Energy Prospectus

Dan, I read an interesting article about how difficult it is now to find drilling crews (as you predicted), but how that could change by 2018 leading to a possible oil glut, and price depression in 2018. I'd like your opinion on that thesis. Thx.

There has been a surge in U.S. drilling activity (from a very low level) and we are seeing the result in higher production. Upstream companies "High Graded" their drilling locations during the downturn and are drilling the "best-of-the-best" now to ramp up production, cash flow and proven reserves. During the rebound phase of a cycle we get a surge like this and then the rate of production growth slows. It is almost impossible to maintain the initial rate of growth because oilfield services companies run out of equipment, people and supplies. The supply chain gets strained. We are already seeing a strain on the frac sand supply chain. Then oilfield services firms jack up prices to "ration" their crews and equipment.

Keep in mind that the drillers will not commit to build new (very expensive) rigs until they are absolutely sure the commodity prices will remain high.

In Mid-2015 U.S. crude oil production peaked at 9.6 million barrels per day. Today, U.S. production is back to 9.3 million barrels per day. My SWAG is that U.S. production increases to 10.0 million barrels per day by mid-2018. Growth will slow and I cannot ever see the U.S. being "energy independent". We consume over 17.0 million barrels of Black Oil per day.

See: https://www.eia.gov/dnav/pet/hist/LeafH ... RFPUS2&f=W


Keep in mind that global demand for hydrocarbon based liquid fuels and feedstock, primarily refined from crude, has gone up ~2.5 million barrels per day and will continue to go up by 1.0 to 1.5 MMBPD each year through at least 2030.

Shale wells decline at a MUCH FASTER rate than conventional wells. The more dependent we become on shale and other tight formations, the more wells we will need to drill each year just to replace annual decline. Read Art Berman's article on natural gas.

If OPEC does their job (a BIG IF), we should see the oil price move to the $60 to $70 per barrel range. There is no way that the U.S. shale oil plays can meet global demand, which will exceed 100 million barrels per day by the end of 2019. We cannot even meet our own demand. Therefore, we need an oil price that makes projects in the offshore areas and Canadian Oil Sands profitable.

What happens when Iran does something really stupid, like shoot at a U.S. war ship? Today, there is no geopolitical risk priced into oil. I have seen that change very quickly.
> Venezuela's production is on steady decline and the whole country may collapse soon.
> Peace is not going to breakout in Libya, Nigeria, etc anytime soon. Their production is always at risk.

Read the article at the link below, but keep in mind that (1) outside of the onshore shale plays, oil production is on decline and (2) global demand for oil goes up at least a million barrels per day each year.

Read this: http://www.oilandgas360.com/race-will-o ... ccelerate/

It seems that regardless of the steadily increasing demand for oil the ability for the US and OPEC and others to ramp up production (without an agreement to limits) with better drilling techniques will put a cap on increasing oil prices above $55+/- at least for some years.
Could you help me out with the counter view re this?

The counter view is that the U.S. shale plays CANNOT MEET GLOBAL DEMAND BY THEMSELVES. Today, U.S. crude oil production is at 9.3 BOPD. Which BTW compares to U.S. crude oil demand of more than 17.0 BOPD. The amount of capital and physical work needed to make the U.S. "independent" for oil is impossible to comprehend (at least for me).

The production growth we are seeing today in the U.S. is the flush production growth during the rebound phase of the cycle, I think I wrote on this board many times that I expected the upstream companies to complete a lot of DUC wells in Q4 to get those reserves in their year-end reserve report. This rate of growth cannot continue for two reason:
> Operators are now drilling in the very best locations, "Tier One of Tier One". Eventually, the sweet spots get drilled up.
> Each year more and more of our production will be coming from high decline rate horizontal wells. More and more wells will be needed each year to offset depletion. This is why every oilfield every discovered eventually reaches a plateau and soon after goes on decline.

Another thing to remember is that we do not need $100 oil (at least for the next few years) for upstream companies to generate solid ROIs.

Here is a homework assignment for you.
Go to the EPG website and look at several Sweet 16 forecast models. Near the bottom of each one you will see what each company actually received for their Q1 production. CLR and EOG have none of their oil hedged, so start with them. Come back and tell us what you see. Tell us the cash flow from operations that CLR and EOG generated in Q1.

I can do it for you, but I believe in "teaching a man to fish" is better than giving him a fish.
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PS: At $50/bbl oil all of the OPEC nations will eventually go bankrupt. Three already are and three more are close. At $50 oil, Venezuela production will soon go to zero.

EOG Q1 has a billion of cash flow but reinvests about the same on new wells for future cash flow if I understand it right.
I'm not sure SA Iran and Russia cant survive on $50 oil but agree that they don't do well with that pricing and are trying to agree to limit their production.