- February 16, 2016
- Posted by: Art Berman
- Category: The Petroleum Truth Report
The oil production freeze announced Tuesday by a few OPEC members and Russia is not a cut and is largely meaningless. It does not include Iran and Iraq. It apparently only includes Saudi Arabia, Russia, Venezuela and Qatar.
What is it really? A largely empty and cynical gesture that will almost certainly result in another “head-fake” price increase that won’t last. This will boost OPEC revenue temporarily.
Saudi oil minister al-Naimi said the agreement to freeze production at January levels was “potential and preliminary,” meaning that nothing will happen unless other countries join the accord.
It is important that Russia was involved. It is more significant that Iraq, whose production growth has been the largest in OPEC, and Iran, whose renewed export will become the largest growth in OPEC, were not involved.
At this moment, it is unclear that anything substantive will result from this announcement, although any movement at all must be taken as somewhat positive.
Thanks Art
Even if they could negotiate a production cut in principle then there is no guarantee that they would all adhere to it given how short of cash a lot of them are I suspect they could not resist the temptation to produce and sell more at the temporarily higher price.
On another topic I came across a news release by a group of UK oil companies and came across a term I had never heard of.
“Fluid flow commenced at around 10.00am GMT yesterday at an initial instantaneous rate in excess of 700 barrels per day through a 1-inch choke, in an approximate mix of 50:50 oil to water. The well was then choked back to 32/64-inches resulting in a steady early oil rate in excess of 460 barrels of oil per day over a further seven hour period, in an approximate mixture of 99% oil and less than 1% water.”
Is there an accepted initial instantaneous production rate in the industry when flow testing wells? It seemed a bit dubious to me.
Thanks
Simon
Simon,
It is mistaken to think about OPEC as a unified group. Middle Eastern members are divided along religious and geopolitical lines. And there are rich and poor members. This has always been their history and they have rarely acted in concert on anything. That is at least equally true today. Saudi Arabia, the UAE and Kuwait are more-or-less united in purpose although it is interesting that neither the UAE or Kuwait were mentioned among those agreeing to a freeze today.
It is noteworthy that Venezuela’s and Qatar’s production have been absolutely flat since 2011 so the idea of “freezing” production is meaningless for them. Incidentally, the UAE’s and Kuwait’s production have also been flat since 2011.
On your other question, when a well is being flow-tested, the liquids are measured about every hour after passing through a separator and into a tank. Whatever volume has accumulated over an hour is extrapolated to 24 hours and that is the “instantaneous” rate. It’s usually totally wrong on the high side depending on what flowing tubing pressure does over the 24-hour or longer period of the test.
All the best,
Art
Saudi Arabia’s liquids exports are flat for years anyway
http://crudeoilpeak.info/wp-content/uploads/2016/01/Saudi_crude_product_exports_2002-Nov2015_JODI.jpg
Other graphs which shed a light on crude and condensate production are in my latest post
15/2/2016
World outside US and Canada doesn’t produce more oil than in 2005
http://crudeoilpeak.info/world-outside-us-and-canada-doesnt-produce-more-crude-oil-than-in-2005
That’s how an Australian super annuation fund looks at the current oil price situation:
https://www.unisuper.com.au/about-us/news/2016/02/15/investment-market-update-february-2016
Matt,
Thanks for the link. The authors emphasize debt in the beginning but then, fall into a standard analysis of supply and demand. Their chart of operating costs per barrel is a bit perplexing because opex without royalties in the U.S. is too low by a few dollars at least. And their statement that “even the high cost producers can make good profits at $40 a barrel” is flatly false unless lots of costs are excluded. Their ending comment that lower oil prices are “unequivocally good news for consumers” is at odds with points made in the beginning that positive impacts are overshadowed by negative. Seems like the author of the first part was different from the one who wrote the last.
All the best,
Art
Until the shalers go into bankruptcy in wholesale, will prices improve. I am saying at the end of the first quarter it will start to trickle and as gas prices fall to $1 range in summer, then there ought to be a steady flow to the Bankruptcy courts into fall. Oil prices will improve quicker than gas and Chesapeake is 80% gas. I see no relief for gas prices over the next five years.
