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By Jennifer Warren on Jan 10, 2014 with 11 responses

Oil Markets and the Shale Boom 2014

Risks, Rewards, and Soft Power

In oil markets, the year 2014 already looks to repeat 2013 with some important differences. Unpredictability in the commodities’ extraction and delivery, political risk, and policy risk may play a bigger role in 2014. The potential lifting of the crude oil export ban, which the industry and some lawmakers desire, may also stir up the market.

On the policy front, safety and methods of transporting oil and water disposal issues arose in 2013, and will likely again in 2014. The second rail disaster from transporting oil from North Dakota’s Bakken Shale, the Lac-Mégantic, Quebec incident with loss of life and the December 30th Casselton derailment, renewed the debate between pipelines versus rail transportation. The director of the North Dakota Department of Mineral Resources “predicted that as much as 90 percent of crude produced in the Bakken this year will move by rail” a recent article noted. In Parker County, Texas, the Texas Railroad Commission listened to residents’ complaints about earthquakes, which they attribute to disposal wells. The US Geological Survey sees a link between the earthquakes and wastewater disposal; a similar renewal in earthquake activity is reported in Oklahoma as well.

Recent violence in Iraq, with Al Qaeda pushing into the cities of Ramadi and Fallujah of Anbar province, create concern about Iraq’s oil production potential in 2014. Iraq is the second largest OPEC producer behind Saudi Arabia. Bloomberg writes: “The violence hasn’t affected Iraq’s major oil fields, the country’s main source of revenue. Iraqi output increased by 100,000 barrels a day to 3.2 million barrels last month, the most since August. The U.S. has pledged support of various kinds to Iraq to help reverse the tide of Al-Qaeda advances and violence.

OPEC producer Venezuela saw its production drop 235,000 barrels a day to 2.45 million the month of December. OPEC production was just under its 30 million b/d target to 29.995 million at year-end. Libyan oil production is expected to rise as some shut-in oil production comes back online.

These events remind us that global oil supply is still under the management of OPEC &Co. Brent crude prices were $107.61 for the February 14 contract; Brent spot prices ended the week of Jan 2nd at 107.94, and WTI was $95 (which is also the Energy Information Administration’s (EIA) 2014 forecast price).

The Shale Genie

The shale genie is out of the bottle. U.S. production in shale oil and gas offers lessons learned for countries desiring to exploit their own resources. bigmap

According to the EIA, several nations have begun to evaluate and test the production potential of shale formations. Poland had drilled 50 test wells as of November 2013. Exxon, Marathon and Talisman had given up on Poland, with its stringent regulations. Recently however, Chevron became one of the first “Majors” to form an agreement with Polish state-controlled gas firm PGNiG. Poland imports most of its gas from Russia. Professor Rychlicki of Krakow’s mining university estimates that “Poland will need to drill about 300 test wells – each costing $10m-$15m – before the country will have a proper grasp of how much shale gas it has,” notes a Financial Times article. These wells are quite expensive relative to U.S. shale gas wells, but natural gas prices in Europe are much higher.

Argentina, Australia, China, England, Mexico, Russia, Saudi Arabia, and Turkey have begun exploration or expressed interest in their shale formations, notes the EIA.

The state of global assessment is varied and uneven. The U.S. estimate for shale oil is on the low side in comparison to estimates I have seen.

GlobalShaleOil

 

 

 

 

 

 

 

The state of shale gas is that of abundance:

GlobalShalegas

 

 

 

 

Importantly, the key to unlocking other countries’ resources is predicated on what is technically and economically recoverable. The testing and de-risking activities for shale oil in the Permian Basin offer a glimpse of the task ahead to recover shale resources. Even Pioneer Natural Resources, with their mad shale skills, took two to three years to analyze thousands of existing wells to assess the potential shale oil reserves in the Permian Basin. Estimates of the shale oil reserve potential in parts of the Permian, consisting of the Delaware, Central Platform and prolific Midland Basins, are still being constructed by various analysts and firms. The EIA cites 9.7 billion for the Permian Basin; the estimates from Pioneer in the Spraberry/Wolfcamp play is 50 to upward of 100 billion, over time.

