By Chris Nelder
Posting in Cities
Oil prices are still in triple digits but Big Oil is taking losses and the fracking boom is cooling down. That can only mean one thing: prices are going higher.
The shale revolution is “a little bit overhyped,” Shell CEO Peter Voser said last week as his company announced a $2.1 billion write-down, mostly owing to the poor performance of its fracking adventures in U.S. “liquids-rich shales.” Which of its shale properties have underperformed, Shell didn’t say, but CFO Simon Henry admitted that “the production curve is less positive than we originally expected.”
Shell was a latecomer to the tight oil game. As late as 2010 it was acquiring mineral rights at inflated prices, predicting that those properties would produce 250,000 barrels per day in five years. Three years down the road, they are yielding only 50,000 barrels per day, and the company intends to sell half of its shale gas and tight oil portfolio. Shell has officially abandoned its production target of 4 million barrels per day by 2012-2018. Instead, Voser said, “we are targeting financial performance.”
Second-quarter earnings were dismal for the so-called oil supermajors. Shell, BP, Exxon Mobil, Chevron, Total SA, Statoil, and Eni SpA all reported sharply lower profits.
Production was also down nearly across the board, with only Total SA reporting an increase.
Of course, none of this would be a surprise for those who read my article from March, “Oil majors are whistling past the graveyard.”
The declining profitability and production primarily owed to lower oil prices and rising costs. As Platts reported in June, total capital spending for the top 100 U.S. producers in 2012 rose 18 percent year on year. Costs will be higher still this year.
Rising costs are partly due to the tight oil boom itself. Producers that invested heavily in tight oil production are struggling to maintain output against the accumulating undertow of existing wells, where output declines rapidly. Geologist David Hughes finds an average decline rate of 60 percent to 70 percent for the first year of production in new wells in the Bakken shale of North Dakota. And a new statistical analysis by Rune Likvern at The Oil Drum shows production from most Bakken wells falls by 40 percent to 65 percent in the second year.
Source: Rune Likvern, The Oil Drum
For the Bakken field as a whole, Hughes calculated an annual production decline rate of 40 percent per year in his February report, Drill, Baby, Drill.
The problem is obvious. Decline rates that sharp make tight oil production a treadmill that speeds up a little more every year. Producers have to keep drilling more each year to simply keep output flat. That increases costs.
Other factors contribute to rising costs across the industry globally, including the ever-increasing difficulty of finding new prospects, and overall price inflation for basic commodities like cement and steel.
A good summary by Tom Fowler and Daniel Gilbert in the Wall Street Journal quotes analysts at Bernstein & Co. who see trouble ahead. "This cannot continue. . . . As long as oil prices stay flat and costs continue to rise, it will be impossible for the industry to sustain the current levels" of spending. If their spending drops off, production will too."
One thing that doesn’t help the cost curve is unprofitable investments, and some of the newer tight oil plays aren’t panning out as hoped. In April, Bloomberg reported that the four biggest stakeholders in the Utica shale of Ohio were divesting, due to “disappointing” results. And the Monterey shale in California has continued to prove troublesome.
A growing consensus suggests that only the Bakken, Eagle Ford, and Permian formations will be major tight oil producers.
As for the Bakken, its heady days of skyrocketing growth appear to be over. Production growth stalled in early 2013 despite the continuous addition of new wells, as this new chart by Hughes shows.
Source: David Hughes
Drilling activity is slowing down in North Dakota. Drilling permit applications are down, and it’s taking longer to bring new wells into production. The state Department of Mineral Resources says investors are “nervous” about tax policy and regulation, but that might not be all they’re nervous about.
For one thing, newer wells aren’t as productive as earlier wells. As I have explained previously, this is because producers drill the most productive “sweet spots” in a shale play first, then move out toward the periphery, where the quality of the shale is lower. (Despite some producers’ claims to the contrary, shale plays are not uniformly prospective. Significant areas of the shale plays may be unproductive.)
In Likvern’s chart below, note how production from wells of 2011 vintage (red line) has fallen below that from wells of 2010 vintage (turquoise line).
Source: Rune Likvern, The Oil Drum
The falling productivity per well was somewhat masked by the sharp increase in drilling in 2011 and early 2012, which drove overall Bakken production higher.
