Friday, May 29, 2020

Enquiring Minds Want To Know -- Finishing Where I Left Off -- May 29, 2020

The following comments relate to the linked story far down below, below the "page break." A reader asked for my thought regarding that article. I read the article yesterday, started to reply, and then got side-tracked by grilling.

This is my not-ready-for-prime-time reply. In a long note like this there will be typographical and content errors. I don't proofread these long notes prior to posting. I post them and then come back to correct obvious errors. I often miss mistakes. I am not good at articulating my thoughts, but I think folks can get the gist of what I'm trying to say.

The thesis of the original article is that decreased CAPEX is going to lead to a "devastating supply crunch." Bottom line: that's not going to happen based on history, based on experience in the Bakken, and based on facts regarding costs going forward. There are a lot of things to worry about but CAPEX is not one of them.

So, let's begin. My thoughts regarding the linked story below the fold.

1. These stories have been a dime-a-dozen ever since I started blogging, back in 2007. and before that, The Oil Barrel, led the parade with these stories.

2. The thesis of this article: the decrease in CAPEX spending will result in a supply crunch. I remember the hand-wringing when folks said declines in CAPEX spending for off-shore drilling due to the US shale revolution would lead to $200-oil, or some other ridiculous number. I believe I even recall talk of $500 oil but maybe I'm mis-remembering.

3. That was before 2014 - 2016, the Saudi Surge. Again, there were any number of stories regarding "the end is coming" due to CAPEX spending falling off the cliff. They predicted by that by this time (2020), due to staggering CAPEX spending, we would be seeing $200 oil.

4. They were clearly wrong, and it's my impression that they were incredibly wrong because they did not understand the "Bakken," and articles like the one the reader asked about suggests many analysts still do not understand the "Bakken."

5. Prior to 2007, the "Bakken" did not exist. The discovery well in Montana was in 2000 and there was some activity after that in eastern Montana, but the boom took off with the discovery well in 2007 in/near Parshall, North Dakota. By 2010, the Bakken was hitting its stride, and we had not even heard of the Permian yet, or the Eagle Ford for that matter.

6. For the Bakken, the speed with which the Eagle Ford, and then the Permian, came along was downright frightening. From 2012, or thereabouts, to 2014, there was so much oil being produced by US shale and so much more predicted, it forced Saudi Arabia to take drastic action. US oil was pretty much forced to shut down. How did that turn out? The price of oil dropped from $100 to $60 pretty much "overnight." The price of oil never recovered.

7. But, wow, the number of stories coming out between 2014 and 2016, predicting $200 oil due to decreased CAPEX spending was staggering. I had several blogs on that, and several graphics. If I run across them I will link them but I'm not going to look for them now.

8. So, CAPEX plummeted after the Saudi Surge. How did that turn out? Not to long ago, oil was quoted in "negative" territory. The published price of WTI is now in the low $30-range; probably lower in the "unadvertised" market. Saudi Arabia apparently doesn't see much hope for the rest of the year, and neither does Morgan Stanley, forecasting maybe $40-oil by the end of 2020. That certainly doesn't look like a "devastating" supply crunch. Which reminds me: the authors of these stories never provide any timeline: is the "devastating supply crunch" going to occur one month from now, six months from now; a year from now; five years from now; or, in 2035?

9. Okay, that's history: the meme from 2014 to 2016 that decreased CAPEX would lead to much higher oil prices -- that clearly didn't happen. It's clear that analysts who wrote those stories were modeling conventional drilling and off-shore drilling because they did not understand (or believe) the shale oil story. They certainly weren't modeling on-shore shale.

10. Going forward. It took a lot of capital to build out the Bakken between 2007 and 2014 (and it's still going on): oil companies setting up shop; frack spreads coming together; pipelines (local, regional, and national); natural gas gathering and processing plants -- the amount of money was incredible. Prior to 2007, in North Dakota, almost no infrastructure for the coming boom. Now? That infrastructure is there and in excellent condition. Not a lot of CAPEX is going to be needed to cover infrastructure costs.

