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Page added on January 8, 2015
Oil Turnaround: Timing The US Production Peak
Summary
- Analysis points to US production peaking in late April.
- Oil rig reduction is accelerating.
- Current two week decline in EIA estimates not too unusual.
- Canadian rig count down 66% year over year.
- Current oil rig count 1482. Estimated production breakeven rigs required: 1267.
Shale oil wells deplete much faster than traditional wells. This article attempts to determine the number of rigs that need to be deployed in order to neither increase nor decrease the US production of oil.
To estimate a ballpark peak date and ballpark breakeven number of rigs in this cycle, one needs to:
1. Estimate the number of barrels that are produced in a given week, given a known number of oil rigs in operation.
2. Estimate the rate of depletion (that is, to estimate the amount of additional depletion expressed as a percentage of peak production as a function of time that occurs as a well ages).
Calculations
Step 1. Establish a predictive relationship between the number of rigs in operation and the amount of new oil to be produced. This article assumes that, on average, six weeks is required to start a productive well.
The December 9, 2014 reports from the Energy Information Agency forecast that the major oil shale producing basins will add 423,000 barrels per day in new production in the month of January 2015. These basins represent approximately 95% of new production, so total estimated new daily production would be 445,000 daily barrels. Based on 4.34 weeks per month, each week in January should average approximately 102,500 barrels of oil from new wells.
According to Baker Hughes, the number of oil drilling rigs in use (on average) from the week of November 21, 2014 though the week ending December 12, 2014 was 1566.75.
In essence, based on the EIA’s numbers, 1567 rigs in constant operation should be expected to add 102,500 barrels of oil per week. On a per well basis, that would translate into each rig contributing 65.5 new barrels of oil (102,500/1567).
Using this approach avoids the issue of determining how many rigs are unsuccessful in creating a productive well, as well as how many barrels a day each successful well produces.
While conceding that production at new wells does mildly increase over time, this analysis, as a simplifying assumption, assumes that the amount of this increase is not significant. To the extent that it is significant, the date of peak production would be further into the future.
Step 2. Calculate the amount of new oil based on rig count with a 6 week lead time, using the equation:
new oil in a week = # rigs in place six weeks ago X 65.5
For example, to determine the number of expected barrels from new wells for the week of July 4, 2014, multiply the number of rigs in operation six weeks prior (that is, the week of May 23, 2014 when there were 1528 rigs) by 65.5 barrels per rig. Result: Of the total amount of US production in the week of July 4, 2014, oil from new wells completed would have been 100,084 barrels per day.
Step 3. Determine the relationship between the age of a well and its peak production.
Fortunately, the fitted logarithmic equations for the major oil shale plays yield similar results. For this analysis, I averaged the equations from the top three oil shale plays (Bakken, Eagle Ford and Permian).
(click to enlarge)
Thank you to “Drilling Deeper – A Reality Check …” for the underlying data.
The composite fitted equation is: f(NYSE:X) = -0.237 ln(x) + 1.318. Results are then normalized by dividing by 1.318 so that week 0 will be at 100%.
One of the implications of the fitted curve is that during the first year of production, the largest portion of the reduction of productive capacity happen earlier in the year.
Step 4. Determine total amount of depletion of legacy wells.
Total amount of depletion =
Amount of depletion from wells completed last week
+ Amount of depletion from wells completed the previous week
+ Amount of depletion from the week before that … etc.
The amount of depletion for any given week is the decreased percentage of peak production occurring during that week times the original production of those wells in that week.
As an example, to determine the difference in expected production during last week and this week for wells completed in the week of July 4, 2014:
1) Calculate the % difference in peak production between the week of July 4, 2014 (26 weeks prior) and July 11, 2014 (25 weeks prior) from the equation above. The yield curve tells us a well at age 25 weeks produces 40.08% of its original production and at 26 weeks 40.73%.
The difference 0.654% times the original estimated production of 100,084 yields a reduction of 654 barrels per day for wells completed in the week of July 4, 2014.
Adding these 654 barrels per day to the reduced output based on the same methodology for all legacy production yields a total expected reduction from legacy wells of approx. 94,700 barrels per day.
Step 5. Make an adjustment for advancements in technology, rearrangement of rigs.
Two factors could push the date of peak production later than the above analysis would predict: 1) the advance of technology in which new wells squeeze out more oil and 2) the probable movement of rigs to more productive areas as less productive areas are abandoned.
Step 6. Determine number of wells required to maintain production at current levels.
