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We Live In A New World And The Saudis Are The First To Get It

by Raul Ilargi Meijer via The Automatic Earth blog

There are many things I don’t understand these days, and some are undoubtedly due to the limits of my brain power. But at the same time some are not. I’m the kind of person who can no longer believe that anyone would get excited over a 5% American GDP growth number. Not even with any other details thrown in, just simply a print like that. It’s so completely out of left field and out of proportion that you would think by now at least a few more people understand what’s really going on.

And Tyler Durden breaks it down well enough in Here Is The Reason For The “Surge” In Q3 GDP (delayed health-care spending stats make up for 2/3 of the 5%), but still. I would have hoped that more Americans had clued in to the nonsense that has been behind such numbers for many years now. The US has been buying whatever growth politicians can squeeze out of the data and their manipulation, for many years. The entire world has.

The 5% stat is portrayed as being due to increased consumer spending. But most of that is health-care related. And economies don’t grow because people increase spending on not being sick and/or miserable. That’s just an accounting trick. The economy doesn’t get better if we all drive our cars into a tree, even if GDP numbers would say otherwise.

All the MSM headlines about consumer confidence and comfort and all that, it doesn’t square with the 43 million US citizens condemned to living on food stamps. I remember Halloween spending (I know, that’s Q4) was down an atrocious -11%, but the Q3 GDP print was +5%? Why would anyone volunteer to believe that? Do they all feel so bad any sliver of ‘good news’ helps? Are we really that desperate?

We already saw the other day that Texas is ramming its way right into a recession, and North Dakota is not far behind (training to be a driller is not great career choice going forward), and T. Boone Pickens of all people confirmed today at CNBC what we already knew: the number of oil rigs in the US is about to do a Wile E. cliff act. And oil prices fall because global demand is down, as much as because supply is up. A crucial point that few seem to grasp; the Saudis do though. Good for US GDP, you say?

What I see more than anything in the 5% print is a set-up for a Fed rate hike, through a variation on the completion backward principle, i.e. have the message fit the purpose, set up a narrative that makes it make total sense for Yellen to hike that rate. And Wall Street banks (that’s not just the American ones) will be ready to reap the rewards of the ensuing chaos.

And I also don’t understand why nobody seems to understand what Saudi Arabia and OPEC have consistently been saying for ever now. They’re not going to cut their oil production. Not going to happen. The Saudis, probably more than anyone, are the guys who know what demand is really like out there (they see it and track it on a daily basis), and that’s why they’ll let oil drop as far as it will go. There’s no other way out anymore, no use calling a bottom anywhere.

In the two largest markets, US demand is down through far less miles driven for a number of years now, while domestic supply is way up; at the same time, real Chinese demand is way below what anybody projects, and oil is just one of many industries that have set their – corporate – strategies to fit expected China growth numbers that never materialized. Just you watch what other – industrial – commodities fields are going to do and show in 2015. Or simply look at prices for iron ore, copper etc. today.

OPEC Leader Vows Not To Cut Oil Output Even If Price Hits $20

In an unusually frank interview, Ali al-Naimi, the Saudi oil minister, tore up OPEC’s traditional strategy of keeping prices high by limiting oil output and replaced it with a new policy of defending the cartel’s market share at all costs. “It is not in the interest of OPEC producers to cut their production, whatever the price is,” he told the Middle East Economic Survey. “Whether it goes down to $20, $40, $50, $60, it is irrelevant.” He said the world may never see $100 a barrel oil again.

The comments, from a man who is often described as the most influential figure in the energy industry, marked the first time that Mr Naimi has explained the strategy shift in detail. They represent a “fundamental change” in OPEC policy that is more far-reaching than any seen since the 1970s, said Jamie Webster, oil analyst at IHS Energy. “We have entered a scary time for the oil market and for the next several years we are going to be dealing with a lot of volatility,” he said. “Just about everything will be touched by this.”

Saudi Arabia is desperate alright, but not nearly as much as most other producers: they have seen this coming, they’ve been tracking it hour by hour, and then made their move. And they have some room to move yet. Many other producers don’t. Not inside OPEC, and certainly not outside of it. Russia should be relatively okay, they’re smart enough to see these things coming too, and adapt accordingly. Many other nations don’t and haven’t, perhaps simply because they have no room left. Anatole Kaletsky makes quite a bit of sense at Reuters:

The Reason Oil Could Drop As Low As $20 Per Barrel

… the global oil market will move toward normal competitive conditions in which prices are set by the marginal production costs, rather than Saudi or OPEC monopoly power. This may seem like a far-fetched scenario, but it is more or less how the oil market worked for two decades from 1986 to 2004.

Whichever outcome finally puts a floor under prices, we can be confident that the process will take a long time to unfold. It is inconceivable that just a few months of falling prices will be enough time for the Saudis to either break the Iranian-Russian axis or reverse the growth of shale oil production in the United States. It is equally inconceivable that the oil market could quickly transition from OPEC domination to a normal competitive one.

