When Will The Rigs Come Back? Seeking Alpha Article On Shale Oil Collapse; A Silver Lining In This Dark Cloud -- August 19, 2015

When will the rigs come back? This is a great article sent to me by a reader. I had not seen it; it's very, very good, reinforcing what most readers already know. The Bismarck Tribune is reporting:

There are two interviews over the past four years that stand out when thinking about the big picture in oil and gas trends. Signs and indicators, if you will, to determine whether Big Oil will stick around or whether they are going to pack up and move to another shale play.

The first memorable interview is from North Dakota native Ed Schafer. The former governor and current board member of Continental Resources says understanding oil activity is just like hunting ducks.

"Oil companies work three to five years out, they're securing mineral rights, moving rigs, getting capital. They're planning where they are going to be punching holes, not today, not tomorrow, but three years from now, five years from now," Schafer said. "Let's be aware of the competitive situation out there and understand that, you know, it's kind of like shooting ducks. You shoot ahead of them, you don't shoot at them. You shoot ahead."

The one thing about hunting is how variables often come into play: Weather, unexpected noises and a sprained ankle, are just a few variables that could change a hunter's strategy on a moment's notice. These unforeseen variables create shifts and create the need for audibles and changes to logistical plans. Much like the weather and oil prices, speaking about energy futures can be dicey.

Schafer's use of colorful and colloquial language to illustrate oil companies planning years out quickly transitioned into discussing a multitude of variables that can just appear.

"The reality is the oil companies are going to extract our minerals resources where they can the most efficiently for the least amount of cost." Schafer said. "And we need to be aware of that in North Dakota."

Much, much more at the link.  (Archived.)

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Break-Even Prices --  Again

Don alerted me to this article, a Seeking Alpha submission. It's important enough to archive. Regardless of which side of the fence one is on with regard to this issue but there are a lot of data points which will be interesting to follow over time.

First the summary:

• most of the oil production growth worldwide over the past few years has been due to tight oil in North America and elsewhere;
• tight oil cannot be profitably extracted at today's oil prices;
• those companies operating in the area have been able to survive due to hedges that allow them to essentially sell their oil at above market prices;
• these hedges will expire shortly and cause these companies to have financial problems which may be insurmountable; and,
• ultimately, production from shale will decline and oil prices will begin to increase. 

I don't think there is anything new in this article that regular readers are not already aware of.

With regard to the summary:

• "... due to tight oil in North American and elsewhere." Note to newbies: there is no "elsewhere."
• "... tight oil cannot be profitably extracted at today's prices." What are today's prices? "Tight oil" is not equal across North America 

The linked article has two graphs. 

The first graph is the average cost to extract a barrel of oil from these regions around the world:

• onshore Middle East: $27
• offshore shelf: $41
• heavy oil: $47 (the article does not say where "heavy oil" is found)
• onshore Russia: $50
• onshore rest of world: $51
• deepwater: $52
• ultra-deepwater: $56
• North American shale: $65
• oil sands: $70
• Arctic: $75

Although folks may disagree on the lifting cost, the relative order is probably correct.

A couple of comments:

• the "actual" cost to lift oil in the Mideast is irrelevant; even if countries in the Mideast could lift
• oil for pennies/bbl, it would not matter. What matters is what the country needs to balance their national budget. It's a lot higher than $27/bbl across the Mideast;
• the Arctic may have a price associated with it, but is it relevant; unless we are talking currently produced Arctic oil from Siberia and Alaska, the Arctic is fairly irrelevant

In the first graph, all North American shale is lumped together in one small block.

In the second graph, the cost to lift crude oil in tight North American plays is broken down by region / play. The Bakken is further broken down by sub-regions:

A: Parshall Sanish
B: Fort Berthold
C: West Nesson
D: Northern Mountrail, Williams Core
E: Williams Perimeter, North Williston

A and B are hard to see on the graph but are at the far left, within the lifting cost of Eagle Ford Karnes Trough Condensate and the Utica Condensate Core.

The Bakken heat map is at this link.

The "x" axis is labeled cumulative reserves, but does not say whether it's million or billion of bbls. I assume it is millions of bbls.

The graph is undated, as far as I can tell.

The Bakken sub-regions, A, B, C, and D are all to the left. The Permian is all to the right (most costly) and Eagle Ford Black Oil is also to the right.

The graph does not include the SM Energy sweet spot in Divide County, North Dakota, which is probably similar to Bakken sub-regions A and B.

When one looks at this graph, remember:

• the US produces a fair amount of oil
• one-half of all US production now comes from unconventional sources
• unconventional sources accounted for 95% of all growth in oil production in the US between 2011 - 2013, reported earlier today
• of the unconventional sources, the Bakken appears to remain the gold standard when looking at all metrics