[shallow sand]

In our area in 1998, almost half of the oil production was shut-in. Some was voluntary, but most was due to operators running out of cash and going bankrupt. The largest operator in the area went under, and its production dropped by 2/3 in a year as the money simply ran out.

I read where most assume that the producing shale wells will not be shut-in because they are profitable and the money has already been sunk to drill and complete them. I suppose some production may be bought by solvent operators at fire sale prices. However, if the price keeps dropping and stays there for awhile, why wouldn't the same thing happen that has happened in the past? The operator runs out of cash, lays off everyone and files BK. There is no one to pump the wells and no money to pay utilities, down hole chemical, water haulers, etc. It is not easy for the bankruptcy trustees to operate oil production, especially if there is no cash with which to hire contract operators.

Would appreciate input.

[westexas]

I would think that the 2008 to 2009 decline is more relevant:

2008 Vs. 2014

It’s interesting that the five month decline in monthly Brent prices, from $133 in July, 2008 to $52 in December, 2008 was sharper than the current five month decline, from $112 in June, 2014 to $79 in November, 2014, roughly a 60% decline in five months in 2008, versus a 30% decline in five months in 2014. However, the annual price in 2008, $97, is going to be quite similar to the annual price in 2014, probably right around $99.

The monthly decline bottomed out at $40 in December, 2008. The year over year change in annual prices was from $97 in 2008 to $62 in 2009. And of course two years later, annual prices ranged from $109 to $112 for 2011 to 2013 inclusive. The three year annual rate of increase in monthly Brent prices, from December, 2008 ($40) to December, 2011 ($108) was 33%/year.

However, according to the EIA, Saudi total petroleum liquids production (+ other liquids) declined from 11.2 mbpd in July, 2008 to 10.0 mbpd in December, 2008, which does not seem to be a pattern that the Saudis are currently emulating. Having said that, after Saudi net exports increased from 7.1 mbpd in 2002 to 9.1 mbpd in 2005, their annual net exports have been below their 2005 rate for eight straight years, and I estimate that the Saudis have already shipped, through 2013, about 40% of their post-2005 CNE.

Monthly Brent Prices:
http://www.eia.gov/dnav/pet/hist/LeafHa ... =RBRTE&f=M

And as I periodically note, CNE (Cumulative Net Exports) depletion marches on.

Normalized values for the (2005) Top 33 Net Oil Exporters, as a percentage of 2005 values, for 2005 to 2012:



Updated numbers 2013 (as a percentage of 2005 values):

Production: 101%
Net Exports: 94%
ECI Ratio: 83%
Estimated Remaining post-2005 CNE: 72%

(ECI = Ratio of production to consumption)

Note that (by definition) it is not whether remaining post-2005 Global CNE have declined; it’s a question of by what percentage. Based on the 2005 to 2013 rate of decline in the (2005) Top 33 ECI Ratio, I estimate that we consumed about 5% of remaining post-2005 CNE in 2013.

And of course, so far at least, through 2013, China & India have consumed an increasing share of a post-2005 declining volume of Global Net Exports of oil, as the supply of Global Net Exports of oil available to importers other than China & India fell from 41 mbpd in 2005 to 34 mbpd in 2013.

A friend sent me a note to the effect that net new global automotive sales (net being gross new sales less vehicles scrapped) are estimated to be about 50,000,000 units in 2014, or in round numbers about 140,000 net new vehicles per day.

[Subjectivist]

$this->bbcode_second_pass_quote('shallow sand', 'I')n our area in 1998, almost half of the oil production was shut-in. Some was voluntary, but most was due to operators running out of cash and going bankrupt. The largest operator in the area went under, and its production dropped by 2/3 in a year as the money simply ran out.

I read where most assume that the producing shale wells will not be shut-in because they are profitable and the money has already been sunk to drill and complete them. I suppose some production may be bought by solvent operators at fire sale prices. However, if the price keeps dropping and stays there for awhile, why wouldn't the same thing happen that has happened in the past? The operator runs out of cash, lays off everyone and files BK. There is no one to pump the wells and no money to pay utilities, down hole chemical, water haulers, etc. It is not easy for the bankruptcy trustees to operate oil production, especially if there is no cash with which to hire contract operators.

Would appreciate input.

[BobInget]

World wide auto sales topped 70,000,000 not 50 million as westexas writes.

http://www.statista.com/statistics/2000 ... ince-1990/

In fact, vehicle sales (and motorcycle) have not had a down year since 2009.
Harley alone sold almost a half million bikes in the US this year.