The many bullish oil investors who still expect prices to rebound quickly to their pre-slump trading range are likely to be disappointed. The best that oil bulls can hope for is that a new, and substantially lower, trading range may be established as the multi-year battles over Middle East dominance and oil-market share play out. The key question is whether the present price of around $55 will prove closer to the floor or the ceiling of this new range. [..]

… the demarcation line between the monopolistic and competitive regimes at a little below $50 a barrel seems a reasonable estimate of where one boundary of the new long-term trading range might end up. But will $50 be a floor or a ceiling for the oil price in the years ahead?

There are several reasons to expect a new trading range as low as $20 to $50, as in the period from 1986 to 2004. Technological and environmental pressures are reducing long-term oil demand and threatening to turn much of the high-cost oil outside the Middle East into a “stranded asset” similar to the earth’s vast unwanted coal reserves. [..]

The U.S. shale revolution is perhaps the strongest argument for a return to competitive pricing instead of the OPEC-dominated monopoly regimes of 1974-85 and 2005-14. Although shale oil is relatively costly, production can be turned on and off much more easily – and cheaply – than from conventional oilfields. This means that shale prospectors should now be the “swing producers” in global oil markets instead of the Saudis.

In a truly competitive market, the Saudis and other low-cost producers would always be pumping at maximum output, while shale shuts off when demand is weak and ramps up when demand is strong. This competitive logic suggests that marginal costs of U.S. shale oil, generally estimated at $40 to $50, should in the future be a ceiling for global oil prices, not a floor.

As Kaletsky also suggests, there is the option of a return to an OPEC monopoly and much higher prices, but I personally don’t see that. It would need to mean a return to prolific global economic growth numbers, and I simply can’t see where that would come from.

Meanwhile, there’s the issue of ‘anti-Putin’ sanctions hurting western companies, with an asset swap between Gazprom and German chemical giant BASF that went south, and a failed deal between Morgan Stanley and Rosneft as just two examples, and that leads me to think pressure to lift or ease these sanctions will rise considerably in 2015. Why Angela Merkel is so set on punishing her (former?) friend Putin, I don’t know, but I can’t see how she can ignore domestic corporate pressure to wind down much longer. Russia is part of the global economic system, and excluding it – on flimsy charges to boot – is damaging for Germany and the rest of Europe.

Finally, still on the topic of oil and gas, Wolf Richter provides another excellent analysis and breakdown of US shale.

First Oil, Now US Natural Gas Plunges off the Chart

It’s showing up everywhere. Take Samson Resources. As is typical in that space, there is a Wall Street angle to it. One of the largest closely-held exploration and production companies, Samson was acquired for $7.2 billion in 2011 by private-equity firms KKR, Itochu Corp., Crestview Partners, and NGP Energy Capital Management. They ponied up $4.1 billion. For the rest of the acquisition costs, they loaded up the company with $3.6 billion in new debt. In addition to the interest expense on this debt, Samson is paying “management fees” to these PE firms, starting at $20 million per year and increasing by 5% every year.

KKR is famous for leading the largest LBO in history in 2007 at the cusp of the Financial Crisis. The buyout of a Texas utility, now called Energy Future Holdings Corp., was a bet that NG prices would rise forevermore, thus giving the coal-focused utility a leg up. But NG prices soon collapsed. And in April 2014, the company filed for bankruptcy. Now KKR is stuck with Samson. Being focused on NG, the company is another bet that NG prices would rise forevermore. But in 2011, they went on to collapse further. In 2014 through September, the company lost $471 million, the Wall Street Journal reported, bringing the total loss since acquisition to over $3 billion. This is what happens when the cost of production exceeds the price of NG for years.

Samson has used up almost all of its available credit. In order to stay afloat a while longer, it is selling off a good part of its oil-and-gas fields in Oklahoma, North Dakota, Wyoming, and Colorado. It’s shedding workers. Production will decline with the asset sales – the reverse of what investors in its bonds had been promised. Samson’s junk bonds have been eviscerated. In early August, the $2.25 billion of 9.75% bonds due in 2020 still traded at 103.5 cents on the dollar. By December 1, they were down to 56 cents on the dollar. Now they trade for 43.5 cents on the dollar. They’d plunged 58% in four months.

The collapse of oil and gas prices hasn’t rubbed off on the enthusiasm that PE firms portray in order to attract new money from pension funds and the like. “We see this as a real opportunity,” explained KKR co-founder Henry Kravis at a conference in November. KKR, Apollo Global Management, Carlyle, Warburg Pincus, Blackstone and many other PE firms traipsed all over the oil patch, buying or investing in E&P companies, stripping out whatever equity was in them, and loading them up with piles of what was not long ago very cheap junk bonds and even more toxic leveraged loans.This is how Wall Street fired up the fracking boom.

PE firms gathered over $100 billion in their energy funds since 2011. The nine publicly traded E&P companies that represent the largest holdings have cost PE firms at least $12.7 billion, the Wall Street Journal figured. This doesn’t include their losses on the smaller holdings. Nor does it include losses from companies like Samson that are not publicly traded. And it doesn’t include losses pocketed by bondholders and leveraged loan holders or all the millions of stockholders out there.

