Ramblings On A Sunday Morning -- February 21, 2016

Updates

February 26, 2016: Bloomberg graphic -- collapse of the drilling industry in the US. For me, it's not the rig count, but the production data that is important.

February 22, 2016: one of the themes I explored below was the suggestion that I did not think Saudi's rivals inside OPEC were its main concern. Today, in this tweet, there are suggestions that I was right on the mark, tweeting now:

• OPEC crude oil output capacity to rise by just 800,000 b/d over next 6 years, IEA says 

Original Post

 

Before reading this post, be sure to read the post regarding the Pershing oil field and look at the spreadsheet of the top producing oil fields in the Bakken.

At a later day, I will re-post the Pershing oil field post, breaking it up into two parts, and will go over this again, if the spirit moves me.

I assume everyone in the oil industry saw this some years ago; I noticed bits and pieces several years ago and have blogged about it, but I did not see this coming, to this extent. My hunch is that the geologists inside the oil industry saw this coming several years ago.

I wrote this quickly; have not reviewed it very well; and have not triple-checked it for errors. In a long note like this there will be typographical and factual errors. In addition, I may be seeing things that do not exist. I may be far out in front of my headlights. I'm certainly beyond my comfort zone, but this is quite something if even part of it is accurate. So here goes.

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The jury is still out: we don’t know if the Saudis opened the tap to protect their market share from Russia and/or the rest of OPEC — their publicly stated objective — and the US shale industry was simply collateral damage; or, alternatively, Saudi set out to do both: protect their market share and take on the US shale industry.

I don’t think anyone has given much thought to the third possibility: the Saudis opened the tap to take on the US shale industry and it was Russia and Venezuela that were collateral damage.

But let’s look at that for a moment. Within OPEC, Saudi hardly had rivals. Sanctions on Iran were soon to be lifted but it would take a year or two for Iran to be a true threat. The rest of OPEC was pretty much status quo; certainly everyone was increasing production against a backdrop of less demand (the Chinese economic slowdown) but in a certain sense it was not a whole lot different than what they had seen before. Venezuela was becoming a basket case long before Saudi Arabia opened the taps. Outside of OPEC, besides the US, the only Saudi rival was Russia. There is certainly evidence that Russian production was flattening or rising very slightly, again because of the global economic slowdown.

Perhaps Saudi was simply worried about Russia and Iran and market share; that’s what they said. I'm not so sure.

I’ve followed the Bakken fairly closely and I’ve said many, many times it never fails to surprise me. By blogging on it daily, I’ve been able to “predict” or talk about certain things that I had not seen in mainstream media. Perhaps all of that was in the trade journals, but much of what I saw developing was not being reported even by RBN Energy or Platts. Mike Filloon may have touched on some of these things but did not develop them. I'm sure he saw the same things I saw well before I did but he has a different audience and doesn't need the flak he would get if he wrote some of the things I've written about.

If I could see some of these things, and I assume I only understand 1% or less of what is really going on the Bakken, I can only assume oilmen were five years ahead of me, maybe ten years ahead of me. The only fallacy in that, of course, is the fact that, it appears, that no one in the oil industry saw the implosion coming (the Saudi Surge/price plunge, October, 2014). But some of that can be blamed on the Chinese slowdown and that was not as predictable.

Remember, it has been said the Saudis made a trillion-dollar mistake.

Let’s say these are the “facts”:

• Russia was producing near its capacity
• Iran would take a year or so to hit its stride
• Venezuela would implode and any increase in production by the rest of OPEC would be offset by the decrease in Venezuela’s production
• US shale production was what it was, but the US was still importing 5 million bopd, and its refineries were configured for heavier oil than Bakken light sweet crude

With those “facts” — it that enough for Saudi to open the taps and risk a trillion-dollar mistake?

I just don't see it. I keep coming back to this graph. "We" seem to be focused on the Saudi Surge, but it's hard for me to think the Saudis were more than somewhat alarmed at the rate of growth of USA crude oil production. The three big tight oil plays in the US were still nowhere near maximum capacity and there were a dozen other tight plays in the US on the sidelines.

Of course, one can argue that the risk of a trillion-dollar mistake is only known in hindsight. I am arguing that the mainstream press and folks like me know less than 1% of what’s really going on. And Saudi Arabia certainly isn't going to show its cards. The oil industry is the second "most secretive/paranoid" "entity" in the modern world. I can argue that the oilmen, and particularly the Saudis, knew something about the US shale revolution that the rest of us did not see, or if we saw it, were not particularly concerned. Remember: as important as the US oil industry is to the US, it does not define our existence. Oil is Saudi Arabia. Without oil, Saudi Arabia is the largest sandbox in the world. For Saudi Arabia, oil is an existential issue.