China's soft landing attempts seem to bother growth investors. What would they prefer?

New methods of O&G extraction are not limited to the US. As always, crude oil has been an international bidness. When current techniques begin to show diminished yields in the US they will either move to Argentina or China or cut costs.

All this speculation about US E&P BK's is only playing into short the market speculation.

You need to understand, OPEC is at war with itself. Low oil prices are endangering
more then a few US highly leveraged drillers.

Venezuela is being thrown into China's arms. Iraq, potentially the world's biggest
crude oil contributor is fighting for its life as a coherent nation. Libya, for all intents a failed state.. primed for the picking. I could go on but most of you, already bored.

[shallow sand]

I agree if this is a short term situation, most will survive or at least be in a position to divest leases with bank approval. Some equity and bond holders would get burned. There could be some mergers.

However, I feel the low prices will last more than one year. I thought that before the OPEC meeting and the meeting confirmed.

I figured WTI would slide to $60-65 range and that would slow drilling. I think maybe I was wrong and we may be looking at much lower prices for 2015.

I agree 2008-2009 was more pronounced, but I would wager the debt levels held by public and private E & P's was not so high. We are not in a shale area, but aware of a lot of production which was sold for $100,000 per bbl range and was financed since 2010. Was not so much the case in 2008-2009. Compare shale drillers 2008-2009 debt levels to 2014. I think CLR has 10 times the liabilities it had in 2009.

If this is short term, most can manage. Year plus of sub $50 WTI will cause massive default IMO. Many 40 handles on Plains Marketing Price bulletin yesterday and those turn to 30 handles with sub $50 WTI. I think you will see a lot of production shut in if we have a long term event of below $50 WTI. Carnage. Followed by another super spike.

[westexas]

BobInget,

You might want to re-read what I wrote about vehicle sales.

[GoghGoner]

The IEA estimates the surge in the US will continue through next year.

$this->bbcode_second_pass_quote('', 'T')he IEA boosted projections for supplies outside Opec in 2015 by 200,000 barrels a day, forecasting output will expand by 1.3 million barrels a day to 57.8 million a day. Non-Opec supply will climb by a record 1.9 million barrels a day this year, it estimated.

"Despite lower crude oil prices, we expect US production to continue to grow apace in 2015," expanding by 685,000 barrels a day, the agency said.

[Tanada]

$this->bbcode_second_pass_quote('GoghGoner', 'T')he IEA estimates the surge in the US will continue through next year.

$this->bbcode_second_pass_quote('', 'T')he IEA boosted projections for supplies outside Opec in 2015 by 200,000 barrels a day, forecasting output will expand by 1.3 million barrels a day to 57.8 million a day. Non-Opec supply will climb by a record 1.9 million barrels a day this year, it estimated.

"Despite lower crude oil prices, we expect US production to continue to grow apace in 2015," expanding by 685,000 barrels a day, the agency said.

[shallow sand]

Williston Light Sweet posted price will be at $40 today.

Cost of Bakken well approx. $10 million

EUR over 5 years average 170,000 bbl oil
20% royalty
5.5% sev. taxes
$5 per bbl LOE
$5 g & a, land etc.

136,000 x $40 = $5,440,000 x .945 = $5,140,800 - $1,360,000 = $3,780,800 pre tax net in 5 years.

Still $6,219,200 short after 60 months and haven't even factored interest and time value of $$. Yes, leaving out nat gas revenue, but it won't help much.

CLR 182,000 boepd and land still valued at around $22 billion (market cap of $12 plus $10 billion of total liabilities).

I guess the market still thinks this is a short term collapse?

[GHung]

Yeah, Shallow, maybe the 'markets' can't deal with a reality check just now:

Fed Bubble Bursts in $550 Billion of Energy Debt: Credit Markets
http://www.bloomberg.com/news/2014-12-1 ... rkets.html

$this->bbcode_second_pass_quote('', 'T')he danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt.

Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank AG. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for energy junk bonds will double to eight percent next year.

“Anything that becomes a mania -- it ends badly,” said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management. “And this is a mania.”

The Fed’s decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were being overlooked. A report from Moody’s Investors Service this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis.

Borrowing costs for energy companies have skyrocketed in the past six months as West Texas Intermediate crude, the U.S. benchmark, has dropped 44 percent to $60.46 a barrel since reaching this year’s peak of $107.26 in June.