Source: David Hughes
But by mid-2012 drilling began to fall off, and the declining productivity of new wells began to become evident. To borrow a quote from Warren Buffett, “you only find out who is swimming naked when the tide goes out.”
Hughes estimates that it now takes about 120 new wells per month, or 1,440 per year, to offset decline in the Bakken. So of the 720,000 barrels per day produced from the Bakken in April, 319,000 barrels per day will be lost to decline this year. But as the above chart (through April, 2013) shows, fewer than 120 wells per month were added toward the end of the first quarter. Consequently, Bakken production has tapered off over the past six months as the undertow of depletion overcomes new well additions. Production from the field will continue to decline unless drilling picks up again.
Production is still growing in the Eagle Ford shale in Texas, where new wells are being added at a rate of nearly 3,000 per year.
Source: David Hughes
But again, the increase in production per new well has been falling.
Source: David Hughes
Prices are going higher
To be clear, smaller companies who are extremely focused on U.S. tight oil exploration are still turning profits. Tight oil production is still growing, and should continue to grow for several more years at least, just not as quickly as it has for the last several years. However, I am dubious about its production increasing from a bit over 2 million barrels a day today to 5 or 8 million barrels per day by 2020, as some have forecast.
We’ll probably drill around 19,000 horizontal wells this year, which will push production another few hundred thousand barrels per day higher. But we’re not going to raise production by a million barrels per day in a year anymore.
And it’s gonna cost ya. U.S. oil prices have bounced around $95 this year (as I predicted) but that has not been high enough for Shell to make money in tight oil and shale gas. It has not been high enough to sustain high drilling rates in the Bakken. It has not been high enough for most of the supermajors to turn a profit.
The decline in Bakken drilling could have been partly due to the glut at the Cushing, OK delivery point, which forced Bakken producers who ship by pipeline to accept a steep discount. (Bakken producers who shipped by rail directly to coastal refineries could fetch higher prices.) That is now partially relieved due to new pipeline capacity, and U.S. oil prices have risen back to global price levels. That may spur a new uptick in production as we head into the end of the year. As I explained in my last column, tight oil production supports price, it doesn’t reduce it.
But the decline in Bakken drilling can’t be wholly explained by the temporary glut at Cushing. The entire U.S. tight oil boom appears to be running into more systemic problems.
Analyst Bob Brackett of AllianceBernstein says, “the prime locations have already been drilled” in U.S. tight oil plays, and that drillers are moving on to less prospective areas. He sees the U.S. oil price benchmark WTI averaging $103 per barrel in 2015, while the European benchmark Brent rises to $113.
Source: Bernstein Research
Rising costs across the industry, and declining profitability for the supermajors in an era of triple-digit global prices, suggest that oil prices need to be higher to maintain output. Since domestic gasoline and diesel prices, which are strongly linked to global prices, have remained stubbornly high even while U.S. oil prices were falling this year, that suggests we will likely see gasoline prices pushing toward $4.50 a gallon next year in higher-priced U.S. markets like San Francisco and New York City.
From an oil booster’s perspective, drilling 19,000 new horizontal wells (and 35,000 new wells in total) this year is a good sign. But regular folks might want to think about how much longer such a frenetic pace can go on, about the incursion of fracking into their backyards, about the environmental cost, and about the financial cost of keeping the “bonanza” going.
There is trouble in fracking paradise. A $2 billion write-down by Shell doesn’t quite spell the end of the U.S. oil boom, but it doesn’t bode well either. The "Saudi America" craze was cute, but that slogan isn’t going to make you any happier when you’re shelling out $4.50 and more for a gallon of fuel.
Want my advice? Get a more efficient vehicle. Don’t settle for less than 40 mpg. If your habits and pocketbook allow, consider an electric vehicle. And if energy independence is really your thing, then make it an EV with a rooftop solar PV system. That’s your best protection against the persistently rising cost of fuel.
My thanks to David Hughes and Rune Likvern for their contributions to this article.
Photo: Old pumpjack in East Texas (rcbodden/Flickr)
Aug 6, 2013
The scramble by industry to frack the crap out of every conceivable layer of shale on the planet should be an indication that we are in a global peak oil crisis and the oil industry knows it! It knows it because it also know that rising oil prices will make fracking more financially viable and lucrative in the long run. If there was still enough conventional oil in the ground then why tarsands and why fracking?
