Tag: Arthur Berman

Arthur Berman: Why The Price Of Oil Must Rise

Submitted by Adam Taggart via PeakProsperity.com,

Geologist Arthur Berman explains why today’s low oil prices are not here to stay, something investors and consumers alike should be very aware of. The crazy-low prices we’re currently experiencing are due to an oversupply created by geopolitics and (historic) easy credit, not by sustainable economics.

And when the worm turns, we are more likely than not to experience a sudden supply shortfall, jolting prices viciously higher. This will be a situation not soon resolved, as the lag time for new production to come on-line will be much longer than the world wants:

The same things that always drive prices in the end it’s always about fundamentals. The markets are peculiar and they change every day. But the fundamentals of supply and demand at some point markets come back to those and have to adjust accordingly. Not on a daily basis, maybe not even on a monthly basis. But eventually they get it right. So this oil price collapse is really straight forward as far as I can tell, and it has to do with cheap stupid money because of artificially low interest rates that resulted in over-investment in oil — as well as lots of other commodities that are not in my area of specialty, but that’s what I see. And over-investment led to over-production and eventually over-production swamped the market with too much supply and the price has to go down until we work our way through the excess supply.

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Only 1 Percent Of Bakken Shale Is Profitable At These Prices

Submitted by Arthur Berman via OilPrice.com,

Only 1 percent of the Bakken Play area is commercial at current oil prices based on my analysis that follows.

Only 4 percent of horizontal wells drilled since 2000 meet the EUR (estimated ultimate recovery) threshold needed to break even at current oil prices, drilling and completion, and operating costs.

The leading producing companies evaluated in this study are losing $11 to $38 on each barrel of oil that they produce, the very definition of waste.

Although NYMEX prices are about $46 per barrel, realized wellhead prices in the Bakken are only $30 per barrel according to the North Dakota Department of Mineral Resources. At that price, approximately 125,000 acres of the drilled play area of 10,500,000 acres is commercial (green areas in Figure 1).

Figure 1. Bakken Shale Play commercial area map at $30 per barrel wellhead price. Contours are in barrels of oil estimated ultimate recovery. Contour interval = 200,000 barrels of oil. Source: Drilling Info, North Dakota Department of Natural Resources & Labyrinth Consulting Services, Inc.

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We Are Witnessing A Fundamental Change In The Oil Sector

Submitted by Arthur Berman via OilPrice.com,

The U.S. oil production decline has begun.

It is not because of decreased rig count. It is because cash flow at current oil prices is too low to complete most wells being drilled.

The implications are profound. Production will decline by several hundred thousand barrels per day before the effect of reduced rig count is fully seen. Unless oil prices rebound above $75 or $85 per barrel, the rig count won’t matter because there will not be enough money to complete more wells than are being completed today.

Tight oil production in the Eagle Ford, Bakken and Permian basin plays declined approximately 111,000 barrels of oil per day in January. These declines are part of a systematic decrease in the number of new producing wells added since oil prices fell below $90 per barrel in October 2014 (Figure 1).

TightOilNewProducingWellsAdded

Figure 1. Eagle Ford, Bakken and Permian basin new producing wells by month. Source: Drilling Info and Labyrinth Consulting Services, Inc

(Click image to enlarge)

Deferred completions (drilled uncompleted wells) are not discretionary for most companies. Producers entered into long-term rig contracts assuming at least $90 oil prices. Lower prices result in substantially reduced cash flows. Capital is only available to fulfill contractual drilling commitments, basic costs of doing business, and to complete the best wells that come closest to breaking even at present oil prices.

Much of the new capital from junk bonds and share offerings is being used to pay overhead and interest expense, and to pay down debt to avoid triggering loan covenant thresholds. Hedges help soften the blow of low oil prices for some companies but not enough to carry on business as usual when it comes to well completions.

The decrease in well completions provides additional evidence that the true break-even price for tight oil plays is between $75 and $85 per barrel. The Eagle Ford Shale is the most attractive play with a break-even price of about $75 per barrel. Well completions averaged 312 per month from January through September 2014 when WTI averaged $100 per barrel (Figure 2). When oil prices dropped below $90 per barrel in October, November well completions fell to 214. As prices fell further, 169 new producing wells were added in December and only 118 in January.

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