Yields Surge

Yields on junk-rated energy bonds climbed to a more-than-five-year high of 9.5 percent this week from 5.7 percent in June, according to Bank of America Merrill Lynch index data. At least three energy-related borrowers, including C&J Energy Services Inc. (CJES), postponed financings this month as sentiment soured.

“It’s been super cheap” for energy companies to obtain financing over the past five years, said Brian Gibbons, a senior analyst for oil and gas at CreditSights in New York. Now, companies with ratings of B or below are “virtually shut out of the market” and will have to “rely on a combination of asset sales” and their credit lines, he said.

Companies rated Ba1 and lower by Moody’s and BB+ and below by Standard & Poor’s are considered speculative grade.

Stimulus Effect

The Fed’s three rounds of bond buying were a gift to small companies in the capital-intensive energy industry that needed cheap borrowing costs to thrive, according to Chris Lafakis, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Quantitative easing “has been one of the keys to the fast, breakneck pace of the growth in U.S. oil production which requires abundant capital,” Lafakis said.

One of those to take advantage was Energy XXI Ltd. (EXXI), an oil and gas explorer, which has raised more than $2 billion in the bond market in the past four years.

The Houston-based company’s $750 million of 9.25 percent notes, issued in December 2010, have tumbled to 64 cents on the dollar from 106.3 cents in September, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They yield 27.7 percent.

Energy XXI got its lenders in August to waive a potential violation of its credit agreement because its debt had risen relative to its earnings, according to a regulatory filing. In September, lenders agreed to increase the amount of leverage allowed.....

[rockdoc123]

$this->bbcode_second_pass_quote('', 'M')O this forecast is based on the assumption that oil companies are too stupid to see the writing on the wall so they will blindly go forward drilling a massive number of wells that they know will lose money because they are drilling a massive number of wells. People in the real world do not stay in business for very long if they act in such a contrary fashion.

[Subjectivist]

$this->bbcode_second_pass_quote('', 'R')iyadh, Asharq Al-Awsat—Saudi Arabia is playing a strategic game by refusing to back a cut in OPEC oil production, lowering international oil prices, according to Gulf-based economists.

The price of oil continued to fall this week after the International Energy Agency (IEA) forecast weaker demand in 2015. Brent crude fell to below 63 US dollars per barrel on Friday, its lowest price since July 2009.

Suhail Al-Darraj, a Saudi-based economist, told Asharq Al-Awsat that he expects Brent crude oil to maintain price levels of no less than 60 US dollars per barrel. “We may see prices dip below this level, but not for long. Oil prices have become a major source of concern for many countries and international companies,” he said.

Darraj said that the oil price drop is most affecting countries like Venezuela, Iran and Russia, but is actually serving Saudi Arabia’s interests. “The declining oil prices are serving the strategic interests of the Kingdom, and in my view Saudi Arabia’s oil policy is characterized by a great deal of wisdom,” Darraj said in reference to the ongoing competition between shale and crude oil.

OPEC took the decision not to reduce oil production despite an oversupply in world markets at its annual meeting in late November. Oil prices have fallen sharply since June this year as increasing North American production of shale oil has flooded the market at a time of sluggish economic growth.

Darraj confirmed that many oil companies have stopped, or slowed, oil production due to falling prices. He added that billions of dollars are being lost due to the high cost of shale oil exploration, adding that it will be increasingly difficult for shale oil producers to continue a high level of output due to the accelerating slide in oil prices.

As for how Saudi Arabia has so far been able to absorb the impact of falling oil prices on its economy, the Saudi financial expert said that the steady value of the US dollar to the Saudi riyal has helped. “Iran and Russia have suffered a double blow during the current crisis, with the currency of both countries declining in line with falling oil prices.”

Gulf-based economist Fahad Al-Mashari told Asharq Al-Awsat that Saudi Arabia’s interests will be meet so long as crude oil stabilizes between 60 and 70 US dollars per barrel, adding that other oil-producing
states—particularly those relying on shale oil production—will be unable to sustain long-term profits if oil prices do not improve.

“Shale oil producers will suffer from the sharp decline in oil prices, while Saudi Arabia will succeed in protecting its share of the market, particularly after some international companies stop producing oil to save costs,” Mashari said.

