Exploring Hydrocarbon Depletion
Page added on April 14, 2017
Recent data on international rig counts continue to show little increase into 2017.
We anticipate oil production from non-OPEC, non-US production sources to decline in 2017 as depletion and decline rates take their toll;
We differ from IEA’s interpretation of the trend line for non-OPEC, non-US production in H2 2017.
This is our third and final article updating our oil thesis for 2017. Our prior articles addressed sentiment and fundamentals, and here, we’ll discuss international rig counts and what the low number of rigs portend for oil production.
As always, we like to use our kids’ affinity for desserts to explain an oil concept, and kids are a bit of an expert when it comes to understanding decline and depletion rates. So, let’s use my daughter for instance.
Like any oil producer with a new oil field, whenever my daughter gets a big bowl of ice cream, she dives right in. Big scoops of “where has this been all of my life” fly into her mouth. As her bowl of ice cream dwindles (depletes), her scoops begin to shrink (decline) as she tries to savor the last mouthfuls. Like a good little oil executive, she usually tries to find more capital to replenish her finite bowl of ice cream and stem depletion (“More Daddy?”), but when the capital markets don’t cooperate (“Daddy says no. #sad”), then the ice cream enters terminal decline. Tough life kid, but that’s the way the ice cream melts.
Today’s oil producers can keep pumping at high volumes, but that merely increases depletion rates, or pump at lower volumes to stem depletion and preserve the reservoir, but that increases decline rates. Oil companies have tried to balance the two, but it’s a Sophie’s choice in today’s oil prices. Low oil prices mean many oil producers have elected to keep pumping at high volumes (because they need the cash), but that sacrifices the longevity of their reserves. As we enter the third year of low oil prices, we’re starting to see that there’s just not enough capital to even stem decline rates let alone depletion.