The large quake this past week in N Central OK portends a time when injection will be forcibly cut back by the state or feds to reduce earthquake risk; and I suspect Sandridge is going to be early on the list to fold and that alone may help slow the earthquake problem. They are injecting multiples of the fluid amounts that they are producing profitably. Even if otherwise profitable (and they are not) Sandridge is going to face class action suits over the quakes. Peoples homes are literally being shook apart. I showed a slide in a recent webinar for the Appraisal Institute with sheetrock cracks and we’ve seen dozens of collapsed brick walls in central Oklahoma. People are only going to tolerate that so long.
Terrel,
Interesting comments.
I don’t see gas prices going that low. Stay tuned for my next post.
Otherwise, I agree. The defaults will be more significant than many expect and the HY bond market woes may spill over into other markets as people liquidate assets to cover losses. Shale gas and tight oil were build on credit and will unwind as credit contracts.
At the same time, I and many others have been wrong in the past about foreseeing an end to the shale casino.
All the best,
Art
Art, thank you very much for keeping us up to date on breaking significant events affecting the oil and gas industry. Your commentary of all manner oil and gas is appreciated more than you will ever know. Scott.
Thanks, Scott.
Art
Art
Thanks for the reply.
With regard to yours and Terrel’s comments I have been looking at a few small oil companies outside of shale in the US. 2 particular UK Listed conventional oil companies are operating in Trinidad & Tobago. Their debts are relatively insignificant as being merely $12 million and $13 million which are owed to BNP Paribas and Citibank.
I have been expecting these banks to pull the plug on these companies for some time as they simply can’t repay the loans and they have no chance of repaying them in the future without investors throwing a whole heap more good money down the money sink hole of drilling for oil in T&T.
I feel these 2 companies are a microcosm for the banking system’s exposure to losses and there must hundreds of companies in similar positions. The banks it seems to me have gone into extend and pretend mode.
One company has received 20 extensions on its loan repayment schedule whilst it tries to dispose of assets and I expect BNP Paribas to come to a similar arrangement for the other company.
Because of the scale of the problem a significant dynamic that has occurred is that the assets these companies pledged as collateral for loans is now virtually worthless. Banks will not pull the plug on these companies because they know there is nothing of value to salvage from the wreckage. At best they could only recover 10% of monies owed and obviously the greater the failure rate of such companies on a global scale, the greater the pool of assets everyone is trying to dispose of at the same time.
For this reason banks are becoming increasingly reluctant to formally crystallize the industrial scale losses sitting on their books and many will prefer extend and pretend repayment holidays in the hope of a large oil price recovery or vast improvement in investor sentiment in the E&P sector. Neither of these are likely to happen.
This leaves everything very finely balanced. Given holidays from repayment schedules some companies can stagger on for a good few months and maybe a few companies could get increased funding from banks to carry on operating. The only other options for financing are bonds or equity issues and they are increasingly difficult if not impossible to sell to investors in the current environment.
There will come a point when even given repayment holidays, these companies without any operating cash at all will be forced to pull the plug on themselves and declare bankruptcy and it is only then that the banking system will be forced to declare the impairments and asset write downs.
I think this might put us in a similar position to the sub prime crisis. All the banks are aware of their own precarious positions and pretend and extend undeclared losses and must assume that all the other banks invested in the E&P sector are in the same boat. This could inevitably lead to a breakdown in counter party trust between banks such as the one that brought on the credit crunch.
That’s how it looks to me anyway.
Cheers
Simon
Simon,
Those are interesting case histories. I wish that I disagreed with your prediction of how all of this may play out for the banks and the overall structure of the economy. At the same time, the world has gotten quite expert at extending bad things.
Best,
Art
Hi Art,
Great work as usual. Credit Sights recently did a webinar on E&P. They are forecasting lots of downgrades from IG into HY space. Within HY, the cumulative default rate over the next 3 years is estimated at a whopping 45%. Dont expect M&A to bail out shareholders as there is little equity value left. Could this the start of the long awaited production cuts from the US? Additionally, do you think GOM production which ramped up in 4Q 2015 can be sustained?