I read all the comments. A piece of nuclear material that fits in a soup bowl can power an aircraft carrier for years. France gets more than 75% of their power from nuclear, and all the waste that country has EVER generated fits in the space of a soccer field. Pebble bed and other safe reactor designs simply cool down and sit there if/when their cooling systems fail. Thorium reactors, now being tested, can burn uranium waste and product large quantities of energy with ZERO carbon emissions for 10s to 100s of years using EXISTING nuclear waste stockpiles. Nuclear energy is what powers the ... sun. (Yes, the sun runs on fusion, not fission. Many are working on that, too.) Everything above is documented (some in Smart Planet), yet Mr. Nelder & others act like big oil is almost gone and wind/solar are the only hope. Really?
1: The old majors are in serious trouble due to lack of forward thinking. (They may get around this by hoovering up the smaller, more profitable companies.) 2: No matter what happens, oil/gas prices are going to rise. Shale extraction is only economic due to the prevailing prices. I'll add one more point: Oil/gas are far more valuable as industrial feedstocks than as fuels. At some point in the future our descendants are going to laugh incredulously at how profligate we were, burning vast quantities of valuable resources.
I see the usual suspects screaming evermore about facts and denigrating our esteemed author with their short term opinions while the planet we all live on turns into a big ol' brush fire, the supreme fact. The fact that they show up with each Nelder article and attempt to browbeat those who thank him for his data analysis and conclusions, tells me worlds about their facts. They are either puny and frightened by the prospect of their oily, gassy investments turning to mush or are paid stand ins for those who are. What Chris tells better than just about anyone else, at full display in this article, is that the worm is not so slowly turning. As new sources of fossils become ever more marginal and diffuse, difficult to find and produce, thus more expensive, and the more we are exposed to and aware of the ecological costs, we approach a point where, "at any cost," triggers either clean, renewable alternatives or collapse. Once that point is reached and it's not far off, "bye, bye fossils" as the bedrock of civilization. Even some of Chris's colleagues don't quite grok this. Michael T Klare just published an excellent historical, ecological, analytical article called "How to Fry a Planet." http://www.commondreams.org/view/2013/08/08-2 He doesn't seem to quite get like Chris does that his worst case scenario is near impossible because of growing fossil marginality. Not worst case will be plenty bad. Chris, my friend, keep on keepin' on while the tool deniers scream and beat their narrow chests. Time will make the "facts."
It's a simple fact that all the cheap and easy to get petrol has been gotten. The so-called "peak oil theory" is, to me, not so much a theory as a description of what happens to any commodity as it gets more expensive to mine. It's just a bell curve! Except for a slight bump on the right side of the bell curve, the peak oil description for the US was pretty accurate. But that's because we have better data on US reserves than on reserves in other countries. For some, it is literally a state secret. So of course, we'll never "run out" of oil. It will just get so expensive to get out of the ground that we'll start leaving it there and using something else. When? No one can say with 100% accuracy. MAYBE 20 years from now?
http://www.forbes.com/sites/davidblackmon/2013/08/07/texas-oil-and-gas-numbers-fly-off-the-charts/?ss=business%3Aenergy "The growing scale of the oil and natural gas boom in Texas continues to stun most observers. We have discussed this phenomenon periodically (see prior pieces here and here) , but the newest developments are so off the charts that an update is warranted." "As Dr. Mark J. Perry points out in his Carpe Diem blog, Texasâ daily oil output has doubled in just a little more than two years, averaging 2.525 million barrels per day in May, the highest daily output the state has experienced since April 1982. In February of this year, Texas â were it a nation in and of itself â would have ranked as the 14th largest oil producing nation on earth. In April â the most recent month global data is available â Texas would have ranked 12th among all nations, in this category, just ahead of Venezuela, and slightly behind Kuwait and Mexico. By the end of the year, when Texasâs daily production is likely to exceed 3 million barrels per day, Texas would likely rank 9th on this list. Extraordinary."
Phillyâs Resurgent Refineries http://www.siteselection.com/theEnergyReport/2013/feb/philly-refineries.cfm "Greater Philadelphia's refining industry is experiencing a rebirth. It's a remarkable turnaround for an industry that seemed to be on the rocks only 18 months ago. Three massive refineries were on the verge of shutdown, victims of the rapidly rising costs of importing and refining foreign oil in outmoded, inefficient facilities." "Delta Airlines is investing in a $350-million upgrade of the Trainer refinery to process light sweet crude coming from North Dakota's Bakken Shale formation, a move that will give the company access to cheaper jet fuel. And Sunoco and The Carlyle Group are renovating a 146-year-old Philadelphia petroleum refinery to prepare for a future built on the Marcellus Shale."
