Permian

The American oil market continues to be run by people with zero vision or forethought.
The price of oil in depressed by the Arabs and Russia having a pissing contest over market share. That has been going on for years and is showing no sign of abating. As long as they go at it, there will be a global surplus that will spook the markets into keeping the price down. The US shale fields have mostly become unprofitable at these prices. Dozens of companies have filed for bankruptcy, costing banks billions. But some companies are holding on, and even squeaking out small profits at the Permian basin in Texas. You would think that the companies still in the mix would be laying low, waiting for the market to balance itself out and the price to creep up to where a healthy profit can again be made. We know that oil has to rise in price. We are running out. New finds are not even close to meeting current demand. And existing fields are becoming more expensive to extract from.
Nope. More and more companies are flooding into Texas to bust their humps for a nickel. The latest is Blackstone Group who is investing $1.5 billion into the Permian fields. To MAYBE make five dollars a barrel. When your costs are fixed at $40 a barrel, why rush in? Oil WILL go up in price, and your costs remain flat. Producing a year from now will greatly increase profits. I just don't get it.

The Future

While everyone spends these days panicking over an increases of one or two drilling rigs, and potential OPEC production cuts. Lets look beyond that, to where production will be years down the road.
Humanity uses close to a hundred million barrels per day. More than thirty billion barrels over the course of a year. That is a whole lot of oil. So where will we get it from in the future? As wells and fields go dry we need to keep bringing new fields online to keep up production. And the petroleum industry spends billions a year in exploration. We have spent decades cataloging fields and building a global backlog of untapped fields. However that appears to be coming to an end, and fast. When the price of oil collapsed, so did exploration budgets. A 60% drop across the industry. And the effects of that are becoming apparent. In 2015 we only discovered 2.7 billion barrels of new reserves, a month’s worth and the lowest amount found in a year since 1947. This year is even worse. Just 700 million barrels by the end of July. Barely a week’s worth, found in seven months’ time. And with the price of oil remaining in the forties, budgets for next year are expected to be just as small.
So what does this mean going forward. There are no new super fields that will save us. Humanity will have to make due with what we have already found. Large aging fields. Small low yield fields. And a few large offshore fields that are technically very difficult to access. None of these options are cheap to produce. We may be in the midst of a glut, but something will give. For years now large projects have been shelved. Big offshore rigs cost a fortune and all new projects have been put on hold. Everyone is trying to get by with small horizontal wells. Those are fine for short term production, but are not a long term answer. They will give out and with the natural declines from the big fields, global production will plummet sharply in a short time. How long this will take will be hard to ascertain. A lot of people think the 2020's.

Iraq Getting Cheap

Iraq. The birthplace of civilization, and currently a smoking mess. After decades of war under Saddam, and another decade of civil war after he was deposed, ISIS is there still fighting away. All of that adds up to a constant stream of military expenditure and disruptions.
But that is fine, they could pay for it, because they have oil. A lot of oil. An estimated 10% of the remaining global reserves. Its why the US invaded both times. The oil has to flow to keep the world moving ahead. After Saddam fell and the country stabilized a little bit, oil companies came in to start reaping the profits. Iraq had contracts where the companies were paid based on how much production was brought online. That was fine, oil was worth a lot, and Iraq had plans to produce a lot. They originally had plans to be pumping over ten million barrels per day by 2020. That kind of fell apart when ISIS started their nonsense, but production has been rising and everyone was making money. That was until the price crash.
Iraqi oil contracts are paid out by the government after they sell the oil. So a lot of oil companies who spent years working old fields to increase they production were screwed over. In 2015 payouts to these companies significantly dropped or were withheld. The same is happening this year. the Iraqi government is currently pleading with the oil companies to increase drilling and production, saying that as more oil is sold, Iraq will have more money to pay them. This puts the petros in a bind. They want to get paid, but don’t want to be expending a lot of capital and resources when they are already having trouble collecting. And this spotty record of payment will keep companies away from developing new fields. Until the price of oil starts making some serious headway Iraq is in the same boat as Iran. A lot of oil, that just isn’t worth the trouble of getting at. 

The Current State Of 'Murrica

The weekly EIA data is out. The US added a two and a half million barrels to storage this past week. The markets saw that, did their thing and panicked. But let’s look at the numbers that really matter. The weekly field production numbers. After a huge 150K BPD spike in production last week, this week was a 50K drop. An almost 800k BPD drop from this time last year. And a 671k BPD decrease from the beginning of the year.
As much of a drop as this appears, it can get a lot worse. Since the beginning of the year four large oil platforms came online in the Gulf Of Mexico. Those were in the works for years and were funded back before the crash. They have boosted Gulf oil significantly. So the decline is being caused by the onshore fields. While rig counts are ticking up, and well efficiency is at its highest levels, there is only so much that can be done at $50 oil. Already the Eagle Ridge And Bakken shale formations are being abandoned. While there is still a huge amount of oil in those fields, most of it is not profitable to drill at these prices. All of the new US drilling is happening in the Permian basin in Texas. These wells are allegedly profitable at $40-$45 dollars. So at current oil process, they have to be just scraping by. The US will start running out of these cheap Permian deposits soon, and unless oil starts creeping back up to the seventy dollar range, drilling in the US will start tapering off again.