Regards
Hi Art
Further to those issues I see Devon Energy announced a $1 billion dollar equity placing to keep the lights on yesterday. Looking at their accounts they lost $15 billion in 2015 or about $287 million a week or $1,150 a month. Looks like that $1 billion in new equity will not go far. I’m utterly amazed that there still appears to be a pool investors willing to pour funds down these money drains.
Cheers
Simon
Simon,
The oil-price market has been characterized by exceptional volatility since September 2014. This is because of an emotional conflict among investors between hope that things will return soon to normal and the reality that we have crossed a boundary that redefines whatever normal is.
The end of normal is because of the extraordinary expansion of credit that followed the 2008 Financial Collapse. The devaluation of the world’s major currencies that is still ongoing and zero-interest rate policies lead to high prices, over-investment and over-production for all commodities.
Oil is by far the world’s most traded commodity and concerns about the risk and exposure of banks and investors to oil is now adding to over-supply as a downward force on prices. The present worry is that defaults on bonds will spill over into other markets as investors sell assets to cover losses in HY bonds. This cascading effect is similar to what happened with real estate from 2007 to 2009. We solved that debt problem with more debt and the day of reckoning is upon us.
Central banks have gotten very good at the “pretend and extend” strategy that you mentioned a few days ago. Investors actually believe–or hope to believe–this stuff when announcements are made and oil prices increase 25-50% for awhile before giving up those gains and more in the volatility cycle that follows.
The Devon equity offering is the hope part of that phenomenon. I can’t tell you how many requests I get from people who want help in buying low to later sell high in this market. They think that they are the first geniuses to figure this out.
All the best,
Art
Hi Art,
Excellent article, as usual. I am amazed at the nonsense I read in most media articles.
A question for you. Sorry if I have missed an explanation elsewhere. I assume that when wells are drilled from a ‘multipad’ all the required wells from that pad are drilled sequentially. So there are maybe 8 – 10 (?) wells drilled before fracking starts.
Do they then frack all the wells at the same time to maximise production, or one at a time, every few months to compensate for depletion? If the later, and if it is still economical to frack, this could continue for some time. For the finance companies, any income is better than no income.
Incidentally I often read that multiwell pads are one of the new, super technologies that have reduced costs in the last couple of years, but I first saw them in use in Oman, 12+ years ago.
Trevor
Trevor,
Wells that are drilled from a pad are separate wells–they are drilled separately although some may be completed simultaneously. They are also produced and metered separately although in Texas, oil well production is commonly reported on a lease basis and that makes it more difficult to evaluate production histories and reserves.
As you point out, none of the new technology is new. It has, however, been optimized as a result of its frequency of use.
There is an excellent new research article by Bernstein that reaches the same conclusion that I have made for many years namely, that when measured on a cost per unit of production basis (barrel or mcf), there are almost no technological improvements that have come from shale production.
All the best,
Art
[…] exporting countries have realized a windfall for 2 months based on hope for a freeze that I called meaningless when it first surfaced. In a few weeks, they will float the idea again and prices will […]
[…] exporting countries have realized a windfall for 2 months based on hope for a freeze that I called meaningless when it first surfaced. In a few weeks, they will float the idea again and prices will […]
[…] exporting countries have realized a windfall for 2 months based on hope for a freeze that I called meaningless when it first surfaced. In a few weeks, they will float the idea again and prices will […]
[…] exporting countries have realized a windfall for 2 months based on hope for a freeze that I called meaningless when it first surfaced. In a few weeks, they will float the idea again and prices will […]
[…] exporting countries have realized a windfall for 2 months based on hope for a freeze that I called meaningless when it first surfaced. In a few weeks, they will float the idea again and prices will […]
[…] exporting countries have realized a windfall for 2 months based on hope for a freeze that I called meaninglesswhen it first surfaced. In a few weeks, they will float the idea again and prices will […]