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Page added on October 19, 2014
No End in Sight for US Oil Production Boom
Falling oil and gasoline prices have sent oil company stocks tumbling, but oil experts say the boom in American energy production shows no signs of slowing down, keeping the market flush with crude and gasoline prices low.
Even after a drop of as much as 25 percent in oil prices since early summer, several government and private reports say that it would take a drop of $10 to $20 a barrel more — to as low as $60 a barrel — to slow production even modestly.
On the downside, taxes and royalties on oil will decline, potentially cutting into the finances of oil-producing states like Texas, Alaska, Oklahoma and North Dakota. And it will continue to put pressure on the Organization of the Petroleum Exporting Countries to cut output to support prices, as well as cause economic pain to big producers like Russia, Venezuela and Iran.
Current production levels can be sustained in the shale fields in 2015 even if the Brent global oil benchmark, which fell to just under $84 a barrel at one point this week, dropped to as low as $60 to $65, according to Rystad Energy, an international oil and gas consultancy based in Norway.
“Oil output will respond very slowly to a drop in oil prices,” Bjornar Tonhaugen, vice president for oil and gas markets at Rystad Energy, wrote in a report released this week. “Markets may even be oversupplied next year more than previously thought.”
Slowing American oil production is like slowing a freight train moving at high speed. The current production of 8.7 million barrels a day, the highest in nearly a quarter-century, is more than a million barrels a day higher than it was only a year ago. Most companies make their investment decisions well in advance and need months to slow exploration because of contracts with service companies. And if they do decide to cut back some drilling, they will pick the least prospective fields first as they continue developing the richest prospects.
The Energy Department this week reported that only 4 percent of shale production in North Dakota, Texas and other states needed an oil price above $80 a barrel for producers to break even on investments. One reason is that improved efficiencies in hydraulic fracturing and other modern production techniques have increased the output of each new well month after month in recent years.
For example, the Energy Department expects that new oil production from new wells in the North Dakota Bakken shale field will increase by seven barrels a day next month over this month, and in the Texas Eagle Ford field by eight barrels a day. Put together, over a couple of months that translates into tens of thousands of new barrels every day across the country, with no increase in investment.
Sadad Al Husseini, the former head of exploration and production at Saudi Aramco, predicted that the United States would add a million more barrels of oil in daily production over the next year.
“What is softening prices is weaker demand because of the global economy and the growing volume of North American production,” Mr. Al Husseini said in an interview. “So will prices bottom? It depends on what comes from the U.S.”
He added that when investors start seeing $75 to $80 oil, that will cut back some ambitions, and that could mean “a leveling off of new supplies by midyear 2015.”
The United States has banned most oil exports for four decades, but the expanded production has slashed imports from many OPEC countries, forcing them to drop their prices in Asia. The United States is also expanding its exports of refined products like gasoline and diesel, which are allowed, and that is cutting into production from other countries.
The Paris-based International Energy Agency, which accumulates and analyzes data for the industrialized nations, this week identified deep water offshore production, the Canadian oil sands and some of the American oil shale fields as the most susceptible to cuts in investment and production when oil prices fall. But only about 8 percent of these types of production require $80 a barrel oil to break even.
All told, the I.E.A. said only about 2.6 million barrels out of total world production of just over 90 million barrels requires a break-even price of $80, including some fields in China, Indonesia, Malaysia, Nigeria and Russia, which are high-cost fields in part because of how much the governments require producers to pay them in taxes and royalties.
Global and American benchmark oil prices bounced back a bit on Friday, ranging between roughly $83 and $86. The American benchmark, West Texas Intermediate, fell below $80 for the first time in two years briefly Thursday morning, and some oil experts say it could break the symbolic threshold again in coming days.
Lower oil prices mean lower prices at the pump for American consumers. The average national price for a gallon of regular gasoline on Friday was $3.14, 10 cents lower than it was a week ago and 22 cents lower than a year ago, according to the AAA motor club. That is the lowest price in more than three years.
Roughly a third of the nation’s gas stations are selling gasoline for less than $3 a gallon. The average American family saves about $120 a year for every dime drop in the gasoline price, experts say.