In a continuing trend for 2013, independent exploration and production firms, both small and large, will persist in improving their processes and find efficiencies, which may potentially add return for investors. Developing the shales is a capital-intensive business. However, firms such as Pioneer Natural Resources, Laredo Petroleum, Concho Resources, and Apache are honing their “manufacturing” skills and processes.

Beyond the Financials

Importantly, when considering investing in energy firms, a number of “soft power” factors may indicate sustainability and longer-term vision. These following takeaways come from my recent article about Pioneer’s leadership in D CEO magazine. They extend to other firms.

1) Leadership and management: Is the top leadership in touch with the operations and culture of the firm? Are there indicators that their employees are in synch with and support of the firm’s mission? Are management and employees proud of their firm?

2) Vision: Is the strategy of the firm aligned with the changing environment in which they operate? Are they sensitive to the trends impacting the industry or are they out of touch with the forces impacting their industry positively or negatively?

3) Communications: Does the leadership display a proactive approach to informing the public and stakeholders about developments that could impact short-term profitability? Does the firm communicate about developments or challenges that impact the industry at large?

There are a number of E&P firms that operate with a high degree of social conscience. In fact, evidence from academic research shows that communications from the C-suite and certain decisions taken from the top are value enhancing.

Permian Basin and Shale Oil

Over the last many months, a focus of the Permian Basin’s re-development has been a foremost interest of mine. In observing the trends, which seem to be set in motion, their context and implications are only beginning to emerge. In 2013, the trends of continued U.S. oil production and a reduction of imports are confirmed. How shale resources exploration evolves around the globe is yet to be determined. New regulation in shale production may emerge given water resource and wastewater disposal issues.

Finally, in spite of depletion concerns in regards to shale oil wells—that they burn out fast and furious— they do burn faster upfront but they continue at a ‘normal’ production rate for up to one, two and possibly three decades. (Most industry experts I have spoken with indicate this to be true.) This final chart, from the December 16th early release from the EIA, indicates the U.S. government view of the impact of shale oil, also known as “tight oil.” They expect shale oil production to peak at 4.8 million b/d around 2020. IHS expects 4.5 million b/d to continue through 2035, in contrast to the EIA forecast.

EIAOilProd

The EIA expects shale oil to decline to 3.7 million b/d in 2035 and then 3.2 million by 2040. The Permian’s Spraberry/Wolfcamp is expected to ramp up more slowly initially than the Bakken and Eagle Ford, which is not a bad development. This will allow more time for infrastructure, labor and capital to adjust and may help smooth out the potential for extremes of boom and bust.

(See the new short book chronicling the U.S. oil boom, some of the Permian players’ role, and future directions: “Chronicles of an Oil Boom: Unlocking the Permian Basin,” by Jennifer Warren on Amazon.)

 

 

 

 

 

 

 

 

  1. By Russ Finley on January 14, 2014 at 12:00 am

    Exporting crude oil while subsidizing biofuels in the name of energy independence …irony is probably not the right word ; )

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  2. By rpm3145 on January 26, 2014 at 8:07 am

    “Finally, in spite of depletion concerns in regards to shale oil
    wells—that they burn out fast and furious— they do burn faster upfront
    but they continue at a ‘normal’ production rate for up to one, two and
    possibly three decades. (Most industry experts I have spoken with
    indicate this to be true.)”

    Ms. Warren, with respect, there is no hard evidence or proven industry track record of decades long “normal” production from either shale oil or gas wells. True experts in this area such Art Berman and Bill Powers, using actual production data, continue to show these wells have no meaningful economic value in as little as five years on average. Most “industry experts” have a direct economic interest in convincing anyone they can its all good when it comes to shale oil and gasses when in fact its not. When one is cracking open shale and burning tar sands to produce energy its pretty compelling evidence we are quickly working our way down the hydrocarbon tree of resources.

