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Arthur Berman

Arthur Berman

Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and…

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The Shale Delusion: Why The Party’s Over For U.S. Tight Oil

The Shale Delusion: Why The Party’s Over For U.S. Tight Oil

The party is over for tight oil.

Despite brash statements by U.S. producers and misleading analysis by Raymond James, low oil prices are killing tight oil companies.

Reports this week from IEA and EIA paint a bleak picture for oil prices as the world production surplus continues.

EIA said that U.S. production will fall by 1 million barrels per day over the next year and that, “expected crude oil production declines from May 2015 through mid-2016 are largely attributable to unattractive economic returns.”

IEA made the point more strongly.

“..the latest price rout could stop US growth in its tracks.

In other words, outside of the very best areas of the Eagle Ford, Bakken and Permian, the tight oil party is over because companies will lose money at forecasted oil prices for the next year.

Global Supply and Demand Fundamentals Continue to Worsen

IEA data shows that the current second-quarter 2015 production surplus of 2.6 million barrels per day is the greatest since the oil-price collapse began in 2014 (Figure 1).

Figure 1. World liquids production surplus or deficit by quarter. Source: IEA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

EIA monthly data for August also indicates a 2.6 million barrel per day production surplus, an increase of 270,000 barrels per day compared to July (Figure 2).

Related: Oil Price Increase Will Not Come Fast Enough To Save Alberta

Figure 2. World liquids production, consumption and relative surplus or deficit by month.

Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

It further suggests that the August production surplus is because of both a production (supply) increase of 85,000 barrels per day and a consumption (demand) decrease of 182,000 barrels per day compared to July.

The world oil demand growth picture is discouraging despite an increase in U.S. gasoline consumption (Figure 3).

Figure 3. World liquids demand growth. Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

Related: OPEC Is Winning The Price War Says IEA

World liquids year-over-year demand growth has fallen by almost half from 2.3 percent in September 2014 to 1.2 percent in August 2015. This is part of overall weak demand in a global economy that has been severely weakened by debt.

The news from both IEA and EIA is, of course, terrible for those hoping for an increase in oil prices.

U.S. production has fallen 510,000 barrels of crude oil per day since April 2015 while OPEC production has increased 1.2 million barrels per day since the beginning of the year (Figure 4). U.S. production increases in the first quarter of 2015 were partly because of an oil-price rally that ended badly this summer, and because of new projects coming on-line in the Gulf of Mexico.

Figure 4. OPEC and U.S. crude oil production. Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

It appears that OPEC is winning the contest with U.S. tight oil producers to see which can continue to over-produce oil at low prices. IEA ended its September Oil Monthly Report saying,“On the face of it, the Saudi-led OPEC strategy to defend market share regardless of price appears to be having the intended effect of driving out costly, “inefficient” production.”

In other words, tight oil and oil sands production.

With Iran poised in early 2016 to add almost as much oil as the amount of the U.S. production decline to date, the outlook for tight oil producers could not be worse. And yet, the sell-side analysts and investment bank research groups continue to chant the refrain of logic-defying hope for tight oil producers in the face of crushingly low oil prices.

Party On, Dude!

This week, Raymond James joined the chorus with its bewildering “Energy Stat: U.S. Operators’ Response to Low Oil Prices? Get More Efficient!”

The message is all about rig productivity and drilling efficiencies. I showed in my post last week that these measures are nothing but red herrings to distract from the unavoidable truth that all tight oil companies are losing money at current oil prices.

I would like to say that Raymond James is simply repeating the shop-worn and illogical cliché that “We’re losing money but making it up on volume” but it’s much worse than that.

There is no mention of money in the report. There is not a single dollar sign ($) in the text or figures nor are there are there any costs, prices or cash flows mentioned. That seems odd since Raymond James is, after all, a financial advisory company.

Raymond James presents 30-day IP (initial production rate) data to show that everything is fine and getting better in the tight oil patch.

Really guys? Is that why oil companies are laying off staff, cutting budgets and selling assets?

Besides, everyone knows that IPs are a practically meaningless predictor of EUR or profitability, and something that producers often manipulate to create press releases in order to satisfy investors.

Nonetheless, they forecast “2015 to be a banner year for both oil/gas well productivity gains.” Interesting but irrelevant since it’s going to be an atrocious year for profits.

Related: Norway Has Nothing To Fear From Oil’s Downturn

Here is my table from last week’s post for the best of the tight oil companies in the best parts of the plays.

Table 1. First half (H1) 2015 cost per barrel of oil equivalent summary for Pioneer, EOG and Continental.

Source: Company SEC filings and Labyrinth Consulting Services, Inc.

EOG, Pioneer and Continental lost between $10 and $24 per barrel in the first half of 2015 but Raymond James says, “Never mind and party on, Dude!”

This report by Raymond James is both misleading and clearly out-of-touch with the price and investment environment that the International Energy Agency and the Energy Information Administration describe.

Conclusions

ExxonMobil CEO Rex Tillerson summarized the situation this week in an interview with Energy Intelligence:

“It [tight oil] will compete. Will all of it compete at all pricing? No.”

For the next year or so, tight oil wells will not be commercial except in the best parts of the best plays. Tight oil companies will lose money. For the most part, the efficiency gains are behind us.

Until market fundamentals of supply and demand come into balance, prices will remain low. Goldman Sachs predicted yesterday that U.S. oil prices through the first quarter of 2016 will be “low enough to discourage investment in new oil production and shrink the global glut of crude.”

Clearly for now, the party is over for tight oil.