When this methodology is back-tested against the latest 26 weeks, there is a small but significant bias of 9,500 more barrels actually being added to supply than would be expected in an average week. To adjust for this bias, instead of summing all legacy wells, I limited the summation to a time period starting February 1, 2013. This date was chosen as it most nearly eliminated the bias. Over a 13 week period, there is a slight average deficit and over 26 weeks a slight average surplus.
Applying this adjustment to this week’s depletion, expected depletion is 83,000 barrels. To ensure that 83,000 barrels would come on-line six weeks from now would require 1267 (83,000/65.5) oil rigs to be in operation this month. [The adjustment is somewhat higher than 9,500 due to there being more weeks excluded to produce an estimate for this week than for the average over 26 weeks].
EXPECTED TIMING OF PEAK PRODUCTION BASED ON THIS ANALYSIS
Currently there are 215 rigs more than is required to maintain production. Over the past 4 weeks, 91 rigs were idled. If that trend were to continue, one would expect that the number of rigs would reach breakeven in about 9 to 10 weeks. Peak production would occur six weeks after that, putting it sometime in the latter part of April.
UPDATE ON RIG COUNTS
Baker Hughes reports Canadian oil rigs deployed dropping to 52 this week from 152 a year earlier, a 66% drop.
Baker Hughes reports American rigs deployed dropping by 17 in the current week to 1482, 8% below maximum rig deployment of 1609 in the week of October 10, 2014. The decline in American oil rig production appears to be accelerating. Respectively, for the three months after peak rig deployments, changes in rigs deployed were -41, +7 and -93.
UPDATE ON Energy Information Agency Weekly Supply Estimates:
EIA has estimated lower weekly supply over the last two weeks. 27 times in the last 5 years, EIA has shown 2 consecutive (or more) weeks of declining estimated weekly supply.
This article explores one approach to determine the timing of peak production in this cycle. The Seeking Alpha articles “Let’s do the math” and “How many rigs need to be removed …” approach this topic from different methodologies.
14 Comments on "Oil Turnaround: Timing The US Production Peak"
SugarSeam on Thu, 8th Jan 2015 8:15 pm
finally….
Though, perhaps later today we can expect the other journalist at seekingalpha to come with his counter narrative.
Plantagenet on Thu, 8th Jan 2015 11:04 pm
An oil glut produces a drop in gasoline prices and less new oil drilling
It happens every time
GregT on Thu, 8th Jan 2015 11:46 pm
Did you make an honest attempt at verifying your tanker theory Plant? Or would you rather make shit up, as opposed to seeking out the truth?
Plantagenet on Fri, 9th Jan 2015 3:55 am
@GregT
You are more than welcome to join me here in Gibralter and count the dozens of oil tankers anchored in the bay for yourself.
I’ll meet you in The Lord Nelson for a Guiness and then we’ll go have a look together.
Cheers!
Ralph on Fri, 9th Jan 2015 5:07 am
Several MSM reports of oil being stored in tankers today. Longer future prices are sufficiently in contango to make this a rational economic strategy. It is a normal mechanism in the market. Volumes involved are unclear.
Plant is a sock puppet but on this he is correct.
http://www.independent.co.uk/news/business/news/oil-traders-hoard-crude-at-sea-9966736.html
Davy on Fri, 9th Jan 2015 5:13 am
Planter, I spent 20 years 2 times a year in Spain to visit my daughter who moved back to Spain after my 1st wife and I split the sheets. I love that region. Unfortunately I was never in Gibraltar. Most Spanish didn’t care for the situation. Europeans have a pride among themselves and Gibralter was a thorn in every Spaniards heart.
Nine years ago when I used to drink I drank Guiness at lunch with a hearty grilled Salmon meal every Sunday. It was one of those nice routines we find ourselves in. In fact I liked it so much that when I bailed on my 1%er life I bought the bar. Something special about that beer. I usually had a shot of Makers Mark after 4 Guiness and my Salmon lunch. Then I would go home and take a nice Sunday afternoon nap. I did this in the traditions of the Benedictions “prayer, work, leisure”. Prayers started in the morning in my 100 acre woods in the tradition of the Osage. Work was cutting up a rank of wood. I don’t know how this relates to PO but you PO boys tick my memory sometimes.
paulo1 on Fri, 9th Jan 2015 7:11 am
There are not enough idle tankers for meaningful long-term storage that will mitigate this price collapse, regardless of a few anchored up around Gibraltor, or anywhere else. Think about it.
