[Pops]

Great discussion from you guys and I hate to butt in but doc just said a couple of things that I think should be underlined.

I think it is pretty obvious the price is not being driven by fundamentals at this point in time.....I doubt anyone can actually say what the price should be.

We've had discussions over time about how futures prices eventually meet the market price reality and so don't / can't influence the actual price paid.

That is not even half the story. The spot price for any and everything is partially a "futures" price. Every deal made, from a boatload of oil to a to a tank of unleaded takes the possible future price into account and by extension the futures price to some extent.

Would you fill your tank if you thought the bill would be half as much tomorrow?
What about if you thought the price would be twice as much tomorrow, would you fill your tank today?

Fundamentals include guesses about the future. If you and I do it over an 18 gallon deal, you can bet other folks do it over an 1,800 gigaton deal, LOL

Interesting to read all of the articles from various pundits regarding oil prices and how they are set to stay low for a long time for various reasons. Everyone of the articles either ignores or discounts the concept of Peak Oil.

Ditto that here doc. Folks don't get the fact that this isn't our daddys' 1980-whatever glut. They tucked away PO on the strength of the O&G PR that we are the next top exporter. I'm pretty sure they will be quite surprised if the US glut evaporates as quick as it came.

[shallow sand]

One thing that I think is a tell (possibly) is how the independent E & P stocks and the oil majors have not fallen as far as one would expect in this rout. For example, we had a one day rally today in oil and all of these stocks shot up significantly. In fact, they are trading much higher than they were a few weeks ago, when the oil price was much higher.

Exxon and Chevron really have not dropped much at all, even though a year of sub $50 oil prices would have to cause an huge hit to their earnings. Neither of them hedge from what I read, so the hit to revenue is immediate.

I have not invested in any shale drillers, but I definitely would not if I thought oil was going to stay sub $50 or even sub $70 for any length of time. Most of them have high levels of debt and no hope of paying it back if we are in a several year period of depressed prices. Yet on a one day rally:

Continental Resources is at $39.69, up from 52 week low of $30.06.

EOG is at $90.31, up from 52 week low of $80.63.

Both of the companies have taken on a significant amount of long term debt to grow very quickly. Both have among the most LTO wells and LTO acreage/locations of any company in the United States, with EOG being strong in Eagle Ford and Bakken, and with Continental having, I believe, the most acreage in both the Bakken and the SCOOP in OK. However, if you look at a top well under current economics, you find the following:

Bakken - Plains posted today $32.44, so assume these large operators are able to obtain $40 per bbl.

Lets assume a Middle Bakken well which produces 200,000 bbl of oil in the first two years, or averages 274 bbl per day. Also, we sell all gas, 600,000 mcf for $2.50 per. I think we would all agree this would be a much better than average Bakken well. Assume .80 NRI, $5 per bbl OPEX, $1 per bbl G & A and 5.5% severance. Won't include the extraction tax, just assume low price makes it go away.

Two year's breakdown

Oil sales $6,400,000.00
Gas sales $1,200.000.00

Less
Severance taxes (5.5%) 418,000.00
OPEX 1,200,000.00

Net $5,982,000.00

In this example I have not included interest expense or any other expenses one would expect. This is a very good Bakken well and we are still short after two years, no time value of money is figured in either. Hard to say what "average" Bakken well costs, but have seen anywhere from $6-12 million and Continental said in 3rd quarter, 2014 average across Bakken and SCOOP was $10 million and they hoped to get it down to $9.6 million.

Now consider that "average well" in Bakken will gross 170-200,000 barrels of oil in five years. Also consider that Eagle Ford, although benefits from much higher wellhead price, typically has steeper decline and lower production rates than Bakken (double the wells but producing less than 1 1/2 times as much). These guys should be in big trouble, however they still have many billion market caps and enterprise value which places per flowing per bbl value over $100,000.

Clearly think market does not think this depressed price will last long.