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    • By Robert Rapier on January 26, 2014 at 9:45 am

      “True experts in this area such Art Berman and Bill Powers, using actual production data, continue to show these wells have no meaningful economic value in as little as five years on average.”

      I know Art and I like him, but he has gotten it wrong before. Google his 2010 article: “Shale Gas—Abundance or Mirage? Why The Marcellus Shale Will Disappoint Expectations.” Read what he wrote about all the reasons the Marcellus would disappoint, and then reconcile that with the fact that today it’s producing nearly as much gas as the entire country of Qatar. And Art will tell you he got that one wrong.

      You should take all authorities with a grain of salt. They are making projections too, and sometimes they are wrong. I don’t think Art and Bill “continue to show”, I think they “continue to predict.” I saw Bill recently talk about the plummeting Barnett, but the last time I looked it has 1 year of a decline in a year that oil plays were competing hard against gas plays for rigs. He talked about the current surge in natural gas prices — purely weather-drive — as evidence of his predictions. Or, a company takes reserves off the book because of low prices, and someone incorrectly concludes that the gas simply wasn’t there. Maybe in 10 years we look back and say “Those guy really nailed it.” But it’s too early for that.

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      • By rpm3145 on January 26, 2014 at 2:59 pm

        My point is that Ms. Warren stated industry experts tell her shale gas wells last for decades at “normal rates” and this is clearly not true to date and mainly supported by O&G industry based computer modeling based on unproven claims of hyperbolic curves of production as in the people trying to sell you something.

        Regarding Art’s observations on the Marcellus, please take note of the EIA’s January 2014 Drilling Productivity Report for key tight oil and gas regions and note their reporting of a noticeable increase in the decline of production from legacy Marcellus wells. Local media in Texas is reporting the Barnett now has a documented 6.5% field wide decline and as Bill Powers would point out, decline rates in the nearby Haynesville are even more dramatic.

        I respect your observations as no one is the owner of the truth of all of this and I am not anti-drilling or anti-industry. Its these types of dialogues which should be occurring on a much larger scale instead of all the hyper claims that have been pushed so aggressively by the O&G industry and parroted by so many without question.

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        • By Jennifer Warren on January 27, 2014 at 3:45 pm

          This is regarding shale oil — from two people I actually regard as one-the-ground experts — one a top producer (engineer with three plus decades experience) and the other a financial economist (also three plus decades at least in O&G and highly sought after for his testimony and analysis — not energy writers). I’m offering the information I have heard plus noting some trending in Barnett (shale gas) (that it has not fallen off map with little new drilling)…Sorry I don’t really have time to review your comments in full and engage in facts exchange.

          And EIA data about tight oil seems to confirm this as you look at their projections over to 2040, which may be slightly more conservative than some O&G firms.

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        • By SRSrocco on February 13, 2014 at 12:43 am

          rpm3145… I totally agree with your comments. Citi put out a report last year stating that the annual decline rate for U.S. natural gas production was 24%.

          If we assume that there was 71.5 Bcf in marketable production at the end of 2013, that turns out to be a 17 Bcf annual decline rate. At peak production the Barnett, Woodford, Fayetteville & Haynesville produced together approximately 17 Bcf.

          Thus, we need to add a new Barnett, Woodford, Fayetteville & Haynesville in 2014, 2015, 2016 and so on and so forth, just to keep production flat. That’s a lot of gas.

          rpm3145… if you get this comment, would you contact me at SRSroccoReport@gmail.com

          ,
          steve

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    • By Jennifer Warren on January 28, 2014 at 9:47 am

