[shallow sand]

I realize there is a big debate on whether crude oil price crash is supply or demand driven. I am not smart enough to know the correct answer. However, given short term moves appear to be speculative, did the constant lowering of "break even" claims by these guys drive the prices further down? Shouldn't they have said, "We are in trouble at $75 WTI." to save their hides? I guess wall street wouldn't have liked that. I think it is a tactical mistake on their part. Saudi talked about an $80 floor. So they all said we can make it at $50-60. So here we are.

[rockdoc123]

I agree that it would have been prudent on their part to talk about a higher breakeven but for publically traded companies they are legally obliged to tell the truth or just say nothing. Irrespective of what they have said the problem comes from media interviews with market "nabobs". Everyday there are at least 2 or 3 new ones on Bloomberg. Funny how the guys from hedge firms are talking ever spiraling down prices (want to bet how much short position they have?) more often than not. The analysts interviewed have no requirement to backup their arguments, they could have pulled the analysis out of their collective backsides for all we know. I believe the market moves mostly on perception. Until such time as OPEC makes even a minor cut and shows some solidarity and a plan to protect prices or there is some indication of falling production in the US prices will continue to drop I'm afraid. There needs to be a catalyst indicating prices could go higher.

[Keith_McClary]

$this->bbcode_second_pass_quote('shallow sand', 'I') realize there is a big debate on whether crude oil price crash is supply or demand driven. I am not smart enough to know the correct answer.

[ROCKMAN]

Shallow - Here's some practical info you can share with our merry band here. You sell oil very month so how do you determine how much your buyers have to pay you per bbl? Is it based upon the profit margin you require? Or is it based upon the cost the shale players say it takes them to break even? Or do you make an independent calculation of what it must cost the shale players to break even? Or do you check what Saudi Arabia is charging?

You're one of the very few here that actually sells crude oil so I'm sure everyone would really like to know how you calculate the price of oil that you require the refiners to pay you.

We're waiting...

[Keith_McClary]

$this->bbcode_second_pass_quote('ROCKMAN', 'S')hallow - Here's some practical info you can share with our merry band here. You sell oil very month so how do you determine how much your buyers have to pay you per bbl? Is it based upon the profit margin you require? Or is it based upon the cost the shale players say it takes them to break even? Or do you make an independent calculation of what it must cost the shale players to break even? Or do you check what Saudi Arabia is charging?

You're one of the very few here that actually sells crude oil so I'm sure everyone would really like to know how you calculate the price of oil that you require the refiners to pay you.

We're waiting...

[ROCKMAN]

Keith - Very good. But while consumers don't tell the man at the Chevron station how much to charge they do get to decide how much they buy. Unfortunately the Rockman and Shallow et al typically don't get to decide how much oil the refiners get to buy from us: we'll sell ever bbl we can produce.

Still waiting to hear from Shallow how he calculates the price he makes his oil buyers pay.

[shallow sand]

ROCKMAN. Sorry I took so long. Pretty busy and able to visit here in short spurts. Of course we get Plains posted price plus a volume premium. Ironic there are several options for selling crude here and every one posts the same price as Plains every day. And since at least I began in 1997 the Plains posted price has been based upon the close each day of WTI. So ultimately, the close of WTI is the price we get each day.

ROCKMAN, please explain how the WTI price is determined each day? Is it really determined by what consumers are willing to pay for end products or what refiners are willing to pay the pipelines? Explain to me why in the last 15 years oil has been priced at the close from $8 to $145. Supply has nothing to do with it, nor does speculation about future demand or supply? Did all of the world's consumers suddenly decide, hey OPEC is going to keep oil production as is, so I am now only willing to pay x amount for gas? Give me a break.

Furthermore, please point me to the future projects that provide a good investment return at sub $60 WTI? Last I knew, demand world wide is still projected to increase, as it has almost every year since the days of Colonel Drake. I'm glad the Arctic oil projects are so cheap and easy. Maybe we will finally have peace in the middle east and Iraq can ramp up to 10 million barrels per day.