North Dakotaâs Oil Boom "North Dakota has seen a boom in oil production thanks to new drilling techniques including horizontal drilling and hydraulic fracturing. The promise of well-paying jobs has generated an influx of workers from around the world." http://darkroom.baltimoresun.com/2013/08/north-dakotas-oil-boom/#1
Oil and gas industry employment growing much faster than total private sector employment http://www.eia.gov/todayinenergy/detail.cfm?id=12451 "From the start of 2007 through the end of 2012, total U.S. private sector employment increased by more than one million jobs, about 1%. Over the same period, the oil and natural gas industry increased by more than 162,000 jobs, a 40% increase."
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPND1&f=M N Dakota sets record in May for oil.
That's the process of taking organic materials and reducing the polymers back into simpler forms, i.e., crude oil. If you do a search on it you'll most likely find a reference to "turkey waste" because the first large scale plant was built to deal the the waste from a turkey processing plant. In truth, almost any carbon-based waste, from the remnants out of a meat-processing plant to plastic bottles can be reduced to crude oil. I'd like to know what plants like that can do to the theory of "peak oil".
Mr. Nelder once again doesn't tell the whole story. For example, the article on drilling in North Dakota starts out "North Dakotas oil production has set another record. The state Department of Mineral Resources reports that May's average production was 810,000 barrels a day. That's an increase of 2 percent from the previous month." It then attributes the slowing down in production due to rains which made moving heavy equipment around difficult, as well as the concerns about federal tax policy and regulation Mr. Nelder cited. There's also a problem getting the oil out of the region because pipeline capacity hasn't kept up, and continuing skilled labor shortages. In fact, on April 30 the US Geological Survey released new figures on the reserves there ( http://www.doi.gov/news/pressreleases/usgs-releases-new-oil-and-gas-assessment-for-bakken-and-three-forks-formations.cfm ). The report indicated a twofold increase over what was previously thought. Mr. Nelder also quotes a WSJ article exploring the costs at Shell and Chevron. There's another good one at http://online.wsj.com/article_email/SB10001424127887323997004578642391718255534-lMyQjAxMTAzMDAwNzEwNDcyWj.html?mod=wsj_valettop_email . Both articles stress that Shell, Exxon, and Chevron got in late in the game, and didn't gain rights to the best shale leases. These major companies were relying on their conventional reserves, and failed to change direction in time. As a result, these late comers to the new technology are paying the price. Part of Shell's problem was that at first they concentrated on shale gas instead of shale oil, and took their lumps when natural gas prices collapsed -- because of too much production. Saying that these big oil companies are emblematic of the industry is a bit like saying the troubles at Dell, HP, and Microsoft mean the entire tech industry is collapsing. You have pay attention to them because they're so big, but they're not where the future is. What's really going on in the oil industry is that the old dinosaurs are struggling to keep up, just as they are in the tech industry. Another example: Just today GE announced it is getting out of solar panel production because it can't make money. Does that mean solar energy is doomed because an old industrial giant can't make it work? The truth still is that US oil and gas production are at highs not seen since the '70s. Mr. Nelder is finally admitting this, even though he predicted in 2008 that peak oil would occur in 2010 ( https://www.youtube.com/watch?v=vQ_5S0bbjwU about 2 minutes in). After spending most of the article saying how production is flat and we're on an ever increasing treadmill, Mr. Nelder now hedges his bets by saying "Tight oil production is still growing, and should continue to grow for several more years at least."