By Art Berman for Oilprice.com

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Leave a comment
  • tim schmidt on September 14 2015 said:
    You are a little late to the party. Everyone in the "patch" threw away their party favors six months ago.
  • John Graham on September 15 2015 said:
    Assuming that you are right and OPEC (S.A.) is actually winning the price war with U.S. oil producers then S.A. will keep or event expand their "holy" market share at the cost of maybe 300 billion dollars (what a victory...).

    Now let me pose you a question:

    Once the oil price escalates again, what will prevent the U.S. producers from reentering the market as long as it makes economic sense? Market "memory"?

    My point is, does it really make sense to waste hundreds of billions of dollars in a war that you cannot possibly win in the medium long term?

    If I was sitted on top of the world's largest oil reserves, I would probably focus on long term wealth and not on pyrrhic victories.
  • Michael Moran on September 15 2015 said:
    Agree. And it is really worse as the companies you highlighted are likely the most efficient producers with the best land.
    But oil demand is growing 1.5 million b/d. That is 3 million b/d by 2017. US oil supply drops 1 million b/d in 2016 and likely another 1 million b/d in 2017. By 2017 non OPEC, non shale oil production drops at least 1 million b/d. That is a 6 million b/d hole. Current oversupply is not close to that. Iran production is drop in bucket. Last 4 yeas or so only real growth in oil production came from US shale. So sometime before 2017 price of oil has to increase enough to cause US shale to work. When and what that price is are the only questions.
  • Steve Barnes on September 15 2015 said:
    The problem with saying the shale play is over,is the fact that the oil isn't perishable,it will still be there in the ground,the equipment will still exist,and there are still companies out there with deep pockets who will resume production when the price returns.
  • aberman on September 15 2015 said:
    Steve,

    I didn't say that tight oil is over. I said it is over for now at current prices outside the core areas. I have no doubt that tight oil is a permanent part of the supply landscape going forward and, as Rex Tillerson said, it will compete, just not at current prices.

    Michael,

    You are completely right. Drilling and development projects are being deferred but global demand continues to grow. Those two trends intersect somewhere in a few years and price must be higher. That's the way these cycles always are.

    John,

    Same comment as for Michael. I never said or meant that tight oil is over.

    I don't see Saudi Arabia's strategy the same way that you do. I think that they are discovering the real price point for unconventional oil supply and that their target is not the oil producers but the capital enablers who fund their competition to over-produce at non-commercial prices. If S.A. can kill that, they will have accomplished a great deal.

    Tim,

    I am late to the party? I've been saying that the tight oil party made little commercial sense outside the core areas for a few years.

    Thanks to all for your comments.

    Art
  • Seth on September 15 2015 said:
    "Steve,

    I didn't say that tight oil is over. I said it is over for now at current prices outside the core areas."

    So who is responsible for the misleading, attention-grabbing headline:
    "The Shale Delusion: Why The Party’s Over For U.S. Tight Oil"
  • todd cory on September 15 2015 said:
    "You are completely right. Drilling and development projects are being deferred but global demand continues to grow."


    yes... BUT there are limits to growth which we are just starting to see. this is why demand will drop and may never come back.

    degrowth is here, and that ultimately reduces demand.
  • joe on September 15 2015 said:
    I know... tight oil is over... God forbid 99.999 percent of the world not oil market get save 20 dollars a fillup...
  • Lee James on September 15 2015 said:
    The title of this article is a bit over the top, but are there additional industry production cost issues, just around the corner?

    What if fossil fuel burners paid more for pollution? Pricing carbon -- almost all carbon -- is a possibility. Presently we dump for free.

    What if we continue to progress on side-stepping dependence on oil burned for transportation? Renewable energy is just about at parity with fossil fuel for electric power generation. How far away are we from electric and hydrogen-based transportation?

    We need to go ahead on transitioning away from fossil fuel now. An exploding Middle East suggests that the price of oil could be back to the 100's should foreign oil producing areas have a really bad day. Prudent risk management and the need to reduce volatility in energy markets suggest that our emphasis should be on burning less fossil fuel.
  • aberman on September 15 2015 said:
    Read the post, Seth.
  • Royce on September 15 2015 said:
    The table is incorrect. Let's take Continental. Continental spends 40.70 to generate a Boe. That investment yields a Boe that I sell for 34.90 at a production cost of 18.24 yielding a net cash per barrel of $16.66 per boe. I recover my Capex after 2.5 Boe produced. I grant that this is not the spectacular margin that companies generated at higher prices but the cash flow is still there.
  • Seth on September 16 2015 said:
    Art,

    I did read the post. There should be some correlation between the typical alarmist headline, and the nuanced post.

    "I didn't say that tight oil is over. I said it is over for now at current prices outside the core areas."

    Oh, so the party is over just outside the "core areas" which generate the overwhelming majority of tight oil.
  • rjsigmund on September 16 2015 said:
    anyone:

    i can understand a liquids surplus must mean that the extra oil must be stored, but, what exactly is a liquids deficit? does that mean that for the quarter in question oil for use must come out of storage? how then does the planet run a liquids deficit for the better part of 3 years as shown in the first chart?

    i am trying to understand what that chart means in terms of production and movements of liquids...
  • BarryG on September 21 2015 said:
    Gads, when can we start getting off of oil before we drown our coastal cities? What we really need is much better batteries, then oil may be over forever.
  • Will on October 04 2015 said:
    Barry G, better batteries are coming that will indeed allow the grid to be powered by 100% renewables. Take as one interesting example the saltwater-based electrolyte batteries produced by Aquion Energy.

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