The "Unknown Unknowns" That Threaten U.S. Shale

Authored by Tsvetana Paraskova via OilPrice.com,

Three years after the oil price crash, the U.S. shale patch is on its second growth phase and is expected to continue to increase its production, at least through the next five years.

The global oil markets have become increasingly dependent on U.S. tight oil supply - and the oil industry is still coming to grips with this new reality, Simon Flowers, Chairman and Chief Analyst at Wood Mackenzie, wrote in a recent article.

Current projections put the Permian on the forefront of the United States’ ability to deliver increased tight oil supply to the global markets. However, forecasts for the shale patch are as dynamic as production and drilling rates are. And some ‘known unknowns’ have been surfacing such as higher gas-to-oil ratios in some wells, and the parent/child wells issue, Flowers says.

Wood Mackenzie said last month that signs had started to show that intensified drilling in the Permian doesn’t deliver commensurate volumes of oil. Although WoodMac thinks that such setbacks could just be growing pains and Permian drillers could indeed ‘change the laws of physics’, it had warned three months ago that drillers might soon start to test the region’s geological limits. If exploration and production companies can’t overcome the geological constraints with tech breakthroughs, Permian production could peak in 2021, putting more than 1.5 million bpd of future production in question and potentially significantly influencing oil prices, WoodMac said in September.

In his December article, WoodMac’s Flowers included this observation in the Permian’s ‘known unknowns’:

“Growth might also be constrained by shareholders demanding that independents rein back from volume-driven targets.”

Those ‘known unknowns’ serve as a warning: the oil market can’t be complacent and just assume that the Permian boom will deliver as expected, according to Flowers. The Wolfcamp may be the star of the Permian, WoodMac says, but “there are more than likely ‘unknown unknowns’ out there too. And if there are, there’s not another Permian ready to step in; and conventional options will take time to crank into action.”

The Eagle Ford and the Bakken combined represent nearly half of the current U.S. tight oil production, according to Wood Mackenzie, which is expressing new doubts that those two plays could offer long-term commercial drilling inventory as operators move out beyond the sweet spots. Therefore, the analysts downgraded the growth rates for both plays from the mid-2020s, but have significantly upgraded the Permian growth pace, especially for the Wolfcamp basin.

If the Permian turns out to have ‘unknown unknowns’ alongside the ‘known unknowns’, the U.S. shale patch may not deliver as expected.

Currently, WoodMac’s supply/demand balance forecasts show that the U.S. and OPEC will “do battle for contestable demand that will climb to over 5 million b/d by 2024.”

The analysts believe that U.S. shale will take the lion’s share of that demand—90 percent—as its production will double to 9.6 million bpd by 2024 from 4.9 million bpd in 2017, while OPEC will be left with meeting less than 1 million bpd of that additional demand.

Three years after the oil price crash, the most unexpected outcomes in the global oil market are the second wave of U.S. shale growth, OPEC’s “zealous adherence” to the cuts, and the resilience of some non-OPEC non-U.S. producers, WoodMac says.

While Mexico, China, and Africa as a whole have been “heavy casualties” of the lower-for-longer oil prices, Russia, Canada, and the North Sea have surprised on the positive side by adapting remarkably well to the low oil prices. Russia is the “poster child” of this resilience. Canada is also doing well with Duvernay liquids where breakevens are competitive with U.S. plays, and with better uptime from oil sands projects. The North Sea has also been a positive surprise, with the UK leading the way with aggressive cost cuts that have helped to raise oil production, WoodMac says.

Still, U.S. tight oil, especially the Permian, will be the main growth story over the medium term, but ‘unknown unknowns’ may be lurking out there and could restrain the pace of that growth.

Keystone XL Pipeline Shut Down After 5,000-Barrel Spill In South Dakota

Well this is awkward.  After months/years of protests targeting the Keystone XL pipeline from environmentalists worried about oil spills, TransCanada has now been forced to shut down the pipeline following...drum roll please...a 5,000 barrel oil spill in South Dakota.  According to The Hill, the pipeline was taken offline at 6am this morning following a leak that was discovered about 35 miles south of a pumping station in Marshall County, South Dakota.

Workers took the Keystone oil pipeline offline on Thursday after it spilled 5,000 barrels of oil in rural South Dakota, officials said.

 

A TransCanada crew shut down the pipeline at 6 a.m. Thursday morning after detecting an oil leak along the line, the company said. The leak was detected along a stretch of the pipeline about 35 miles south of a pumping station in Marshall County, South Dakota.

 

TransCanada estimates the pipeline leaked 5,000 barrels of oil, or about 210,000 gallons, before going offline. The company said it"s working with state regulators and the Pipelines and Hazardous Materials Safety Administration to assess the situation.

 

The South Dakota Department of Environment and Natural Resources heard about the leak at about 10:30 a.m. Thursday, ABC affiliate KSFY reported.

For those who aren"t familiar with the project, the 1,179 mile Keystone XL pipeline links Canada’s Alberta oil sands to U.S. refineries.  While a portion of the pipeline has been operating, part of it has still not been approved by state regulators.