Talk Is Cheap

It is an amusing game that OPEC plays. When oil prices drop, a country or two makes rumblings about them all banding together to cut production. The markets celebrate, the price of oil rises, OPEC countries make tens of million more dollars before anyone realizes that no deal will happen, and the price drops down again. This has been going on since the price crash, and its amusing how much the markets still bite. This go around it is Iran with Russia making some slight lip service.

Oh silly day traders, when will you learn. Ignore what OPEC says, pay attention to what they do.

The Sauds Can Never Win

It is becoming increasingly apparent that while the Sauds were able to damage the US fracking industry in its price war, it was a Pyrrhic victory. The only losers are US banks.
When oil was holding steady at $100 per barrel and the US started to tap into their shale reserves, the banks went nuts. At that price of oil almost any well was profitable. Anyone could get a loan and the money ran free. People were drilling in previously unprofitable fields, and with horizontal drilling and hydraulic fracturing the wells were producing. It was a true free for all where there were almost no losers. Everyone was getting rich. And like everything that seemed too good to be true, it was. The US was adding millions of barrels per day to a stable market. This was delayed by the US adding to its strategic reserve, but once Cushing showed some signs of being at capacity, the market panicked and over corrected. Oil dropped to the twenties, and things started screeching to a halt. US rig counts plummeted as banks were no longer lending money to finance new drilling. All the fly by night companies were not able to operate with oil being that cheap, folded under their debts. A wave of bankruptcies flowed across the industry, and the lenders are the ones who took the hit. The US is left with the companies who are the most skilled and efficient, and can drill a well in record time. A core of skilled drillers who are profitable at $40 per barrel. And their knowledge and skills are trickling across the rest of the industry. Even with the current undervalued oil price, the US rig count is ticking up. I will take something drastic to get the US rig counts back over a thousand, but this is not a crippled industry. They were beaten down, but not broken. And the Sauds can not hurt them anymore. Despite what they say, Saudi Arabia is producing at max capacity. And the price of oil is creeping back up. As global production drops, the price of oil will keep increasing and more and more US shale fields will become profitable again. All the Sauds managed to do in their insane market share grab was destroy their own GDP and hurt some US bankers. All the while losing Saudi Arabia the important designation of global swing producer.

Uncompleted Wells

In May and June there was a lot of talk about uncompleted wells. This mythical amount of pre drilled wells that were only waiting for the prices to hit a certain dollar amount before they would all come online and flood the world anew with oil. Its pretty safe to say now that this was another industry boogey man. At the end of May, the price of WTI had risen to $50 per barrel. The invisible barrier that speculators pegged as the price required to complete all of those wells. We are now two and a half months past that point, we should be seeing all of that production coming online. Here is the weekly EIA US production numbers.

May 06                  8.80 mbd
May 13                  8.79 mbd
May 20                  8.77 mbd
May 27                  8.74 mbd
June 03                 8.74 mbd
June 10                 8.72 mbd
June 17                 8.68 mbd
June 24                 8.62 mbd
July 1                     8.43 mbd
July 8                     8.49 mbd
July 15                   8.49 mbd
July 22                   8.52 mbd
Aug 5                      8.45 mbd

There is no rise in production. Aside from a few weekly blips in July, US production is still trending downhill. But it may not be that simple. Maybe the flood of oil from completed wells has come online and is just hidden by the data. It takes about a month to complete a well after drilling. Assuming a lot of wells were being brought online near the beginning of June, we should have started to see production hitting the market in the past few weeks. And maybe we are. From May to June there was a 100,000 barrel per day drop, and from June to July There was a 300,000bpd drop. Yet July to August remained flat. There could have been a surge in shale production, but it was only enough to offset the current decline. Time will tell if that is the case. The US is still barely drilling, and if the backlog of uncompleted wells has been used up, then production in the months ahead will steeply drop. 

STRIPPERS!

Or stripper wells to be more specific.
In any well oil production will inevitably drop. Well what happens when production drops too much? Normally they are just sealed off and abandoned by the petro companies as they move on to newer, more productive fields. Without using any enhanced recovery techniques the vast majority of the oil is left remaining in the resevoir. In the last hundred odd years of US oil production, hundreds of thousands of abandoned wells have been accumulating. When the price of oil rose some enterprising people started looking at these old wells. And with some minimal work, they began producing again. These reclaimed fields are now referred to as stripper wells. The EIA designation of which is a well that produces no more than 15 barrels per day. That doesn't seem like a lot, but there are a lot if these wells operating. An estimated four hundred thousand. And these wells add up to about 10% of the US total production.
And like a lot of oil projects. These fields are in danger. With the price of oil still deflated, the minimal amount of enhanced recovery that these fields require is starting to become uneconomical. Most operators are very small, and getting any sort of bank loan for an oil project is difficult to obtain. Hopefully the oul price recovers, and the slow trickle from stripper fields will continue to drip on.