If a tanker is going to sit anyway, might as well hold some crude for company, but as a strategy it is foolish.
I remember the collapse in drilling sometime in the nineties. I remember a massive offshore drilling rig anchored up in the Gulf Islands (just east of Vancouver Island). It was there for several years. I was not interested in oil production at that time, but assumed it was an arctic refugee. The stand out for me was the bright orange colour, its massive size, and that it had no business being there. One day it was gone…poof.
rockman on Fri, 9th Jan 2015 7:23 am
Davy – Good memories…glad you shared.
As far as oil being stored in tankers that always happens…to some degree. They’ll often have to wait days and sometimes weeks to get a berth to unload. And sometimes they are half way to a terminal and get redirected half way around the world is the price is right. So it’s not difficult to imagine some tankers are going idle while looking for a better price…especially in the face of falling prices.
But as I mentioned the other day some of those tankers might be idle because they can’t find a market to sell to at current prices. IOW demand for even the cheaper oil isn’t there. As pointed out earlier when the average yearly price of oil dropped for $98/bbl to $58/bbl from ’08 to ‘09 the world’s oil consumption actually decreased a bit. And that was most pronounced in the earlier days of the price collapse. Consider yourself a refiner right now and you have enough oil and product inventory to meet your market for a month. So here’s the gamble: don’t buy replacement oil now on the anticipation that the price will be lower in the near future…especially if enough buyers take the same position. This could actually develop a true glut at least in the short term: sellers willing to trade at the market price but not enough buyers to take all that oil. If this is the case I suspect the dynamic won’t last more than a few months.
The latest numbers from the EIA for the week ending 2 January: It appears that at the moment at least US refineries are in a controlling position and that part of that dynamic was developed as a result of decreased demand allowing the refiners to build inventory which, if you’re aware, refiners hate to do. Holding excessive inventory represents a loss of cash flow. But it also puts them in a better position to negotiate future oil purchases.
U.S. crude oil refinery inputs averaged over 16.4 million barrels per day during the week ending January 2, 2015, 43,000 barrels per day more than the previous week’s average. Refineries operated at 93.9% of their operable capacity last week. Gasoline production decreased last week, averaging 8.7 million barrels per day. Distillate fuel production decreased last week, averaging 5.2 million barrels per day.
U.S. crude oil imports averaged about 6.9 million barrels per day last week, down by 205,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged over 7.3 million barrels per day, 4.6% below the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 760,000 barrels per day. Distillate fuel imports averaged 265,000 barrels per day last week.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 3.1 million barrels from the previous week. At 382.4 million barrels, U.S. crude oil inventories are well above the upper limit of the average range for this time of year. Total motor gasoline inventories increased by 8.1 million barrels last week, and are well above the upper limit of the average range. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories increased by 11.2 million barrels last week but are in the lower half of the average range for this time of year. Propane/propylene inventories fell 1.6 million barrels last week but are well above the upper limit of the average range. Total commercial petroleum inventories increased by 9.9 million barrels last week.
rockman on Fri, 9th Jan 2015 7:43 am
Paulo – There are a number of designated offshore rig anchorage areas along the Gulf Coast where rigs have been known to sit idle for more than a year. And when times get really bad some rigs can’t even make it to those locations: about 20 years ago my company had to file a lawsuit to have a jackup rig removed from our field. The drilling company went under and had no money to move it. It was sitting over one of our producing wells. The Coast Guard essentially “arrested” the rig, took it into custody and moved it to an anchorage. Given we we’re right at the mouth of the Mississippi River and in hurricane alley it was deemed a safety hazard.
And 30 years ago I had to file a lawsuit along with the landowner for an onshore drill rig of a company that went bust. In fact when we were almost finished drilling the well the owner showed up and passed out the paychecks to the rig hands. Knowing the company was in financial trouble the tool pusher immediately went to a bank in town and discovered all the checks were going to bounce. Needless to say the hands were not happy and ready to walk away. But my company decided to pay them so we could finish drilling the well. And knowing they had no taste for checks I went to town and got a big chunk of cash from the bank and we paid them. So we finished the well…a good one. Eventually the land owner received a judgment and had the rig hauled off and sold for scrap.
Such stories typically don’t make it to the MSM but in the oil patch we gossip a lot so we usually hear about all of them eventually. In the next 6 to 12 months I may have some interesting gossip to share.
