The Miracle of Shale Gas & Tight Oil is Easy Money Part I

Posted in Audio/Video & Articles, Presentations, Presentations & Publications on January 13, 2016

PART I from ALTA CORP Presentation for Distribution 12 Jan 2016 1-18

Chart_World Con-Uncon


13 comments on this entry


  1. Until ~ or just before 2008 or so, the ratio between natural gas and oil prices was in a range of roughly 8-12:1 (MCF gas to 1 bbl. oil) . After oil prices sky-rocketed, that ratio has not been less than 20:1 for all practical purposes. In 2013-2014, the ratio was over 30:1.

    Sensibly the price of natural gas should be higher, and the ratio of gas to oil should be closer to the BTU ratio of the energy therein. Perhaps that ratio will be restored.


  2. Terrel,

    For 2015, the price ratio was 17:1 and that is the conversion that I used to convert mcf to boe in my economics.

    All the best,

    Art


  3. Art,
    What is the cause behind the projected increase in US oil production in 2017? Is it expected resurgence in unconventional drilling due to price recovery, GOM production, or something else?
    And if you are entertaining questions, do you have an opinion as to the amount of spare oil capacity around the world? Most discussion about world supply treats the KSA as an unlimited reservoir where the turn of a policy valve will bring more oil to the market. But how much more can the valve theoretically open and how long can KSA continue at this pace with no new major fields in the wings? Any information on water cut in Ghawar’s horizontal wells?
    Regarding unconventional in PA & OH: I’m sure you’re aware of the EQT open flow at 73 MMcf/d. The excitement extends beyond merely southwest PA and southeast OH. Potter County in northern PA is frenzied; the County’s Recorder’s office has been crowded with abstractors for months. Granted, local players working off their own dollars are idle. One often hears that the # necessary to break even is $3. With pipeline constraints the current price is far below that; discount to NYMEX is a $1 or more, so some gas sellers are netting less than $1 (not accounting for hedges).
    Thanks.


  4. Arthur,

    The 2016 U.S. oil production resurgence (~400 kbpd) you are looking at is from the November STEO forecast. The January STEO has greatly modified that forecast and only calls for an ~200 kbpd increase after a lower minimum in September 2016. This points out the weakness of forecasts but I am glad that EIA does this anyway. They offer no explanation for why the volume increases when it does but I suspect it is because they believe–as I do–that the market will be near balance by then. The great fall in price since October has probably changed EIA’s view although I was not surprised (reflected in all of my posts in October and November) perhaps as much as they were.

    On your global capacity questions, I have no data beyond what is reported by IEA, EIA, OPEC and others.

    The EQT Utica well in Pennsylvania is at 13,500 ft. at a well cost of more than $15 million. The sustained rate was 27 mmcf/day not 73 mmdfd. Managing horizontal drilling and completions at these depths and pressures is largely beyond existing technology and, in any case, the wells are doubtfully commercial at those costs. Although I am as optimistic as the next person, this play requires exceptional restraint that is altogether lacking among shale players and investors.

    All the best,

    Art


  5. Art,

    Thank you for publishing your very interesting article. The recent collapse of the US high yield market, which accelerated in earnest around mid December marks in view the end of easy money in the oil and gas sector. This will speed up in my opinion the production decline in oil and gas much faster than many commentators think.


  6. Heinrich,

    I agree with your observations. Pioneer, however, supposedly just raised $1 billion in a secondary share offering. If true, this is exactly the kind of thing that will prolong low prices.

    All the best,

    Art


  7. Good article. 2 questions:

    1. Do you have another link for the graphs? Many of them are small and hard to read.

    2. How significant do you think China’s removal of the one child policy will be? Ideally that would result in more demand for consumer goods, energy, food, transportation, larger vehicles and houses, etc. Do you think we will see noticeable results from this?


  8. Doodles,

    I do not have a link to the graphs since they have not been published in any posts so far. Going forward, I hope to include most if not all of the figures used in the presentation in future posts.

    The time line for potential changes in China’s consumption is beyond my scope.

    All the best,

    Art


  9. Art, when Conoco and Anadarko released their 2016 budgets
    they both cut capex substantially as suspected, but their production they said
    would be flat. Besides efficiency gains and lower service cost, I believe they have projects coming online in Gulf of Mexico this year that were sanctioned when oil prices were near $100. So that I presume is why. How long until the industry’s deep capex cuts be felt on production? Thank you sir


  10. David,

    Everything takes longer than most people expect because there are a lot of moving parts to oil and gas production. As you point out, although marginal-cost projects like tight oil should be the first to be cut with low prices, there are other considerations like cash flow to service debt and the need to keep production growing to prevent stock-price devaluation. Deep-water projects in the Gulf of Mexico, heavy oil projects in the oil sands and conventional projects in the North Sea all came on stream just as oil prices tanked in early 2015 because these were long-term high-capital cost projects that were initiated when prices were high.

    The capex cuts that were made in 2015 and 2016 will similarly have a lagged effect of perhaps 2-4 years before they are really felt among the increases from earlier periods and the continued activity for debt-burdened producers and countries that must generate cash.

    All the best,

    Art


  11. […] Arthur Berman “The Miracle of Shale Gas and Tight Oil is Easy Money” http://www.artberman.com/the-miracle-of-shale-gas-tight-oil-is-easy-money-part-i/ […]


  12. […] Arthur Berman “The Miracle of Shale Gas and Tight Oil is Easy Money” http://www.artberman.com/the-miracle-of-shale-gas-tight-oil-is-easy-money-part-i/ […]


  13. […] Arthur Berman “The Miracle of Shale Gas and Tight Oil is Easy Money” http://www.artberman.com/the-miracle-of-shale-gas-tight-oil-is-easy-money-part-i/ […]