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Page added on November 19, 2014
Shale Oil vs. Arctic Drilling
Last month, the suits over at Shell (NYSE: RDS-A) put on their sad faces and went to the White House to ask for more time to burn through another billion or two.
I tell ya, these guys are gluttons for punishment.
After eight years and more than $6 billion, Shell has come up completely empty on its promise to bring a bounty of Arctic crude to market from the Chukchi Sea.
The plan to tap this Arctic flow was devised more than a decade ago — before the U.S. was swimming in shale oil and before consumption rates started falling.
Certainly I don’t fault management for moving aggressively on black treasure in the Arctic. At the time, it made a lot of sense. But today, with $80 crude, a boom in domestic oil and gas production, and little chance of ever successfully producing anything more than losses in the Chukchi, Shell really should just chalk the whole adventure up to an unfortunate face-plant and move on.
That’s not to say Arctic drilling is a wash. After all, the Russians continue to leverage their Arctic assets to ink major deals with China, and Norway’s Statoil ASA (NYSE: STO) claims its discoveries in the Barents Sea can be profitably developed with oil trading below $80 a barrel.
Of course, Norway is also desperate to stop its 13-year decline in production, so certainly there’s a bit of urgency for Statoil to produce a field that some believe holds 40% of the country’s undiscovered reserves.
Still, it should be noted that the first field scheduled for production is already looking at cost overruns in excess of 50%. This doesn’t bode well for future developments — at least not with oil trading below $80.
Fortunately for Statoil, this won’t last long.
3 Inconvenient Truths About Shale
Although you will get plenty of arguments from other analysts, I maintain that current oil prices are merely a blip.
I don’t buy for a second that OPEC has the ability to play a long game of chicken, and I’m also of the belief that the shale revolution, which has completely disrupted the global market, doesn’t have significant staying power.
As I’ve discussed in the past, the full impact of decline rates is rarely discussed when investors gather around to throw shale parties and wax poetic over illusions of century-long production runs throughout the United States.
In fact, a new report authored by Canadian geoscientist J. David Hughes (a 32-year veteran with the Geological Survey of Canada) argues that the government’s entire forecast for tight oil and the shale boom is severely flawed because it doesn’t take into account three inconvenient truths:
- High productivity shale plays are not ubiquitous, and wells suffer from very high rates of depletion.
- Because depletion rates are so high and drilling locations increasingly unproductive, the industry must drill ever more wells just to offset declines.
- To continue drilling rates, the industry will need prices to rise substantially or have to take on more debt, which may not be sustainable.
Hughes concludes that 89% of current tight oil production in the U.S. will peak this decade and decline to a small fraction of current production by 2040.
So What’s This Mean?
It means the shale party could come to an end a lot sooner than many are anticipating.
But the way I see it, there’s still plenty of opportunity to milk this thing for everything it’s worth — especially now, while oil prices are low and there are plenty of bargains to be had.
It also means that in another 10 to 20 years, perhaps the longing for Arctic oil will be met by economics that make it viable.
But for now, I don’t expect Shell to get much love from the Obama administration. And even if the company does get an extension on its lease, that doesn’t mean it will be successful.
Continued lawsuits and equipment malfunctions could end up being a much better facilitator of failure than a thumbs-down from the president.
To a new way of life and a new generation of wealth…
Jeff Siegel
14 Comments on "Shale Oil vs. Arctic Drilling"
wildbourgman on Wed, 19th Nov 2014 8:58 pm
Shell just can’t get out of it’s own way. Several wells have been drilled offshore Alaska and Canada, so what’s the problem ? I know new post Macondo regulations and a bunch of self regulation slowed them after 2010 but they should have been able to drill prior to 2010.