Undeterred, Blackstone is raising its second energy-focused fund; it has a $4.5 billion target, Bloomberg reported. The plunge in oil and gas prices “has not created a lot of difficulties for us,” CEO Schwarzman explained at a conference on December 10. KKR’s Kravis said at the same conference that he welcomed the collapse as an opportunity. Carlyle co-CEO Rubenstein expected the next 5 to 10 years to be “one of the greatest times” to invest in the oil patch.

The problem? “If you have an asset you already own, it’s probably going to go down in value,” Rubenstein admitted. But if you’ve got money to invest, in Carlyle’s case about $7 billion, “it’s a great time to buy.” They all agree: opportunities will be bountiful for those folks who refused to believe the hype about fracking over the past few years and who haven’t sunk their money into energy companies. Or those who got out in time.

We live in a new world, and the Saudis are either the only or the first ones to understand that. Because they are so early to notice, and adapt, I would expect them to come out relatively well. But I would fear for many of the others. And that includes a real fear of pretty extreme reactions, and violence, in quite a few oil-producing nations that have kept a lid on their potential domestic unrest to date. It would also include a lot of ugliness in the US shale patch, with a great loss of jobs (something it will have in common with North Sea oil, among others), but perhaps even more with profound mayhem for many investors in US energy. And then we’re right back to your pension plans.

Source

The Dangerous Economics of Shale Oil

Submitted by Dave Fairtex via Peak Prosperity.com,

For years, we’ve been warning here at PeakProsperity.com that the economics of the US ‘shale revolution’ were suspect. Namely, that they’ve only been made possible by the new era of ‘expensive’ oil (an average oil price of between $80-$100 per barrel). We’ve argued that many players in the shale industry simply wouldn’t be able to operate profitably at lower prices.

Well, with oil prices now suddenly sub-$60 per barrel, we’re about to find out.

Using the traditional corporate income statement, it is difficult to determine if shale drilling companies make money. There are a lot of moving parts, some deliberate obfuscation at some companies, and the massive decline rates make analysis difficult – since so much of reported profitability depends on assumptions made regarding depreciation and depletion.

So, can shale oil be profitable? If so, at what price? And under what conditions?

I try to deconstruct all this: here

Crude Crash Set To Continue After Arab Emirates Hint $40 Oil Coming Next

In space, no one can hear you scream… unless you happen to be Venezuela’s (soon to be former) leader Nicolas Maduro, who has been doing a lot of screaming this morning following news that UAE’s Energy Minister Suhail Al-Mazrouei said OPEC will stand by its decision not to cut crude output “even if oil prices fall as low as $40 a barrel” and will wait at least three months before considering an emergency meeting.

In doing so, OPEC not only confirms that the once mighty cartel is essentially non-existant and has been replaced by the veto vote of the lowest-cost exporters (again, sorry Maduro), but that all those energy hedge funds (and not only) who hoped that by allowing margin calls to go straight to voicemail on Friday afternoon, their troubles would go away because of some magical intervention by OPEC over the weekend, are about to have a very unpleasant Monday, now that the next oil price bogey has been set: $40 per barrell.

Luckily, this will be so “unambiguously good” for the US consumer, it should surely offset the epic capex destruction that is about to be unleashed on America’s shale patch, in junk bond hedge funds around the globe, and as millions of high-paying jobs created as a result of the shale miracle are pink slipped.

According to Bloomberg, OPEC won’t immediately change its Nov. 27 decision to keep the group’s collective output target unchanged at 30 million barrels a day, Suhail Al-Mazrouei said. Venezuela supports an OPEC meeting given the price slide, though the country hasn’t officially requested one, an official at Venezuela’s foreign ministry said Dec. 12. The group is due to meet again on June 5.

“We are not going to change our minds because the prices went to $60 or to $40,” Mazrouei told Bloomberg at a conference in Dubai. “We’re not targeting a price; the market will stabilize itself.” He said current conditions don’t justify an extraordinary OPEC meeting. “We need to wait for at least a quarter” to consider an urgent session, he said.

And with OPEC’s 12 members pumped 30.56 million barrels a day in November, exceeding their collective target for a sixth straight month, according to data compiled by Bloomberg. Saudi Arabia, Iraq and Kuwait this month deepened discounts on shipments to Asia, feeding speculation that they’re fighting for market share amid a glut fed by surging U.S. shale production.

The above only focuses on the (unchanged) supply side of the equation – and since the entire world is rolling over into yet another round of global recession, following not only a Chinese slowdown to a record low growth rate, but also a recession in both Japan and Europe, the just as important issue is where demand will be in the coming year. The answer: much lower.

OPEC’s unchanged production level, a lower demand growth forecast from the International Energy Agency further put the skids under oil on Friday, raising concerns of possible broader negative effects such as debt defaults by companies and countries heavily exposed to crude prices. There was also talk of the price trend adding to deflation pressures in Europe, increasing bets that the European Central Bank will be forced to resort to further stimulus early next year.

