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Page added on March 27, 2015

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Oil Drilling: another Seneca Cliff

Oil Drilling: another Seneca Cliff thumbnail

The concept of an impending “Seneca cliff” seems to be making inroads in the debate, even though it may not be given that name. For example, watch the animation above on “Bloomberg.com

The crash in oil prices kicked off intense debate over when, and how, American producers would react. So far they’re still cranking out oil, but there are signs that a slowdown is looming. Chief among them: the record drop-off in drilling for new oil. The animation below shows the deployment of drilling rigs since 2011, culminating recently in a sudden collapse.

 

These four years of data represent the fastest expansion of oil production in U.S. history. New technology drove this boom—particularly the deployment of horizontal drilling through shale rock. The three biggest oil-producing shale regions are the Permian basin in West Texas, the Eagle Ford in Southern Texas, and the Bakken in North Dakota. Hover on the map for drilling history in each basin.
As the price of oil plunged in the second half of last year, producers started shutting down rigs at an unprecedented rate. First to go were rigs that operated without long-term contracts. Then companies began terminating agreements early and letting expired contracts go unrenewed. Active rigs declined by more than 40 percent. Remaining drilling efforts have focused on the most productive oil regions—sweet spots where oil will be profitable even at $40 a barrel.
So with all these drilling rigs shutting down, why isn’t oil production slowing? The short answer is efficiency. (See the longer answer here.) New wells pump more oil faster, so raw rig counts are losing some of their predictive power, at least for now. In fact, despite the tumbling number of active rigs, the U.S. is pumping more oil than any time since 1972.

Producers are running out of places to put all that oil. Storage-tank levels are at record highs, and production could drop sharply if inventory space ever maxes out.
Just as worrisome to oil investors is the so-called fracklog—thousands of nearly completed wells that are being left untapped. As soon as oil prices start to rise, these wells can start pumping crude after just a few weeks of finishing work. The fracklog has become America’s de facto backup storage.
Rig declines are likely to continue for the next few months, and may not stabilize until the third quarter, according to an analysis by Bloomberg Intelligence. In three previous oil slumps, it took about 32 weeks for rigs to bottom out. In highly productive shale regions with big fracklogs, production could still climb for months even if rig counts fall to zero.
For drilling companies, it’s an industry in crisis. Thousands of jobs have been lost, and more will follow. But for countries like the U.S. that buy more oil than they produce, the economic benefits of cheap oil and cheap gasoline outweigh the economic losses

 Cassandra’s legacy by Ugo Bardi



19 Comments on "Oil Drilling: another Seneca Cliff"

  1. shortonoil on Fri, 27th Mar 2015 12:19 pm 

    But for countries like the U.S. that buy more oil than they produce, the economic benefits of cheap oil and cheap gasoline outweigh the economic losses.

    Usually Bardi’s stuff is pretty well thought out, but this comment is lacking. The shale industry has $1 trillion in debt that it can not repay. Default on that debt will bring havoc to the financial system. Economic losses are likely to outweigh a little cheap gasoline by a factor of a 100. I must, respectfully, totally disagree.

  2. Perk Earl on Fri, 27th Mar 2015 1:10 pm 

    “Producers are running out of places to put all that oil. Storage-tank levels are at record highs, and production could drop sharply if inventory space ever maxes out.”

    Uh, Rockman, here’s another comment on rising storage levels.

  3. Davy on Fri, 27th Mar 2015 2:48 pm 

    Short said “The shale industry has $1 trillion in debt that it can not repay. Default on that debt will bring havoc to the financial system. Economic losses are likely to outweigh a little cheap gasoline by a factor of a 100”. Short I agree in pre new-normal times but these days the authorities can extend, pretend, and file bad debt away never to be seen again. I would like to know where are all those bad derivatives from the housing bust went. I believe many are on the Fed’s balance sheet. Maybe someone here can enlighten me.