Nony on Wed, 19th Nov 2014 9:17 pm
Shale ain’t a blip. If prices go back up again, then we will keep adding another million bpd until the cows come home. That stuff is like coal mining. You can look at EOG and CLR’s 10Ks and see the years and years of drilling location inventory.
shallowsand on Wed, 19th Nov 2014 10:26 pm
Non. I don’t agree shale is just like coal mining. I assume you mean that every well produces at about the same rate. Look at the state websites. Some wells are huge, some are average and some are duds, just like conventional. Some would make money at $30 WTI and many will never payout unless WTI gets well over $100 again and stays there.
I am used to smaller numbers and so I look at it this way. If I spent $100,000 to drill and complete an oil well I would hope for better than 1500-3000 bbl of oil in the first five years and would hope the well would still be making more than 1/4 to 1/2 a barrel a day after year five. However, that is what the typical Bakken well is doing after five years if you multiply by one hundred. They each cost about $10 million.
They are huge fields, but need $90+ oil for most to be considered a success IMO.
Nony on Wed, 19th Nov 2014 11:03 pm
The whole Bakken has different productivity. But if you look in a given area, the output is pretty predictable.
It’s like less than 1% dry holes.
Check the standard deviation versus conventional drilling.
The other aspect in which it is like coal mining is not related to predictability but to decline rate. You get a very high decline rate, but with a high IP. So it’s like mining. You’re reliant on new wells, but also you get results right away.
P.s. CLR has been able to borrow money based on their inventory of drilling locations. The bankers would be silly to just looked at proved developed producing for deciding on loans. After all, look how production grew for the last 3 years. Obviously, they had drilling locations available.
Poordogabone on Thu, 20th Nov 2014 12:04 am
Nony, The oil age is nothing but a bleep in the history of human civilization. we just happen to live in it. Shale oil is a micro-bleep, a tiny offshoot from the momentum of 20th century
industrialization. For one the capital for those grand scale projects will run out. I don’t consider myself a doomer but a realist. The cows won’t be too tardy to come home. Sooner than later we will be living off the passive energy from the sun like we did for millennia.
Makati1 on Thu, 20th Nov 2014 4:25 am
The shale sweet spots are tapped and the rest is down hill to none. Only future production will be in defaults, bankruptcies and failures. The Entire economy of the US is dying and it will take down the massive shale debt along with the too big to fail banks. Better it happens while there is still some relatively unpolluted water and land left, say, next year.
Davy on Thu, 20th Nov 2014 5:12 am
NOo said – The other aspect in which it is like coal mining is not related to predictability but to decline rate. You get a very high decline rate, but with a high IP. So it’s like mining. You’re reliant on new wells, but also you get results right away.
NOo, you’re a smart guy granted but sometimes you talk too much. Coal miners find a coal seam and follow it sometimes for years. There may or may not be a high decline rate. This is my experience back when I sold mining equipment to the coal mines in IL. Most of the mines I dealt with were strip mines but that should not change the dynamics. I could be wrong since you are the resident expert corn on hydrocarbons.
Boat on Thu, 20th Nov 2014 6:05 am
Lol @ Makati1, A lot of investors made a lot of money on fracking and will continue to do so. The US economy is fine in fact so fine I just bought a 60″ tv to put in my 24′ x 24′ man cave. It’s a smart tv so I can look at big letters now when typing. This is a golden age were living in. Some people cant see the forest for the tree.
Dredd on Thu, 20th Nov 2014 6:08 am
More oil to fuel suicidal growth.
Whoopie!! we’ve got cultural cancer.
http://www.youtube.com/watch?feature=player_embedded&v=VOMWzjrRiBg
Davy on Thu, 20th Nov 2014 6:36 am
Boat thus was Niro’s sweet sounding fiddle as Rome began to burn.
Boat the forest for the trees appears to me to be something corns and dooms are failing to understand. I am not sure in the short term if either the corns or the dooms can see the forest. There is no historical or scientific reference for the human timeframe of 20 years or less for us to draw on either way. Corns have a strong argument for another 3-5 years at best over some doomer’s claims of 2015 being D-Day. Yet, over 5 years is folly to predict.