11. Most of the CAPEX in North Dakota is drilling and completing. Back in 2010, they were spending upwards of $12 million to drill and frack a middle Bakken shale well. It took sixty days to complete/frack a well. Operators now drill a well to total depth in less than two weeks on average; the "gold standard" is, apparently, about seven days: three days for the vertical portion; less than a day for the curve; and three days for the horizontal. Wells were costing about $7 million, in general, when I last looked, and some operators talked about getting costs down to $6 million. I didn't pay a lot of attention to "exact" numbers that they were quoting because there can be a lot of "smoke and mirrors" with accounting. But it was clear that the price of drilling/completing a well had fallen significantly. That will drive CAPEX down.

12. That leads us to the quality of the wells. In the early boom, the EURs were 300,000 bbls. Today, operators won't drill a well unless the EUR is a million bbls. That's going to take a lot less wells to produce the same amount of oil, and the wells are a lot less expensive -- that will all drive CAPEX down.

13. The huge upfront costs of leasing the land, building the roads out to the pads, building the pads, all of that is greatly, greatly reduced. That will drive lower CAPEX costs.

14. So, historically, all that hand wringing about CAPEX going over a cliff resulting in $200-oil never came to fruition. Going forward, it's going to take a lot less CAPEX to produce the same mount of oil.

15. A lot of operators may go broke; a lot of operators may disappear, but the oil is not going anywhere.

16. Bottom line: CAPEX is not my concern. There are a number of other concerns, but CAPEX is not one of them.

 The Issue Of CAPEX

A reader asked me my thoughts on this article:

The thesis:
At a time when the U.S. shale industry was going through a phase of a debt-fueled drilling frenzy, the rest of the oil world entered into a “Lower Forever” mindset in the famous words of Royal Dutch Shell PLC’s chief executive Van Beurden and started to seriously trim spending.
CAPEX investments across the globe crashed 66 percent between 2014 and 2016 to $322 billion and have never fully recovered.
Global E&P Capex spending in 2019 clocked in at an estimated $546bn, well below the $880bn recorded in 2014 during the last oil price boom. The latest spending cuts have set back the clock a good 13 years. Obviously, it’s just a matter of time before global production starts to suffer. Roughly 60 percent of the world’s oil comes from just 25 oil fields mainly in Saudi Arabia and the Middle East with an average age of over 70 years and already experiencing 6-7 percent annual declines. Further, the role of Saudi Arabia as a swing producer tends to be overstated, with its often-cited spare production capacity of 2.5mb/d closer to 0.5mb/d.
First line that caught my attention:
CAPEX investments across the globe crashed 66 percent between 2014 and 2016 to $322 billion and have never fully recovered.  
As usual, analysts use that data point all the time and never remind readers why CAPEX investments crashed 66 percent between 2014 and 2016.


  1. The technology keeps improving . EOG's total cost Boe was 26.15 in 1st qtr down from 27.60 in preceding qtr . I agree that many drillers will merge or go under . What about the pipeline companies ? Like OKE ?

    1. Again, individual pipeline companies by come and go, merge, etc. But Warren Buffet, et al, know that pipelines are only getting more expensive to build and increasingly more difficult geo-politically to build.

      For investors, I don't see pipelines as a growth opportunity, but if one likes utilities, pipelines are probably best put in that category.

      Every time I see a pipeline proposal killed/delayed by the government (state or federal), I see cash flow for that pipeline company increasing in the short term.

      In the long term, the operator of the pipeline in question still holds a "local monopoly."

      For those investors with a long horizon, 30 years, that's a win-win.

  2. Thank you for the awesome reply to my question! You explain it so very well! (no pun intended) I always appreciate you!!!

    1. Of course, I'm in the minority on this, LOL. And my thoughts plus 69 cents will get you a cup of senior coffee at McDonald's.

  3. 69 cents will get you a clipper buzz cut from me...........

    1. That beats the $15 Sophia is collecting from me. Yesterday I owed her $45. She may see it some day. LOL.