Tuesday, September 2, 2014

Time to pay the Red Queen

They say It'll kill me
but they don't say when
     -Eric Clapton

How long
do I hafta wait
    -Jorma Kaukonen (Hesitation Blues)


        Hope you all have had a nice Labor Day.  Still time to can those tomatoes and stack that wood somewhere dry.

        Here's a nice little something to inspire you.  It comes from  Tom Whipple, a retired CIA analyst,

        He points out that the the only thing between us and the world  peak is the US  "tight oil",  which most experts (including the EIA)  agree will be unable to increase after 2016.(or even earlier see this, Oil Industry insider says peak in 2014).   Nevertheless the EIA, predicits a long plateau, assuming the oil companies will drill greater numbers of wells.

         But, oil companies are already having trouble increasing production right now. 

      " Usually missing from optimistic estimates for future U.S. shale oil production is any discussion of just how fast production from fracked wells declines....The EIA recently noted that for North Dakota to increase its oil production by 20,000 barrels a day (b/d) next month, it must bring 94,000 b/d of new production online. At Texas’s Eagle Ford basin, it will take 152,000 b/d of new production next month to increase net production by 31,000 b/d."

       Talk about your "Red Queen Sydrome"  !  The decline rate for fracked oil wells is quite stunning.    Whereas, production from  traditional wells takes years, even decades to peak, and then decline at about 6%,  fracking wells will decline almost immediately, at rates up to 75%/ per year.

The average flow from a shale gas well drops by about 50 percent to 75 percent in the first year, and up to 78 percent for oil, said Pete Stark, senior research director at IHS Inc.
"The decline rate is a potential show stopper after a while," said Stark, a geologist with almost six decades in the oil patch. "You just can’t keep up with it.
Here's another way to look at it. Ron from "peakoilbarrel" analyzes one of the fracking fields. " I... it takes almost 7.6 barrels of every 10 barrels from new wells just to make up for the decline in production from old wells. And of course that number increases every month."

        Trying to keep up with declines, is an expensive proposition.  And an oil price of "merely" $100, may not provide enough cash to fund the ambitious drilling campaign needed. as this article makes clear:

"Last July the government agency, which has collected mundane statistics on energy matters for decades, quietly revealed that 127 of the world's largest oil and gas companies are running out of cash.
They are now spending more than they are earning. Profits have lagged as expenditures have risen. Overburdened by debt, these firms are selling assets.
The math is simple. The 127 firms generated $568 billion in cash from their operations during 2013-2014 while their expenses totalled $677 billion. To cover the difference of $110 billion, the energy giants increased their debt load or sold off assets.
Given that the gap between earned cash and spending stood at a modest $10 billion in 2010, that's a significant change for the industry as well as the global economy it fuels.      

     This insvestment problem is not limited to US. Both private companies and state run companies are subject to it. For an interesting analysis of how oil prices affect various OPEC countries see this article.   The "break even price"  is the price which allows a county to continue to operate the governmental including its various welfare programs).    Last year, on average, the  break even price  increased  by 7%, while the price  only rose by 1.9%.   At the current price,  Venezuela, Iraq, Nigeria, Algeria, and  Iran are already running in the red. 

     Will this affect future exploration in OPEC countries?   It already has.  The CEO of Saudi Aramco recently said that it has "        launched a program to reduce its capital cost by 20%, as "even at Saudi Aramco, project costs have roughly doubled over the last decade."   He notes that  lack of investment is " likely to put downward pressure on supplies over the longer term..",  .  

  The world's oil fields are in decline, so the world needs to replace close to 40 million barrels a day of new capacity within the next two decades, Mr. Al-Falih said. A lot of those resources will be complex and expensive, such as shale oil and gas and heavy oil projects.
"So, to tap these increasingly expensive oil resources, oil prices will need to be healthy enough to attract needed investments," said Mr. Al-Falih
 see here

       These fats are not unknown to the "folks in charge"  Mr Whipple is in fcat reporting from Falls Church in Fairfax county, Virginia - the epicenter of the "establishment"  both in terms of political power and wealth ( Fairfax County, in  suburban DC, is also the 3rd wealthiest county in the US ).
                   But, most politicians, like the execs of the oil companies that fund them,  are taught to focus solely on the next  quarter, or the next election.  So, from  that perspective, 2016 is still a long way off  


For those following the world oil production situation, it has been clear for some time that the only factor keeping global crude output from moving lower is the continuing increase in U.S. shale oil production, mostly from Texas and North Dakota. Needless to say, once the fabled “peak” comes oil and gasoline prices are certain to move higher, triggering a series of economic events – most of which will not be good for the global economy.

