[shallow sand]

This morning I heard more than one financial person on CNBC or Bloomberg talking about how low the second cycle and third cycle costs are in the major US shale fields. The numbers I was hearing were $30-35 per barrel.

I'm not up on these terms. What exactly do these mean?

I am familiar with CAPEX to drill and complete wells and workover wells. I am also familiar with lifting and operating expenses, LOE. I am also familiar with G&A. However , I don't remember the "cycle" term.

Is this something new since the shale boom? Could someone explain how these cost are calculated and how they can be so low? If I am not mistaken, each new well in Bakken is around $10 million to drill and complete, given a two mile lateral and each Eagle Ford well is running around 7.5 million. I don't understand the math.

[coffeeguyzz]

Hey, shallow. I've been following the shales since 2007 or so when the first stirrings out of North Dakota started and I never heard those phrases applied anywhere. Will do some checking, though.

[shallow sand]

Coffee. I also hear full cycle costs and half cycle costs. Don't know if those terms are different than those in OP.

[shallow sand]

Found a definition of half cycle v full cycle. Full is all costs including land, tank battery, g&a, etc. Half cycle is in fill drilling on producing lease. Can't find anything about second or third cycle, so maybe I miss heard that. I'm definitely capable of not hearing correctly, especially on fast talking business channels.

[ROCKMAN]

Shallow - This may be what you heard: http://www.cnbc.com/id/102123683#.

“Full cycle” sounds to be the total costs to lease, drill, frac and produce a well. It sounds as if all they’re saying is that lower oil prices will reduce the full cycle cost that wells can be drilled for. Well, double Da! LOL. I'm guessing "second cycle" will be the cost that limits drilling when prices hit a new low plateau.

For what it’s worth here is some of the potential the Rockman sees developing. Just posted on an old front page story so most probably aren’t going to read it there:

It doesn’t mean the shales will immediately fall off the cliff at today’s prices. First, companies have hundreds on $millions tied up in undrilled leases. Since most are pubcos with significant value booked for those leases they’ll not write them off until forced to. Also, being pubcos, they are already seeing stock prices fall. To maintain as much value as possible they need to show they still have viable wells to drill…even if in reality many of those undrilled locations aren’t all that viable. But those companies are going to get a break from the service companies…the ones that actually drill and frac those wells. They have invested $billions in new equipment to meet the original booming demand. And their prices reflected that high demand back then. But this is now.

With a decrease in drilling activity those companies will immediately suffer significant loses in cash flow. There’s a good reason Halliburton just gobbled up Baker Hughes: months ago all the service companies saw the current situation developing. Going forward the service companies will be focused solely on market share and cash flow. Prices will fall accordingly. I wouldn’t be surprised if an Eagle Ford well drilled/frac’d 6 months ago will cost 15% to 30% less 6 months from now. And undrilled leases nearing their expiration: operators will go to those mineral owners and propose lowering the royalty on their lease in exchange for drilling a well. If they mineral owner doesn’t agree the operator drops the lease and the land owner gets nothing. I’ve personally done the same on dozens of leases during a price collapse in the past.

{Shallow - Have you ever hit one of your royalty owners with that proposition: lower the royalty or I’ll P&A. A little bit like playing a weak hand in poker: you can win if you bluff the other player off his hand. LOL.}

And then there’s the BIG IF: companies will still have some financial incentive to keep drilling…IF they have the capex to do so. Which will be a function of cash flow – (debt service + overhead). That’s where the real shake out will show up. The Rockman’s owner, who had never chased the shales due to insufficient profitability, still has more capex then Dog. So we might take advantage of those terminally wounded shale plays and buy their assets cheap. And might even drill/frac a few shale wells given lower front end and operational costs. There are going to be viable shale locations at $70/bbl or less. The question will be who has the money to drill them. I’m actually sitting at my desk on Black Friday morning analyzing production of a conventional player that is about to put some producing properties up for sale. Cannibalism never takes a holiday. LOL.