Here is the statement on the incident posted by TransCanada earlier this morning:

At approximately 6 a.m. CST (5 a.m. MST) today, we safely shut down the Keystone pipeline after we detected a pressure drop in our operating system resulting from an oil leak that is under investigation.

 

The estimated volume of the leak is approximately 5,000 barrels. The section of pipe along a right-of-way approximately 35 miles (56 kilometres) south of the Ludden pump station in Marshall County, South Dakota was completely isolated within 15 minutes and emergency response procedures were activated.

 

The safety of the public and environment are our top priorities and we will continue to provide updates as they become available.

As you may recall, former President Barack Obama opposed the completion of the pipeline, but the Trump administration granted a permit for it in March. That said, Nebraska state regulators still need to approve the project in their state and a decision was expected from the Nebraska Public Service Commission next week....somehow we suspect that decision might be delayed.

The five members of the Nebraska Public Service Commission will vote on a proposed order for the Keystone XL pipeline on Nov. 20, the agency announced on Monday, though it didn’t detail what that decision might be.

 

Approval from the Nebraska commission is one of several tasks facing Keystone XL developer TransCanada, which hopes to build the pipeline and deliver oil from Alberta, Canada, to the Gulf of Mexico.

 

TransCanada reapplied for its Nebraska permit in February, putting the decision in the hands of the Public Service Commission. It applied to follow the same route bisecting Nebraska that the state’s governor approved in 2013, before President Obama rejected federal permits for the pipeline.

Ironically, Trump touted the Keystone XL pipeline as "the greatest technology known to man or woman" when he approved it back in March...oops.

Today, I was pleased to announce the official approval of the presidential permit for the #KeystonePipeline. A great day for American jobs! pic.twitter.com/5ga6XmpStG

— Donald J. Trump (@realDonaldTrump) March 24, 2017

Is Another Oil Head-Fake Coming?

Authored by Charles Hugh Smith via OfTwoMinds blog,

The dramatic declines in the costs of oil production will be boosting supply at the very moment that demand is falling.

Over the past decade I"ve addressed what I call Head-Fakes in the cost of oil/fossil fuel: even though we know the cost of extracting and processing oil will rise over time as the easy-to-get oil is depleted, oil occasionally plummets to such low prices that we"re fooled into thinking it will remain cheap for a long time to come.

This drop in price is a head-fake, because over time the depletion of the cheap-to-extract oil will push global prices higher.

Why does this matter? Economists have noted for decades that spikes in energy costs tend to trigger recessions for the obvious reason: the more households and businesses spend on energy, the less they have to spend on goods and services.

When the price of oil drops, people buy larger, fuel-hungry vehicles because the operating costs are reasonable at the moment of purchase. The need to conserve declines across the board, setting up a high consumption level that establishes a high cost basis when oil returns to its "natural" price levels.

Correspondent Joel M. submitted an article that explains one reason why oil may plummet in price: oil companies are dramatically dropping the costs of production in order to remain profitable as oil has fallen from $100/barrel to $50/barrel. Ironically, this drive to lower costs to make oil profitable at $50/barrel or lower is sparking a production and investment boom that promises to boost production in the near-term.

Race to Bottom on Costs May Cause Oil to Choke on Own Supplies (via Joel M.).

Wael Sawan, the head of Shell’s deep-water business, said the company had been able to reduce the cost of its wells by 50 percent over two years. The biggest reason: Shell now uses just four standard well designs worldwide, compared with dozens previously, according to Sawan.

"We are going to see more material cost saving in the next couple of years," he said in an interview.

With costs down from shale to mega-projects, companies big and small are starting to green-light more investment. Shell for example just approved the Kaikas deepwater oil field in the U.S. Gulf of Mexico, the first to get a go-head from the company in more than two years. The project will make money at less than $40 a barrel after Shell reduced its projected costs by 50 percent.

Though the global stock market is in a euphoric uptrend at the moment, many observers see the inevitability of a global recession as China dials back its astonishing credit expansion/housing bubble. Having created $30 trillion in new credit, China"s financial authorities are trying to cool down that runaway credit expansion without choking the Chinese economy. Their modest tightening in 2014 deflated their housing bubble, and the trickle-down effects soon slowed the global economy to a crawl.

As many of us have noted, no structural problems have been solved over the past eight years globally; all we"ve done is create unprecedented sums of new money in the form of credit and sovereign borrowing to keep the bubbles inflated. At some point, diminishing returns on new debt will trigger a break in the ability of households, corporations and nations to service their rising debt loads, and a retrenchment/recession of some size will occur--even if central banks flood the financial sector with liquidity and lower interest rates.

They can"t force households and corporations to borrow more, though they will try.

Any significant reduction in global demand for oil will trigger a sharp, sustained decline in the price of oil. Price for commoditized goods and services is set on the margin; a 5% decline in demand doesn"t necessarily reduce price by 5%; if the drop in demand shifts the the global supply into chronic over-supply, it may trigger a price drop of 25% or more.