Thus the key question is just how many more months or years production of U.S. shale oil (more accurately call light tight oil) will continue to grow. Many have answers to this question ranging from the “next year or so” on out the middle or end of the next decade. Some forecasts as to time remaining until the “peak” arrives are politically tinged. No politician, business manager, or even investor wants to hear that serious economic problems affecting their lives may be only a few years away. Fortunately for these folks, there are many forecasters available to spin stories about how “technology” will enable US shale oil production to continue on into the dim future of the 2020’s – which most of us really can’t comprehend or plan for.

Usually missing from optimistic estimates for future U.S. shale oil production is any discussion of just how fast production from fracked wells declines. Most fracked wells are adequate or at least economic producers for three years or so, after which their production is so small that they need to be replaced or reworked to keep a meaningful amount of production going. As shale oil production grows larger and larger, more and more wells will have to be drilled and fracked just to keep production level. At some point there will be a cross over between new wells coming on stream and old wells going out of production, so output will start to slip. The EIA recently noted that for North Dakota to increase its oil production by 20,000 barrels a day (b/d) next month, it must bring 94,000 b/d of new production online. At Texas’s Eagle Ford basin, it will take 152,000 b/d of new production next month to increase net production by 31,000 b/d.

There is no doubt that the shale oil drilling industry has made many significant technological advances in recent years. Multiple wells are now being drilled from a single drilling pad – foregoing the need to move drilling rigs and setting up all the expensive infrastructure needed to frack shale wells. For a while shale oil drillers were drilling and fracking longer wells, which reduced the cost per barrel. Now we hear that drillers are increasing production per well by pumping more fracking materials down each well, and some are saying this will be enough to offset any decline in prices.

Currently US shale oil production is about 3 million b/d and in June output increased by about 100,000 b/d. About half of US shale oil production comes from North Dakota, where winter conditions are so harsh that production has been falling during the winter months.

The two major forecasting agencies, Washington’s EIA and Paris’ IEA, are both more pessimistic than is generally known for they both foresee US shale oil production leveling off as soon as 2016. The reason for this is that drillers will simply run out of new places to drill and frack new wells. While new techniques of extracting more oil from a well are possible, there is need to look closely at the costs of these techniques vs. the potential payoff.

The shale oil situation in Texas is somewhat different than in North Dakota, for there you have much better weather and two separate shale oil deposits. The recent growth in Texas’s shale oil production has been much smoother than in storm-prone North Dakota and has been increasing at about 44,000 b/d each month. So faras can be seen from the outside of the industry, production in both states will continue to grow for at least another year or two – but then we will be at 2016.

The government has never gotten around to publishing the assumptions that go into the forecast that U.S. shale oil production will stop growing circa 2016. The biggest difference between EIA/IEA and independent analysts is the government forecasters do not see a precipitous drop in shale oil production following the peak. Instead they see a period of flat production followed by a gentle decline stretching well into the next decade. Such a gentle end to the shale oil “bubble” can only assuage fears of a calamity. This projection on a gentle end to U.S. shale oil is at variance with outside forecasters who note that shale oil wells are pretty well gone in three years and simply do not see where the oil to maintain production levels will be coming from for another 10 or 15 years after the peak.

Independent analyses of U.S. shale oil generally come to the same conclusion that production will peak in the 2016-2017 timeframe, but as noted above see a much faster decline than does the government.

There are however, other factors that could become the primary cause of world oil production peaking in the next few years. The first is the turmoil in the Middle East. A lot of oil production in the region has dropped off line in recent years for political reasons and Iraqi production is endangered. The spread of militant Islam could eventually threaten other major producers in the region as could the Arab-Israeli standoff.

A more recent development having serious long-term implications for the oil industry is the growing disparity between the cost of producing a new barrel of oil from the Canadian oil sands or deep below the ocean and the selling price of that oil. A recent study points out that many planned oil production projects are simply not economical at today’s oil prices, which have been relatively stable for the past five years as costs continued to soar. Oil companies are already cutting back on new drilling projects which will have little impact on current production, but will be very significant five years or so from now.

Originally published at Falls Church News-Press.

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