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Discussion: (16 comments)

  1. Oil is a finite source so enjoy the boom while it last.When the last drop of oil is squeezed out of the earth.and it will the party is over for all the oil dependent states.Can you say Texas sales tax?

    1. sorry but for over a 100 years there have been individuals like yourself saying that oil is finite. But new technologies have over that time released oil and gas that was not accessible 10, 20 or 30 years ago.
      what would you replace oil and gas with? and remember that both are used as not fuel but feed stocks for various manufacturing processes

      1. sorry but for over a 100 years there have been individuals like yourself saying that oil is finite. But new technologies have over that time released oil and gas that was not accessible 10, 20 or 30 years ago.

        Oil is finite. And the debate is not about running out but when does the annual production rate turn down.

        what would you replace oil and gas with? and remember that both are used as not fuel but feed stocks for various manufacturing processes

        I would let the markets figure it out by getting government out of the way. I certainly would not be ignoring the capital destruction that goes on in the solar, wind, biofuel, or shale sectors.

        1. Oil is finite. And the debate is not about running out but when does the annual production rate turn down“…

          It doesn’t really matter to the 4000 get work today…

          I would let the markets figure it out by getting government out of the way“…

          Absolutely! There’s always a market for the better mouse trap…

          1. It doesn’t really matter to the 4000 get work today…

            And it shouldn’t. As long as some idiot investors and lenders are willing to finance money losing operations they should just say thank you and do what they must.

            Absolutely! There’s always a market for the better mouse trap…

            Sadly, the protectionists on both the left and right seem to miss this point.

  2. First, the decline rates are quite steep. Several sources have used the production well data to conclude that the well production declines about 80 to 90 percent in the first two years. For the Bakken, which you have been hyping up for quite some time, we see that after five years of production the average well stands around 35 barrels per day. It reaches stripper status (10 barrels per day) in about seven years. While the Eagle Ford activity is more recent the data indicates that the wells could reach stripper well status in around four to five years.

    Given the $7.5 million drilling cost for your typical Eagle Ford well the low EURs indicate an inability to produce a positive return from the average well.

    Second, the amount of oil that can be produced is determined by the number of possible drilling locations. For the Bakken and Eagle Ford formations the EIA’s total number is only around three times the current operating well counts. I have stated that some of the analysis that I have looked at indicates that the EIA is too optimistic and the number of possible locations is closer to twice the current operating well counts for the two areas. But even if we accept the EIA estimates regarding available well locations, we can project tight oil production from those two formations to grow to a peak of around 2.2 million barrels per day some time in 2016. At that point we will see a replay of the Elm Coulee profile as production collapses. Between the two plays we should get around 5 billion barrels but no profit will be made by the industry. That is 8 months of use produced by investing more money than what could have been spent to purchase that amount of oil from foreign suppliers.

    1. joe dagostino

      I’m pretty certain, unlike Solyndra, the accounts have shown they WILL make money. That’s how private enterprise works.

      1. juandos

        I’m pretty certain, unlike Solyndra, the accounts have shown they WILL make money“…

        Speaking of Solyndra, that reminds me: SoloPower: Another Department of Energy “Junk Loan” Teetering with Over $250 Million of Taxpayer Money

      2. I’m pretty certain, unlike Solyndra, the accounts have shown they WILL make money. That’s how private enterprise works.

        That has not been the way it has worked so far. The shale industry has turned out to be a lot like the internet sector was in the 1990s. A lot of money got spent because financing was available and negative cash flows were accepted by investors. If you look at the 10-Ks filed with the SEC you will see debt exploding and large funding gaps that have to be made up by more debt, equity dilution, or asset sales. Solyndra was a bad idea justified by hype. I see shale gas and oil to be very similar outside of a few small core areas that can be quite profitable for the producers that stick to them.

  3. If folks think the federal government and state government estimates for number of drilling locations in the Bakken are exaggerated, they should look at the number of estimates provided by operators and independent observers.

    When the Bakken boom began, the “word on the street” was one well on each section and that’s pretty much how leases were valued. The norm is now 14 wells in a 2-section spacing unit n the better Bakken, 8 wells in a 2-section spacing unit everywhere else, except for some areas on the edge that will have 4 wells per spacing unit. [Native Americans in North Dakota are now suing each other because they feel their minerals were sold at too low a value; they also were under mistaken impression there would only be one well per section. The Berthold Indian Reservation has one of the sweet spots in the Bakken, and yesterday it was noted that one operator plans to put in 22 Bakken wells in one spacing unit.]

    The original recovery rate was estimated to be about 3% in the Bakken; it was clear that the recovery was much closer to 6%, maybe 8% now. That is with primary production. Ten, twenty, thirty years following initial primary production, operators move to secondary production, where recovery rates then move to 22% (per recent corporate presentation).

