VanLoh coined the phrase, "the heart of the watermelon has been eaten" several years ago. He was referring to the quality of tight oil reserves remaining in the U.S. He was right then and is right about this now; even with an influx of CAPEX straight from heaven the U.S. tight oil sector is done growing and its unlikely even the Permian can carry it anymore.
The EIA and other staunch cheerleaders for the sector predicted 500,000 BOPD of tight oil growth in 2024, based on the same "efficiences" that occured in 2023...Wells Fargo just announced thru 3Q24 U.S. tight oil has only grown 100,000 BOPD. By year end we look for that to be considerably less. Growth will be be in the mid 5 figures, at best. The Bakken and Eagle Ford are falling and I look for little to no growth from the Permian 4Q2024. We've gone to great lengths to show our readers what created the illusion of higher productivity per drilled well in 2023 and why it was NOT going to carry forward into 2024 and beyond. It has not.
At current oil and associated gas prices the U.S. tight oil sector cannot maintain current production levels, pay dividends to investors, service and/or de-leverage long term debt, which is still growing, and cannot prepare financially for its enourmous retirement (P,A &D) costs coming in the future. Real "breakeven" prices required for the sector to pay all of it's debt and plug all its wells is closer to $85 a barrel and $5 per MMBTU, sustained for a prolong period.
Drill Baby, Drill
"Given that oil is priced on an international market, increased domestic oil production will not do much to lower prices for U.S. consumers, as any gains in U.S. production will be spread across the international market. Greater reliance on domestic oil resources in substitution for imports will reduce the vulnerability of the economy to oil supply disruptions, although not by much."
The Council On Foreign Relations
In a recent post on Forum Stuff we estimated that for Mr. Trump's campaign promises of 'reducing prices at the pump by 50%' to occur, the U.S. shale sector would have to ramp up production 4.5 MM BOPD more than its already producing, effectively driving the price of WTI down to $38 per barrel and gasoline prices $1.75. It cannot physically be done, regardless of the amount of money thrown at it. We therefore agree with Mr. VanLoh and hold his take on our oily future in high regard.
Well done to our occassional looker-inner, Christine Guerrero, on her work on water coming OUT of the Permian. Thats big work !
This is a tipping point for the Permian, water. Texas, of course, can't accept that because they think when it comes to the oil and gas industry, NOTHING is a road block. But they are wrong.
I should write about the valuable groundwater going IN to the Permian Basin that everybody ignores. The amount of water to frac 5.000 wells a year in an arid desert is staggering, at a time when all of Texas is running out of water. Its usable water too. Don't buy the lies that it is is not usable water and DO NOT buy the lies that 60% of produced water is recycled. Its less than 25%.
Its the sacrifice zone, West Texas. All of that groundwater, all that produced water causing earthquakes, all that flaring....all for exports to foreign countries. 75% or more of all Permian tight oil production goes overseas, including China. The drill baby drill BS to cut gasoline/energy costs here in the U.S. by half, is a lie. It will all be exported.
@Christine Guerrero
Hi Mike,
I understand tight oil in texas,new Mexico is getting low.
What about tight oil in Illinois basin? I think noble energy tried some in Indiana. Also Kentucky i think?
Also how about horizontal drilling of old vertical wells in legacy sites?
Regards
An observation, not a rant:
There is nothing "nice" about a flare. Its a valuable American natural resource being wasted.
This Twit, sorry Tweet, is the mindset of the American data-sell sector servicing the investment community, the finance community, private equity firms and everybody else in America trying to make a buck from shale oil and shale gas. Flaring is a necessary evil; gas is a bi-product and besides, America doesn't do anything differently than Siberia or Nigeria.
One more rant.
The lower the price of oil goes, the deeper the bullshit regarding breakeven prices for HZ tight oil development. Its like the Sunday always following Saturday.
There is generally acceptable accounting practices (GAPP) in the oil and natural gas business; the shale oil sector lives and breathes using NON-GAPP practices. I like to use what I call RLAP for real life accounting practices, the kind you would use if you were working out a check book with your own money.
The price of WTI, WTI Cushing, WTI Houston and other postings applicable to the Permian Basin have been steady as she goes around $70 for a number of months. At $70 on oilprice.com a HZ tight oil operator is getting $66 at the well head, thats pretty standard.
