling could take a huge hit at low oil prices. Deep-sea drilling, in fact, may be the story no one is yet reporting. Brazil could be in deep trouble. Statoil, Norway, could be in deep trouble; they were having problems and now with slump in price, things are exacerbated. Britain's domestic oil and gas industry (North Sea) suffers, but their citizens will have a better winter, price wise for heating oil / natural gas. [This is the reason I posted this note earlier than expected. I wrote the note early on October 14 (yesterday), and sent it to a friend to review. I was going to spend more time on it, but stories are starting to appear that validate my thoughts. This was the story that forced me to post this before editing: from SeekingAlpha, falling prices are the last straw that break off-shore drillers' backs.]

4. Russia is in deep trouble. Russia may have to make huge concessions to companies like Schlumberger and XOM to keep them there. Sanctions complicate things.

5. I know I look through Bakken-colored glasses, but when I look around, the Bakken seems as good as any place to drill; better than most.

6. Canadian oil sands have always been said to be the high-cost play. If so, the Canadian oil sands are the "canary in the coal mine." If Canadian oil sands keep operating, it tells me that companies are able to adjust (at least in the short term) to very low prices.

7. Saudi can't do much but react in the short term. My hunch is the Hawks in Saudi will win out and they will severely cut production to get price back up. It takes the US out of their portfolio, but US imports from Saudi had been dropping anyway.

8. Unrest in Venezuela could be interesting if oil industry falters there.

9. Mexico: I don't know.

10. The most interesting development might be the dichotomy between North America and OPEC/Brent.  It's a very artificial commodities market when that part of the world producing half the global oil is not exporting oil (banned in US; pipeline/CBR constraints in Canada).

[Update: compare this list with Forbes list posted October 24, 2014.)

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Musings -- January 7, 2015

A Note I Sent To Don

Not Ready For Prime Time

The last few days looking at daily activity reports made me think of this. This could be the year we finally see clarity which oil companies will be the big Bakken players.

For example:

• we know Fidelity is out of the Bakken
• OXY USA is still a mystery. They want out, but they continue to drill and get new permits.
• Hess and Oasis remain really, really active. I think Oasis is going to be a big player, if not merged with someone
• KOG, of course, is gone, and at one time (a year or so ago), it seemed Whiting wanted out but with buying KOG it is clear they intend to stay (unless bought out by someone bigger). 
• CLR will always be here
• EOG will always be here. My hunch is that EOG might be in the mood to buy Fidelity; not particularly good acreage, but they have relatively small amount of acreage compared to others
• Hess will remain huge (the last thing I read on Hess suggests the Bakken may be their biggest play
• SM Energy closes their Tulsa office, and exits Oklahoma; will focus on Bakken and Eagle Ford (that speaks volumes by the way)
• WPX will continue to "fight" with the Indians on Fort Berthold
• BR will keep busy in its locations
• XTO seems happy. 
• Statoil seems content (happy). Before it's all over, Statoil (Norway) may need more Bakken
• MRO seems happy -- especially with re-fracking
• QEP seems happy in the Grail area; it will be interesting to see their long-term game plan
• Newfield, surprisingly, is still here and getting more active, if anything
• Not publicly held, Petro-Hunt seems busier than ever in the Bakken
• Not publicly held, Slawson, so-so. 
• I think every thing else (Triangle, Emerald, Halcon, etc) are small potatoes. Small companies could be bought; unlikely to go into bankruptcy; probably sell before it comes to that. But another three months of daily activity reports (and hearing dockets) and watching to see who gets permits will tell the story

2. The permits, more and more, are for wells on six-well pads.

Instead of six wells on six different pads with three or four rigs, an operator will simply go to one pad for six wells with one rig. And they will drill those six wells in the amount of time it used to take two or three or four sequentially. The number of rigs, in my mind, reflects the amount of activity (busy-ness, trucks on the road, number of workers, etc) but the number of rigs reflects less accurately actual production. 

3. Another note: a story today talked about $8 - $10/bbl when shipped by rail, and thus another reason why the Bakken is hurt. I think the $8 - $10 / bbl figure is high, but if that is an issue, we're going to see less production in the Bakken, so operators can fill cheaper pipelines.

4. I don't know if you saw the story today -- but again, a story that folks forget about and I haven't written about in a long time: heavy vs light oil. US refiners need heavy oil -- much of which they get from Venezuela. That's why they are still interested in Keystone Canadian oil. The article did talk about mixing Bakken light oil with heavy oil to more nearly match Saudi oil "heaviness/lightness."

5. But of all the above, I'm most interested in watching the "Darwinian" survival of the fittest. For those operators who have the cash/credit facility/liquidity they could pick up some nice acreage. This will be interesting to watch.

6. By the way, SM Energy closing their Tulsa office, and exiting Oklahoma -- I have to check where SCOOP is in relation to where SM Energy was in Oklahoma, but as good as Harold Hamm says the SCOOP is, the  much smaller in scope. It's possible SM Energy didn't have enough acreage in Oklahoma to make it cost-effective to stay there (different than Hamm/SCOOP but it is interesting that they are leaving Oklahoma and there are NO (okay, few) transportation problems/costs getting their oil to Cushing.