Peak Oil stories - 12/19/2014

Why The US Is About To Be Flooded With Record Oil Production Due To Plunging Oil Prices

Zero Hedge,
19 December, 2014



One would think that plunging oil prices and the resulting mothballing (or bankruptcy) of the highest-cost domestic producers would lead to a collapse in US oil production. And sure enough, if looking simply at headline data like the Baker Hughes count of active rigs in the US, then US oil production grinding to a halt would be all but assured. However, what will actually happen, even as the highest-cost producers and those with the weakest balance sheets are taken to their local bankruptcy court, is that as Bloomberg reports, the US is - paradoxically - set to pump a 42-year high amount of oil in 2015 "as drillers ignore the recent decline in price, pointing them in the opposite direction."

Here is the surprise for all those thinking Saudi Arabia will declare a quick win when half of the US shale is bankrupt and supply plunges: U.S. energy producers plan to pump more crude in 2015 as declining equipment costs and enhanced drilling techniques more than offset the collapse in oil markets, said Troy Eckard, whose Eckard Global LLC owns stakes in more than 260 North Dakota shale wells. That and the scramble to put competitors out of work, before competitors do just that to you.

On one hand oil companies are, logically, shutting down expensive production. However, in borrowing a page from the playbook of the iron ore producers who also are caught in an AMZNian race to the bottom, and are producing more raw materials than ever in hope of putting their competitors out of business as fast as possible, what they are also doing is shifting their focus to their most-prolific, lowest-cost fields, which means extracting more oil with fewer drilling rigs, said Goldman Sachs Group Inc. Global giant Exxon Mobil Corp. the largest U.S. energy company, will increase oil production next year by the biggest margin since 2010. So far, the Organization of Petroleum Exporting Countries’ month-old bet that American drillers would be crushed by cratering prices has been a bust.

In short, what the US energy industry will do at the national level, is precisely what OPEC did as an international cartel: battle plunging prices, and demand, with surge, if not record, production:

“Companies that are already producing oil will continue to operate those wells because the cost of drilling them is already sunk into the ground,” said Timothy Rudderow, who manages $1.5 billion as chief investment officer at Mount Lucas Management Corp. in Newtown, Pennsylvania. “But I wouldn’t want to have to be making long-term production decisions with this kind of volatility.”

Everyone's hope: flood the market with as much cheap oil as possible to take out higher cost competitors, and remove supply as quickly as possible. The problem is that this is precisely what everyone else will also do, and in the biggest paradox of the crude price collapse, the near-term outcome will be an unprecedented surge in oil supply, which will lead to an even greater crash in prices before everything reverts back to a more stable equilibrium... at some point in the distant future.

Some of the facts according to Bloomberg:

• U.S. oil production is set to reach 9.42 million barrels a day in May, which would be the highest monthly average since November 1972, according to the Energy Department’s statistical arm.
  
  
• Exxon, the world’s biggest oil producer by market value, is expected to boost crude and natural gas output by 2.8 percent next year to the equivalent of 4.1 million barrels a day, based on the average of eight analyst estimates compiled by Bloomberg.
  
  
• Existing wells remain profitable even as benchmark crude futures hover near  the $55-a-barrel mark because operating costs going forward are usually $25 or less.
  
  

While as we have shown the vast majority of US shale is no longer profitable below $60, when one factors in the entire US energy sector, the average cost to operate an existing well in most parts of the U.S. "is about $20 a barrel,"according to Tom Petrie of Petrie and partners. "It might be $5 higher or it might be $5 lower, that’s the out-of-pocket costs that we’re talking about. Until you dip into that and start losing money on a cash basis day in, day out, you don’t think about shutting in” wells.

So what does this mean for the US energy industry: simple - while capital spending and growth projects are about to be frozen for years to come, companies are about to set existing production on turbo Max, as everyone hopes to not only "make up for lower prices with soaring volume", but to take out their immediate competitors before their competitors do just that to them.

And so the race to the bottom truly begins. The only question is will Saudi Arabia's cash reserves last long enough to keep its "bread and circuses" social fund solvent while the US energy sector implodes under its own weight, or if with a little help from outside, something "black-swany" were to happen to Saudi Arabia and/or its production infrastructure.

Then those very deep OTM 2016 Brent calls we bought a few weeks back will seem like quite the bargain.

US Oil Rig Count Tumbles Most In Over 5 Years,"Demand From Oilfield Customers Dropping Rapidly"

Zero Hedge,

19 December, 2014

"Unequivocally" not good. Following last week's surge in initial jobless claims for 'Shale' states, Baker Hughes confirms rig counts continue to tumble.  The last two weeks have seen the total US rig count fall the most since 2009 (and Canada down 9.3% this week alone). Seemingly confirming this weakness, The Kansas City Fed notes respondents see non-durable (petroleum) demand "sluggish", and rather awkwardly against the "everything's great meme," one respondent exclaims, "demand from oilfield customers is dropping rapidly." The current US rig count is now the lowest in 5 months.

