Alice In Wonderland And Puff The Magic Dragon -- December 10, 2015

Reuters/Rigzone is reporting that North Dakota boosted oil output ahead of OPEC meeting:

North Dakota's oil producers boosted output in October to sell as much as possible ahead of last week's OPEC meeting, bucking a trend for contraction amidst plunging crude prices. The 13-member bloc of global oil producers had long been expected to keep or raise its unified output cap at its semiannual meeting.

Because output wasn't trimmed and members were effectively allowed to pump at will, oil prices have sunk further since the meeting, adding to losses of more than 50 percent in the past year. "A lot of (North Dakota) operators were pretty pessimistic about the OPEC meeting, and they looked at October and November to sell oil at what may have been the high price for the next six months," Lynn Helms, head of the state's Department of Mineral Resources, said on a Wednesday conference call with reporters.

The move now appears prescient, as OPEC's meeting ended last week without a reference to its output ceiling.

North Dakota producers also were able to raise output, in part, because of new natural gas collection equipment coming online from Oneok Inc and others. About 86 percent of produced natural gas was collected and processed during October, 5 percentage points higher than the previous month and far above state-required minimums.

Roughly 260 wells had failed to meet the minimum during September and had been temporarily shuttered by state officials, but they were able to come online by October, fueling part of the production rise. Still, the state's oil producers only fracked 43 wells in October, 65 percent fewer than the previous month, an ominous harbinger as at least 110 must be completed each month to maintain long-term production.

Much more at the link.

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Poof, The Magic Dragon

Updates

Later, 10:59 a.m. CT. Seeking Alpha reports

Companies such as Chesapeake Energy pushed the SEC for an accounting change in 2009 that made it easier to claim reserves from wells that would not be drilled for years, but Bloomberg says the chickens will come home to roost in the next few months when billions of barrels of shale drillers’ reserves are wiped out.

The rule requires the undrilled wells to be profitable and be drilled within five years, but now the time is up, and the companies must soon report 2015 figures - and prices are down, way down.

Regulatory filings show CHK's inventory will be cut by 45%, Bill Barrett will lose as much as 40%, and Oasis Petroleum will lose 33%.

"How are these reserves going to come back?” says a Guggenheim Securities analyst.

“Because if you have to spend within cash flow, those reserves aren’t coming back. Not unless we get a spike in prices, or we return to levered growth.” 

Original Post

 

Meanwhile, Bloomberg/Rigzone is reporting that "in a puff of smoke, oil reserves have vanished":
In an instant, Chesapeake Energy Corp. will erase the equivalent of 1.1 billion barrels of oil from its books.

Across the American shale patch, companies are being forced to square their reported oil reserves with hard economic reality. After lobbying for rules that let them claim their vast underground potential at the start of the boom, they must now acknowledge what their investors already know: many prospective wells would lose money with oil hovering below $40 a barrel.

Companies such as Chesapeake, founded by fracking pioneer Aubrey McClendon, pushed the Securities and Exchange Commission for an accounting change in 2009 that made it easier to claim reserves from wells that wouldn’t be drilled for years. Inventories almost doubled and investors poured money into the shale boom, enticed by near-bottomless prospects.

But the rule has a catch. It requires that the undrilled wells be profitable at a price determined by an SEC formula, and they must be drilled within five years.

Time is up, prices are down, and the rule is about to wipe out billions of barrels of shale drillers’ reserves. The reckoning is coming in the next few months, when the companies report 2015 figures. 

This is an important article for another reason. This is the second time in the past two weeks that we have seen what is meant by "proven reserves." Analysts look five years out when estimating proven reserves.

Much more at the link.

For clarification, and perhaps a correction to one of my recent posts: based on the Reuters/Rigzone article linked above, the "proven reserve" estimate in North Dakota may go down this year, but the amount of oil originally in place (OOIP) in the Bakken remains the same, whatever that "number" may be. Only God knows for sure. And the Bakken gods.