Many oil experts say that Saudi Arabia and several other OPEC countries that have shaved their prices in recent days are trying to drive down global production, and particularly American and Canadian production, to protect their market share. But with a growing population and struggling to tamp down potential domestic unrest, Saudi Arabia carries a rising social service budget that is financed almost entirely by oil money.
Over the long term, it may need to stretch its production as much as or more than the United States.
“For the government to balance budgets on an ongoing basis, higher oil prices are inevitably required,” Badr H. Jafar, president of Crescent Petroleum, a United Arab Emirates-based oil and gas company, said in an email exchange. “Otherwise, if oil prices continue to fall, maximizing production may be an imperative to securing required higher revenues, and that in turn might have a catastrophic effect with the creation of a major glut.”
30 Comments on "No End in Sight for US Oil Production Boom"
dissident on Sun, 19th Oct 2014 8:50 am
No end in sight for US media idiocy. The NY Times has turned into a cheap tabloid.
There is NO such thing as a shale oil field. The Bakken is oil in a Dolomite layer sandwiched between two shale-like rock layers and not shale. These ignorant/misleading articles just highlight how messed up the current situation is.
Nony on Sun, 19th Oct 2014 9:15 am
And the nature of the middle Bakken in what way affects any of the points of the article?
Plantagenet on Sun, 19th Oct 2014 9:20 am
Interesting article from thr NYTimes. If they are right then the collapse in oil prices will extend into next years, with oil prices potentially dropping into the $60s.
Make your preps accordingly.
Perk Earl on Sun, 19th Oct 2014 9:22 am
“Even after a drop of as much as 25 percent in oil prices since early summer, several government and private reports say that it would take a drop of $10 to $20 a barrel more — to as low as $60 a barrel — to slow production even modestly.”
There have been many claims that for every $1.00 made it took $1.50 to produce LTO, but the above paragraph contradicts that position. How much certainty is there in actual LTO production costs?
oilystuff on Sun, 19th Oct 2014 9:38 am
In the over 50 years I have been an oil and natural gas producer in the U.S. I have been thru countless oil price swings and seldom have I seen domestic production shut in because of low oil prices, if ever. Protracted periods of low oil prices leads to restrictions of development in new production and in the case of costly, unconventional shale oil resources, 70-75 dollar oil, for a year or more, will change the entire LTO drilling treadmill picture, big time. I find it remarkable that after only 70 days of concern for oil prices the New York Times implies that there in no end in sight for the shale oil boom. To say it will take 60 dollar oil to stop drilling shale oil resources is insane.
Actually, I think remaining development of tight oil is out of the shale oil industry’s hands right now and its future is now entirely in the hands of the banks and lending institutions. In the past 6 months the personal wealth that has been lost by people dumb enough to buy stocks in these shale companies is staggering. They may now stay out of the shale oil industry completely. Lower oil prices reduces reserve estimates; banks were already getting nervous. Whether LTO production continues to grow depends on how well the shale industry can continue to service its massive debt.
For the shale oil industry, price volatility is, to coin their favorite phrase, a “game changer.”
Davy on Sun, 19th Oct 2014 9:46 am
Oily, this time is different. I will avoid redundancies and just mention two points’ debt levels and interest rate repression. We have never had these conditions at the degree we have today. That must be considered. I am not an insider like you. I am talking out my ass from something I follow day in day out for 10 years. Patterns develop and present themselves. We can chose to ignore them or we can entertain their message. I am not saying I am right only there appears to be a situation that is much more dangerous than low prices in the past.
JuanP on Sun, 19th Oct 2014 10:06 am
This is MSM BAU BS!
With falling oil prices, investments in future oil production will be delayed because the reduced cash flow will prevent investment. Cash flow will have to service debt first to stay solvent, and there will be little left for R&D.
When we consider the amazingly fast decline of shale wells, we must conclude that it can’t take more than a few months for a slowdown in production to begin.
If these prices remain, Bakken oil production might never recover from next winter’s weather related production declines.
Boat on Sun, 19th Oct 2014 10:27 am
Juan where do you come up with that kind of conclusion now that you have attracted my ire. Never recover? So when oil goes back to $100 you think there will be a lack of investors?
