- May 31, 2015
- Posted by: Art Berman
- Category: The Petroleum Truth Report
The U.S. rig count dropped by 10 rigs this week after only falling by 3 last week. No doubt some analysts will say that this increase is somehow important and that a return to normal–i.e., high oil prices–is around the corner.
Well, don’t get too excited because the rig count that matters–the horizontal Bakken, Eagle Ford and Permian plays–only fell by 2 rigs after not falling last week. This is a normal fluctuation when oil is $100/barrel.
Table 1. Rig count summary by play through May 29, 2015. Source: Baker Hughes & Labyrinth Consulting Services, Inc.
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The rig count decline is effectively over as shown below in Figure 1.
Figure 1. Tight oil horizontal rig counts. Source: Baker Hughes & Labyrinth Consulting Services, Inc.
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Production has fallen and will fall more but rig count is the wrong measure at this time. The real measure is capital given to U.S. tight oil companies. And there seems to be plenty of really stupid capital that thinks that investing now means buying low. Good luck with that once oil prices fall.
Figure 2. Bakken, Eagle Ford and Permian “Shale” tight oil production. Source: Drilling Info & Labyrinth Consulting Services, Inc.
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There have been a steady stream of articles championing the ingenuity of U.S. tight oil producers for figuring out how to maintain production with fewer rigs. It doesn’t strike me as ingenious to produce more oil at low prices that ensure losing money.
OPEC will meet on Friday (June 5, 2015) and most doubt that a production cut will result. If that is the outcome, expect the recent rally in oil prices to end badly. If producers cared about their investors and share holders, they would be slashing production by shutting in wells. That might help oil prices rebound sooner and then, they could sell the oil at a profit instead of losing money while celebrating their own ingenuity.
Art,
What would happen to the deferred tax liabilities of Shale Co’s should they stop drilling?, do you think its significance has been overlooked?
see :
http://www.taxpayer.net/library/article/effective-tax-rates-of-oil-gas-companies-cashing-in-on-special-treatment
and comments posted by ‘shallow sand’ and others on 29/05/2015 here:
http://peakoilbarrel.com/opec-according-to-the-eia/
I have no idea how the tax code actually works, those bloggers could be completely wrong – but if they are correct it would appear to an absolute necessity to drill no matter what, or have balance sheets become very (fataly?) ugly very quickly as deferred taxes catch up.
If so, perhaps this is another reason why production has not fallen as expected?.
Ian,
This means that a potential future liability has been registered. These entries are required quarterly but not payable until year-end. It is possible that by then, the liability may increase or decrease. I am hardly an expert on this subject but I don’t see great significance in deferred tax liability at this time.
Thanks,
Art
Art, as usual, thanks for your very clear and easy to digest data driven articles. I assume some shale oil producers that are still producing, instead of shutting in their wells, may be doing so to meet debt obligations. That said, I have read a number of articles which point out that there is still plenty of money out there from investors to keep the shale oil producers running.
It will be interesting to see how much of Saudi’s wealth will be burned in order to drive down the shale oil producers and gain market share. I see world crude setting up for a whipsaw increase down the road when the various high cost crude projects get put off due to capex cuts by larger companies. Regards, Dan.
Daniel,
You are correct that a lot of capital continues to flow to the U.S. E&P sector. I believe that much of this is being used to pay down debt and maintain variable costs like G&A and interest expense. Production must be maintained or stock price takes a hit, reducing overall value and potentially triggering debt covenants.
Saudi Arabia is apparently burning through approximately $50 billion per quarter of their reserve accounts at present prices. That is significant although they always take the long view and, with more than $700 billion in those accounts, they can afford to wait. Certainly, the long term is for higher prices but there is considerable debate about when that occurs. A recent internal OPEC report predicts mid-$70 average oil prices for the next decade.
Thanks for your comments,
Art