We must acknowledge 200 years of a growth momentum. You are just not going to see that stop overnight. Even if a major crisis develops momentum will push us through some of it. Just like a bullet striking a block of ballistic gel. Neither side can grasp the complexity of our current system. If our academia with the help of supercomputers can’t figure it out then it is a matter of faith. Is faith equivalent to the forest or is it the trees? I would say neither. Faith is just the feeling of dread or confidence when looking at the forest and the trees.
rockman on Thu, 20th Nov 2014 9:21 am
“It’s like less than 1% dry holes (in the shale plays). Check the standard deviation versus conventional drilling.)
Shame, shame Nony. I know Nony understands the biz well enough to realize that statement, while technically true, is pure propaganda BS. One of these biggest problems with the EFS play is that even after they’ve drilled and logged a well it’s virtually impossible to tell if it’s worth completing. They have to run casing and frac every well to see what it will do. Essentially every EFS well is completed…even the ones that eventually prove to be money losers because they don’t recover enough oil/NG to cover all the investment. There have been many EFS wells completed that depleted before they recovered 100% of their costs.
OTOH in most conventional plays once you log the well you’ll usually have a pretty good idea if it’s worth completing. A couple of months ago I drilled a deep conventional prospect in LA. Found the sandstone reservoir we were looking for and it had oil/NG in it. I ran the logging equipment down hole that measures reservoir pressure: son of a bitch! It was pressure depleted! LOL. Apparently it leaked across the trapping fault and was produced in another well. So I P&A the well and we lost $5 million.
So bottom line: Bragging about not drilling “dry holes” in any of the shale plays is pure unadulterated BS. The brag should be how many of those wells at least recovered 100% of the investment. IOW there’s something worse than drilling a $5 million dry hole like I did: drilling a $5 million hz hole in the EFS and then spending $4 million to complete/frac it and not recovering the entire $9 million investment. But it will produce oil/NG…but maybe only net the operator $3 million. Which means even investing just the $4 million to complete/frac the well was bad investment. Financially the company would have been better off pugging the well and eating the $5 million drilling cost instead of completing the well and losing $6 million.
But there’s some good news for the pubco that completed a money losing EFS well: they can issue a press release bragging about completing their X EFS well in a row: “We’ve never drilled a dry hole in the EFS!!! So buy our stock!” LOL.
BTW I’ve seen more than one pubco complete a conventional well knowing for certain that it wouldn’t recover the cost but did so to avoid announcing a dry hole. The common ploy in such circumstances is to delay putting the well on production as long as possible.
I often kid about us folks in the oil patch being “lying bastards”. But I have worked with more than a few who really were lying bastards. It doesn’t matter what the investment vehicle might be: if you don’t understand the details (like believing that company is a good investment because they’ve never drilled a “dry hole” in the EFS) you’re leaving yourself open to get screwed.
But remember…it isn’t personal…just business.
oilystuff on Thu, 20th Nov 2014 12:37 pm
Rockman, well said. Remember the old saying…”it was a geological success but a pipeline failure?”
The shale oil business has it’s own vocabulary (and its own accounting standards it seems); my favorite shaleism is “de-risked.” If the shale oil business is going to brag about 1% dry hole rates lets create a term for shale wells that never reach pay out. Instead of a dry hole we’ll just call it a “damp hole.”
I am not a lying bastard, by the way. But I have been known to embellish a little now and then and I am often guilty of believing my own bullshit.
rockman on Thu, 20th Nov 2014 3:41 pm
“… lets create a term for shale wells that never reach pay out.” I’ve been using such a term for decades: a non-commercial oil well.
Nony on Thu, 20th Nov 2014 4:29 pm
If you only drill ecomomical wells, you are under-drilling. There is some variance of performance. Drilling is a statistical business. However, I will BET MONEY that the standard deviation or log standard deviation of drilling within a conventional field or shale field (not the whole trend) is WAY LOWER for the shale prospect. It’s expensive, but (more) predictable.