[ROCKMAN]

"As for how Saudi Arabia has so far been able to absorb the impact of falling oil prices on its economy, the Saudi financial expert said that the steady value of the US dollar to the Saudi riyal has helped". So let's see how the numbers work out: at their current production rate oil selling for $30 per bbl less will lose the KSA $106 BILLION over just the next 12 months. Actual since oil prices began dropping the SAR has dropped in value to the USD but it's been a very small decrease. Either why I'm not sure how a steady SAR/USD exchange rate makes up for potentially losing hundreds of $BILLIONS in the coming years.

As far as $60/bbl oil killing the enthusiasm for developing the shale it's good to remember that the shales took off and US oil production reversed its decline trend just a few years after prices recovered to $60/bbl from the pain suffered by the oil patch from $17/bbl oil in 1998. So when the KSA decides to force oil prices back up to $100/bbl it shouldn't take long for the shale plays to regenerate IMHO. After every bust the oil patch has suffered in the past activity always recovered when prices increase. The recent collapse in oil prices pales in comparison to what happened in the mid 80' and late 90's.

And lastly lets eavesdrop on that conversation the KSA had with the refiners that buy its oil:

KSA: "We realize you're willing to buy the same amount for oil you have been at $100/bbl. But we want to drive the US shale players out of business so we must refuse to accept that extra $100 BILLION you're willing to pay us over the next 12 months."

Refiners: "That's OK by us. How much we pay for your oil doesn't determine our profit margin. That's done by the difference in the price we pay you and what consumers pay us for our products. IOW the crack spread. So it doesn't matter to us if you charge us $100/bbl or $60/bbl as long as we make the same $15/bbl crack spread. In fact, we'll charge our customers less then they are willing to pay for our products. If we didn't voluntarily reduce our crack spread from $45/bbl to the $15/bbl we're getting now it would just be so unfair to our citizens. After all, ExxonMobil and we other product sellers pride ourselves in selling to our customers at the lowest price possible."

Oh yeah...easy to imagine that conversation taking place. LOL.

[shallow sand]

Understand what consumers are willing to pay argument, but how does that explain the wild swings? $8 to $30 to $14 to $147 to $32 to $115 to $57 and falling. Demand typically doesn't move that fast. Also, looks like demand is increasing world wide, although maybe at slower than expected rate.

And why just because OPEC doesn't cut its production do we go from $74 to $57 in two weeks? Did that much really change in 2 weeks, or even 6 months? I bet 90% of people you survey would say they didn't change driving habits because price was just too high in June, as opposed to how they drove previously. I don't know that I've ever cancelled a trip in the truck due to the price, although some do I'll admit.

I accept the wild price swings because they have happened since about 1861. Doesn't mean I am always able to understand why. Grains swing alot also, but the swings usually make more sense than those in crude oil. Crude oil price action is difficult to understand. Funny how business channel pundits change their tune all the time. Prices up sharply its going to $150, six months later prices falling sharply, its now going to $30. Aren't these people just actors reading a script. Don't know how they made money trading when they just seem to go whichever way the wind blows.

[GoghGoner]

Well, here we go again. I have a hypothesis that while an energy company is restructuring, it deliberately lowers its revenue. I don't have any data but it seems rational that you would want to pay as little debt as possible and use the revenue after the debt is restructured.

Whiting as been a top two producer in the Bakken. I thought they would file a few years back but they were propped up by the low interest policies. Lots of zombies out there but this is a big one. Chesapeake has been labeled too big too fail in the past but that isn't going to protect them now.

First big bankruptcy of latest oil downturn comes to Houston

$this->bbcode_second_pass_quote('', 'I')n many cases, it would have taken longer for a large company like Whiting to put together a prearranged bankruptcy, but Whiting had already been in talks with its creditors starting back in 2019, said Sarah Foss, a Debtwire restructuring analyst.

[sparky]

.
Why would a cashed up mob , if there is such a thing ,want to buy in fracking
the production at time of buy will dribble fast ,
new drilling are more expensive than the selling price
the whole industry has a record of not making a buck profit
the only reason I can think is the lease rights

That's when the reality come in ,
OPEC and Russia will not cut production unless the US cut production too
else it would be a mug game

[GoghGoner]

This was a tweet >

$this->bbcode_second_pass_quote('', 'H')ead of the TX RRC now says that planned capex cuts by US frackers will reduce production by >30% within 3 months.

[sparky]

.
That sound like a good prospect large amount of bankruptcy followed by a rationalization of production
the point is at what production cost ?