And while the bankruptcy advisors and “fondos buitre” as they are known in Buenos Aires, are circling Venezuela whose default is essentially just a matter of day, OPEC is – just in case its plan to crush higher cost production fails – doing a little of the “good cop” routing as a Plan B.

According to Reuters, OPEC secretary general tried to moderate the infighting within the oil exporters, saying “OPEC can ride out a slump in oil prices and keep output unchanged, arguing market weakness did not reflect supply and demand fundamentals and could have been driven by speculators.”

Ah yes, it had been a while since we heard the good old “evil speculators” excuse. Usually it appeared when crude prices soared. Now, it has re-emerged to explain the historic plunge of crude.

Speaking at a conference in Dubai, Abdullah al-Badri defended November’s decision by the Organization of the Petroleum Exporting Countries to not cut its output target of 30 million barrels per day (bdp) in the face of a drop in crude prices to multi-year lows.

“We agreed that it is important to continue with production (at current levels) for the … coming period. This decision was made by consensus by all ministers,” he said. “The decision has been made. Things will be left as is.”

Some say selling may continue as few participants are yet willing to call a bottom for markets.

There is some hope for the falling knife catchers: “Badri suggested the crude price fall had been overdone. “The fundamentals should not lead to this dramatic reduction (in price),” he said in Arabic through an English interpreter. He said only a small increase in supply had lead to a sharp drop in prices, adding: “I believe that speculation has entered strongly in deciding these prices.””

Unfortunately for the crude longs, Badri is lying, as can be gleaned from the following statement:

Badri said OPEC sought a price level that was suitable and satisfactory both for consumers and producers, but did not specify a figure. The OPEC chief also said November’s decision was not aimed at any other oil producer, rebutting suggestions it was intended to either undermine the economics of U.S. shale oil production or weaken rival powers closer to home.

Some people say this decision was directed at the United States and shale oil. All of this is incorrect. Some also say it was directed at Iran and Russia. This also is incorrect,” he said.

Well actually… “Saudi Arabia’s oil minister Ali al-Naimi had told last month’s OPEC meeting the organization must combat the U.S. shale oil boom, arguing for maintaining output to depress prices and undermine the profitability of North American producers, said a source who was briefed by a non-Gulf OPEC minister.”

And as Europe has shown repeatedly, not only is it serious when you have to lie, but it is even worse when you can’t remember what lies you have said in the past. That alone assures that the chaos within OPEC – if only for purely optical reasons – will only get worse and likely lead to least a few sovereign defaults as the petroleum exporting organization mutates to meet the far lower demand levels of the new normal.

In the meantime, the only question is how much longer can stocks ignore the bloodbath in energy (where there has been much interstellar screaming too) because as we showed on Friday, despite the worst week for stocks in 3 years, equities have a long way to go if and when they finally catch up, or rather down, with the crude reality…

Source and chart

How Long Can The Shale Revolution Last?

by Nick Cunningham via OilPrice.com,

A new study has cast serious doubt on whether the much-ballyhooed U.S. shale oil and gas revolution has long-term staying power.

The U.S. produced 8.5 million barrels of oil per day in July of this year — 60 percent more than just three years earlier. That is also the highest rate of production in three decades.

Put another way, since 2011, the U.S. has added 3 million barrels per day in additional capacity to global supplies. Had that volume not come online, oil prices would surely be much higher than they currently are.

That has “revolutionized” the energy industry and geopolitics, as scores of energy analysts have claimed. The Energy Information Administration (EIA) forecasts that U.S. oil production will hit 9.6 million barrels per day (bpd) in 2019, and gradually decline to 7.5 million bpd by 2040.

This would allow the U.S. to be one of the world’s top oil producers for an extended period of time. With such an achievement now at hand, many analysts are predicting an era of American dominance in geopolitics. For example, in an op-ed on Oct. 20, columnist Joe Nocera considered a “world without OPEC,” in which U.S. oil production soon kills off the oil cartel.

Or consider this rather triumphalist piece in Foreign Affairs from earlier this year, where two former National Security Council members who worked under President George W. Bush boasted that the recent surge in oil production “should help put to rest declinist thinking” and “sharpen the instruments of U.S. statecraft.” In the following issue, Ed Morse of Citibank went further. “Despite its doubters and haters, the shale revolution in oil and gas production is here to stay,” he declared.

But a new report throws cold water on the thinking that U.S. shale production will be around for the long haul. The Post Carbon Institute conducted an analysis of the top seven oil and top seven natural gas plays, which together account for 89 percent of current shale oil production and 88 percent of shale gas production.

The report found that both shale oil and shale gas production will peak before 2020. More importantly, the report’s author, David Hughes, says oil production will decline much more quickly than the EIA has predicted.

That’s largely because of high decline rates at shale wells across the country. Unlike conventional wells, which can produce relatively stable rates for a long period of time, shale oil and gas wells experience an initial burst of production in the first few years, followed by a precipitous decline thereafter.

