Cleaning Out The In-Box -- August 7, 2015

Capacity Factor

There are still a lot of stories about intermittent energy sources, wind and solar. Whether wind and solar has "legs" will depend on which political party takes the White House in 2016/2017.

It is obvious that at the moment (August 7, 2015) the only country really touting intermittent energy any more is the United States. The EU gives it a lot of lip service to it, but reality being what it is, Europe knows that intermittent energy is not all it's cracked up to be. I continue to post notes about intermittent energy for two reasons: a) it helps put the Bakken into perspective from an archival point of view; and, b) readers seem to be fascinated by the subject.

If one wants to question my views on EU's intermittent energy, I'll direct you to this post with the incredible graphics.

Personally I have learned a lot about energy by following the intermittent energy story. Prior to the blog, I did not understand "nameplate capacity" and, now, all of a sudden there's another "old" concept that is getting a lot of attention: "capacity factor" which is very closely related to "nameplate capacity."They may be synonyms. I recently posted a story from The Lead for the archives and now it turns out that Forbes has a long article on the very same subject: "The Clean Power Bill Will Collide With The Incredibly Weird Physics Of The Electric Grid." Coincidence?

**********************

US Crude Oil Exports

The headline says CLR/CEO, Harold Hamm expects the ban on the export of US crude oil to be lifted by October, 2015. I read the article very closely several times and unless I missed it, I did not see a quote that was so specific. Maybe the quote was in the conference call (I'll check later if I find time and if the spirit moves me). Doesn't matter. Not gonna happen. Certainly not by October, 2015.

It may be counter-intuitive, but there are a lot of folks in the oil and gas industry that don't want to see the ban lifted. Tesoro might be one of the big players that likes the way things are. Tesoro just increased its dividend by a significant amount. Things must be going well for Tesoro. The refiners have cracked the code: they can make a lot of money buying cheap oil and exporting high-margin refined products overseas. There must be a reason why UK diesel is the least expensive it's been in decades relative to gasoline. Refiners are running at all-time highs, as reported earlier today, with a great graph for those who like graphs.

Back to Tesoro. Argus Media has an update on Tesoro. There are three stories in the article:

• Tesoro still needs Vancouver, Washington, to agree to increased Bakken crude oil for the Tesoro refinery; Tesoro thinks perseverance will pay off; I'm not so sure
• Tesoro recently expanded the refinery at Salt Lake City for waxy crude oil from the Uinta oil field; but Newfield has slashed CAPEX and now Tesoro has a larger white elephant on its hands
• either Argus or Tesoro pointed out that supplies are tight and demand continues to increase but at the moment there is no shortage of gasoline in California (though supplies are tight; and prices are as much as $2.00/gallon higher than the rest of the country); from the linked article on Tesoro:

Tesoro is the second largest refiner by crude capacity in California, where outages including an ongoing shutdown of gasoline-producing equipment at ExxonMobil's 155,000 b/d Torrance refinery have sharply curtailed the normal supply of gasoline and driven up prices.

The state has seen a significant increase in imports compared to previous years, but the backwardation may make it difficult for exporters to fully capture that arbitrage.

Tesoro had meanwhile tilted production toward gasoline and ran at 523,000 b/d in California during the second quarter. Refiners in the state last week hit a 2015 record of 1.04mn b/d of production for the state's boutique gasoline blend.

Don't you just love that word "boutique" when talking about gasoline blends? Especially if you are an investor?

*************************

US Crude Oil Productivity 

As hard as they try, US operators simply cannot slow the glut of oil production fast enough. There are several reasons. In no particular order:

• there is no central planning body; the US is not a dictatorship (regardless of what President Obama thinks); operators are all independent and they all have their own issues to deal with;
• even if all new drilling stopped, in the Bakken alone there are 7 years x 1500 wells/year = 10,000 relatively new wells that are producing oil; the costs are sunk; and it costs very little for each additional bbl to be produced from these wells; and there are 3 - 4x that many new wells across the US (Eagle Ford, Permian, Oklahoma);
• contractual agreements to provide a certain amount of oil to midstream (pipeline) companies or to refineries;
• contractual agreements to lease rigs; if one already has the rig leased, might as well drill the well (though it may not be completed);
• the operators are now drilling the best wells they've ever drilled -- they need to if they want to survive; so they may be cutting way back on their drilling/completing, but the wells they are getting are some of the best wells ever; 
• operators need a minimum amount of production to maintain liquidity or cash flow or cover fixed overhead expenses.

**************************

The Canary In The Coal Mine

When I first started blogging, there was a lot of discussion about the break-even points for US shale (tight) oil and for Canadian oil sands oil. It was always my understanding that the break-even point for Canadian oil sands oil was around $60; the Bakken, across the board, slightly less. There were other folks who said the Bakken was more expensive than Canadian oil sands. Regardless of which side of the fence one was on with regard to that argument, the fact remained that the break-even point was said to be around $60/bbl for both. I always thought Canada would be the "canary in the coal mine": if the price of oil dropped far enough, fast enough we would see stories about the implosion of the Canadian oil sands. I don't know how bad things are out in Alberta, but I haven't seen many stories that the Canadians are calling it quits. This past week, Canadian oil sands oil hit a new low: $27/bbl and not much was written about that.

**************************

And Then There Were Three

It is my understanding that approximately 50% of US oil production comes from tight oil; and there are only three places really active right now: the Permian, the Eagle Ford, and the Bakken. The EOG 2Q15 conference call certainly spent a lot of time on the Bakken. Abraxas says it won't drill any more in Texas until WTI gets back to $65 but they will leave their lone company rig working in the Bakken. By the way, in that linked Abraxas, it is stated that costs for drilling a well have come down 50% in the Bakken. I think that's a bit of hyperbole; EOG says wells have gotten a lot less expensive but they still run $7.5 million for a short lateral.

The tea leaves suggest activity in the Bakken reached its post-boom low point in the 2Q15 (April-May-June 2015); will plateau through 2Q16; and Willistonites will see increased sewage runs by August, 2016.

**************************

Record Bakken Wells

Back to US crude oil productivity (up above). It was noted that:

the operators are now drilling the best wells they've ever drilled -- they need to if they want to survive; so they may be cutting way back on their drilling/completing, but the wells they are getting are some of the best wells ever; 

With that in mind, did you all see the comment made  by the EOG/CEO in the 2Q15 conference call?

Riverview 102-32H, first Bakken well in the Antelope extension using high density completion

• maximum rate: 3,395 bopd
• 6 million cfpd
• with an average rate of 2,760 bopd for July, 2015, this short 4,300' lateral will be the highest rate ever recorded for the Bakken or Three Forks
• "EOG excited to continue applying high density completions throughout the entire play"

That's what he said: this short 4,300' lateral will be the highest rate ever recorded for the Bakken or Three Forks. It was not clear if he meant the highest rate ever recorded in the Bakken/TF or the best rate for an EOG Bakken/TF well, but it certainly sounded like he meant "across the board." If so, that's quite a statement.

Filloon recently said the same thing with regard to mega-fracks.

John Kemp has also noticed it; he calls them "super-wells." This London analyst noted that "all of a sudden," producers are reporting an inordinate number of "super-wells."

How good are these "super-wells"? They completely moved the average IP to a new level. 

******************************

Time To Quit

There's so much more, but I have to quit. The pipeline / storage story is incredible. RBN Energy is doing a great job keeping us up to date. Oh, by the say, did you all catch the EOG/CEO's passing reference to how "far out" fracking is effective? If I remember I will come back to that one; it's a huge story and something the blog got right from the git go.