Oh I forgot, its all a bubble and nobody every made a dime on fracking. Sarcasm intended
Northwest Resident on Sun, 19th Oct 2014 10:33 am
TPTB top priority #1: Keep the illusion of BAU alive and keep the witless masses emotionally, logically and financially invested in that illusion. Because if the illusion fades sufficiently to reveal the weak and crumbling foundation it is built on, then TSHTF.
Fracking and unconventional oil production is probably the single most critical component of the BAU illusion — the centerpiece of that master plan to fool as many of the people as often as possible and for as long as possible.
Fracking and unconventional oil production is the ONLY source of increase in world oil production since 2005. We all know that a growing economy absolutely must have corresponding increases in oil to fuel that growth. And that is why tracking and unconventional oil is so critical to the grand BAU illusion — without the “growth” in production from unconventional, it would be well recognized that we are on the downward, irreversible backside of the peak oil curve, with all the many dramatic consequences that reality brings.
With unconventional, TPTB can PRETEND that BAU is chugging along, they can fake economic “growth”, they can print massive volumes of new money to keep the balloon inflated and to compensate for the decreasing amount of energy that our world economies run on.
Obviously, articles like this one are meant to bolster confidence in unconventional, to offset the really bad news of sinking oil prices, to hide and obfuscate the sad reality of economic decline and demand destruction going on.
The amplitude of the lies and propaganda being pushed on us is an excellent indicator of just how bad the situation really is that they are trying to hide. Articles like this one and others are pumping serious amounts of B.S. — I guess that tells us something. That something is, the truth of the matter is that the wheels are getting ready to fall off of unconventional oil production — the world economy can’t afford it anymore and the Fed and other governments can’t just keep printing trillion$ to keep the illusion inflated.
Buckle up. Get ready. It’s going to be a wild ride.
rockman on Sun, 19th Oct 2014 10:59 am
“…several government and private reports say that it would take a drop of $10 to $20 a barrel more — to as low as $60 a barrel — to slow production even modestly.” As oily points out utter BS. We don’t make drilling decisions based on emotions. It’s done based on hardnosed economic evaluations. And slowing production is not the same thing as slowing drilling activity.
Very simple to appreciate statistics: oil didn’t break the $60/bbl level until late 2006. The response in Texas: nothing…stayed flat for years afterwards. Production here didn’t start growing until about 4 years later. Don’t argue: the stats are readily available. And all the tech available today was available 8 years ago. The Bakken was showing a very modest increase even before prices hit $60/bbl. But as pointed out the Bakken reservoir isn’t your typical shale. But its growth didn’t really jump until years later.
It wasn’t until prices reached $80/bbl that Texas production started to climb. So while it isn’t a perfect 1:1 correlation it seems that current prices may represent a bit of a brick wall. Not that the EFS rig count will plunge over night. As pointed out the ship changes course very slowly. And while a number of EFS locations will not be drilled at the current price many will.
But there’s a huge difference between now and 4 years ago: thousands of EFS wells have already been drilled. And while the oil patch doesn’t have perfect 20/20 vision we do have a strong history of drilling the sweet spots first.
So no I don’t think shale drilling will drop significantly at $80/bbl. But $60/bbl? A very different game IMHO as the stats show. But I’ll have to add a big qualifier to that: only if enough of the pubcos (which have dominated the shale plays) don’t collapse under the weight of their accumulated debt that might not be serviceable at $80/bbl. I don’t have a sense of that probability but the possibility can’t be ignored IMHO.
shortonoil on Sun, 19th Oct 2014 11:33 am
Ron, at peakoilbarrel.com does an excellent job of tracking Bakken production: Bakken Oil Production by County.
http://peakoilbarrel.com/
McKenzie County is now the only area in North Dakota that is seeing any significant increases in production with 16,345 barrels per day per month, last month. A number of areas are falling. At its present rate of increase it will take over 5 years for North Dakota to add 1 mb/d. We are seeing a similar slow down in the Eagle Ford, and Permian Basin. The US (and almost entirely shale) are the only regions in the world at present showing increasing production. Our cost based, and energy dynamics model puts the peak in world liquid hydrocarbon production in 2016. We may be late for the party?