Hughes estimates that the average shale oil well declines at a rate of between 60 and 91 percent over three years. Wells in the Bakken decline by 45 percent per year, which stands in stark contrast to the 5 percent annual decline for an average conventional well.

Or put another way, oil and gas companies will have to keep drilling at a feverish pace just to stand still. This means the industry is on a “drilling treadmill” that will be unsustainable over the long-term.

Predicting what oil production will be in 25 years is difficult, to say the least, but the Post Carbon report projects that oil production from the Bakken and Eagle Ford will be just one-tenth of the level that EIA is forecasting. The EIA predicts that the Bakken and the Eagle Ford will be producing a combined 1 million bpd in 2040. Hughes thinks it will be just a small fraction of that amount – a mere 73,000 bpd.

This is not the first time that David Hughes has taken aim at EIA data. In a December 2013 report, he skewered the high estimates for the potential of the Monterrey Shale in California, calling the EIA’s numbers “simplistic and highly overstated.” Several months later, the EIA was forced to back track on its figures, downgrading the recoverable oil estimates in the Monterrey by 96 percent.

Hughes says the implications of getting it wrong are “profound,” since so many companies are basing very large investments on incorrect projections. He says rosy estimates have cut into investment for renewables, while steering capital towards expensive oil and gas export terminals that should now be called into question.

An article in CleanTechnica points to the possibility of boom towns turning into “ghost towns” if the pace of drilling drops off. If David Hughes and The Post Carbon Institute are correct, there could be quite a few ghost towns popping up in the coming years as the shale revolution begins to fizzle.

Source and Full Report Here

US oil production grew more in 2012 than in any year in the history of the domestic oil industry back to the Civil War

Mark J. Perry | January 20, 2013, 12:48 am

From Saturday’s WSJ:

U.S. oil production grew more in 2012 than in any year in the history of the domestic industry, which began in 1859, and is set to surge even more in 2013. Daily crude output averaged 6.4 million barrels a day last year, up a record 779,000 barrels a day from 2011 and hitting a 15-year high, according to the American Petroleum Institute (API), a trade group. It is the biggest annual jump in production since Edwin Drake drilled the first commercial oil well in Titusville, Pa., two years before the Civil War began (see chart above).

The U.S. Energy Information Administration predicts 2013 will be an even bigger year, with average daily production expected to jump by 900,000 barrels a day. The surge comes thanks to a relatively recent combination of technologies—horizontal drilling and hydraulic fracturing, or fracking, which involves pumping water, chemicals and sand at high pressures to break apart underground rock formations.

Together, they have unlocked deposits of oil and gas trapped in formations previously thought to be unreachable.

That has meant a resurgence of activity in well-established oil regions, such as West Texas’s Permian basin, as well as huge expansions in areas that had been lightly tapped in the past, such as North Dakota’s Bakken shale region. The Bakken has gone from producing just 125,000 barrels of oil a day five years ago to nearly 750,000 barrels a day today.

The benefits of the surge in domestic energy production include improving employment in some regions and a rebound in U.S.-based manufacturing.

MP: Actually, the API’s estimate of a 779,000 barrel per day (bpd) increase in domestic oil last year is pretty conservative compared to year-end comparisons of EIA data for weekly US oil production. Compared to oil output at the end of 2011 (5.846 million bpd), US oil production increased by 1.139 million bpd last year to almost 7 million bpd during the last week of December 2012. Alternatively, using the EIA’s four-week production averages show an increase of 1.063 million bpd from December of 2011 to December 2012. The reason that the yearend comparison shows a much higher annual increase in US oil production (about 1 million bpd vs. 779,000 bpd) is that domestic oil production accelerated during the second of last year – crude oil output increased 14.6% during the second half of 2012 compared to the 4.2% increase during the first six months.

The record increase in oil output last year reminds us the US oil and gas industry continues to be at the forefront of the otherwise sub-par economic recovery, and without that sector’s strong growth in output and jobs, the economy’s sub-par performance would be even more lackluster. The 1 million bpd increase in domestic oil production last year has delivered a powerful energy-based economic stimulus to the economy, creating thousands of new direct, shovel-ready jobs in oil and gas activities, and igniting many spinoff business and indirect jobs throughout the oil and gas supply chain like the “oil-by-rail shipping boom.” The future of the US economy over the next few years looks a lot brighter because of America’s surging domestic energy production.

Source

These Are The Companies That Will Make A Killing Off Of The Coming ‘Industrial Revolution’ In America

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Simone Foxman

Last week, Citi analysts argued that technological breakthroughs—particularly in shale oil extraction—that will allow energy companies to exploit petroleum resources that were formerly inaccessible could spark an “industrial revolution” across the North American continent.

In fact, they think that oil production could almost double—in just the next 8 years!

A follow-up report from Citi’s equities team highlights the companies that are already in position to take advantage of this energy boom. While analysts argue that the effect of an energy boom would be transformative and extend far beyond the oil industry, these are the companies that will be directly and locally impacted by the technological breakthroughs in resource extraction.

