Another Ignorant Forecast of the Death of the Shale Boom

Guest “riiiight” by David Middleton

From the perpetually wrong Nick Cunningham at Oil Price Dot Com…

US Shale Production Is Set For A Steep Decline
By Nick Cunningham – Oct 01, 2019

U.S. oil production fell in July, another worrying sign for the shale industry.

The latest EIA data shows that oil output fell sharply in July, dipping by 276,000 barrels per day. The decrease can be chalked up to outages related to a hurricane that forced oil companies to temporarily idle operations in the Gulf of Mexico. Offshore Gulf of Mexico production plunged by 332,000 bpd in July.

As a result, the dip in output might easily be dismissed as a one-off aberration. However, U.S. output has stagnated in 2019, ending several years of explosive shale growth. Compared to December 2018, total U.S. production was only up 44,000 in June 2019, which essentially means that despite heady forecasts and lots of hype, U.S. shale has plateaued this year.

Because the Permian drives much of the growth and commands most of the attention, it is instructive to look at Texas. The latest EIA data shows that Texas boosted production by 40,000 bpd in July from a month earlier, which is not trivial, but down sharply from the triple-digit monthly gains routinely posted throughout much of 2017 and 2018. Year-to-date, Texas has only added 125,000 bpd, a rather modest figure. The state added 474,000 bpd in the first seven months of 2018 by comparison.

[…]

For shale drillers, the problem is made worse by the fact that they are facing financial stress and the prospect of persistently low prices. The rig count has fallen sharply, down roughly 20 percent since last November. Drillers are cutting back, hoping to improve their cash flow position amid investor scrutiny.

[…]

Oil Price Dot Com

At no point does Mr. Cunningham cite anything that supports the notion that “US Shale Production Is Set For A Steep Decline”. The hurricane-related shut-in of Gulf of Mexico production is totally unrelated to the Permian Basin and “shale” plays in general.

Hurricanes and the Obama maladministration’s unlawful drilling moratorium/permit-torium are obvious on this production plot:

Figure 1. U.S. Gulf of Mexico oil production (US EIA)

Most, if not all of that 332,000 bbl/d is already back online. GOM production is on track to exceeding 2 million bbl/d in early 2020.

A slowdown in growth is not a steep decline. As awesome as the Permian Basin is, production growth can’t perpetually accelerate. Mr. Cunningham did note that falling oil prices are a factor… It’s actually the only factor. The fact that every oil well ever drilled exhibits a decline curve, means that the only way to maintain and/or increase production is to keep drilling.

The Baker Hughes rig count for the Permian Basin pretty well tracks the price of crude oil (WTI).

Figure 2. Baker Hughes Permian Basin rig count and WTI.

The rig count has been falling with the price of crude oil since December 2018. With the rig count falling, the rate of production growth has slowed down, but “U.S. shale” has not “plateaued this year.”

The EIA tracks the monthly productivity changes for tight oil and shale gas plays. The September 2019 Drilling Productivity Report: For key tight oil and shale gas regions shows that U.S. tight oil plays are still growing, with almost all of the growth in the Permian Basin.

Figure 3. Month-over-month change in crude oil production for U.S. tight oil plays.

All of the regions, except the Haynesville, exhibited continued increases in productivity (new-well oil production per rig). The Haynesville is almost exclusively a gas play.

New Permian Basin wells are nearly 8 times as productive as they were in 2010.

Figure 4. Productivity = More results per unit of effort. (US EIA Drilling Productivity Report)

While the rate of production growth has slowed, there’s no “plateau” in sight…

Figure 5. Peak Oil my @$$. (US EIA Drilling Productivity Report)

Mr. Cunningham then went with the “but, but, but, they can’t make money” angle, citing himself in the process…

For shale drillers, the problem is made worse by the fact that they are facing financial stress and the prospect of persistently low prices

Nick Cunningham

US SHALE INDUSTRY TURNS CASH FLOW POSITIVE
August 21, 2019

In a remarkable turnaround, the second quarter of 2019 is the first three-month period on record when US shale operators achieved positive cash flow from operations after accounting for capital expenditures, according to Rystad Energy.

Rystad Energy – the independent energy research and consultancy in Norway with offices across the globe – has studied the financial performance of 40 dedicated US shale oil companies, focusing on cash flow from operating activities (CFO). This is the cash that is available to expand the business (via capital expenditure, or capex), reduce debt, or return to shareholders.

In the second quarter of 2019, 35% of operators in the peer group balanced their spending with operational cash flow, and reported an accumulated $110 million surplus in CFO versus capex.

[…]

Rystad Energy

While the more successful shale players, like EOG and Cabot, have been generating free cash flow for the past several years, the less successful companies are catching up.

Figure 6. Free cash flow is what enables companies to buy back stock, pay off debt, pursue M&A opportunities, etc.

Positive operating cash flow is essential for staying in business. It means your operations are generating more than enough revenue to cover your operating costs. Free cash flow is like Nirvana. It means that your operations are generating more than enough revenue to cover your operating costs (OpEx) and your capital expenditures (CapEx).

Cash Flow
Cash flow is the net amount of cash and cash equivalents being transferred into and out of a company. Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders and pay expenses. Cash flow is reported on the cash flow statement, which contains three sections detailing activities. Those three sections are cash flow from operating activities, investing activities and financing activities.

