Saturday, February 8, 2020

Idle Rambling -- Top Stories For The Week -- February 8, 2020

Top stories for the week have been posted.

Two items jumped out at me.

First, about a year ago I posted a note suggesting that, and I forget whether I said "2019" or "2020" but one of those years we would start to see a lot of wells going over 500K bbls crude oil cumulative. I may have been a year premature, but clearly we're going to see a fair number of such wells this calendar year (2020) but we should see many, many more starting next year. Pretty exciting.

Second, I posted a note about the US being the new "global" swing producer. I think a new term is needed. Prior to the US shale revolution, there was no question that the concept of "swing producer" and that term's relationship to Saudi Arabia made sense. When circumstances dictated, Saudi Arabia could increase / decrease production and or exports, and thus they were rightly considered the swing producer.

But the US is not a "Saudi Arabia." US oil production is not "centrally" managed out of Washington, DC. As long as operators -- hundreds of them -- are making money producing oil they will continue to produce oil. US oil operators don't act / react "in concert."

So, one can't talk about the US as a "swing producer" when it comes to oil.

A new term is necessary.

On another note, regarding the increasingly better oil production in the Bakken, this note was highly interesting and educational: water. It helps explain why the Bakken wells completed in 2020 are so much better then wells completed in 2010. (And, yes, I could come up with fifteen more reasons, if I had to.)


  1. How about independent or non binding producer. One of the many glories of Capitalism.

    1. Yes, I like that: the US is the world's independent producer, or non-binding producer. Thank you.

  2. I think your comment was in reply to me, when I did a little analysis to show how many wells were within each "bin" of production amount. The mega-cum wells are a tiny fraction of the population. That said, it is still fun to follow them and see more and more wells passing 1 MM bopd. (But I don't remember where we talked about it.)

    1. Yes, the "mega-cum" wells are a tiny fraction of the entire population of Bakken wells. That's why there's so much work left to be done in the Bakken. "All" those wells drilled before 2014 (that would be seven years of wells) need to be re-fracked, or re-drilled/re-fracked.

    2. Some of them, sure. But they are not all going to graduate to superstar. I think the percentage may double or even go up tenfold. But they will remain in absolute numbers a tiny minority.

      They still help the economics a lot though, since companies make money on the average, not the median. And superstars can sort of "carry" a lot of wells that are slightly subeconomic.

    3. I guess it depends on the definition of "superstar."

  3. The correct term is "marginal producer". Marginal does not mean an insult, although you could take it that way. What it means is the next increment of production to be added or subtracted. Essentially it is the production that is barely profitable (so declines away with price drop) or barely NOT PROFITABLE (so comes ON if prices increase).

    This is the production that comes on/off the market to respond to a price signal. Not the way a cartel would. But just naturally...extra production when prices go up and some coming off as prices go down. Just based on economic response.

    This is standard economics, supply and demand. (Elasticity of supply.) Check out the Wikipedia article or look at Youtube for the Kahn Academy explanations of supply and demand.)

    In the case of oil, you also have an issue of time response. In general, almost ALL wells that are already completed will CONTINUE to pump. That's because the cash cost to continue is low. However, new wells will not be drilled (if prices crash)...or at least less of them will. So this in conjunction with natural decline (reasonably fast for shale) leads to production decline in response to price crashes...see 2015-2016. The same thing applies in reverse however, when prices go up. We saw this very notably in 2018 when prices were 65 average.

    If we go back into the 40s, production will likely decline in the US. If we go into the 60s, it will explode like 2018 (maybe not quite as strong an explosion since we are already so big and fight more decline, but still big...over 1 MM bopd/year growth). In the 50s is sort of a middle ground with moderate growth. But 51 makes a big difference versus 59.

    Don't strain yourself keeping up with silly billies on CNBC or MSNPC or Bloomberg who talk about "swing producers" and don't even know basic economics. Good looking chicks, reading questions for the camera (and getting talked to in the ear by the producer). You've seen the movie Broadcast News...journalists are airheads, not analysts. But you should know the basic concepts of supply and demand and not mangle the language like those pretty girls do. Just say not to "US is the new swing producer".

  4. Thank you.

    I think the big "aha" moment for me this weekend was realizing that "swing producer" currently has little relevancy.

    "Swing producer" is jargon, and jargon is often helpful shorthand when discussing an issue. Without jargon it would be difficult to give an effective "30-second elevator speech" or "pitch."

    In the "old days," one could argue Saudi Arabia was the "swing producer." Perhaps for now, that phrase is simply irrelevant and no longer something that needs to be discussed.

  5. Swing producer was always a silly term, even pre-shale. The correct term is "dominant player". Basically they were monopolists. (Yes they did not have 100% of the market, but enough of it to be able to push prices up, by constraining supply. They act as monopolists do.)

    They did have the ability to dampen shocks but really this is a very overplayed thing by the media and by them. Really they were all about restraining supply to raise price. Often they blew off dampening shocks and in any case they were dampening them around a much higher level. And for consumers the damage from paying systemically higher prices is much more important than shock dampening (at high price).

    Periodically SA has thrown in the towel and allowed the market to clear (i.e. pumped like a US company would, all out). At that point in 1986 or 2014, prices crashed dramatically. Usually they've gone back to acting as a monopolist and raising prices. They are actually doing it right now. No, not back to 100. But definitely higher than it would be if all of their (and OPEC allies) oil was flowing freely.

    Again, this is basic supply and demand theory along with the behavior of monopolists. Can watch some Youtube videos on it, if you want to learn how this works.

    1. Many, many moving parts. Books have been written about this. Anyway, it will be interesting to see how this plays out over the next ten years.