“The Energy Department this week reported that only 4 percent of shale production in North Dakota, Texas and other states needed an oil price above $80 a barrel for producers to break even on investments.”
This is a repost of the 10/18/14:
“Citigroup’s global head of commodity research, Edward Morse, estimates that “to take out enough new production to flatten production growth might require prices in the $50 range.” A $75 price “may only be a soft floor.”
Our study of 4598 Bakken wells, which we consider the best of the best in shale plays, put drilling costs at $53/barrel. Not including an average of 15% in royalty payments, $6/barrel in OP costs, $3.85/barrel in state taxes, and $2.00/barrel in well head to terminal transport cost. Mr. Morse is coming up a little short. Maybe, Citi is planning on picking up the balance?
It smells like a very big, widely orchestrated rat feast in this entire argument. Either they are out right lying, or their brains have been removed, and replaced with a turnip. Someone is in very big trouble, and his name isn’t Ivan!
http://www.thehillsgroup.org/
Northwest Resident on Sun, 19th Oct 2014 11:46 am
“a very big, widely orchestrated rat feast”
That must be PHD-level oil industry expert lingo for “lies and propaganda”.
Porlock on Sun, 19th Oct 2014 11:47 am
One question on prices and break-even levels for Rockman or oilystuff or anyone else who has an idea on this.
My understanding is that many of the producers in the Bakken and the EFS are not getting WTI prices but some price discounted to that — for example, North Dakota Light Sweet Crude in the case of the Bakken. And this article here from last week (http://hotlineprinting.com/oph/index.html) suggests that 8-10 rigs in the Bakken (about 5% of the total in use up there) are already at risk, and that prices below $70/bbl “will put a lot of pressure on the oil and gas industry”. And the thing is, North Dakota light Sweet closed at $70/bbl on Friday, so $13/bbl below WTI.
So my question is, aren’t we already closer to the break-even levels in some of the Bakken areas than the headline WTI would suggest?
Or, when people say the break-even level for a given area in a given play is $60/bbl or 80/bbl or whatever, is that in effect a WTI-equivalent price that already takes into account the price discount to WTI that the oil coming from these areas is being sold at?
I ask the question because there is never any discussion of this point in the MSM, and even on this site with all its expertise it appears to be an all-too-often overlooked consideration.
So, does the fact that NDLS is already trading at $70/bbl mean that we are much closer to the edge than a WTI price of $83/bbl would suggest?
Grateful for any insight and apologies if the question is naive.
DMyers on Sun, 19th Oct 2014 1:13 pm
Re: Boat at 10:27 am vs JuanP at 10:06 am
I read JP’s comment as being in response to Davy’s comment at 9:46 am. Davy pointed out an intervening factor, that being the presently insane and precarious financial situation.
JP’s suggestion of non-recovery is related to what Davy’s comment had implied. If there is financial collapse, that will predicate non-recovery, as finances are as important to oil production as the oil, itself. The financial situation is so far gone, beyond anything ever seen before, that its collapse might lead to a state in which it can not be revived.
Expanding on this, for my own part, I find there is enormous resistance and widespread reluctance to take on the possibility of non-recovery, in any sense of the term. This is probably an offshoot of “the religion of progress” often mentioned by JF Greer.
The most powerful non-recovery scenario I can recall is R.C. Duncan’s “Road to the Olduvai Gorge” thesis. Duncan focused on peak oil, but his final blow to industrial civilization is posited as a complete breakdown of the electric grid, from which it never recovers.
To me, that is the most chilling and frightening of Duncan’s predictions, as this failure to recover would most certainly leave us to start over under relatively primitive conditions. I sense the catastrophic financial collapse considered above in the same way as I imagine Duncan’s dead grid.