The dramatic declines in the costs of oil production will be boosting supply at the very moment that demand is falling. This imbalance will crush the price of oil, perhaps as low as $25/barrel. Some analysts are predicting sub-$20 oil.

Low prices will devastate profits and oil-exporting nation"s oil revenues, and perversely remove incentives to conserve energy. These two dynamics will then set up the next oil spike, as production will decline while demand will be boosted as economies use more "cheap oil."

The global economy will quickly adjust to low oil prices, and decisions will be made to raise consumption based on those low prices.

When oil inevitably spikes higher as supply is slashed and demand increases off the recessionary trough, everyone will be "surprised" that low prices didn"t last.

That"s the oil head-fake in a nutshell.

10 Energy Surprises In 2017

Submitted by Peter Tertzakian via OilPrice.com,

There’s less than two weeks left before the 2016 calendar gets tossed. So for the pundit community it’s time to publish the obligatory list of, “What to Watch For in in the New Year”.

It’s pointless to list the obvious. For oil and gas, pundits know that things like OPEC compliance, U.S. rig counts, pipeline angst, and Chinese consumption are on a long list of standard items that are obligatory to parse from our cluttered news feeds.

But what are the nascent items that could lead to unforgiving surprises? “When everyone looks to the right, it’s time to look left,” is an adage I always go by. So for 2017 here is a 10-item listicle that won’t be in the mainstream, but may be worthy of the left shoulder.

1. Sales of the Chevy Bolt – GM’s mass market, pure battery electric vehicle made its debut late this year. Reviews have been positive. Early sales figures in ‘17 will be a litmus test for the potential displacement of pistons, valves and gears – and also whether the long-term outlook for crude oil is acid or base.

2. Growth in African Energy Demand – If you build it they will come: Top line energy consumption on the continent is growing by about 2% per annum as infrastructure spending multiplies. A growing middle class is buying wheels and appliances. We’ve seen this movie before. The billion people living in the sub-Sahara are embracing joules generated by oil and gas in greater quantities than any other primary source (Figure 1). Is Africa the new China-and-India?

(Click to enlarge)

3. Fracking Goes Viral – Multi-stage hydraulic fracturing as applied to horizontal wells has been the hottest oil and gas innovation in 100 years. Technology genies never stay in a bottle, so proliferation beyond the U.S. and Canada is inevitable. Start counting rigs in places like Argentina, Russia and Saudi Arabia; they are trying to put the genie to work too.

4. Will Standing Rock Start Walking? – Pipeline protesters in North Dakota demonstrated their ability to block construction of the Dakota Access oil pipeline. With environmental groups losing influence at the high altitude of the White House, the ground-level Standing Rock playbook could spread to other US oil and gas fields. And it’s not so cold in the Southern States.

5. Escalating Oilfield Service Costs – Oil producers have been smug about how they have cut their costs by 20 to 30% over the past two years. But much of that has been accomplished by crippling the margins of the oilfield service sector. Rising rig counts are already germinating the first hints of oilfield inflation. If costs escalate again, $60/B may not be the new $90 (see past blog “$60 is in Style…For Now”).

6. The Next Boomtown – Alberta has a history of creating resource boomtowns. Drumheller was the province’s coal capital 100 years ago. Black Diamond and Turner Valley kicked off the oil boom. Medicine Hat made history with shallow gas. And of course Fort Mac is synonymous with oil sands. Next up? Watch Grande Prairie, ground zero for the next wave of oil and gas extraction.

7. Lithium, Cobalt and Graphite Prices – Lithium-ion batteries continue to fall in price and increase in utility. That’s why we’re scaling up from watch batteries, to iPhones, to electric vehicles, to home storage units and beyond. But key battery ingredients are lithium, cobalt and graphite. Commodity prices are likely to rise. All energy systems trace their baggage back to natural resource extraction; just ask anyone in the fossil fuel business.

8. Follow the Money – Oil prices should firm up into 2017, leading to a modest rise in global upstream investment. But where will the money go? Hang the theoretical cost curves. Capital allocations by leading oil companies will be a real-time test of which jurisdictions, and which methods of oil extraction are economic at oil prices above $55/B.

9. Natural Gas Market Access – In Canada, oil pipelines (or the lack thereof) have dominated talk of “market access.” But natural gas reserves are more prolific than oil in Western Canada, and of higher potential value if transportation access and costs improve. West Coast LNG terminals won’t be harbouring tankers anytime soon. Following tolling deals on pipes like the TransCanada Mainline are going to be more meaningful in the near term.

10. Nuclear Fusion – The running joke for 60 years is that nuclear fusion for unlimited power generation is always 20 years away from reality. Time lines are still long, but technological advancements and a recent shift to focus on smaller scale, faster development could cut REM-sleep dreaming to five-year increments. Companies like Lockheed Martin think they’re not far from creating a compact sun on our planet.

Next year, 2017, will be no less remarkable than the calendar we are about to close. Whatever energy system your business fancies, fossil fuels or renewables, nobody should be in denial about how disruptive change can surprise the wisest of us all, whichever way we look.