[westexas]

Shallow,

Re: "If global depletion rate is 9%, as I read recently in Mr. Kemp's Reuters story"

One small clarification. He was referring to the gross decline rate from existing wells. The depletion rate refers to the rate that we consume remaining recoverable reserves. Production can increase, stay the same or decline, but depletion is a one way street.

Incidentally, at a 9%/year gross decline rate from existing wells, in order to maintain current production, we would have to replace the productive equivalent of every currently producing oil well in the world over the next 11 years. Of course, existing production would be down to 37% of the current level in 11 years (at 9%/year), but if we stipulate a steady state production rate, we would be declining against the current production level, not against a declining production level.

[ROCKMAN]

Shallow - "I cannot see how this price will continue unless global demand is falling significantly." Not a prediction of the current situation but we'll see if there's a similar trend in global consumption we saw after the price collapse in 2008. In 2009 with the average oil price at $58/bbl the world consumed a little less oil then in did in 2008 when the average price was $98/bbl. I'm not sure how one could argue that this demand destruction wasn't due to the EVENTUAL cumulative effect of higher oil prices. At the end of 2015 we'll look back at the average price of oil and see if the world's economies boomed thanks to all this "cheap oil" or if they continued to be dragged down by the EVENTUAL cumulative effect of high oil prices.

[shallow sand]

I don't have the numbers in front of me but if I recall correctly worldwide oil demand in 2009 was slightly less than 2008 and the only year over year decline in demand in the 21st century. The price cratered, rigs running collapsed and I think demand rose in each quarter of 2009, despite it being overall lower than the previous year. The price of oil rose steadily from March, 2009.

My point is that this price can only be sustained through this year and into the next few in the event demand falls significantly and continues to do so. If demand stays flat or continues up, where are the locations profitable at $48 WTI?

On a side note, a few months ago we chatted about college majors. Haven't heard my son mention petroleum engineering recently. I feel for the young people who went into that major. Hopefully this is a short downturn like 2008-2009 and not a repeat of 1986-1999.

[ROCKMAN]

Westexas' success does not surprise me. But not very relevant to the discussion IMHO. As I pointed out a couple of years ago I drilled a nice oil well in La: been making 400 bopd ever since...300,000 bbls and still going strong. And a cheap production operation: I can still have positive cash flow if I were selling the oil for $3/bbl. But that's it: a small fault block with no room for even one more well. But wait: there's an adjacent fault block with no well in an optimum position even though down dip wells produced 2.5 million bo. So we drilled it 6 months ago. And SOB...we plugged it. The sands were there but depleted. Apparent the oil leaked across the trapping fault due to pressure draw down on the other side. One of THE most difficult situations to evaluate.

And that's it...no locations left to drill in this area...zip...nada...nothing. The problem isn't making a nice profit at current prices drilling a SUCCESSFUL conventional oil well. The problem is a scarcity of viable conventional oil reservoirs to target. As mentioned before my little company drilled $400+ million in conventional NG targets when it started up 5 years ago. And then NG prices collapsed and we haven't drilled for such targets for 2 years: $400 million to $zero.

As Doc points out this is why the pubcos rushed to the shales once oil prices got high enough. I still contend that had oil prices and the shales not boomed as many as half the oil pubcos might not exist today: if you couldn't find enough conventional prospects to drill you didn't have a company that could survive.

So what does the Rockman do now? Easy: slip in cannibal mode. We just partnered with another small independent that will target shallow projects: redrill mechanically failed wells, going after recompletions in bypassed pays, etc. But also keeping an eye for potential acquisitions from companies crippled by low oil prices. Typically great deals available in every bust be it the oil patch, real estate, etc. But one reason is the lack of "bankability" and thus few loans made. Fortunately working for $billionaire that doesn't need to borrow the Rockman is in a much better place then most.

[shallow sand]

westexas. I mixed up terms, which I am prone to do.

EIA predicting gasoline demand will be up in 2015. Does not surprise me. Put 17 gallons in truck yesterday and cost $29. Even I got a little charge out of that, even though the oil price drop has been punch in the gut. Imagine those who merely consume are rejoicing.