ClearCreek, I essentially agree with you except for how you place Chris Nelder in the picture. I'm scared to death of the huge stocks of over 60 years worth of the most lethal toxic substances known to humanity in plant wastes and weapons. If you believe that we can be expected to store that crap safely for 100,000 years, can I sell you a bridge? That means that nuclear research must develop the 5th or better generation of nuclear power reactors that can burn the nuclear wastes down to 1000 year storage, and be capable of shutting themselves down safely with humans asleep at the switch. If the technology for that weren't available in pebblebed and molten salt reactors, why are the Chinese building both from 30 year old American Technology? In America it's because GE only knows how to build the old, unsafe, inefficient,light water plants, and doesn't want to lose its quasi monopoly to upstarts, and can afford to pay to stop them after not paying any corporate taxes and getting a refund on top of that. My how the elephant corruption swells. How many American citizens know that the earliest light water reactors could only burn about 1% of their fuel before the fuel rods were too corrupted and had to be either reprocessed or stored, and even 3rd or 4th generation light water reactors are only up to about 5% efficiency. Molten Salt reactors of the thorium or uranium variety can potentially reach 98% efficient burn with what's left having a 300 year half life in a tiny package, no bomb fissile material produced, and, like you say will shut themselves down, even in a zombie apocalypse. What's more they could be manufactured in small assembly line sizes and be railed to where needed or buried safely in your back yard for 20 years of monitored but unattended large neighborhood power. With the nuclear wastes and weapons currently available, after reprocessing we could burn at today's nuclear energy level for several centuries, and even more importantly pretty much clean up after ourselves. I've never seen Chris address this possibility. He has only talked, rightfully and disparagingly, about current nuclear problems and costs, because he can get the data to talk about this intelligently. He can't get data for a possibility. It's possible that he would agree that we should be looking with sharp focus at further generation nuclear possibilities. The current GE generation is useless because of its expense and continues to be elephant dangerous. By the time we wise up we'll be licensing the tech from the Chinese who got a start free from 35 year old American research. This isn't a Fukushima because the only heavy danger is someone blowing a plant up on purpose and if the plant is small enough the reach is no where near Fukushima extent. It could be close to the distributed, resilient power that we all want.
Lets not forget Fukushima!!! We might not have even begin to understand what impact that disaster is going to leave on this planet. Besides, nuclear material is also finite so when it all gets used up where to then?
not tell the facts, and not tell the whole story, and to omit the parts of any studies/reports which completely destroy his credibility. I don't own any stock in oil companies, and I never did, and never will, nor do I own any stock in any type of energy company. I simply want the facts to get told, and Mr Nelder is pretty good at avoiding the truth. If you think that he is anywhere close to telling the truth, then you are either clueless or just as "agendized" as he is. BTW, commondreams.org is a far-left rag, with just as much of an agenda as Mr Nelder, and the truth will never meet their lips or typing fingers. It's like asking Obama to come clean about his birth certificate; it ain't gonna happen. The only reason that Mr Nelder will never be successful in his quest, is because the truth is out there, and the truth completely destroys Mr Nelder's alternate reality.
something which has never proven to be "fact". Peak oil has been predicted for around 100 years, and every year, there are new oil fields discovered and new ways developed to extract the difficult to get oil out of the ground. In all cases, peak oil theory is nonsense. In fact, there are predictions that, the available oil and gas in the ground in the U.S. alone, could power the country for around 100 years, and perhaps even 200 years. The only thing that prevents the U.S. from being completely energy independent, are the massive number of regulations which liberals, and especially Obama, have created against our energy sector. Even if oil becomes expensive to get, it will still be less expensive than the alternate energy sources, which need a lot more government subsidies than the oil industry. Without the government subsidies, the solar and wind-power generation wouldn't even exist, or would be so prohibitively expensive to produce, that the efforts and money spent, would not have even been thought about.
I heard about depolymerization a fews years back, seeing it on a science show. Then, not much else. It sure sounds like a great technology. I THINK it's being utilized by one or more companies, some of whom may also use the older Fischer-Tropsch process. Perhaps they are just being tight-lipped about it right now, or, as Syntroleum does in calling their version of the Fischer-Tropsch process "Bio-Synfining", it's being used in the same or modified form under some brand name now?
areas where the industry might seem to not be doing well, while disregarding the areas where the whole story points to an overall success. Mr Nelder can't ever tell the truth, or he wouldn/t have anything to write about, and he'd be out of a job.
I am sure that Obama's birth certificate is going to leave this current civilization in the biggest crisis mankind have ever experienced! It could wipe out millions, possibly billions of lives and leave the planet devastated for the few that will survive. Food and water crisis, climate catastrophes and many wars will be fought because of this simple little document that seems to contradict the facts!!!
Oil subsidies to the tune of Seven Billion Dollars per year? Talk about selecting which facts you want to present!