Long term, supply and demand is key, but short term prices are pretty speculative IMO. I suppose if OPEC cuts 3 million bbl per day or KSA is bombed by Iran, consumers will collectively decide they will now pay $4 for oil and refiners will gladly pay $125 for crude, even though we are "awash" in crude, as the talking heads love to say.

Rockdoc. I think the pubcos are pretty vague on numbers, enough to stay out of hot water. IMO most of the shale folks weren't doing so great at much higher prices. You may disagree and my math is pretty rudimentary, but continuing to borrow and never paying it back doesn't make for a successful business model. That's the way it looks to me. I hope I'm wrong, because that will mean $100+ oil, although I think that is not helpful for the US economy as a whole.

I accept crude is a volatile commodity. We intend on surviving this thing, just like in past downturns. And if we don't, and if my numbers are right, almost every pure play shale driller will have bit the dust prior thereto.

[Paulo1]

re: "You may disagree and my math is pretty rudimentary, but continuing to borrow and never paying it back doesn't make for a successful business model."

That sounds like....(drum roll, please)...every country on the planet these days.

[westexas]

Some Thoughts on Net Export Math Vs. Net Cash Flow Math

As I have periodically noted, given flat to increasing oil consumption in a net oil exporting country, and given an ongoing production decline, the resulting net export decline rate will exceed the production decline rate and the net export decline rate will accelerate with time. We actually see something similar for the net cash flow from producing properties.

Let’s arbitrarily assume that we have five properties, each generating a net cash flow of One Million Dollars per month, after direct Lease Operating Expenses (LOE), and not counting General & Administrative (G&A) costs. Let’s assume that LOE percentages range from 10% to 50%, so the gross cash flow would vary for each property, but the net cash flow, after LOE, would be the same.

Let’s then assume that gross cash flow at the wellhead drops by 50% for all five properties, and let’s then look at the resulting decline in net cash flow for each property.

Again, we are assuming that the initial condition is that each property generates a net million dollars per month.

LOE = 50% of Gross, and gross declines by 50%, net declines by 100% (goes to zero)

LOE = 40% of Gross, and gross declines by 50%, net declines by 83%

LOE = 30% of Gross, and gross declines by 50%, net declines by 71%

LOE = 20% of Gross, and gross declines by 50%, net declines by 63%

LOE = 10% of Gross, and gross declines by 50%, net declines by 56%

One can see how a 50% decline in gross cash flow really hammers higher operating cost older properties, e.g., the North Sea and the North Slope of Alaska, and this is without taking into account G&A costs. Here is how Euan Mearns described the North Sea employment situation: “Here in Aberdeen a massacre is in progress.”

Of course, a projected lower price profile hammers the discounted Net Present Value (NPV) and EUR for all types of producing properties, especially high decline rate tight/shale plays and higher cost older properties.

In any case, it seems to me that the Saudis are targeting not only high cost US tight/shale producers, but also higher cost older properties, like the North Sea and the North Slope of Alaska. One also wonders about the older, higher cost Western Siberia properties in Russia.

[Synapsid]

shallow sand,

Hang on. And keep posting here!

[shallow sand]

Paulo. That is what always worries me, that demand will crater due to economic problems resulting from high debt levels. Syn. Thanks. Just needs to stop. $30-35 WTI for a year plus is probably the tipping point here.

[ROCKMAN]

Shallow - First, the "price of WTI" that almost everyone just loves to ross out has nothing to do with what WTI producers sell their oil for and has nothing to do oath the price refiners are willing to pay for WTI. That "WTI price": WTI is the underlying commodity of the New York Merchantile Exchange's oil futures contracts. IOW it's not the price that WTI is sold for by anyone. Everyday folks make a bet what the future contract price for WTI will be when their contract expires and they have to settle. In the old days the futures market actually made bets in real bbls of oil: you had to physically by oil (on paper) to settle your contract. Not the Merk doesn't require folks to go through that head fake: you just write a check if you lose or get a check if you win. So how re winners and losers decided? It has nothing to do with what your willing to sell your oil for. Does everyone realize that there are over

You make or lose money depending on what the settlement price is on the day your contract expires. And who determines the price of a contract you buy today for a Jan 2015 expiration? No one because there is no set price: you make a bid price and if someone overs that price then that's your contract price. As of last Friday the bids for Jan 2015 delivery ranged from about $42 to $68 per bbl. Essentially these are bets. But not on the future price of WTI but on the settlement price of the futures price on the day your contract expires.

