There has always been a close link between U.S. oil production, international prices and OPEC, so it should come as no surprise that North America’s shale drillers find themselves locked in a battle with Saudi Arabia over prices and market share.

Until the 1950s, the United States accounted for more than half of all global oil production. Big finds such as Oklahoma’s Glenn Pool (1905) and the East Texas field (1930) drove oil price changes around the rest of the world.

Since the 1970s, the United States has been a net importer, and international prices have tended to drive changes in U.S. exploration and production.

Drilling and output in major oil-producing states have been closely correlated with the rise and fall in real oil prices. And nowhere has the relationship been closer than North Dakota, where the fortunes of its oil industry have mirrored the rise and fall in prices, resulting in a brutal cycle of boom and bust.

Light The Flare

After unsuccessful exploration for almost 40 years, the first oil was found in North Dakota in 1951, and the first well was drilled in the now-famous Bakken formation in 1953.

The extraordinary story of the state’s dogged oil pioneers was chronicled by North Dakota State Geologist John Bluemle in a monograph to mark the 50th anniversary of the first successful find in 2001.

Photographer Bill Shemorry, who was there on the night of April 4, 1951, later wrote: “When I reached the hill just west of Wheelock I could see the glow of a fire in the sky directly to the east” four miles further on (“Mud, sweat and oil” 1991).

Parking near the well, Shemorry recalled: “The drilling rig and surrounding area were lighted by a huge gas flare. It was almost as if it were daylight. The noise of the escaping gas that fed the flare was so loud spectators had to shout to make themselves heard.”

Clarence Iverson No. 1 well, named after the landowner, went on to produce more than half a million barrels of oil and 800 million cubic feet of natural gas over the next 28 years.

Booms And Busts

After the initial burst of excitement, however, North Dakota settled into a role as a niche producer, drilling around 200 wells a year and producing perhaps 50,000 barrels per day throughout the rest of the 1950s and 1960s.

The state’s first oil boom came in the late 1970s and early 1980s as a direct consequence of the Arab oil embargo (1973), the Iranian revolution (1979) and the price increases demanded by OPEC.

The number of new wells drilled increased from just 90 in 1972 to peak at 834 in 1981 as the real price of oil surged from $14 to around $100 per barrel at today’s prices.

But the state’s oil industry fell into a deep and prolonged depression in the 15 years of low prices that followed the crash of 1986.

In 1989, just 188 new wells were drilled. By 1994, the number had fallen to 111. And in 1999, it fell to just 58. (http://link.reuters.com/taq43w)

Bakken Dreams

Even as prices and drilling fell in the 1980s and 1990s, some of the most enterprising companies had begun to experiment with drilling horizontal wells in the Bakken formation.

Meridian Oil drilled the first horizontal well in the Bakken in 1987. For a few years, Bakken was the most active oil exploration play in the state, with dozens of wells drilled each year. “But by the end of 1995, drilling for the Bakken had ceased and the play was over,” according to Bluemle, the state geologist.

Writing in 2001, before horizontal drilling had been successfully coupled with hydraulic fracturing, Bluemle speculated about the possibility of renewed production from the Bakken. “However, for that to happen, we’d need to see the development of a significant new technology,” he wrote.

“Economic volumes of oil or gas cannot be produced using today’s technology. It was the application of an improved technology, horizontal drilling, that spurred the short-lived Bakken play during the late 1980s and early 1990s. But horizontal drilling wasn’t enough.”

Bluemle wondered: “Perhaps some other new technology will be developed that will allow the hydrocarbons trapped in the shale to become mobilized and produced at economic rates. If this happens, many wells will be drilled for the oil and gas in the Bakken formation.”

From 2005, just four years later, horizontal drilling and hydraulic fracturing were successfully employed together to release oil and gas trapped in the shale.

The quadrupling of oil prices between 2002 and 2012 provided the financial incentive for another drilling boom.

And by 2013, the number of new wells drilled topped 2,000, and daily production hit 860,000 barrels.

In August 2014, state oil production stood at more than 1.1 million barrels per day, more than 90 percent of it from the Bakken, according to North Dakota’s Department of Mineral Resources (http://link.reuters.com/waq43w).