Click to see the companies >

Read more: BI

Insight: Natural gas pain is oil’s gain as frack crews head to North Dakota

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By Selam Gebrekidan
NEW YORK | Mon Mar 19, 2012 4:43am EDT

(Reuters) – Collapsing natural gas prices have yielded an unexpected boon for North Dakota‘s shale oil bonanza, easing a shortage of fracking crews that had tempered the biggest U.S. oil boom in a generation.

Energy companies in the Bakken shale patch have boosted activity recently thanks to an exceptionally mild winter and an influx of oil workers trained in the specialized tasks required to prepare wells for production, principally the controversial technique of hydraulic fracturing.

State data released this month showed energy companies in January fracked more wells than they drilled for the first time in five months, suggesting oil output could grow even faster than last year’s 35 percent surge as a year-long shortage of workers and equipment finally begins to subside.

As output accelerates, North Dakota should overtake Alaska as the second-largest U.S. producer within months, extending an unexpected oil rush that has already upended the global crude market, clipped U.S. oil imports, and made the state’s economy the fastest-growing in the union.

Six new crews trained in “well completion” — fracking and other work that follows drilling — have moved into North Dakota in the past two months alone, according to the state regulator and industry sources. Back in December, the state was 10 crews short of the number needed to keep up with newly drilled wells.

“Three to four months ago, the operators were begging for fracking crews,” said Monte Besler, who consults companies on fracking jobs in North Dakota’s Bakken shale prospect. Now “companies are calling, asking if we have a well to frack.”

For the last three years, smaller oil companies with thin pockets were forced to wait for two to three months before they could book fracking crews and get oil out of their wells. As more and more wells were drilled, that backlog has grown.

Last year, an average 12 percent of all oil wells were idled in North Dakota. Even so, output in January hit 546,000 barrels per day, doubling in the last two years and pushing the state ahead of California as the country’s third-largest producer.

FEWER WELLS IDLE

Fracking, which unlocks trapped oil by injecting tight shale seams with a slurry of water, sand and chemicals, has drawn fierce protests in some parts of the country, but it has not generated heated opposition in North Dakota.

The number of idle wells waiting to be completed in the state reached a record 908 last June, the result of a new drilling rush and heavy spring floods. Only 733 wells were idle in August as crews caught up, but the figure crept steadily higher until the start of this year.

Now, the industry may be turning a corner in North Dakota, the fastest-growing oil frontier in the world.

“Both rig count and hydraulic fracturing crews are limiting factors. Should they continue to rise together, production will not only increase, it will accelerate,” said Lynn Helms, director of the state Industrial Commission’s Oil and Gas Division.

The tame winter likely played an important role in helping reduce the number of idle wells — those that have been drilled but not yet fracked and prepped for production. That number fell by 11 in January, as oil operations that would normally be slowed by blizzards were able to carry on, experts said.

Residents of the northern Midwest state — accustomed to temperatures as low as minus 40 degrees Fahrenheit (-40 Celsius) in winter and snow piles as high as 107 inches — this year enjoyed the fourth warmest since 1894, according to the National Weather Service.

The milder conditions also helped prevent the usual exodus of warm-weather workers that occurs when blizzards set in.

“Not everyone wants to work in North Dakota in the winter,” Besler said.

The backlog of unfinished wells has also begun to subside because the pace with which new wells are drilled has leveled off. The state hasn’t added new rigs since November.

The latest state data shows oil companies brought 37 new rigs to North Dakota’s in 2011 but have not added more since November. The rig count held steady at 200 in January 2012, although more than 200 new wells were drilled in that period.

SLUMPING NATGAS PRICE PROVIDES RELIEF

North Dakota has gotten a boost from the fall-off in natural gas drilling due to the collapse in prices to 10-year lows. Energy companies such as Chesapeake and Encana have shut existing natural gas wells and cut back on new ones. Last week, the number of rigs drilling for gas in the United States sank to the lowest level in 10 years as major producers slimmed down their gas business, according to data from Houston-based oil services firm Baker Hughes. [ID:nL2E8EG9OY] The fewer gas wells drilled, the less need for skilled fracking crews in the country’s shale gas outposts.

Fracking in oil patches is similar to the process used in gas wells, except for the inherent power of the pumps employed. Crews inject high-pressure water, sand and chemicals to free hydrocarbons trapped in shale rock. So big service firms such as Halliburton, Baker Hughes and Schlumberger  are reshuffling crews from shale gas fields to oil prospects in the badlands. “We have moved or are moving about eight crews. Some of those crews are moving as we speak,” Mark McCollum, Halliburton’s chief financial officer, said at an industry summit in February.

Halliburton declined to specify where the crews were moving.

Calgary-based Calfrac moved one crew into the Bakken in late 2011, according to an SEC filing. Privately owned FTS International no longer works in the gas-rich Barnett shale but has set up operations in the Utica, an emerging prospect in Ohio and western Pennsylvania, according to a company representative.