That may be confusing so here a simple analogy: who's going win the NFL game today between Team X and Team Y? Of course you probably know such bets are usually done with the "spread": add to Team X score and if that number exceeds the Team Y score you win. And guess what they call the difference between the price of your WTI contract and the settlement price when your contract expires...the spread.

I'll sell my oil based on a "benchmark price" just like you probably do. Some is benchmarked to WTI. And the benchmark price is based upon the Merck future price. And I've never sold single bbl of WTI at its benchmark price: A benchmark crude or marker crude is a crude oil that serves as a reference price for buyers and sellers of crude oil. There are three primary benchmarks, West Texas Intermediate (WTI), Brent Blend, and Dubai Crude. Other well-known blends include the OPEC Reference Basket used by OPEC, Tapis Crude which is traded in Singapore, Bonny Light used in Nigeria, Urals oil used in Russia and Mexico's Isthmus. Energy Intelligence Group publishes a handbook which identified 195 major crude streams or blends in its 2011 edition. Benchmarks are used because there are many different varieties and grades of crude oil. Using benchmarks makes referencing types of oil easier for sellers and buyers.

I don't sell WTI at the benchmark price: my contract price is determined by adjusting the benchmark price up or down depending on the actual composition of my oil, transportation cost and, most important, competition from other oil buyers. And the adjustment can swing on a number of varying factors other then the WTI benchmark. There you go: a geologist's understanding of futures markets and benchmarks. And probably not as complete or accurate as I would like. If you have a few of hours of your life you don't mind pissing away go on line and search the subject. Here's just little taste of the complexity: www2.hmc.edu/~evans/e104l12.

BTW folks do understand how much "oil" is in the futures market every day, right? WTI is the deepest and most liquid global energy benchmark, trading nearly 850,000 futures and options contracts daily. And each contract represents 1,000 bbls of oil. IOW 850 MILLION BBLS OF WTI oil are traded on the exchange every business day. That's more than 9X the amount of oil actually produced every dy.

And for those who forgot my question to Shallow: how did he calculate the price he required his oil buyers to pay for his production. A trick question, of course: Shallow doesn't tell his buyers what they'll have to pay... they tell him what they'll pay. His only choice: take the best offer he gets or he can shove his production up his ass. LOL. And to varying degrees the same is true for the Rockman and Saudi Arabia. And the Rockman and Saudi Arabia have the same option: sell at the price the buyers are willing to pay or shove our oil up our collective asses. LOL. The only choice Shallow, the Rockman and the KSA have is how much oil we are willing to sell.

The KSA, Rockman, Russia, Shallow and all the US shale players appear to be making the same decision so far: we are selling as much oil as we possibly can at the current price. Now if someone, like the KSA or the US shale players were to stop selling.... hmm...5 million bopd it would increase the price the rest of us could charge. So, Shallow, why don't you drop emails to all the shale players and ask that they shut all their wells in. Or even easier: just one email to the head man at the KSA and respectfully ask them to reduce their revenue stream by 50%. LOL.

[Subjectivist]

Actually for KSA if cutting supply 1 MMbbl/day raised the price $10.00 the income should be the same. KSA says they are worried about losing market share, cutting production and making the same cash flow would cost them not in money, but in influence.

[shallow sand]

ROCKMAN. Very good detail. Thanks for the post. If I had enough pull with KSA I'd put an end to this decline. Ha! I think you kind of made my point although I do not know that you will agree.