    In this day and age without normal markets and proper market fundamentals what is real and what can be manipulated away in some new hat trick. In any case Short the damage is done to the oil industry’s financial abilities. The resulting effort to clean this bad debt up will require more moral hazard activity. There are limits to what they can do. Don’t forget some of the trillion in student debt that still needs to be hat tricked away somewhere somehow. How about all the unfunded liabilities that are waiting a few years ahead.

    This is a surreal situation because most of us if we have bills they must be paid. At the level of the central banks it is nothing more than a computer program that is goal-seek’d to satisfy political aims. This activity is essentially nothing more than lies and self-deception at the highest levels. Eventually these activities propagate towards a point of critical mass. At some point lies cannot be lied away. I feel we are getting ever closer to that point.

  4. rockman on Fri, 27th Mar 2015 3:41 pm 

    Earl – Yep, another collection of misleading spin. Though most already get it I’ll run down the bullsh*t list:

    A) “So far they’re still cranking out oil, but there are signs that a slowdown is looming.” Based upon the current rig count (which is still dropping) about 4,500 shale wells that were drilled last year won’t be drilled in 2016. The Red Queen just told the cornies to go f*ck themselves. LOL.

    B)”New technology drove this boom…”. The tech, though tweaked some, isn’t new. It drove the hottest oil play in the world 20 years ago in the fractured Austin Chalk carbonate shale. What drove the boom were the high prices. The loss of which is now crushing the boom.

    C) “So with all these drilling rigs shutting down, why isn’t oil production slowing? The short answer is efficiency.” It’s not slowing down because the wells current going into production were drilled before the rig count fell significantly…3 to 6 months ago. We won’t see the effect on new production numbers until this summer. BTW drilling efficiency has improved significantly…from where we were 4+ years ago. There has been no meaningful improvement in the last year or so.

    D) “Producers are running out of places to put all that oil”. There is no chance of even coming close to running out of storage. Yes: highest storage level in decades. But that still leaves 40% empty…over 140 million bbls. And the storage increase this time of year: it has happened for decades. And for decades storage have dropped in the erly summer as refineries increased cracking to meet summer driving demand. A demand that actually began ramping up last Dec as a result of lower moor fuel prices.

    E) “…thousands of nearly completed wells that are being left untapped. As soon as oil prices start to rise, these wells can start pumping crude after just a few weeks of finishing work. The fracklog has become America’s de facto backup storage.” First, the current estimate is 1,500 wells waiting to be frac’d. And the lag time between the rig moving off and the well being frac’d and put on production ranges from 3 to 6 months. So a number of those 1,500 remain on their original schedule to be frac’d. Though we can’t determine the number, very few of those 1,500 are having their fracs intentionally delayed.

    As far as calling any unfrac’d well as “storage” that’s a gross overstatement IMHO. Storage can be drawn at rates of hundreds of thousands of bbls per day. Those unfracpd wells can’t deliver like that. But a mute point anyway since we aren’t going to run out of storage.

  5. Nony on Fri, 27th Mar 2015 3:55 pm 

    I think the Seneca cliff or the “shark fin” appeals to peakers who are disappointed by the production not peaking as early as they wanted or the production being higher than they predicted. So, instead of using the new information to change their impression of total resource to be extracted, they decide we are just using up what is available too fast. This also allows to consider a harsh crash. Which is psychologically appealing for doomers.

    However, the history of oil extraction generally does NOT show shark fins or cliffs. Peaks do happen. But usually EOR or infill (things that capitalize on sunk cost like existing infrastructure) enable to keep production from crashing and it goes down rather more gently than doomers expect.

  6. Apneaman on Fri, 27th Mar 2015 4:36 pm 

    Nony, do you really think doomers want it to happen in their lifetime just to say “told ya”? Maybe I could see it in older ones who already got most of their living in. I don’t wish it and I’m a hard core doomer, but I’m afraid we are fucked on all fronts (3E’s)sooner not later. Things are speeding up. Do you follow the climate change Nony?

