Updates
October 17, 2014: the NY Times on the slump in oil prices. My feelings, exactly, in general.
Original Post
Link here.
How crude prices will impact the Bakken was the main topic of discussion in this month’s Director’s Cut.
Lynn Helms, director of North Dakota’s Department of Mineral Resources Oil and Gas Division, gave his monthly director’s cut assessment of the Bakken and Three Forks formation, emphasizing the impact crude prices could have on the Bakken.
There are many facets that need to be considered when we look for such an answer, Helms said.
Brent crude prices have been dropping all summer, reaching a two-year low this week at roughly $84 per barrel. West Texas Intermediate, which trades lower than Brent, is closest in price to Bakken crude.
During the webinar, Helms noted that North Dakota sweet crude was being sold for less than $70 per barrel to the Flint Hills Resources Refinery in Minnesota.
To the question of when oil prices will rise, he seemed to answer honestly “We don’t really know where the oil prices are heading.”
With the decrease in crude prices, Helms said that a reduction in the state’s rig count at a pace of roughly 10 percent could be in the future. There are three counties—Bowman, Slope and parts of Divide—that aren’t economic with current oil prices, he said.
“The drop in prices puts eight to ten rigs in those counties at risk,” said Helms. Helms mentioned that Saudi Arabia needs $92 per barrel to satisfy their government needs, which in turn puts them under a lot of pressure as well to change their oil production plans.
“We’re in this together,” said Helms. “Not only is North Dakota under a lot of pressure, but so are all of the Organization of the Petroleum Exporting Countries. But, we are watching it [crude prices] and there are serious concerns out there regarding it.”
*********************************
My Thoughts
My initial thoughts, "not ready for prime time" were posted October 14, 2014, and have not been updated.
A reader sent me a fairly long commentary from a newsletter author who was very, very bullish on the Bakken (the author had an agenda, to sell newsletters, so the commentary has to be read with some circumspection). I assume the commentary is meant only for subscribers so I won't post it (now) but this was my reply:
The most interesting thing: the cost of completing a well on a per bbl basis (break-even cost) was said to be ___.
That goes along with the ___ (or whatever it was the Reuters said) that was said to be the break-even cost in McKenzie County.
Several months ago I got an e-mail from someone "connected in the Watford City area who said the break-even cost in Watford City area is _____. He said I should not post that.
For a brief moment I posted the link to the Retuers article and _____ (per Lynn Helms) in McKenzie County (more accurately Watford City area), but I pulled it down once I got push-back from folks who appeared to be misinterpreting what I was trying to say. I did not want to muddy a very complicated issue.
This (the slump in the price of oil) could get very, very nasty before it's all over.
My optimism may be very, very misplaced.
But there's a lot of other stuff that the writer did not say (in the commentary you sent me) that furthers the optimist's argument and my own optimism.
I'm looking for two years of angst.
Folks with long horizons and ability to stomach this could do quite well.
In the near term: Alaska is not coming back; California is not coming back. Deep-sea drilling could be in deep trouble (no pun intended); certainly off-shore US is not going to expand under current administration with this glut of oil. The Wyoming, Louisiana, and Oklahoma shale plays pale in comparison with the Bakken, Permian, and Eagle Ford. Canadian oil sands have greater challenges than US shale. There will be no other "elephant oil fields" discovered in the US North America (the map at the new dinosaur wing at the Los Angeles Science Museum pretty much proves that).
No one talks about legacy conventional field in North America.
At the end of the day, it seems we are left with the Bakken, Permian, and Eagle Ford.
But I'm always an optimist and I could be badly wrong.Much more could be written.
*****************************
The Jobs Report
Now, somewhat related: the jobs report. Again, an e-mail to a friend:
First time unemployment claims (October 16, 2014, report): 14-year-low.
At some point, there has to be some point at which we reach "steady state."
That is, at a certain point, I would assume there will always be "unemployment claims" even at full employment. In addition, the number of applications provided each week is a raw number, not percentage of Americans, or percentage of total able-bodied that could be in the work force, or percentage of actual work force ... etc.
In other words, this has be an extremely good report (they said no state sent in estimates) and the period included nothing unusual.
Investors may be anticipating a global slowdown, certainly a recession in Europe, but with a glut of oil in the US (gasoline solidly below $3.00/gallon is now likely) and 14-year low in first time unemployment claims, one starts to wonder if we might be seeing a divergence -- a huge divergence -- developing between Europe and the US.
If the US accelerates (and, yes, I saw Wal-Mart's projections yesterday) and the EU continues to lag (which is pretty likely), the gap between the US and Europe will widen. It's hard to believe, that if this is accurate, that the North American energy revolution was not responsible for all of this. Energy keeps getting less expensive here and it keeps getting more expensive elsewhere.The winners: China and the US.
China is buying cheap oil as fast as they can and storing it in tankers off-shore.
*********************************
Additional Thoughts
I still maintain that the Bakken is uniquely positioned for crude oil requirements in the northeast US and for California.Additional Thoughts
The RBN Energy post today reminds us that Saudi Arabia oil imports into the US will never go to zero.
"We (OPEC and nd. Oil industry) are in this together" says Lynn helms. Strange observation but true. In other words if OPEC try's and succeeds at price control by withholding supply, nd oil benefits. Thanks Lynn for pointing that out.
ReplyDeleteThis is going to be incredibly interesting to watch. The tea leaves suggest Saudi Arabia is more interested in holding market share (which means they won't cut production to raise prices; in fact, OPEC is so rattled these days, that if Saudi cuts production, Venezuela, Libya, Iraq (ISIS), will do what they can to increase production). Further, global slowdown / recession / depression will result in decreasing oil demand that Saudi would have to cut significantly and rest of OPEC would take advantage. Simply put, Saudi is no longer the swing producer with such a huge world supply/demand imbalance.
DeleteRBN Energy, in its post today, provides background why Saudi cannot cut supply to hold prices. But we will see in November if RBN Energy is correct.
SA will at least try to line up the other OPEC producers with them. Will let them sweat until November first. They are not going to cut production by themselves. Even in 2008, they got KUW and UAE to go along with them.
ReplyDeleteI suppose that would be a good poll, whether one things OPEC will announce a cut in production at the November meeting.
DeleteWhether they do or not, scrappy countries like Libya, Iraq, Iran, ISIS, the Kurds, and Venezuela will all go their own way. Their best outcome: Saudi cuts oil enough to make a difference in price, but countries like Venezuela and Libya allowed to produce whatever they can.