"Over 9x the physical market trades on paper". Those folks trading are speculating on the future price of crude oil, right? And what kinds of things do they look at when speculating on that future price? Supply and demand and all the "stuff" that could affect it? And a big thing IMO they are looking at is US LTO production growth, as it appears to be one of the few areas of production growth.

And then we start to see supply outstrip demand a little, but the price doesn't drop too much because the speculators trading paper oil, upon which physical oil prices are based, assume that LTO can't keep growing so fast because it costs so much, declines so fast, and a little price drop will stall the growth. But then the shale people say no, we are bringing costs down through "efficiency and technology" and we are going to become Saudi America!

Of course, the energy independence talk helps raise money in the junk bond market. Heck why wouldn't I buy a 6% bond to help us become energy independent, instead of languishing at 1/2 % in a one year bank CD? It also catches the eye of Gulf OPEC, who sees a long time customer trying to wriggle away. And they run the numbers closely, and determine the LTO will have a hard time at $80, word gets out and the price drops to $80.

However, the shale folks want to keep drilling, and therefore need to borrow more. So they say, in vague terms, we can make it at $70, $60, $50, $40, etc. Sure, some wells do and even some sweet spots do, so its not a lie. The talking heads blare this info, and suddenly the speculators pick up on this. When it becomes crystal clear on Thanksgiving Day Gulf OPEC wants to defend market share, then boom, we drop over 10%.

That's my thesis, and I may be way off, who knows. I know there is a heck of a lot more to it than that. A world full of moving parts.

I am a karma believer, and when you say something that isn't quite right, you might find yourself having to try to prove it. I know I have made that error several times. Heck I may be making it in this post. I freely admit I don't know much about this stuff. So maybe the LTO companies will show us just how low they can go.

In any event, we hope that LTO breakeven and/or Gulf OPEC social program costs are higher than ours. Otherwise, ROCKMAN, we just might have to contribute to a production cut on an involuntary basis. Speculators play a big part in the short term, IMO, its not all just what consumers or refiners will pay.

[ROCKMAN]

Shallow – We haven’t chatted about “speculators” here in a while. As soon as my engineer gets in I’ll have him remind me of the details of the pricing formula we sell our crude for. I want to post the exact formula for credibility’s sake. It’s essentially a “benchmark price” adjusted for the specific quality of the oil, transportation costs and competition with other crude buyers in my market area.

What I want to confirm is that the benchmark price is one of the specific postings of a certain futures contract. So think about it: ultimately the crude price I sell for is calculated based upon what the future buyers think the 800+ million paper bbls that’s traded in their world will sell for at some future point. So what happens when a lot of future traders anticipate lower FUTURES crude prices: they bid a lower price for those FUTURE paper bbls. But that price is eventually used as a basis for what I sell my real bbls for. Which means that if the futures market suddenly starts bidding the price of their paper bbls way down I’ll end up selling my real bbls for less.

OK…let’s all say it together: A SELF-FULLFILLING PROPHECY. LOL But I want to nail down the specific before I start a separate thread. But if I characterized it correctly we could see my crude sales price rise quickly if the futures players started biding the price up of their paper bbls quickly. Of course, there is the long term aspect of how the futures traders evaluate the dynamics. Economic growth and decline will obviously work into that dynamic but it’s a rather slow changing metric compared to what we’ve just seen in the futures market. But look at the long term trend for WTI prices:

http://www.eia.gov/dnav/pet/hist/LeafHa ... s=RWTC&f=D

Prices rose from 2004 to late 2008 from $30/bbl to $100/bbl (forget the short pop to $147/bbl…just an overreaction by the futures market IMHO). So a rise in oil prices of 330% over a 5 year period. And then…BAM!...economic heart ache crashed oil prices down to $30/bbl for a short time. Then from 2009 to the summer of 2014 prices rise from $31/bbl to about $100/bbl. Yeah…a few short term peaks at $100+/bbl before 2014 but look at the average trend line: it was sliding upwards to $100/bbl throughout that period of time. So a rise in oil prices of 330% over a 5 year period. And then…BAM!...oil prices crash down to $60/bbl.