  7. Davy on Fri, 27th Mar 2015 5:22 pm 

    Apeman, the NOo wants to discount our message that is now ominous for a cornucopian like the NOo. He is like the Marmi with no middle ground. They are desperate to keep their momentum of holmium going. The shake bonanza was like a coke buzz for them.

    Apeman, I am just as worried as you are for the shit storm ahead. Why the hell would I want this to come with such a good life. No, this about accepting reality that doom may be ahead and if so when and if when how do we prepare.

    NOo, why can’t you give a bit and admit things are not right and us doomers have legitimate concerns. Peak oil dynamics is a certainty. The arguments are only timing and degree.

  8. rockman on Fri, 27th Mar 2015 6:46 pm 

    “…the history of oil extraction generally does NOT show shark fins or cliffs.” For all the times I’ve verbally bitch slapped Nony it might surprise some to offer some support to that statement. A bell shaped curve doesn’t mean it symmetrical. The slide back down is almost always more slow then the build up.

    OTOH I think the entire debate over pending doom by both sides is missing the point. From an energy perspective the “bad times” aren’t coming. They’re here now and gave been here for decades. No, it hasn’t been Mad Max time. But hundreds of thousands have dies and $TRILLIONS have been forfeited by countless millions as a result of the POD. IMHO it’s easy to trace the first major POD bitch slap to the so called Arab embargo more the 30 years ago. It’s been a cycle of good times/bad times for energy consumers.

    The POD pain has not been shared equally. As a result those that haven’t directly suffered don’t feel very doomerish. And those looking closer at the suffering so many have experienced have difficulty seeing the silver linings.

    The Rockman has shared fine wine with those who benefitted from the POD and has seen the died lying in the streets thanks to the POD. Doom vs good times: just depends on which story you feel like telling IMHO.

  9. Nony on Fri, 27th Mar 2015 7:10 pm 

    Marcellus is putting out NG at close to a dollar per MCF. Yeah…truly she is mighty!

    http://www.naturalgasintel.com/data/data_products/bidweek?region_id=northeast&location_id=NEALEIDYT?region_id=northeast&location_id=NEALEIDYT

  10. Nony on Fri, 27th Mar 2015 7:19 pm 

    Oops…Marcellus did it again. She played with my hear…r…art.

    http://bakken.com/news/id/232937/oops-marcellus-did-it-again/

  11. Nony on Fri, 27th Mar 2015 7:24 pm 

    Gotta love that low oil price too. Rock’s “POD” [high prices] done taken a 50% cut. Go cornies, go!

    Let us frack the ANWAR and we will really rock this pig. Drill, baby, drill worked!!!!

    USA! USA! USA!

    Miracle on ice!

    https://www.youtube.com/watch?v=qYscemhnf88

  12. Perk Earl on Fri, 27th Mar 2015 7:40 pm 

    “Storage can be drawn at rates of hundreds of thousands of bbls per day. Those unfracpd wells can’t deliver like that. But a mute point anyway since we aren’t going to run out of storage.”

    Ok, rockman, that was a pretty convincing by the numbers report, and although there are conflicting reports being tossed around in the news, until conclusive proof indicating otherwise, I’ll defer to your assertions re: oil storage.

    Meanwhile oil price keeps doing something interesting; there seems to be a price wall in which WTI is stuck below $50 a barrel, and Brent the same at $60.

    For several days the price of oil was going up, then yesterday hit those walls and I was very interested to see what would happen next. Well, today they did a 180 and went back down. See oil price change for today below:

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

    Crude Oil (WTI) USD/bbl. 48.87 -2.56 -4.98% May 15 17:15:00
    Crude Oil (Brent) USD/bbl. 56.41 -2.78 -4.70% May 15 17:59:21
    TOCOM Crude Oil JPY/kl 42,550.00 -1,280.00 -2.92% Aug 15 14:59:00

    So this is something to watch, i.e. if oil price has difficulty rising above those price points and for how long.