      I have been actively researching this issue since last summer when I learned of the Permian Basin shale oil additions to the other big two oily plays. This is regarding shale oil — from two people I actually regard as on-the-ground experts — one a top producer (engineer with three plus decades experience) and the other a financial economist (also three plus decades at least in O&G and highly sought after for his testimony and analysis — not energy writers re-hashing other commentary). I’m offering the information I have gleaned, plus noting some trending in Barnett (shale gas, that it has not fallen off map with little new drilling)… I share my “experts” that have relevant expertise from my investigations of supply projections data, reserves from shale oil plays, well results from many O&G producer IR presentations, etc. They confirmed the projections I was observing from the data, ie., verification. Trust who you like. This is a work in progress but there is a lot of information contained in EIA work about all this…

      And EIA data about tight oil seems to confirm this as you look at their projections over to 2040, which may be slightly more conservative than some O&G firms. I have looked at many tens of shale oil well curves and understand their initial faster burn than conventional wells, and followed by a steady “natural” decline. It is the nature of the well and its production. EURs are a relevant metric too. Below are initial ramp ups, which have not peaked yet.

      Also, this is all predicated on price, the economics. If prices were to collapse, we’d be talking about less supply. However, there is no good reason at present to expect this. I had much deeper writings about this in other places– this is not the forum to cover such vast topics.

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      • By rpm3145 on January 30, 2014 at 10:15 am

        Ms. Warren,
        We certainly agree no one holds the truth regarding shale oil and gasses and developments within the industry are very fast moving. However since mid-2005 the O&G industry has been aggressively pushing all good things shale gas as in all upside and no downside all wrapped up in the banner of “America has a 100 Year Supply of Natural Gas”. This feel good hype was based on an unproven calculation of shale gas resources, not reserves and certainly not proven reserves. Its very misleading and harmful to the U.S. economy over the long term to have created this impression of energy security.

        While there may be many good people inside the EIA, the realities are the agency relies heavily on O&G industry consultants to put together their long term estimates and these consultants will often use the annual reports and 10Ks from the O&G companies themselves as data sets. IHS and its use of Chesapeake Energy’s 2008 investor presentation in which IHS cut and pasted it into an EIA report is a great example. I think we can see how CHK’s claims under its senior management in the time period from 2005 to early 2012 panned out.

        As well the reserve engineering firms hired by the O&G companies to make estimates of shale gas resources and reserves are paid for by the companies and typically would not be considered as the primary sources of information about the estimates.

        Much of the looser claims of what and what is not in the ground by the industry come about from the 2010 Oil and Gas Reporting Modernization Act.

        I mean no disrespect to your work or knowledge base however its apparent a lot of what is being said about the O&G industry comes from the O&G industry to place their operations in the best light possible. Not unusual given most are publically traded firms operating in the open market. I would urge you and others who follow the industry to read Bill Powers new book, “Cold, Dark, And Hungry, Exploding America’s Natural Gas Supply Myth”. Its data driven from production history as an ongoing point to what the industry claims are.

        Please note I have no financial arrangements with Mr. Powers in any regard.

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        • By Jennifer Warren on January 30, 2014 at 10:35 am

          I do understand your POV. And I am aware of his book. CHK is a special case. I am piecing things together myself wrt shale oil, and more specifically the Permian basin, where I can see it for myself, so to speak. I have not studied shale gas wells in detail bc the shale oil situ has been my main interest. And I do care very much about resource sustainability, environment, etc. I am also looking through an economic lens, and the need for jobs that the O&G industry has brought.

          Will being interesting to see in five years, and ten years. And no one has the crystal ball.

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    • By Optimist on February 13, 2014 at 3:19 pm

      “When one is cracking open shale and burning tar sands to produce energy its pretty compelling evidence we are quickly working our way down the hydrocarbon tree of resources.”
      And the problem is…?

      Over time we WILL continue to work “our way down the hydrocarbon tree of resources”. A combination of technological developments and market forces will ensure this.

      Scale gas (and oil) made no sense @ $10/bbl. At $100/bbl it’s a no-brainer.

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    • By Newton on March 21, 2014 at 5:59 pm

      as in alot of hype and wishful thinking

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