Fortunes Together

North Dakota’s oil industry and other similar shale oil plays across the United States are the product of events and price changes far beyond the state’s own borders – and indeed beyond North America. It is vital to remember that linkage when thinking about the next phase of the oil price cycle.

Craig Pirrong at the University of Houston doubts that Saudi Arabia is using a predatory pricing strategy to drive shale producers out of business (“The Saudis: crazy like a desert fox?” Nov 2014).

There is no evidence that Saudi Arabia is deliberately engineering a volume or price war to stop the shale revolution (or indeed to intensify the pressure on other oil-exporting rivals such as Iran and Russia) rather than simply responding rationally to protect its market share.

Yet a prolonged period of low prices and a squeeze on the shale business may be inevitable, unless Saudi Arabia and OPEC are willing to accept a big drop in their market share.

Past experience suggests the fortunes of the U.S. oil industry, Saudi Arabia and OPEC are bound tightly together. Part of the adjustment process now underway in the oil market is likely to be a prolonged period of lower prices and a slowdown in the growth of the U.S. shale industry.

North Dakota’s Bakken has become a relatively mature play, so this time around it might be spared the worst of the slowdown. Drilling has slowed in some outlying counties, but in counties at the core of play continue to report strong activity.

North Dakota’s Bakken is far more cost-competitive than it was in the 1990s thanks to technical advances and improvements in drilling efficiency.

The shale revolution will not be reversed, and the United States will continue to have a much bigger role in global supply.

But some slowdown in shale growth is inevitable and will probably come on the fringes of the Bakken and in less developed shale oil plays, which have taken its place at the vulnerable high-cost frontier for U.S. onshore oil exploration.

RIGZONE

18 Comments on "Will The Saudis Drive US Shale Out Of Business"

Dredd on Thu, 13th Nov 2014 7:52 am 



A thrilling story about death-juice. How quaint. It is like the discussions about the equipment to be used by people who are planning to take their own lives.

shortonoil on Thu, 13th Nov 2014 9:02 am 



The shale revolution will not be reversed, and the United States will continue to have a much bigger role in global supply.

The shale revolution began its meteoric rise around 2007 while WTI prices were on their way up. In 2007 it hit $66/ barrel. The shale revolution will begin it precarious descent at the same point of $66/barrel on the way down. Reversing the shale revolution won’t be very difficult. We predict that the $66/barrel figure will be reached sometime late next year.

Further more, the Saudis have done nothing to affect world petroleum prices. They have not increased production, nor cut production. They are merely responding to the world market as is every other producer on the planet. For a professional magazine, RIGZONE should be ashamed of themselves for making such ludicrous accusations.

http://www.thehillsgroup.org/

Northwest Resident on Thu, 13th Nov 2014 9:44 am 



International Energy Agency Says: Brace for Impact

“The customarily cheery International Energy Agency (IEA), created to advise the member nations of the Organization for Economic Co-operation and Development (OECD), has taken a more somber tone in its latest annual World Energy Outlook released today. The agency dismisses the wildly hyped shale-oil and -gas “boom” in the United States as a band-aid on a malignant tumor, a temporary mask distracting the world from the pervasive illness afflicting its oil supply.”

Exactly.

“Just to keep up with expected growth in demand from developing countries (China, India, Brazil, to name the biggest ones), and to replace exhausted wells and fields, the IEA says will soon require the investment of nearly a trillion dollars a year. With the world price of oil unusually low and the cost of finding and delivering new sources of oil higher than it has ever been, there is simply no conceivable source for that kind of money.”

The Last Bust. We’re living it right now.

“In the US oil patch they are still throwing confetti in the air and blowing tin horns about America’s fracking renaissance, insisting they can drive on through this little price deviation toward American energy independence, but in the background you can hear the thuds of oil derricks hitting the ground — being laid down by companies that cannot afford to keep them going. [See Shale Drillers Idle Rigs From Texas to Utah Amid Oil Rout, Bloomberg News Nov. 7. and Oil Below $80: The First Shoes Drop, Forbes Nov. 4.)”

http://www.dailyimpact.net/2014/11/12/international-energy-agency-says-brace-for-impact/

MSN Fanboy on Thu, 13th Nov 2014 10:49 am 



Fantastic source NR. You know were fucked when the cornies start admitting we possibly have a problem.

The last Bust…

What state you from NR?