Actual death to BAU, oil production, economic growth, money, and all other distinguishing characteristics of industrial/financial civilization, remains as an ever-present possibility, whether pleasant to consider or not.
steve on Sun, 19th Oct 2014 1:21 pm
the fact that the oil is heavily debt related is the key component here…I think Oily gets it right, there is no way the FED can raise interest rates and not have a collapse…it is all smoke and mirrors from here on out…unless they can raise interest rates on consumers and not on oil companies….can you imagine the servicing of debt at a much higher interest rate? Think of the great depression times 10….they must know this…..unless every Sunday they are just burning the debt in a furnace..
Boat on Sun, 19th Oct 2014 2:01 pm
BAU is a frequent term used around here that also makes no sense. So business as usual means solar prices are going up? Renewables and nat gas are not the products of choice instead of dirty coal which is a huge health hazard? This is not an improvement? semi tech that gets 11-123 mph vrs the 5,5 that most trucks get now? I still don’t get how all this change is happening right before your eyes and I read about BAU. Where I grew up we call that on the brink of a paradigm shift in energy use.
I am not saying a asteroid will not take out the earth or climate change down the road wont take out billions of humans or Putin trips the nuke trigger and we all die. We can fix debt if we decide to.
Examples-The US estimates they have over 400 billion in uncollected taxes last year. China spends close to 160 billion a year on their military while after a cut we spend 670 billion. The latest budget reports a 480 billion deficit and close to 18 trillion in debt. If we simply collected the taxes and cut the military to China’s size we could pay down the debt fast and save another 400 billion a year that it takes to service the debt. We have the money just not the will at this time but the time will come.
ghung on Sun, 19th Oct 2014 3:12 pm
Boat – Think causes and effects. Cut military spending? I’m all for that, except it translates to job cuts/unemployed people and lower velocity of capital circulating. Collect those unpaid taxes to reduce deficits? Again, job cuts and more money gone from the private sector => less revenue going forward. I’ve seen that the US needs a real growth rate of between 4 and 6 percent just to make its interest payments and begin whittling away that $18 trillion debt. Any of these things may be what pushes the economy back into full-blown recession. Then there’s the foreign debt and that our largest trading partner (EU) looks to be back into recession.
The Tea Party learned the hard way with the government shutdown. Our rookie Congressman, Mark Meadows was the co-author of the shutdown (Cruz’s boy in the house) only to find his district losing millions of dollars a week when the Smokey Mountain National Park and other attractions shut down. He went begging to the (Republican) Governor to fund opening the park with State money. No joy there. Some jobs were lost and haven’t come back. Smooth move, Ex-lax.
I’ve always told folks to quit bargaining and look at the systemic nature of our collection of predicaments. Countries with a near 1/1 GDP/debt ratio don’t have much wiggle room, even the mighty US. Point is, ‘we’ aren’t going to do any of the things you suggest. Everyone has a list of would’ve/could’ve/should’ves, but I don’t see any of it happening.
Davy on Sun, 19th Oct 2014 3:53 pm
D, thanks for the read reference. I may have read that piece by Duncan. I will check my online library.
Boat, G-man is bring a valid point up here. I will call it consequences and unintended consequences. There is just no way out of a predicament in one piece. It is a trap. The best we can do is gnaw a paw off and try to recover if we are lucky. I have no idea when this is going down but I sense it is imminent. If we are lucky this event will more closely resemble your optimism. Just remember Boat we all have been conditioned by growth. It takes a different kind of mind to delve into the alternative to growth. It is also something requiring allot of research. It is an atypical situation. Past historical events can only lend some reference. The great depression is a good example but the ingredients were there for recovery. There probably will be no recovery only stabilization on the long road down.
rockman on Sun, 19th Oct 2014 3:55 pm
Porlock – “aren’t we already closer to the break-even levels in some of the Bakken areas than the headline WTI would suggest?” You seem to know the answer already. But the reality goes beyond the price of oil. Each potential well has a variety of factors that determine if it’s drilled. Obvious the price of oil is important but not the sole determinant. Each prospect has its own calculated potential. And typically those variations in potential can kill a prospect faster then an oil price drop. I know it’s convenient to characterize a play in such generalities as economic at $X/bbl. But there will be wells drilled at $X, 120% of $X, 80% of $X, etc. in every play.