GregT on Fri, 9th Jan 2015 9:04 am
Plant,
Your premise that just because you see some oil tankers sitting in a port, means that they are full of oil because of an oil glut, is disingenuous. If you have facts to back up your claim that would be truthfulness, otherwise you are just making shit up.
gamilon on Fri, 9th Jan 2015 11:38 am
Re: storage at see, I just saw this: http://www.bloomberg.com/news/2015-01-09/oil-traders-seen-storing-millions-of-barrels-at-sea-on-slump-1-.html
bobinget on Fri, 9th Jan 2015 12:10 pm
Those tankers could be in ballast.
rockman on Fri, 9th Jan 2015 12:32 pm
I don’t know if those tankers sitting off the Rock are holding oil or not. Either way it’s not relevant IMHO because the storage capacity of all the excess tankers in the world is insignificant compared to the daily consumption of oil. Floating storage might be a financial advantage for individual companies but it’s not going to have much effect on the price of oil. Update on floating storage:
Reuters – Exclusive: Oil glut spurs top traders to book supertankers for storage at sea
Some of the world’s largest oil traders have this week hired supertankers to store crude at sea, marking a milestone in the build-up of the global glut. Trading firms including Vitol, Trafigur and energy major Shell have all booked crude tankers for up to 12 months, freight brokers and shipping sources told Reuters. They said the flurry of long-term bookings was unusual and suggested traders could use the vessels to store excess crude at sea until prices rebound, repeating a popular 2009 trading gambit when prices last crashed. The more than 50 percent fall in spot prices now allows traders to make money by storing the crude for delivery months down the line, when prices are expected to recover.
The price of Brent crude is now around $8 a barrel higher for delivery at the end of 2015, with its premium rising sharply over spot prices this week due to forecasts for a large surplus in the first half of this year, in a market structure known as contango. Brent LCOc1 hit a 5 1/2-year low of $49.66 a barrel on Wednesday. It was trading around $51 a barrel on Thursday.
While major energy traders will often hire vessels for long periods as part of their day-to-day operations, industry sources said the fixtures booked in the last week had the option to hold oil in storage. Some could still be used for conventional oil transportation.
Vitol, the world’s largest independent oil trader, has booked the TI Oceania Ultra Large Crude Carrier, a 3 million barrel capacity mega-ship that is one of the biggest ocean going vessels in the world by dead weight tonnage (DWT). The fixture lists, provided to Reuters by tanker brokers and oil traders, also showed Vitol has booked the 2 million barrel Maran Corona Very Large Crude Carrier (VLCC), while Swiss-based trader Trafigura has hired at least one VLCC, the Nave Synergy. Shell has taken two VLCCs, the Xin Run Yang and Xin Tong Yang, the lists showed. Vitol, Trafigura and Shell all declined to comment.
LONGER BOOKINGS, CHEAPER RATES – The shipping lists indicate the trading firms have been able to hire the VLCCs for less than $40,000 a day – well below spot rates of between $60,000 to $70,000 a day. Average earnings reached $97,000 a day in December – the highest in years – and had so far put off many oil traders. The lower rate has been possible to arrange, brokers said, by agreeing to take some older and less fuel-efficient vessels for up to 12 months. “In 2009 freight rates were extremely low and owners were willing to put their ships out on charter in order to mitigate weak spot rates,” said Christian Waldegrave at leading tanker owner Teekay.
“In a rising freight market, such as we are in now, I would think that owners would be more hesitant to fix out their ships on time charter unless they felt strongly that rates were about to decline.” Initial indications are around 12-15 million barrels of floating storage have been booked so far. In 2009 at least 100 million barrels of oil ended up being stored at sea. Shipping sources said more oil traders have also been making enquiries in the past week. Analysts at JBC Energy in Vienna said floating storage, while a sign of an oversupplied market, may provide some temporary support for oil prices in the coming weeks now that traders were able to move crude on to tankers. “This will not only release some pressure on front-end prices, but also allow for the physical market to clear somewhat,” JBC Energy said in a note. “The physical market could also turn temporarily supportive over the coming months thanks to the balancing effect of floating storage.”
FYI: the 100 million bo of oil stored at sea in 2009 represented about 0.3% of the oil the world consumed that year. Or in simpler terms: that 100 million bbls of floating storage in 2009 represented about 28 hours of global consumption. Good to put big number like 100 million bo into perspective, eh? LOL.
Beery on Fri, 9th Jan 2015 6:37 pm
I thought they figured out the timing of the US production peak 44 years ago.