So a repeated trend: two 5 year periods of prices slowly increasing about 3X and then…BAM!...oil prices collapse. A coincidence? Or did the future players see signs of a weakening global demand for oil, such as China’s decrease in economic growth rate? Or maybe the futures players are buying the hype about the US producing so much from the shale plays the country will soon reach “energy independence”? Or maybe they just recognize the cyclic rate of the global economy and that it takes years for higher energy costs to eventually degrade economies? Maybe the future traders looked back to see the response of OPEC when prices crashed from over $100/bbl in early ‘08 to less than $40/bbl in early ’09: OPEC oil exports barely decreased and rose back to previous levels in 2010. Maybe the folks who risk DAILY risk $BILLIONS betting on the price of over 800 million paper bbls of oil pay closer attention to the dynamics at play then the Monday morning quarterbacks and armchair analysts working for the MSM. Ya think? LOL

So if OPEC (Saudi Arabia) didn’t significantly reduce exports when the price fell from over $100/bbl to less than $40/bbl why would anyone expect OPEC (Saudi Arabia) to reduce exports now that prices have fallen from $100/bbl to $60/bbl? Is OPEC (Saudi Arabia) and the rest of the world that much different today than it was just 5 years ago?

So hold on to you ass Shallow...we might both be filling for unemployment in a year...just like I did back in the 80's. LOL.

[AdamB]

$this->bbcode_second_pass_quote('', ' ')
Marie Cusick / StateImpact Pennsylvania Jim Barrett stands next to a wellpad on his farm in Bradford County. He says Chesapeake Energy, which drilled four natural gas wells on his land, is cheating him out of royalty money. When natural gas companies approached Charlie Clark and Jim Barrett about the minerals under their farms, the northern Pennsylvania landowners in neighboring counties both decided to let them drill. They hoped — like so many landowners — to bring in some extra cash. For Clark, the decision has paid off. But Barrett says he feels cheated, and is now suing his gas company. That disparity in how royalties are paid spans the Marcellus Shale, and it’s popping up in other oil- and gas-rich regions across the United States. It stems from a complex web of laws, court rulings and legal jargon that determines how money is distributed

[coffeeguyzz]

Chesapeake, most notably after Carl Icahn got involved, has a terrible reputation for screwing over many parties.
While outsiders can point to such unethical behavior and smear the entire industry, most operators attempt to work with various property owners in the best manner feasible.

[AdamB]

$this->bbcode_second_pass_quote('', ' ')
Oilfield service providers are upping their prices, the latest Dallas Fed Energy Survey has found, confirming what producers began to complain about last year when oil prices started recovering. The survey found the index of input costs for oilfield services jumped from 46.8 from 30.9 this quarter from last. The index for oilfield service prices was also higher in Q1 2018, at 27.9 from 22.6. Further strengthening the view of an industry in recovery, the survey also found that the index for utilization of oilfield service equipment was higher this quarter, at 40.4. That’s up 11 points from the reading for the last quarter of 2018, the Dallas Fed noted. Higher oilfield services prices began pressuring producers’ margins soon after the industry officially swung into recovery and growth mode. It was only to be expected because the services sector suffered a harder blow from the

[rockdoc123]

If the frack is larger and uses more water then the amount of water produced (called refrack fluid) is larger as well.
You have to discern the difference between produced reservoired water and water that was injected and then produced.
As well a few years back the amount of refrack fluid produced was about 40% of that injected, that number is much higher now and some of the water produced could be water that was injected previously.

As to higher water signifying peak oil as SRSROCCO suggests....that's just stupid. There are many fields that produced very high water cut that are nowhere near peak whether they be conventional or unconventional.

Also this statement:

$this->bbcode_second_pass_quote('', 'W')hile a rising water cut isn’t a surprise to the industry as it is a natural progression of an aging oil well or field, the use of Larger Frac Stage wells should be a WAKE-UP CALL to investors. Why? Because Larger Frac Stage wells consume a great deal more water and sand to produce more oil initially, but the decline rates are even more severe than regular shale wells.