Working interest owners in a HZ well don't get the benefit of gross barrels you see on Novi, or Enverus; they pay all the bills to drill, complete and produced a well for typically 75-77.5% of the barrels produced, the other 25-22.5% of barrels produced goes free to royalty and overriding royalty owners. So when doing well economic estimates on per incremental BO basis we start the breakeven determination using a net barrel to the working interest of $51.
State severance tax and property tax to the 100% working interest is 7%. So we're down to $47.50 per BO.
I get to see lease operating statements occassionaly from Permian wells. I determine increamental lift costs per BO, the real cost of getting the stuff out the ground, extrapolated over two years because that includes surface maintenace of facilities and downhole mainteance occure when wells have to be fixed. Its a deceptive trick to do otherwise. I use 2.75 per BW and 4 BW per 1 BO; that includes disposal fees and transportation costs. There are chemical costs, liability insurance costs, daily well management costs by a gauger, electricity costs, etc. etc. Bottom line $12 per BO: net per BO is now $35.50.
Corporate overhead, depending on the company, is $3.50 per incremental BO; the cost of doing business including salaries, rents, paper clips, copy paper, accounting and legal fees, everything gets paid by the oil a company produces. Now we're at $32.00.
Interest expense on debt, and everybody has debt, some cheap debt, some very expensive debt but for 30 companies I pay attention to in the Permian that number is $4 per BO. Now we're down to $28 per BO, net, after all expenses.
Somewhere in this mess you should discount your net back BO for the dividends you now have to pay investors.
You can do the rest from here. Take $28 per BO net back and divide that into $8MM well costs to determine how many barrels of oil from a new well you have to produce just to reach payout. Look at see how long it takes a typical Midland Basin well to produce 285,000 BO and how much it might produce in its lifetime to estimate total return on investment, all things being equal, to the end of the well's life. You can mess with gas and gas liquids all you want; in today's world of over production gas is worth nada.
If you would make an invesment of $8MM to earn a total of $12.5 MM over a period of 15 years you are way tougher than I am. CD's at the bank earn more interest than that...and you get your money back in the end. No so with a HZ sale oil well. You have to plug it. And, hold on to your knickers, you also have to actually pay the principle on all that long term debt back. In lots of company examples that long term debt exceeds several billions of dollars. If you think you do all that earning a 50% return on investment over 15 year well life, good luck. I use to do this stuff for a living and I would not touch it with a long stick.
Breaking even is hardly the point, is it? If you have debt, and have not set aside retirement costs of all your well inventory, you need to be making way more than a 4.4% annual return on an $8 million investment. There are kinds of ways to make those numbers look better than they are, and the shale sector does it better than anyone, but my numbers are real. If you're getting paid $66 per BO at the well head, you earning $28 per BO after all expenses, period. Hopefully. So yeah, your making money, but you are not making near enough.
There is not a public or private tight oil company in the Permian Basin, or anwhere for that matter, that does not feel penned up like a goat. They pray everynight somebody like Exxon, or BP, or Shell, or Conoco will buy them out, take away all that debt and all that plugging liability.
Mike,
I am not going to mess with your thread in any way. There is nothing to fault in your analysis and very soon the big can of worms will open up for all to see.
You, as always, have been the first to highlight that it is not just well P,A&D's that is going to bankrupt each state producing LTO, but also the above ground facilities, especially the NORM contaminated facilities which is comprehension of most people, especially dumb politicians and your favourite Analysts. Well done sir it must have taken some time to write.
I am taking bets on this.
It will not grow for the simple, real fact of lag time between reported rig counts increasing to actual reported first production into the tanks, processed and reported to the general public by the corresponding State regulatory agency.
If Shale R Us, Inc. thinks, hot dog, we got some gas takeaway now, and adds a rig, it will be March or April of 2025 before that new production comes to fruition. This is 8th grade logic.
There are NO HZ tight oil wells in the Permian Basin shut in, or choked back, waiting on more gas takeaway from the Matterhorn being finished. This is stupid reporting by East Daley.
Bet me?