Rig Counts Explained

Every week all I see in endless panicking over rig counts. If the count moves up 10 rigs in a week the world will become flooded in oil if you listen to some people. But will it really? Not even close.
It takes about a month of 24/7 rig activity to actually drill the hole. Then another month to do the fracking and complete a well. And that is the best case scenario. Lets say the crew is really good, there are no break downs and it takes only a few weeks to assemble/disassemble a drilling rig and transport it to a new location. So a rig can drill about six wells a year. How much production would that bring online though? Thanks to the EIA we have access to that information. The Permian basin in Texas is currently the hot area for new drilling, and the average production per well is continually rising. It currently sits at about 500 barrels per day, per well. That is not very much at all. So in a year a rig would bring online maybe 3000 barrels per day. A proverbial drop in the bucket compared to the 100 million barrels per day currently being produced. Even taking into account the 464 total rigs that the US has in operation, that is only 1.4 million barrels a year of new production, not nearly enough to offset the declines of existing wells across the US. These shale fields also have a severe drop off in production, up to a 75% decline after the first year. And because there are currently no secondary recovery methods for horizontal wells, these drop offs will continue.
So when people get all excited about the fluctuation of a few dozen oil rigs, you can ignore their inane blather. You only need to get excited if the rig count starts creeping back up to be anywhere close to the 1600 that the US was running at the beginning of 2015. A single new oil rig will only add about 0.00003% to the global production total in the course of a year. No reason to panic at all.

Two Twenties

Oil is currently hovering around $40 a barrel. An absurdly low price. I have dropped more than forty bucks to feed my family lunch at Wendy's for christs sake.
We are now in the realm where almost no fracking in the US is profitable. The prime spots in the Texas Permian basin have around a $36 per barrel break even point.
A lot of countries and petro companies are auctioning off materials and drilling rights just to stay in the black.
Most OPEC countries are running a budget deficit.
Canada is losing money on its oil sands. They are only still going because that operation is too big to stop.
China has given up on maintaining domestic production, and letting that dwindle down as Arab countries lowball themselves to get their business.
And the US the only country who releases the only accurate and current data on inventory and production numbers dropped these bombshells this week. Gasoline inventories had a large drop, oil inventories dropped, and oil production remained flat.
And oil still hovers around $40 a barrel.

Brazil

While the dumpster fire that is Venezuela continues to burn, Brazil is poised to be the oil superpower of South America. However like a lot of the world they are handicapped by the current oil devaluation.

Brazil currently produces about three million barrels per day, mostly from the Campos basin. A shallow water offshore collection of fields located around Rio De Janeiro. These fields are maturing, but still hold an estimated eight billion barrels. This puts Brazil as an important oil producing country, but not a vital one. Where Brazil can vault into a global player is the pre salt layer. A huge amount of oil covered by a layer of salt. It is a massive offshore field that has produced from every exploratory well that has been drilled into it. People are salivating at the thought of bringing it online. Preliminary reports are that it has eight billion barrels of recoverable oil, but as its is fully explored that number will surely rise. Top end estimates are in the 35-50 billion barrel range (70-100 NFL units worth of oil).

There is just one teeny problem. This oil is not exactly easy to get at. The field is about 250km offshore. In 2000m deep water. The salt layer is under 2000m of rock. And the salt layer is about 2000m thick. So the oil is only 6km below the surface, in the depths of the ocean. Not the easiest thing to get to. And that’s the rub. Brazil needs that oil to help fix their economy. But they don’t have the capital to develop the field. So they are doing the next best thing. Auctioning off parcels of the field to foreign companies. The first of which was just sold for 2.5 billion to Norway. Once oil rebounds to above $100 USD, there will be drilling all over that salt patch, and sweet crude will flow free. Until that point it will just sit out there undeveloped. Mocking Brazil, as the countries’ Olympic debts mount.

Why Is Russia Pumping So Hard

Russia is producing oil at record levels.
Their most productive fields are all old and have been exploited since the Soviet era. With modern techniques they were revived became as productive as they were in their hey day. But even with advanced techniques those fields are entering into decline again. With the price of oil severely depressed, why increase production? Politics. Or more specifically Putin. All of the heads of the Russian oil companies are his cronies, and they funnel money to him. Everyone is supremely rich. And that may not last. As much as he tries, Putin can not stay in power forever. If he goes, there might be real change in Russia. The oil barons could be cast out. So what better way to protect your future than to build up as large a nest egg as possible. The hell with Russia's economy in the future. Get rich now, let the peasants deal with future problems.