And no: I have no way to characterize that distribution. Actually its not that easy for a company to generate that histogram for its own acreage positions. That’s especially true due to the heterogeneity of fractured shale reservoirs. Often they’ll discover unacceptable economics only after producing for a significant time period.
But the answer will eventually become very obvious. But it will probably toke at least 6 months of continuous low prices to see a meaningful dynamic change. It can be great sport to make such a prediction… especially when one doesn’t have their own money on the line. Personally it’s of little interest to me to make any prediction other then lower oil prices will eventually reducing drilling and production rates.
My fondest wish is that it cripples future EFS and Canadian oil sands production. From a tactical POV my company won’t drill on such possibilities. We just take current prices and work the numbers. From a strategic POV we’re optimistic: in addition to lower potential drilling costs our plan is to liquidate the company in several years. Hopefully a significant drop in drilling activity will increase the future value of our reserve base.
Boat on Sun, 19th Oct 2014 4:54 pm
Transmission Lines, smart meters, infrastructure projects, desalination plants, bio fuel, All a better bang for the buck vrs unpaid taxes and military unnecessary spending, I would agree that it will take a different group of folks in congress to make these changes happen.
Davy on Sun, 19th Oct 2014 5:21 pm
Boat, tell me this can we afford free Mercedes in every garage in the country?
Boat on Sun, 19th Oct 2014 5:38 pm
The sub division I build in…yes….me,no
marmico on Sun, 19th Oct 2014 5:48 pm
Boat, tell me this can we afford free Mercedes in every garage in the country?
Nope, but gasoline is a relative bargain. Only ~5% of every consumer dollar is spent on personal consumption of energy goods and services, of which ~3.5% is gasoline.
The chart: http://research.stlouisfed.org/fred2/graph/?g=O8N
Davy on Sun, 19th Oct 2014 6:11 pm
Marm, remove the 1%ers and tell me again what those numbers are?
Good to have you back. I bet you were on a Yacht this weekend or maybe skiing? I am wondering if there is any snow in the Ski areas yet!
Harquebus on Sun, 19th Oct 2014 8:26 pm
The middle classes are being robbed blind by governments and corporations and are unlikely to be able to afford higher prices of oil as has already been demonstrated.
marmico on Sun, 19th Oct 2014 8:30 pm
I don’t think that there is any data specifically for the 1% but there is gasoline consumption by expenditure quintile.
The 2013 Consumer Expenditure Survey (CES) states that the lowest quintile spent a mean of $1,231 on gasoline on total spending of $22,393 which is 5.5 pennies per dollar.
The CES states that the highest quintile spent a mean of $4,071 on gasoline on total spending of $99,237 which is 4.1 pennies per dollar.
Is your concern that the lowest quintile spends an additional 1.4 pennies per dollar on gasoline relative to the highest quintile?
Davy on Sun, 19th Oct 2014 8:50 pm
Marm, I may be a ex 1%er but I have dirt poor friends and your rosy picture painted by your cold numbers don’t do these dirt poor people justice. When you got little it only takes a little to bite. So my point is remove the high quarentile from the equation. Not like you did Marm but with the fuel expense of the dirt poor per disposable income. My point is Marm there are people who can’t afford everything and something has to give. It is called trade offs. I agree with your analysis just agree with me a significant amount of people have been priced out of the market. That’s all Marm. You can smack me around with numbers all day long. You do your homework well but there is more to it than numbers.
marmico on Sun, 19th Oct 2014 9:24 pm
You can smack me around with numbers all day long
I intend to smack you into submission. I’ll make a donation to your political platform:
The Davy-boy 1.4 Penny Gasoline Equalization Tax
Just imagine the price signal for Alt-E! 🙂
Kenz300 on Sun, 19th Oct 2014 10:18 pm
High oil prices hurt the global economy.
Lower oil prices, even if only temporary will give a much needed boost to the world economy.
Porlock on Mon, 20th Oct 2014 3:10 am
Rockman – thanks v. much for the reply and insight, elucidating as ever.
I guess the other question raised by the recent drop in prices is how spooked the banks/bond investors are by the potential for a further fall from here and hence how reluctant they might now be to roll over existing credit facilities on maturity and/or to provide new funds. Time will tell.