I will be very interested in reading the article a reader sent me just before I left last night for an international water polo tournament. I am writing this, having not read that article, which looks to be an article about Yergin talking about the shale revolution. I don’t know what he says (I will read the article later) but let’s assume the word “revolution” is not being over-used. Let’s assume that the “shale revolution” is not hyperbole. [I am purposely not reading the article until I post this. I don't want facts to get in the way of my inappropriate exuberance.]

Let’s assume we know 1% of what goes on in the oil industry and the oilmen know 1000x as much as any of the rest of us know. The Bakken was a huge scientific experiment; it was amazing how fast things changed; how fast IPs improved; how fast costs of drilling came down. All of us now see things that none of us saw in 2000 or even in 2007 or even in 2010.

The question is when did the Saudis see these things.

When did they really understand what it meant when the USGS said the Bakken was the largest continuous reservoir ever discovered in the lower 48?

When did they realize that when CLR and Whiting and XTO were publicly talking about 1 - 3% recovery of the original oil in place, those operators were lowballing what they knew? When did they realize that primary recovery at 10% might even be on the low side?

When did they realize that Harold Hamm was the smartest  / luckiest man in the world to suggest the Bakken reservoir was a trillion bbls of oil (OOIP)? He later brought it back to reality (LOL) when he went back to saying the Bakken probably held only 500 billion bbls of OOIP.

When did the Saudis realize, like the rest of us, that it wasn’t going to be just one well on every section of the geographic Bakken but much, much more?

When did the Saudis realize there might be something to the halo effect?

Early on Bentek forecast 2.2 million bopd unfettered. Did Saudi think that was another low-ball forecast? Remember, the North Dakota Bakken got to 1.2 million bopd in an astonishingly short time and with almost no infrastructure to support the drillers.

When did Saudi realize that the geographic Bakken was just a small part of the entire tight oil US resource? The sidebar at the right lists no less than a dozen other tight plays in the US in addition to the Permian, the Eagle Ford, the Anadarko, and the Bakken.

When did the Saudis realize that with one-seventh of the rigs used during the boom (30 vs 200), the Bakken roughnecks could casually drill three or four wells to total depth every day, not complete any of them, and then casually, back in air-conditioned cubicles in New York City or Tulsa or Houston, run the numbers, study the micro-seismic data and decide which wells are best to complete next. It's my understanding that North Dakota still holds the world's record for the largest micro-seismic array. I don't know if that still holds true, and even as I write it, I really don't understand it.

My hunch is that Saudi oilmen and US geologists are studying the Pershing oil field (see link above). I have to recheck the numbers but if my numbers are correct, the Bakken is revolutionary. In October, 2015, there were 36 wells producing in that field. By November, 2015, three more wells were producing in that field, but production increased by a whopping 107%. Now remember: because of the slump in prices, production from each well is begin held back. It is easy to see: many of the wells are on-line for just a few days each month when they should be on-line every day of the month. Look at how few days some of these wells are pumping; these are huge wells and BR is running them one or two or three days a month (I think there's another story there, by the way, for another day).

One month later, December, there were still 39 producing wells in the Pershing field. As far as I can tell, no low-production wells were taken off-line to be replaced by new wells. Based on my data, there have been no new wells in the Pershing for quite some time. I may have missed one or two, but even so, it would not make a difference. So, what happened in December, in regard to production, despite all the pricing headwinds and no new wells in the Pershing oil field? Yup. Producing in the Pershing oil field increased. By a lot.  By 45%. Even under “boom conditions” that would be impressive but many of the wells were on-line for just a few days in December. Imagine if unfettered, the entire Bakken jumped in production by 45% over one month.

What’s going on? Look at the case study in an earlier note (linked above). I think that’s what is going on. I’ve noticed this to some extent for the past couple of years, but when this month’s NDIC data came out it was shocking if one drilled down (no pun intended) to the data, well-by-well. 

A typical well that was drilled back in 2008 was down to the “standard” 1,000 bbls of oil/month, which by the way, is still an incredible well -- seven years old, paid for, and still producing 1,000 bbls of oil/month. Many months it produced less than 1,000 bbls. Then, incredibly, without obviously explanation, in November, 2015, it produced 5,000 bbls over 10 days, and then in December, it produced 21,000 bbls. Nothing in the well file suggested anything had been done to the well to result in this 20-fold increase in production. However, between September and November of last year, three horizontal wells paralleling this well had been fracked.

Up until “now,” there had been discussions on the best way to frack old wells — wells fracked with only a few stages (some as few as one) and with very little proppant. Some operators advocated re-fracking through the existing hole. EOG, I believe, argued that it was just cheaper and easier to simply re-drill a well and frack it using current technology and processes. Until that is sorted out, it appears there may be a third way. During this period of low oil prices, perhaps the third way is to choose carefully which DUCs to drill first. It looks like it might make sense to complete those new wells that are running parallel next to older wells, as was done in the Pershing.

It may only be temporary, this 20-fold increase in production, but it helps explain the meteoric rise that Pershing oil field has seen in crude oil production.

When did the Saudis see this coming? 2007? 2010? 2015?