[ROCKMAN]

Shallow - I wonder what they predicted for gasoline sales in 2009 compared to 2008 considering that the average yearly price of oil fell from $98/bbl to $58/bbl from '08 to '09? BTW according to same EIA: US gasoline sales DECREASED after the '08 oil price collapse: 55.1 million gal/day in '08 to 49.8 million gal/day in '09.

2015? Time will tell.

[shallow sand]

Looking at gasoline products supplied chart on EIA website. Early 2009 was very weak. However, second half 2009 was stronger than second half 2008. US Economy very weak in first few months of 2009. Things picked up in second half of 2009.

Won't know till it has happened. Hope we get some kind of bounce. $40 is pretty tough.

[dashster]

According to euanmearns.com , global conventional crude oil production has hit a new high:



The question I have is where is this oil (non fracking, non tar sands) coming from, that is, oil that the people predicting Peak Oil at some point over the last 10 years didn't anticipate? Is it just everyone is doing better or are there some specific regions (non fracking, non tar sands) that are producing more than the forecasters foresaw?

[GoghGoner]

Iraq has had the greatest increase in conventional over the last six years. About 1.5 mbd.

A monthly peak isn't significant since the data varies so widely. I view it as a plateau for conventional since 2005. Not as dramatic as the more pessimistic predictions and not as rosy as the optimistic predictions. Just the usual middle ground.

[ROCKMAN]

Goner - You know what would be interesting: if one of our talented cousins here would post a simple curve...global oil production vs oil price. There would have to be a lag factor since it takes a couple of years or more for the oil patch to react to significant price movements. Obviously that curve would show a very positive correlation of the US shale boom with increased oil prices. Which obviously leads to questioning future production rate expectations that don't factor in oil prices into those projections.

[Pops]

The question I have is where is this oil (non fracking, non tar sands) coming from, ?

10 years of the highest sustained prices ever is where it came from.



I hate to point it out, but just about the same period it took to work past the US peak and the rise of OPEC.

[Pops]

Naw, a cartel controls price by restraining production, there is no restraining the Red Queen.

The Railroad Commission did it in Texas for years, right up until Texas and the US really had no surplus capacity to restrict. OPEC theoretically did it too but that looks to be past tense as well, by producing flat out, KSA is pretty well admitting they have no spare capacity and they are in the same boat as everyone else.

We've been saying for 5 years that C+C -LTO has peaked, Mearns said he can't really separate out all the LTO except in ND and the Permian so this probably doesn't really change much unless the number goes quite a bit higher.

I'm just guessing of course.

I'd think 5 years of high price would increase the supply of plain old crude — if the supply of plain old crude could be increased.

[dashster]

The question I have is where is this oil (non fracking, non tar sands) coming from, ?

10 years of the highest sustained prices ever is where it came from.

Yeah, they may have underestimated both the price rise, and the resulting investments made.

[ROCKMAN]

Pops - There's another more simplistic way to frame the situation: from someone like the Rockman with a sh*t load of capex and an owner demanding that we book new oil reserves in the ground TODAY!!!.

And it happening. LOL. And now some qualifications. First, we don't have the capex for Deep Water GOM. And even if we did we don't have a time frame that would allow 7 to 10 years to establish production. Second, same reason as the previous for not going overseas. Third, not being a public company with the leverage of building stock values we have to look at the shale plays simply from their rate of return on investment. In that regards they are insufficient to meet my owner's requirement.

So the bottom line: a well funded and highly motivated group has been searching for NEW CONVENTIONAL OIL RESERVES. And we have found very few opportunities of sufficient potential size. And for the Rockman you're not talking about 100 million bbls targets. He would pee on himself if someone showed him a credible (which doesn't mean a guaranteed success) target of just 1 million bbls.