Some of the best ROR’s the Rockman has ever generated in his 40 years have been at the bottom of a price collapse. As I’ve said before: the price of oil/NG doesn’t determine a company’s profitability: it’s the difference between the price they sell it for vs what it cost to get it out of the ground. During a major price collapse that cost to drill often plummets further than the price of oil/NG. What plummets are the number of players in the game. For the survivors life can be very sweet. Just like a collapsed real estate market: if you have the money it turns into a feeding frenzy.

IOW if the “full cycle" cost drops as much as the price of oil then there could still be a decent profit to be made. So Shallow: as I'm sure you know so well...you figure out how to survive in the oil patch at times like this or you go find another job and begin earning an honest living. LOL.

[shallow sand]

ROCKMAN. Thanks for the info. Have been hunkering down for awhile now. You know what you are doing but I would be careful on shale. Hard to know what you have until you pay for the expensive frac.

There has been two times where we couldn't break even. All of 1998 and a couple months in early 2009. We aren't there yet but if this doesn't stop soon we will be knocking on the door. That is why I think the shale guys are in a lot more trouble than the talking heads let on. Hedges are the only thing saving them, except Oops re CLR. Getting punished for dropping the hedges. Lost $5 billion in market cap today if this holds. Ouch.

[ROCKMAN]

shallow - "You know what you are doing but I would be careful on shale." Have no fears: we're a very conservative group here. We'll only make a move if we can really f*ck over the other company. LOL.

But seriously I mean it: it isn't personal...just business. But if a company makes bad choices then they are the ones responsible for getting f*cked...not me. I've been on both ends of the pillaging. It's just the natural course of business: sometimes you're the butcher...sometimes you're the steer. We don't get to decide what role we play. That's up to the economy and Mother Earth.

[rockdoc123]

I think what is being referred to in terms of second and third cycles here is the various waves of E&P in shales.

As an example I remember the first wells drilled in the Marcellus were quite expensive...about $8MM/well D&C. Within a few years those costs had been managed down so the standard was close to $6 MM/well and now the standard is slightly lower still.

My guess is it is a somewhat arbitrary division of cost control in the industry.

These terms aren't standard ones but the bankers and analysts are always making up verbage to explain issues they could easily do with standard language.

[coffeeguyzz]

In a quick follow up to rockdoc's post, it kinda looks like this perspective/terminology started with a paper from Woody Mac in late August saying the shales' E&P is now entering its' third phase of development in fifteen years or so.
Dunno how accurate this is, but their seems to be a lot of recent analysis via the net incorporating this view.
(Off topic, but just heard of Praxair entering the operational world of waterless frac'ing with liquid CO2. Could be mighty interesting).

[Revi]

I got a feeling that the reason that oil is so cheap now is that we are seeing the bankruptcy sale of petroleum. There is a lot of inventory around right now, and it will be sold at half price, but after the store gets liquidated we may have some higher prices. That's my theory. What do you think?

[Tanada]

I got a feeling that the reason that oil is so cheap now is that we are seeing the bankruptcy sale of petroleum. There is a lot of inventory around right now, and it will be sold at half price, but after the store gets liquidated we may have some higher prices. That's my theory. What do you think?

If I were a betting person that is how I would bet as well. The problem with any bet on oil is always the timing, I am sure the prices from early to mid 2014 will reassert themselves, but the question is how long will it take for that to happen?

[ROCKMAN]

"There is a lot of inventory around right now, and it will be sold at half price, but after the store gets liquidated we may have some higher prices." Certainly part of the dynamic. I'm not sure about half price as far as motor fuel. But some could be selling at cost just for the sake of cash flow. I don't track the numbers that close but they refiners seemed to have had a clear picture of the need to lower fuel prices. Which is why they refused to pay those high prices for oil. We won't see the consumption numbers for a couple of months at least but they may show how well the refiners guessed.