US Rig Counts are sliding fast...

But just as in 2008, there is a lag... this has only just begun...

And Canada is getting crushed...

The Kansas City Fed region has a slightly bigger share of energy-related industries than the national average and the impact of falling oil prices is popping up in today's KC Fed factory survey. The composite index edged up to 8 this month from 7 in November, but the bank notes the strength is in durable goods manufacturing. Nondurables, which includes petroleum and coal products, have "remained sluggish." One respondent comments "Our industrial markets are OK, but demand from oilfield customers is dropping rapidly."

From Kansas Fed

“There is more general optimism about the economy, although the overall economy is still not great. Our industrial markets are OK, but demand from oilfield customers is dropping rapidly.”

“Rumored production cuts so far have not impacted our order backlog. We are still operating at full capacity while striving hard to expand capacity and hire more production personnel.”

“The price of crude oil is a large factor that will impact selling prices for some of our products. If it remains low, we will see prices for some products drop significantly as demand drops.”

“The prices we charge for our products can’t keep pace with the non-stop growth of the costs incurred for compliance with Federal agencies. Federal regulatory burden continues to sap our enthusiasm, risk taking, and meaningful job growth and pay raises.”

“We expect raw material prices to primarily be determined by demand and we are concerned demand could be lower. Parcel shipping companies have already announced healthy increases for 2015 even with declining energy costs. We expect our labor costs to continue to increase at about 3% annually.”

“Overbuilding of capacity will restrain price increases. Higher input prices will result in restricted margins unless offset by cost savings and efficiency improvements.”

*  *  *

Paging Larry Kudlow...

"It's A Huge Crisis" - The UK Oil Industry Is "Close To Collapse"

Zero Hedge,

18 December, 2014

It seems like only yesterday when back on October 11, we first explained - and previewed - the collapse of oil courtesy of the secret deal between the US and Saudi Arabia. However, it seems like only this morning when we subsequently wrote that "If The Oil Plunge Continues, "Now May Be A Time To Panic" For US Shale Companies." In retrospect, it was, and with the price of crude far below mid-October levels, the pain for both Russia and shale is now quite unbearable (even as Saudi Arabia explained earlier today that the reason for collapsing oil has nothing to do with supply and everything to do with plunging demand, and after seeing this chart we believe it).

All of this was perfectly obvious months ago to anyone who cared. To wit:

... while we understand if Saudi Arabia is employing a dumping strategy to punish the Kremlin as per the "deal" with Obama's White House, very soon there will be a very vocal, very insolvent and very domestic shale community demanding answers from the Obama administration, as once again the "costs" meant to punish Russia end up crippling the only truly viable industry under the current presidency.

So with great delight we present the latest blowback from Obama's "brilliant" strategy to cripple Putin: in addition to the default wave about to crush America's own shale industry, America's biggest foreign ally and military partner when it comes to "ideologically pure missions of liberation" - the UK, and specifically its North Sea oil industry which according to the BBC is in a "crisis" and according to Robin Allan, chairman of the independent explorers' association Brindex, the industry was "close to collapse". 

The story is the same as in the shale patch, only in the far colder and stormier North Sea: "Almost no new projects in the North Sea are profitable with oil below $60 a barrel, he claims. 'Everyone is retreating'"

"It's almost impossible to make money at these oil prices", Mr Allan, who is a director of Premier Oil in addition to chairing Brindex, told the BBC. "It's a huge crisis. This has happened before, and the industry adapts, but the adaptation is one of slashing people, slashing projects and reducing costs wherever possible, and that's painful for our staff, painful for companies and painful for the country."

"It's close to collapse. In terms of new investments - there will be none, everyone is retreating, people are being laid off at most companies this week and in the coming weeks. Budgets for 2015 are being cut by everyone."

And to think it was just yesterday that the WSJ telling anyone who believes propaganda that "Christmas has come early for British consumers.

Tumbling oil prices, rising wages and declining borrowing costs are lifting households’ spending power, sending a powerful signal that consumers are set to keep Britain’s economy growing in the New Year.

BOE officials in December concluded the decline in the oil price in particular should act as a mini-stimulus for the U.K. and its major trading partners, even as Russia and other energy producers reel from crude’s recent slide. The BOE estimates the oil price has fallen 35% in sterling terms since June.

Which once again shows that when it comes to being utterly clueless about the real world, central bankers truly have no peers. Well, side from their media cheerleaders of course.

But hold on: wasn't only Putin supposed to be getting crushed as a result of the oil collapse? Suddenly the "secret" Saudi agreement isn't looking all that hot.

As for the truly "best" news: the collapse in the oil field will remain hidden from official government data. Mr Allan said many of the job cuts across the industry would not have been publicly announced. Oil workers are often employed as contractors, which are easier for employers to cut.