IOW think back to all the press releases from US companies touting their BIG DISCOVRIES: how many weren't in the resources plays or DW GOM? IOW from memory list the big US CONVENTIONAL OIL discovers you recall seeing in the last 5 years when we had high oil prices? Short list, eh?

I believe the same point your pushing: abundant capex, high capitalistic motivations, high oil prices, very easily/quickly acquired drilling rights compared to the rest of the world, more geologists, geophysicists and petroleum engineers than the rest of the word combined and lastly, the highest concentration of oil field equipment and skilled service company hands on the planet.

And how much new CONVENTIONAL OIL reserves has this well-honed drilling machine brought forward in the last 10 years? The Rockman is perpetually worried about his group being shut down. Not because of drilling too many dry holes but simply for not drilling enough holes in the first place.

One of the reasons the Rockman is still employed is because we have one partner who is drilling some conventional oil discoveries in Mississippi. And those opportunities are available today because the small operators that are focused in the theater were about 10+ years late to adopting 3D seismic exploration. Now with the new seis we can increase the probability of success to acceptable levels. In an odd way similar to why Iraq has so much potential to bring new oil in to play: development there has been stymied for the better part of 20 years due to wars. And the other reason his owner tolerates the Rockman: producing 300 bopd so far of conventional oil drilled horizontally in a field that was discovered 69 YEARS AGO.

And that's the inside view from someone focused on finding new conventional oil resources in the USA. Focused about 60 to 70 hours per week. LOL

[Pops]

Thanks ROCK, sure sounds like treading water is about the best we can do.

[ROCKMAN]

Pops - Threading water on a good day...some days feels more like drowning. LOL. I'm trying not to be overly dramatic on the issue. But I'm sitting in a company"s office in San Antonio right now trying to find one more hole to poke for oil where they have been poking holes since 1936. Look at a well map of the Texas coastal trends (my playground). Now cut a piece of circular paper that would represent the size of a typical oil field holding 1 million bbls of recoverable oil. Now slide it across that map with the hundreds of thousands of depleted wells and dry holes: try to find a spot where there isn't several holes drilled there already. Very difficult to do.

But you always drill deeper then those wells ere drilled. But now temperature is your problem: as you go deeper it gets to hot for oil to remain stable...you get below the "oil window". Which is a big reason you've seen NG do well for the last 30 years: it is stable at those deeper depths. And much better seismic data has greatly improved the success rate searching for those deep pools of NG. But even that angle is getting a bit long in the tooth: tens of thousands of such prospects have been drilled in the last 3 decades. And starting in 2009 the Rockman spent $240 million over 3.5 years drilling such deep NG targets. And since then when NG prices fell: $0 spent drilling for the same conventional NG reservoirs.

Which is why the big conservational oil and NG plays are in the Deep Water GOM. Folks are so focused on oil many don't realize we're bordering on Peak Conventional NG. And we may already be there. Consider it wasn't that many years ago that NG from the Marcellus represented less than 2% of US production. And today it's closer to 20%. And 20% of US NG production is a lot...and that's from a unconventional reservoir. Same question as with oil: name the major NEW CONVENTIONAL NG FIRLDS (not in the DW GOM) discovered in the last 10 years.

And I always like to remind folks about the reality of the US, one of the largest NG producers on the planet with mucho help coming from the shales: we are still a NET NG IMPORTER. Granted not by very much but it is what it is: the US consumes more NG then we produces.

[kublikhan]

Goner - You know what would be interesting: if one of our talented cousins here would post a simple curve...global oil production vs oil price. There would have to be a lag factor since it takes a couple of years or more for the oil patch to react to significant price movements. Obviously that curve would show a very positive correlation of the US shale boom with increased oil prices. Which obviously leads to questioning future production rate expectations that don't factor in oil prices into those projections.

Here you go Rockman. The first graph is US oil production vs oil price(inflation adjusted 2015 dollars). The second one is the same data with the oil production time shifted 4 years.

US Oil Production vs Price

US Oil Production Time Shifted

Sources:
Crude Oil Production

Oil Prices 1946-Present