Free Cash Flow
Free cash flow (FCF) is the cash a company produces through its operations after subtracting any outlays of cash for investment in fixed assets like property, plant and equipment. In other words, free cash flow or FCF is the cash left over after a company has paid its operating expenses and capital expenditures.

Free cash flow shows how effectively a company generates and uses its cash. Free cash flow is used to measure whether a company has enough cash, after funding operations and capital expenditures, to pay investors through dividends and share buybacks. To calculate FCF, we would subtract capital expenditures from cash flow from operations. (See “What’s the Formula for Calculating Free Cash Flow?“)

Investopedia

It’s not easy to generate free cash flow in this business, conventional or unconventional. Oil and gas exploration and production (E&P) is very capital-intensive. Companies with solid operating cash flows and EBIDAX often don’t generate free cash flow due to their CapEx. It was actually more difficult when oil was over $100/bbl, because the cost of doing business goes up and down with the price of oil.

Idiots and decline curves

The shale doomsayers will often latch onto decline rates. Shale and other tight reservoirs (unconventional) generally exhibit steeper decline rates than conventional wells.

Figure 7. Comparison of average decline rates for “shale” and deepwater GOM (Gulf of Mexico) wells. (Rystad Energy)

“Shale” does have a few advantages over deepwater GOM:

  1. Virtually no exploration risk.
  2. Lower drilling and operating costs.
  3. On production faster.

However, the steep decline curves necessitate a higher operational tempo to maintain and/or grow production.

Figure 8. It takes about 400-500 drilling rigs to maintain and/or increase Permian Basin oil production. It only takes 20-40 rigs to maintain and/or increase GOM oil production. The Permian Basin accounts for nearly 2/3 of Texas oil production. The rig counts are only for rigs drilling oil prospects/development wells.

That said, the decline rates for “shale” wells aren’t some sort of Achilles Heal. A comment to my last post linked to a very frackingly stupid article, suggesting that the decline rate caused the oil to “vaporize…

More Than 50% Of The Mighty Permian’s 2018 Oil Production Has Vaporized

POSTED BY SRSROCCO IN ENERGY, NEWS ON OCTOBER 4, 2019

As dark clouds gather on the financial horizon, big trouble is brewing in the U.S. Shale Oil Industry.  While most Americans are focused on the Mainstream media’s coverage of the ongoing Washington D.C. circus, the real threat to the domestic economy lies in the country’s oil heartland.  And, if we look at what is taking place in the United States’ largest shale oil region, the signs are troubling.

The Permian Oil Basin in Texas and New Mexico accounts for nearly half (46%) of the total U.S. shale oil production.   According to the data from Shaleprofile.com, Permian’s oil production peaked in May at 3.43 million barrels per day.  Due to the massive decline rate, production in the Permian has stalled this year.

The chart below shows the Permian oil production declining even though more wells continue to be brought online.  Unfortunately, there aren’t enough wells being added to offset the tremendous decline rate.  You will notice how quickly the oil production that was added in 2018 (Light Blue color) has declined in just half a year:

[…]

EROI SRSrocco REPORT

“Vaporized”???

Figure 8. Argh. (EROI SRSrocco REPORT)

Dude! That’s how decline curves work. Every well ever drilled exhibits a decline curve. If the decline curve was “killing the ability of shale companies to increase production,” there would have never been an increase in production.

Figure 9. Production from new wells – decline of legacy production = net change… Same as it ever was. (US EIA Drilling Productivity Report)

If the shale players had drilled no new wells in the Permian Basin since 2010, the decline rates would have done this to oil production.

Figure 10. Drill, baby, drill or die. (US EIA Drilling Productivity Report)

A sober analysis

I am sober at the moment… But not an objective observer. I not only work in the evil oil & gas industry, I am also a YUGE fan of it too. Robert Rapier, on the other hand, is generally very objective.

Oct 3, 2019
U.S. Crude Production Returns To Record Levels

Robert Rapier Senior Contributor
Energy

Were it not for the explosive growth of U.S. oil production over the past decade, the recent attacks on Saudi’s oil infrastructure would have undoubtedly had a much larger impact on the world’s oil markets. Now, less than a month later, the prices of West Texas Intermediate and Brent crude are actually below the prices prior to the attacks.

[…]

Back in the summer, it looked like that production growth was slowing. Year-over-year production growth had been slowing since early in the year, and monthly production had been declining heading into summer. The key driver of these developments was that production growth in the important Permian Basin had plummeted over the past year.

But that was then and this is now.

Production started rising again during the summer, and last week the Energy Information Administration (EIA) reported that weekly production tied the all-time production record of 12.5 million BPD of U.S. crude oil production that had been first reached a month ago. This week’s report showed that production declined slightly to 12.4 million BPD, but is still 1.3 million BPD higher than it was a year ago. That is still robust year-over-year growth, and is higher than it was heading into the summer.

About half of the 400,000 BPD production increase since summer comes from the Permian Basin. Production there continues to grow, albeit at the slowest pace in three years.

[…]

Forbes

What a difference two days can make:

US Shale Production Is Set For A Steep Decline

Nick Cunningham, BA history, U of Maryland, MS international relations, Johns Hopkins. October 1, 2019

U.S. Crude Production Returns To Record Levels

Robert Rapier. BS chemistry & math, MS chemical engineering, Texas A&M University. October 3, 2019

Or maybe it’s the difference between ignorance and knowledge of the subject matter.

via Watts Up With That?

https://ift.tt/30ZaanV

October 9, 2019 at 09:02PM

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