Plantagenet on Thu, 13th Nov 2014 11:24 am 



The real cause of peak oil ins’t shale oil. The cause of peak oil is draining the giant conventional fields, like Ghawar in KSA.

The Saudis are dopes to sell their own oil so cheaply. All they are doing is draining KSA faster.

Perk Earl on Thu, 13th Nov 2014 11:31 am 



“Just to keep up with expected growth in demand from developing countries (China, India, Brazil, to name the biggest ones), and to replace exhausted wells and fields, the IEA says will soon require the investment of nearly a trillion dollars a year.”

Hey NWR, the fact the IEA would finally admit that kind of massive investment is needed is quite remarkable. I swear, every day now brings some kind of SHTF type news.

Meanwhile oil just dropped a bunch more.

http://www.bloomberg.com/energy/

WTI -1.98 to 75.20
Brent -1.73 to 78.65

WTI now close to 75?! Brent now solidly under 80?

shallowsand on Thu, 13th Nov 2014 11:39 am 



Plains posted price for Williston light sweet will likely be $57 and change after today’s drop. Subtract another $6 for severance and extraction taxes and you are now at $51 and change. Subtract another $5 for LOE and another $5 for G & A and land acquisition and you are now at $41. CLR most recent quarterly report $10 million to drill and complete a well. Looks like wells make anywhere from 60,000 to 800,000 bbl of oil in first 5 years, average around 200,000. Therefore, after 20% royalty, 160,000 bbl to producer.

800,000 x $41 = $32,800,000 (still a good deal)

60,000 x $41 = $2,460,000 (real bummer, this one didn’t work at $100 oil either)

160,000 x $41 = $6,560,000 (if this is the average expectation for a Bakken well, one would think there is a problem at current prices)

Very “crude” model, I am aware, and am open to comment on what I have missed.

shallowsand on Thu, 13th Nov 2014 11:42 am 



I already see an error, did not reduce high and low side by royalty. Oh well, makes the good deal not as good and the bummer more of a bummer.

shortonoil on Thu, 13th Nov 2014 11:43 am 



“With the world price of oil unusually low and the cost of finding and delivering new sources of oil higher than it has ever been, there is simply no conceivable source for that kind of money.”

As with all our analysis ours is derived from thermodynamic considerations. The study of the energy dynamics of shale production convinced us a long time ago that it was not a net energy provider, thus not sustainable. Apparently the world’s investors are beginning to believe us:

http://www.zerohedge.com/news/2014-11-13/investors-dont-believe-low-oil-prices-are-unequivocally-good-america

We are now convinced that petroleum prices will, over the long term, continue downward for the same reasons:

http://www.thehillsgroup.org/depletion2_022.htm

The world’s high cost producers from bitumen, arctic, shale, ultra deep water, and extra heavy will be ceasing operations within a few years. Depletion will continue to take its toll; anyone who believes differently is experiencing fantasy episodes which will become increasingly dangerous with time.

http://www.thehillsgroup.org/

Davy on Thu, 13th Nov 2014 11:45 am 



Perk, those oil industry investment figures are likely only possible with more QE and continued low rates. It appears effective QE actions are over so this admission seals our fate.

Northwest Resident on Thu, 13th Nov 2014 11:45 am 



Perk — I agree. That is a significant public admission. I like their choice of wording. They could have come right out and said “fellow planetary citizens, we are truly screwed”, but they chose to moderate their language and say the same thing in a well composed pile of word fluff. Same basic meaning.

Please note, as the very foundation of our modern high tech civilization crumbles right before our very eyes, the stock market continues to soar like an eagle. I wonder how much longer they can keep up that charade?

Perk Earl on Thu, 13th Nov 2014 11:47 am 



“Reversing the shale revolution won’t be very difficult. We predict that the $66/barrel figure will be reached sometime late next year.”

Short, you think oil price will continue to drop through to late next year? Don’t you think this drop in price will play itself out to the point of a lot of non-conventional going offline, then start a slow increase afterwards – maybe even as soon as starting in the 2nd qtr. of 2015? I’m not saying oil price will get back up to where it was before, because I think we now in a downward spiral, but there will be fluctuations on the way down, surely.

Anyway, if oil price remains comparatively low to what it was before and continues down like you suggest to 66, then all bets are off. We are toast much earlier than I thought.