His remarks echo comments made by the veteran oil man and government adviser Sir Ian Wood, who last week predicted a wave of job losses in the North Sea over the next 18 months.

BOE bullshit aside, this is what is really going to happen:

The US-based oil giant ConocoPhillips is cutting 230 out of 1,650 jobs in the UK. This month it announced a 20% reduction in its worldwide capital expenditure budget, in response to falling oil prices.

Other big oil firms are expected to make similar cuts to their drilling and exploration budgets. Research from the investment bank Goldman Sachs predicted that they would need to cut capital expenditure by 30% to restore their profitability at current prices.

Service providers to the industry have also been hit. Texas-based oilfield services company Schlumberger cut back its UK-based fleet of geological survey ships in December, taking an $800m loss and cutting an unspecified number of jobs.

On Wednesday Aberdeen-based Wood Group announced a pay freeze for staff, and cut rates for its contractors.

Apache, one of the North Sea's biggest producers, has followed suit and will impose a 10 percent reduction on its contractors' wages from January 1st.

So what happens to the UK oil and energy industry? "The industry was hoping to see continued high levels of investment, stemming the inevitable decline of production as North Sea's resources are used up. But falling oil prices have put that in doubt."

However, the Department of Energy and Climate Change said: "The recent sharp reductions in oil prices are very challenging for companies active in the North Sea. We have seen very little evidence of new projects being cancelled or deferred in reaction to lower oil prices."

Which means the real pain is only just starting, first in the UK and soon everywhere else.

Bankers See $1 Trillion of Zombie Investments Stranded in the Oil Fields

Bloomberg,

18 December, 2014

There are zombies in the oil fields.

After crude prices dropped 49 percent in six months, oil projects planned for next year are the undead -- still standing upright, but with little hope of a productive future. These zombie projects proliferate in expensive Arctic oil, deepwater-drilling regions and tar sands from Canada to Venezuela.

In a stunning analysis this week, Goldman Sachs found almost $1 trillion in investments in future oil projects at risk. They looked at 400 of the world’s largest new oil and gas fields -- excluding U.S. shale -- and found projects representing $930 billion of future investment that are no longer profitable with Brent crude at $70. In the U.S., the shale-oil party isn’t over yet, but zombies are beginning to crash it.

The chart below shows the break-even points for the top 400 new fields and how much future oil production they represent. Less than a third of projects are still profitable with oil at $70. If the unprofitable projects were scuttled, it would mean a loss of 7.5 million barrels per day of production in 2025, equivalent to 8 percent of current global demand.

How Profitable Is $70 Oil?

Source: Goldman Sachs Global Investment Research. Annotated by Tom Randall/Bloomberg

Making matters worse, Brent prices this week dipped further, below $60 a barrel for the first time in more than five years. Why? The U.S. shale-oil boom has flooded the market with new supply, global demand led by China has softened, and the Saudis have so far refused to curb production to prop up prices.

It’s not clear yet how far OPEC is willing to let prices slide. The U.A.E.’s energy minister said on Dec. 14 that OPEC wouldn’t trim production even if prices fall to $40 a barrel. An all-out price war could take up to 18 months to play out, said Kevin Book, managing director at ClearView Energy Partners LLC, a financial research group in Washington.

If cheap oil continues, it could be a major setback for the U.S. oil boom. In the chart below, ClearView shows projected oil production at four major U.S. shale formations: Bakken, Eagle Ford, Permian and Niobrara. The dark blue line shows where oil production levels were headed before the price drop. The light blue line shows a new reality, with production growth dropping 40 percent.

Even $75 Oil Crashes the Shale-Oil Party

Source: ClearView Energy Partners LLC

The Goldman tally takes the long view of project finance as it plays out over the next decade or more. But the initial impact of low prices may be swift. Next year alone, oil and gas companies will make final investment decisions on 800 projects worth $500 billion, said Lars Eirik Nicolaisen, a partner at Oslo-based Rystad Energy. If the price of oil averages $70 in 2015, he wrote in an email, $150 billion will be pulled from oil and gas exploration around the world.

An oil price of $65 dollars a barrel next year would trigger the biggest drop in project finance in decades, according to a Sanford C. Bernstein analysis last week.

A pause in exploration and development may sound like good news for investors concerned about climate change. A vocal minority have been warning for years that potentially trillions of dollars of untapped assets may become stranded due to climate policies and improved energy efficiency. The challenges faced by oil developers today may provide a small sense of what's to come.

However, these glut-driven prices can’t stay low forever. Oil production hasn’t slowed yet, but as zombie projects go unfunded, it will. This is how the boom-bust-boom of the oil market goes: prices fall, then production follows, pushing prices higher again. The longer this standoff goes, the more zombies will languish and the sharper the rebounding price spike may be.