  13. Nony on Fri, 27th Mar 2015 7:47 pm 

    Check out the Utica. Peakers never want to talk about that one….

    http://www.eia.gov/petroleum/drilling/pdf/utica.pdf

    Bla bla bla Haynesville, bla bla bla Barnett. All the plays are down except Marcellus. But then they forget this one taking off.

  14. rockman on Fri, 27th Mar 2015 10:48 pm 

    Earl – It’s all relative. I didn’t sell any oil today, yesterday or the day before. Nor did the vast majority of US oil producers. So those prices changes are not relevant. I sell oil when my stock tanks get full. My oil buyer has a complex formula that determines the purchase price which is based upon a number of factors so essentially very little if any oil is sold at the prices you’ve referred to. Those prices are the futures closing prices for just one specific oil with a specific contract maturity.

    But having said that I suspect the future players aren’t expecting prices to fall much more and perhaps begin to show a slow but consistent increase. That’s if they are becoming aware of the annual swing from filling storage to making net withdrawals as the refiners start building inventory for the summer driving season. They’ve already seen the latest jump in gasoline consumption. If they perceive that this is not a one off increase it could build anticipation for higher oil prices in the next few months.

    It will be very interesting to see how the future players start bidding contract maturities of 6+ months. Once the lag time between the rig count and production catches up with the huge drop in completed shale wells they’ll see the growth rate in US oil production stall and perhaps begin a steady decline.

  15. rockman on Fri, 27th Mar 2015 11:12 pm 

    And along with that thought:

    Reuters – California’s gasoline sales are rising at some of the fastest rates for a decade, as an improving economy and lower fuel prices encourage more driving, according to state tax records.

    Gasoline sales in December were 2.6 percent higher than the same month a year earlier, according to records published on Thursday by the California Board of Equalization, the agency responsible for collecting fuel taxes.

    Gasoline sales have been gradually rising since June 2013, but there has been a marked acceleration in sales since August 2014, coinciding with the sharp drop in fuel prices.

    California motorists consumed almost 960,000 barrels of gasoline per day in 2014, equivalent to about 1 percent of global oil demand.

  16. Jimmy on Sat, 28th Mar 2015 1:02 am 

    This isn’t Bardi. It’s Bloomberg. Bardi put a link to it on his blog and the numb scull at Peak Oil News attributed it to Bardi.

  17. Apneaman on Sat, 28th Mar 2015 1:26 am 

    Good eye Jimmy.

  18. Perk Earl on Sat, 28th Mar 2015 2:56 am 

    “It will be very interesting to see how the future players start bidding contract maturities of 6+ months. Once the lag time between the rig count and production catches up with the huge drop in completed shale wells they’ll see the growth rate in US oil production stall and perhaps begin a steady decline.”

    Yes, should be interesting, rock.

  19. rockman on Sat, 28th Mar 2015 1:45 pm 

    Earl – The folks at Reuters apparent see the possibilities also:

    Reuters – The rapid rise in the number of miles driven by U.S. motorists continued into January, federal data showed this week, with travel gaining 4.9 percent from a year ago to another record high. Motorists drove an estimated 237.3 billion miles (381.9 billion km) in January, the most ever for the month, according to data from the Federal Highway Administration. It was the 11th consecutive month of year-to-year growth and followed a 5 percent rise in December, the fastest rate in at least a decade. Last year, motorists drove over 3 trillion miles, the highest mileage since 2007.

    The trend may be good news for oil traders looking for signs of price supports for falling crude prices, given that U.S. gasoline use accounts for one-tenth of global oil demand. “The demand for gasoline has been stronger than expected, and we are seeing stronger gasoline futures,” said Phil Flynn, an analyst with Price Futures Group.

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