Northwest Resident on Thu, 13th Nov 2014 11:50 am 



“I wonder how much longer they can keep up that charade?”

I just realized, they can keep up that charade forever!

I can see it now. Massive unemployment. Long gas lines in a few places, no gas anywhere in most other places. Vehicles stranded on the side of the road. Food riots everywhere. Resource wars raging in numerous geographic locations around the world. Bodies lying in the street. But Nony will be posting something to the effect of “B_b_but, NG futures look really good!”

Sorry Nony. You know I love you.

Davy on Thu, 13th Nov 2014 12:01 pm 



I personally think this will be a matter of economic activity. If the inevitable recession hits this year then the combination of falling demand and declining oil supply from lower prices will kill any hope of expanding supply.

Prices are critically dependant at this point on economic activity. We know oil’s value is going down but the financial repression of rates and artificial liquidity has managed to maintain enough demand and capex to maintain supply.

All bets may be off if demand suffers and supply gets shut in creating a converging feedback loop of depressed demand and declining expensive supply. It is the interaction of both that is the critical factor supply.

Apneaman on Thu, 13th Nov 2014 12:32 pm 



Seems like the long time cheerleaders at the IEA are distancing themselves from their political masters. It should be quite entertaining watching all the finger pointing and blaming when it all goes to shit. I find myself wishing that nothing too dramatic will happen until after the holidays. Let us (the kids) have one last “normal” Christmas.

marmico on Thu, 13th Nov 2014 12:33 pm 



the IEA says will soon require the investment of nearly a trillion dollars a year.

Wow, $1 trillion in fixed investment in an $80 trillion global economy. Pocket change.

shortonoil on Thu, 13th Nov 2014 2:51 pm 



Short, you think oil price will continue to drop through to late next year? Don’t you think this drop in price will play itself out to the point of a lot of non-conventional going offline, then start a slow increase afterwards – maybe even as soon as starting in the 2nd qtr. of 2015?

Here is the problem: oil prices are dropping, and conventional fields are declining. The first place producers will cut is E&D, and that means less and less new fields coming on line over the next few years. At the same time the world’s economies are contracting as petroleum loses its ability to power those economies. Existing wells will be pumped for every barrel they can produce in an attempt to make up for the falling price. Yes, non conventional will begin to be phased out, but the producers will continue to pump existing wells until their operating costs are no longer being covered by the production. This will continue until we hit bottom, which we expect will be about 2020. After that there will be very little remaining to put the pieces back together again; there will be no low cost, high quality oil left to restart the wheels.

Dutchman61 on Thu, 13th Nov 2014 6:00 pm 



There is one issue with this whole column. And that is the realities of cost structures around the world. 80% of oil comes from national oil companies who have to support their governments. Actual production costs and shipping costs are only part of their cost base. Saudi crude costs $25/barrel to produce and load on tankers. It costs $15-20 to ship it to Europe, China, Japan or the US. Their base cost is therefore $40-45/barrel delivered. But Saudi Aramco has to provide $35 per barrel to support the Saudi government budget raising their effective cost to $75-80. Saudi can increase output and still survive on $60/barrel delivered to the refinery, but that is the effective floor for the world market. Venezuela needs $125, Russia $110, Iran $105, Nigeria $110, etc. The oil producers are in a trap. To take out US and Canadian producers they have to collapse their own economies. In the mean time, the press is using old data for shale oil costs and the oil sands. Breakeven for existing shale oil wells now runs as low as $34/barrel and the Canadian producers are driving costs down to below $48/barrel. Since these producers do not have to support government spending (despite the efforts of the left) they still make money when the majors are bleeding to death.

Anyone who thinks the geo political impact is not part of the Saudi calculations is living in Colorado smoking pot. Iran and its allies Venezuela and Russia are in deep trouble financially. Iran can not continue to support Syria (with Russian help), terror networks, nuke bomb development and its economy all at once. Russia blew the bank on Putin’s Olympics and is hemorrhaging cash in Ukraine. The current movement of heavy weapons is an attempt to force the issue before winter and the end of Russian cash reserves. Venezuela is melting down and it will take the Latin Left (Nicaragua, Cuba, Bolivia, etc) with it when it collapses. All of with helps Saudi.