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Today’s markets: Tough Making a Shale Buck

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Oil producers in shale and oil sands are finding it tough to make a buck and keep production levels rising. While the oil trade has been betting on ever rising shale production the truth is that production has leveled off. Some are saying there is a “shale band” at $60 basis Brent crude, that the market cannot cross without getting a flood of shale oil. The truth is that even if oil prices go up the market will be disappointed with increases in shale oil production. That goes for oil sands as well. In the short-term oil will be focused on the resurgent U.S. dollar and oil inventories that may show another big oil supply draw down but big picture oil fortunes may be driven by the markets misreading of shale oil production and production projections.

While we have pointed out before the problems with shale oil early on and now others are starting to see what we are talking about. The Financial Times covers the points we have covered before in an article “In charts: has the U.S. shale drilling revolution peaked? Data show slowdown in rig productivity and drilling time improvements leveling off.” The papr reports that the market is seeing shale productivity gains leveling off and pointing out that the production per shale oil well is declining.

The FT Writes” Yarrows, a Paris-based energy research firm, has done that exercise for the Permian Basin of west Texas, the hottest area for investment in the U.S. oil industry recently. Its conclusion is that productivity adjusted for well length stopped growing last year, and may even have fallen a little in 2017. As the industry has recovered since last year, companies have moved from drilling in only the most productive “sweet spots” and started to produce from more difficult rocks, creating a natural drag on productivity. Improvements in production techniques have to fight against that drag, and it seems that in the Permian recently they have been losing.”

They also point to the reality of the logistics of shale drilling. The FT says “One issue is the time it takes to drill the wells. The recorded efficiency of rigs improved dramatically over 2013-16, in part because of the spread of pad drilling: running multiple horizontal wells off from a single site, or pad, to cut down the time spent moving the rigs. Recently, however, the rate of improvement appears to have slowed, especially in the Eagle Ford shale and the Williston Basin, which includes the Bakken formation. Wells are generally getting longer, so companies may still be going faster in terms of feet per day, even if they take the same time to drill each well. But it does look as though that particular source of productivity gains is not what it was.”

They also say the shale space is burning cash. The FT says “Throughout its existence, the shale oil industry has consumed cash. Companies have been unable to cover their drilling costs from their incomes, and have needed constant infusions of debt and equity financing”. They have had little difficulty in raising that money, in part because investors wanted to share in the productivity miracle that the companies represented. If the miraculous days are over, and a more humdrum reality is setting in, will investors still be prepared to back the industry so willingly?

Already equity raising by US exploration and production companies has slowed sharply this year. Plenty of attractive investment opportunities still exist in shale: internal rates of return of 30 per cent and higher are available in the Permian Basin, according to S&P Global Platts Well Economic Analyzer. Will there be enough of those attractive opportunities to keep US oil production rising, as the government’s Energy Information Administration and others expect? The industry says yes, but the drilling and productivity numbers will be worth watching closely over the months to come.” A Must Read in the FT.

While many on Wall street are shocked to learn that Shale oil output may have been overstated and may have peaked out, readers of the Energy Report are not. We have been pointing this out for months even when others were talking cray shale production numbers. Remember you cannot lose money on every barrel and make up for it in volume. The FT also writes a piece that traders, even, OPEC and Russia are worried that we have a ‘Shale Band at $60 But if they read the other part of the paper they won’t be as scared. But it is not just shale.

Reuters reports “Canadian Oil Sands survive but can’t thrive in a $50 a barrel oil world. They say Canadian oil sands companies are retrenching. They write “ As the era of large new projects comes to a close, many mid-sized producers – those with fewer assets and producing less than 100,000 barrels of oil a day in the oil sands – have shelved expansion plans, unable to earn back the high start-up costs with crude at around $50 per barrel. Larger Canadian producers, meanwhile, focus on projects that in the past were associated with smaller names.

The last three years have seen dozens of new projects mothballed and expansions put on hold, meaning millions of barrels of crude from the world’s third-largest reserves may never be extracted. Where industry groups in 2014 expected Canada’s oil sands output to more than double to nearly 5 million barrels per day (bpd) by 2030, that forecast has been knocked down to 3.7 million bpd. This follows a spell of consolidation that has seen foreign majors sell off more than $23 billion in Canadian assets in a year and turn to U.S. shale patches such as the Permian basin in Texas, which produce returns more quickly and where proximity to refiners means the barrels fetch a better price.”

Shale to China! In a press release Continental Resources, Inc. announced its first-ever sale of Bakken oil specifically for delivery overseas. The Company has sold 1,005,000 barrels of Bakken crude oil for November delivery to Atlantic Trading and Marketing (“ATMI”), which intends to export the oil to China.

The Energy Information Administration (EIA) will release its inventory report. The API reported a massive 7.130 million barrel crude oil draw but the 1.94 million barrel increase in gasoline supply and the 1.644 build in distillate supply offset the bullish report. Yet a draw in Cushing of 151,000 barrel breaking a string of builds is very bullish. If the EIA confirms we should see new highs even as the dollar is looking strong. A hawkish Fed Chief pick possibility, John Taylor from Stanford is the main reason. Still we are keeping our long term bullish outlook.

 

— Phil Flynn

 

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