The reallocations come with some efficiency losses. Halliburton had to scale back its 24-hour operations and is still trying to solve logistical problems. “You actually take the crew from one basin and they have to go stay in motels, you have to pay them per diems for a while. And then you have to double up your personnel while you’re training new, locally based crew on the equipment once it is moved,” McCollum said.

At the same time, a shortage of key equipment such as pressure pumps is easing as companies start taking delivery of material ordered months or even years ago.

It takes about 15 such pumps to frack a gas well, and many more for oil wells. The total pressure-pumping capacity in the United States at the end of 2012 will be 19 million horsepower, two-and-a-half times more than in 2009, according to Dan Pickering, analyst with Tudor Holt and Pickering in Houston.

FRACKING AROUND THE NATION

Easing personnel constraints suggest recruiters may be meeting with success in nationwide campaigns to attract workers with specialized knowledge of complex pumps and hazmat trucks — and a willingness to brave harsh conditions.

Even with U.S. unemployment at 8.3 percent, such skilled labor remains in short supply despite salaries from $70,000 to $120,000 a year. In North Dakota, unemployment was just 3.2 percent in January, the lowest rate in the nation.

Fracking crews, much like roughnecks on drilling rigs, clock in 12-hour shifts for two straight weeks before getting a day off. They live in camps far from cities and towns. Jobs are transient — a few weeks at a single location. Most workers divide their time between the California desert, Texas ranchlands and the freezing badlands of the Midwest state.

Companies have scrambled to nab talent, with recruiters scouring far and wide. Military bases have gotten frequent visits, and some companies have hired truckers from Europe.

“There’s definitely a push to look all over for people who have good experience since it takes at least six months to train someone how to use a fracking pump,” said David Vaucher, analyst with IHS Cambridge Energy Research.

(Editing by David Gregorio)

Newfound Billions Of Barrels Of Shale Oil In Newfoundland

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Source: Shoal Point Energy website

by Marco G.

The advent of new “fracking” technology has brought previously ignored and non-producible oil source rocks back to the forefront of petroleum exploration. The high pressure hydraulic rock fracturing technology has allow present day oil drillers to fracture and condition the oil source shale rock in order to recover a portion of the oil-in-place. The shale oil stories such as the North Dakota Bakken or the Texas Eagle Ford are now common place for the petroleum environment. There is another shale oil story that has yet to hit the news flow and so you may not be aware of it. It may be an extension of the Utica shales but situated much more northern in Newfoundland Canada.

Shale Oil Basics

Shales with oil are considered the source rocks for conventional oil deposits that are trapped within a seal rock’s anti-cline or hump in the earth’s geology. The source rock was originally a settlement layer underwater on the Earth’s surface where eons of organic matter becomes trapped in the sediments. With geologic events, the rock is overlain with other rocks and becomes embedded deeper in the Earth’s crust. The source rock then has passes through a time frame of the Earth’s geothermal furnace where the high heat and pressure at depths transforms the organic matter into gas, oil or coal in a successive cooking process of maturation.

One clue to the shale oil prospectivity would be the “Total Organic Content” (TOC) of the shale. Another clue is the type of kerogen that the organic matter constitutes and the Vitrinite Reflectance value that indicates whether oil is present or not. A third measure of the prospect is the porosity of the rock or its ability to hold oil within its pores. Finally, there is the permeability of the rock as to whether the oil can be transported from place to place within faults and fractures. This is where the drillers assist the shale layer in releasing their crude oil by hydraulically stimulating multiple fractures along the drilling path.

Location, Location and Location

This shale oil prospect is the Green Point Shale (GPS) that is in the Port au Port Bay area on the west coast of Newfoundland, the island just off Labrador on Canada’s mainland. Here is a link to a good map about Oil and Gas activities around Newfoundland. The specific drilling presently is on well 3K-39, in the map following:

As in real estate, the three most important factors to consider for a resource company are the three location factors. Firstly is the location in a safe jurisdiction, not prone to government seizure? Yes, this property is in democratic Canada on the Atlantic seaboard, about one thousand miles north-east of New York. Secondly, is this property in an environmentally supportive governing jurisdiction? Yes, this exploration property is in oil and environmentally friendly Newfoundland, where there is an oil drilling history and a refinery at Come-by-Chance, Newfoundland. Thirdly, is there the infrastructure to bring in supplies and to take the products to markets? Yes, there are roads and power and ports such as Corner Brook and Stephenville, within the vicinity.

Newfoundland Oil Drilling History

Off the east coast of Newfoundland, there has a long history of oil development including the Hibernia, Terra Nova and White Rose fields discovered 200 mile offshore in the 400 feet deep Jeanne d’arc Basin in the Grand Banks area in 1970s and 80s. These projects are now owned by a consortium of big oil partners including Suncor Energy (SU), Exxon Mobil (XOM), Statoil (STO), Husky Energy (HUSKF.PK) , Murphy Oil (MUR) and Chevron (CVX). These fields are producing 300,000 barrels of light crude per day.