    They have been successfully drilling for oil in Texas since the 19th century, but the Spindletop/Beaumont boom started in 1901. A lot of folks — perhaps three generations of families — have been employed in the oil industry in Texas over the last 112 years.

    I would assume the “new” Eagle Ford will provide jobs for folks for another 100 years. The “old” fields are still very active, and, in fact, getting a new lease on life through new technology. An academic “basic analysis” of the Bakken, back in 2010 (or 2008, I forget), said that primary production in the Bakken would continue through 2100: active drilling for 20 years (through 2030) and continued production through 2100.

    Continental Resources, the most optimistic operator among the major players in the Bakken, has consistently been forced to raise its estimates of potential in the Bakken, meeting or exceeding all forecasts of the past.

    A sales tax in Texas may be coming but it won’t have anything to do with the success/failure of the oil industry. The great news is that the sales tax won’t happen during my investing lifetime.

    Oh, one last thing: North Dakota income per capita is now #1 (not counting the five outliers in the northeast: New York, Connecticut, Massachusetts, New Jersey, and the recession-immune state, the federal government’s real home: Maryland).

    1. If folks think the federal government and state government estimates for number of drilling locations in the Bakken are exaggerated, they should look at the number of estimates provided by operators and independent observers.

      But the operators and independent observers don’t agree. For example, the operators use about twice the average value when estimating their ultimate recovery rates than the EIA. But many of the independent analysts who look at the actual production data come up with EURs that are lower than both. There is clearly a credibility problem because if the operator claims were true the balance sheet would not be exploding with debt and there would be no funding gaps that have to be closed by selling off assets.

    2. The original recovery rate was estimated to be about 3% in the Bakken; it was clear that the recovery was much closer to 6%, maybe 8% now. That is with primary production. Ten, twenty, thirty years following initial primary production, operators move to secondary production, where recovery rates then move to 22% (per recent corporate presentation).

      I don’t know about you but companies that are talking up increased recovery rates while still still losing their shirts and selling off assets at a fraction of what is on the balance sheet are not very convincing. I have stated many times on this site and Mark’s previous blog that I am more than willing to change my mind when someone could show that the shale companies can turn a real economic profit from their operations. I have yet to see that.

      I would assume the “new” Eagle Ford will provide jobs for folks for another 100 years. The “old” fields are still very active, and, in fact, getting a new lease on life through new technology. An academic “basic analysis” of the Bakken, back in 2010 (or 2008, I forget), said that primary production in the Bakken would continue through 2100: active drilling for 20 years (through 2030) and continued production through 2100.

      Eagle Ford wells deplete rapidly. You are looking at stripper status in just a few years and inadequate production to pay for all of the costs associated with the well. For you to be correct the shale wells have to behave much like the conventional wells. But they don’t, which is why nobody in their right mind would risk their own capital on shale outside of a few very small core areas.

      Continental Resources, the most optimistic operator among the major players in the Bakken, has consistently been forced to raise its estimates of potential in the Bakken, meeting or exceeding all forecasts of the past.

      It is obvious from the production data that CLR is overstating its EURs. This conclusion makes a great deal of sense given the actual production data and the fact that the company has to keep borrowing more and more to finance its operations. Go look at the 10-K filings and explain to me why such a great play cannot self finance. It is not as if the company has not been operating in the space long enough or that the per well production is distributed evenly over a long period of time. Their wells are down by 90% from the IP values by the end of the second year of operation. That means that most of the money that could be made from the production of each well has already flowed into their bank accounts. But investors are still waiting for a payoff and have yet to see a dividend even though management has extracted billions and has enjoyed a very nice salary and bonus structure.

    3. Texas has no income tax but has a sales tax, please get that straight. The sales tax is 8.5% if you include the local part. The state constitution bans an income tax.

  4. over 80 years ago the East Texas Giant was discovered. since that time over 5 billion barrels of oil have bee produced. well above the original estimates
    http://en.wikipedia.org/wiki/East_Texas_Oil_Field
    http://www.tshaonline.org/handbook/online/articles/doe01

    or look to the Corsicana field which was discovered accidentally in 1894 by 1993 “On January 1, 1993, the first commercial Texas field reported annual production of 196,645 barrels of oil and 3,091,000 cubic feet of casinghead gas”
    http://www.tshaonline.org/handbook/online/articles/doc03
    http://moneyinoil.com/firstoil.html

    1. over 80 years ago the East Texas Giant was discovered. since that time over 5 billion barrels of oil have bee produced. well above the original estimates

      You are talking about a field where expensive, but relatively cheap techniques compared to fracking, could be used for enhanced recovery. Shale is not the same and there is no profit to be made by drilling $7-$10 million wells that go to stripper status in four years. You have to look at shale based on the real world production data that shows how shale wells behave and calculate the real world economics. I have been reading about the promise of shale my whole life. Yet, I have yet to see a commercial process that could produce both profit and material volume for the operators.

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