Saturday, December 13, 2014

Not Ready For Prime-Time

This post will be up for a few minutes, and then it will be taken down. It will be up long enough for a link, and then taken down. It will be re-posted sometime in the future.

The Sky Is Falling

I'm getting a number of e-mails (more than ever before) suggesting that the US government needs to get involved.

My answer:
I don't think Saudi is going to continue giving their oil away for $50 to $60 for very long.
Saudi put themselves in a real bind.
They did this back in the 80's, I believe (I often get my history wrong) to destroy the surging US oil boom (Alaska?, I forget), and they were successful short term. They are trying it again.
I don't think they realized that oil would fall this fast and this far.
Tight oil economics is not like Alaska oil economics. Unlike the 80's, they are competing with a tsunami of US shale oil that can easily be scaled back until prices come back. And prices don't have to come back very far. Even at $75 the Bakken will do fine.
So, back to the thesis: Saudi has put themselves in a real bind: a) they are now losing $138 million / day quibbling over 640,000 bopd (Fitzsimmons said that, I believe). They have huge cash reserves, but even so, $138 million per day is not bird feed; b) the Saudi sheiks are invested in the market as much as any American (don't they practically own Citibank?), and they are seeing their equity portfolios dive in value also; c) they probably invest in what they know and they are probably overweighted in oil and oil service companies, which are plunging in share value, and, d) they are giving away their grandchildren's inheritance (they've said that many, many times).
On the other side of the coin, if they even hint at holding another meeting before the end of January, 2015, they will be seen as blinking; losing "face" in the Mideast is about as bad as losing a war.
So, they can suck up a loss of $138 million/day in lost oil revenue; see their oil and gas equity portfolios dive; or lose face. If, as the OPEC oil chief is saying that supply and demand fundamentals do not lead to $60 oil and he thinks "speculators" are driving down the price of oil, the big question is how high will those same "speculators" drive the price of oil if Saudi cuts (or even hints they will cut) production.
I might be whistling past the graveyard, but at the end of the day, free market capitalism tends to sort these things out.
Wells Waiting To Be Completed Are Increasing In Number
Director's Cut, December, 2014 -- October, 2014, Data

Slump in oil prices, Well Completions, December 13, 2014:
I've said many, many times on the blog: this is all about liquidity now, not profitability. The companies that can keep drilling, minimize production, maintain cash flow and/or liquidity, can drill wells, and delay completions.

From what I can see, early in the Bakken, drilling to TD / fracking was 50-50 proposition. But wells are getting to TD much more quickly, and with the cut back in drilling, the day-rate for rigs will drop, drillers will save huge amounts of money drilling to TD (man-hours, day rates on rigs, daily costs to BHI, SLB for wirelog, consulting geologists).

On the other hand, the fracking is getting much more expensive: a) huge amounts of sand; b) more sophisticated fracking with more stages; c) more ceramic for those who use ceramic.

I doubt the drilling to TD / fracking is 50-50 any more. I'm sure the numbers are easy to find, but I don't have the time and one might need Premium Services, which I don't have, to get the data over at NDIC.

If one includes leases, exploration costs, etc, as part of the overall cost of drilling to TD (and not part of fracking) -- to compare drilling tight wells with conventional wells, then the overall cost of drilling to TD in the Bakken has gone way done. Exploration costs and outrageous leasing is a thing of the past.

It really is interesting (based on the Bloomberg Businessweek article): shale operators are so flexible, they could drill the wells all winter while the price of oil is $40/bbl in the Bakken, but not complete any of the wells. Then, if oil moves toward $70 next summer, they frack the wells; the front-end is where they get huge production.

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