On the west coast of Newfoundland there has been minor oil exploration and production since the late 1800s. Offshore, is the Anticosti Basin, which was explored with seismic in the 1990s by Hunt, PanCanadian, Talisman (TLM), BHP and Exxon Mobil (XOM) . Onshore in 1994, Hunt Oil drilled the Port au Port #1 well and hit 51 API oil flowing in two intervals flowing at 1528 and 1742 bopd over nine days, but this diminished with time. The hypothesis was that this was a porous zone within a larger trend.

Currently Shoal Point Energy is extending the 3K-39 well and is about to perform open hole tests on the extension.

Billion Barrels of Oil-In-Place

The fascinating geology of the Green Point Shale is that it is considered an “Allochthon”, that is the landform has been moved here by geologic events, they were not formed in-situ. The hypothesis is that the geologic forces that moved the shale layer here also crumpled up the shales in a folding thickening pattern similar to an accordion. The layers are “tectonically thickened by imbrication (stacking)”, so that the shale layer that should be only tens of metres thick naturally ends up being a few hundred meters thick.

The Newfoundland government documents offering the oil exploration licenses for bids says this about the specific area:

Port au Port #1 oil and gas tests and the presence of oil in seeps and drilled wells demonstrate that source rocks are mature and that oil and gas was generated and migrated into traps. After trap formation there were direct migration routes through porous beds or faults from the Green Point shale into allochthonous reservoirs.

With source rocks in the oil window or dry gas window, trap preservation and presence of adequate reservoir remains the main risk factors in the Paleozoic basins.

This tells me that the shale rocks are oil bearing and the risk is how to find the reservoir. Even if conventional oil pools are not located, these thick shale beds can be now produced with modern “fracking” technology.

With the crumpled and thick layers of shale, this gives cause to the lucrative aspects of this story. The thicken layer implies an increase in the amount of oil source rocks available for extraction. The geologic forces may have also assisted in the stressing of the shales to make them permeable with large faults and micro-fracturing. The testing performed by NuTech of Texas on the geology gives some very interesting results as shown following:

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Source: Shoal Point Energy website.

The GPS shale oil layers are uncommonly thick and thus gives a multiple to the amount of possible oil-in-place. Note the number for Long Point well M16 gives 930 MMBO per section, almost a billion barrels of oil-in-place.

Recent Alliance Events

The drilling for 3K-39 is operated by Shoal Point Energy (SHPNF.PK) of Toronto. On October 26, 2011, SPE announced an agreement to acquire 100% of EL 1070 from Canadian Imperial Venture (CIMVF.PK) and also increased their interest in EL 1120 to 80% from Ptarmigan Energy. This agreement acquires the whole of EL 1070 and acquires further interest in EL 1120 which abuts.

On January 17th, SPE announced an agreement with NWest Energy (NWNYF ) to acquire Exploration License (EL) 1079R which is contiguous to EL 1120 and the EL 1070 where the 3K-39 well is. This agreement acquires EL 1079R which increases the holdings three times to basically the whole of the GPS area in Newfoundland. It seems SPE is positioning for a successful well test of 3K-39.

The Catalyst for Discovery

The drilling of 3K-39 is for the appraisal purposes of the GPS. The latest update from SPE on February 22, 2012 was:

Shoal Point is pleased to announce that operations at the DLMC Shoal Point 3K-39z well are continuing, and that the side-tracked well is expected to reach a measured depth of approximately 1,800 metres over the next few days, after which the borehole will be logged, and a open hole test will be run over the entire approximately 190 metre open hole section below the whipstock. Thereafter, the hole will be drilled to final total depth.

As announced previously, the current work will also involve up to four tests out of the casing in the existing 3K-39 borehole, subject to final regulatory approvals of the testing program. All tests will occur within the Green Point Formation, and will test the flow potential and reservoir characteristics of unstimulated, fractured Green Point shales. The balance of the program is expected to take up to 45 days to complete.

SPE states that this GPS prospect has the potential for both conventional oil (due to the fractured formation) as well as unconventional shale oil. This well will test for the flow potential in addition to the prospectivity and the potential resource size for the total Green Point Shales. The numbers for the oil-in-place is estimated to be very large.

Shoal Point Energy’s US symbol is SHPNF and may be traded here. The author holds Shoal Point Energy shares.

References:

Feb 14, 2012

Shoal Point Executive Summary

Jan 26, 2012

George Langdon’s presentation to the Shoal Point Energy Annual General Meeting

Dec 14, 2011

George Langdon Presentation to the World Frontier Exploration Congress in London, England

Nov 2011 – Resource World Magazine Feature Story on Shoal Point Energy

Equities mentioned – XOM, CVS, SU, TLM, STO, HUKSF, MUR, SPHNF, NWNYF, CIMVF

Disclaimer: The information and opinions contained within this document reflect the personal views of the author and should be viewed as food for thought and amusement only. The author may from time to time have a position in any of the securities mentioned. There are no guarantees of the accuracy, reliability or completeness of the information contained herein. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. These writings are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not request or receive compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: The author holds Shoal Point Energy shares.

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