In the Dallas Fed energy survey released today, some comments from oil companies are significant.
https://www.dallasfed.org/research/surveys/des/2024/2403#tab-questions
Special Questions Comments
Exploration and Production (E&P) Companies
We hold the hypothesis that the world is rapidly running out of $60 barrels and is on track to hit $100 in the next five years. OPEC is being punished in the short term for giving up market share. To us, this looks like a smart “oil storage” policy. U.S. shale oil will deteriorate in a manner similar to how Hemingway declared bankruptcy: “Gradually, and then suddenly.” Why do you think very sophisticated companies, worth tens of billions of dollars, are selling out to Big Oil for equity despite having a market-leading presence in the Permian Basin?
Saw this - Van Loh has been very successful in this business over the years and maybe his words will carry some weight with those who continue to see that hockey stick chart in their dreams. Ironically he's talking his book in a way. He's raising another fund to invest in energy, most likely because he believes as we do that oil and later gas prices are going to go much higher. Good news for investors, not so much for a world that's fallen in love with "affordable, abundant" energy.
I also expect surprised comments around year end as it becomes obvious that the EIA has been too optimistic about production. Those machines only learn what their teachers feed them. Even the XOM CEO made the comment that they were increasing "recovery rates". Didn't say, "increasing ultimate recoveries". Getting it out of the ground faster isn't helping.
Operational losses are not the same as long term debt.
The tight oil and tight gas business actually got started in 2005 (gas) and oil, in earnest, in 2008. It lost, at a minimum, $300 billion dollars, see tight oil debt up hole. Bloomberg predicted the shale sector would be able to get out of debt by 2024, meaning it could earn back the $300 B it lost.
So far, not so good. Inflationary drilling costs killed the sector in 2022 and it only made $79B, not $200B predicted (Rystad, Bloomberg). In 2023 the sector made $37B total (Rystad, Bloomberg).
So, for all the horse shit, the shale phenomena is still not in the black. Its still a money loser, with exceptions of course, but looking at the entire resource play, its not profitable. Day traders like to confuse free cash flow with profit, or dividends with profit, but that is not correct.
Nothing is "free" in the oil and gas business until you are completely out of debt and you have all of your plugging liabilities set aside.
Federal tax loss carryforwards from all those years of loosing money is staggering. PP&E can also reduce taxable income...long story short, the U.S. tight oil sector as a whole, with minor exceptions (EOG?) has NEVER paid federal income tax and likely never will.
Above is from a 10Q, 3Q24 of a major pure tight oil player in the Permian Basin. All shale oil companies report "effective" income taxes had they been actually paid and were not offest by tax loss carryfowards. It paints prettier picture. Tax loss carryforwards change hands in mergers and acquistions and can be carried forward year to year up to 80%, I believe. Please note the category description, provisions for benefits from not paying taxes.
Bottom line: I was an oil and gas producer in Texas for over 50 years and paid federal income taxes every year, from year one. I always tried to reduce taxable income thru intangible drilling cost deductions and by drilling wells to benefit therefrom, but some years my tax liability was very, very painful. I always paid those taxes, proudly. I considered it, American.
The U.S. tight oil sector (and likely not the shale gas sector either) does not pay federal income taxes. Research it. I ain't lying.
When I occassionaly rant about the fact that 1.5 billion barrels of U.S, crude oil is exported to foreign coutries every year, below costs, this is partially what I mean by below costs. The Netherlands, for instance, imports Permian Basin tight oil without the burden of the exporter having paid taxes on it, nor will the cost of that barrel paid by the importer cover long term debt owned by the exporter and certainly not the cost of retirement costs. They don't give a shit how much groundwater is left in Ector County, or how big the cracks in the ground there are in Martin County in Rotterdam, promise.
I believe the U.S currently has over 173,000 HZ tight oil wells to plug, abandoned and completely decommision, not only oringial drill sites but all that flowline in the ground, water treatment facilities, compression stations, above ground storage, pipelines, pipeline processing facilities, etc. etc. Estimated costs: $21.5 billion for PA&D of wells and hell, I don't know, about $10B for all the infrastructure to support it? You can't just walk away from that stuff and let it rust away. Some of that steel is no resuable, some of it is contaminated by natural occurring radioactve materials in the ground (NORM). If it cannot be used for the purpose in which it was built, how do you get rid of that stuff?
Last guess I had based on SEC filings, only 30% of this well plugging liability is actually set aside in bank accounts and that only by the biggest of the big producers. You cannot even begin to believe the massive, massive cleanup that will have to occur someday in, for instance, West Texas.
Who will pay the rest, do you suppose?
This Rystad chart is of just 40 shale oil producers in the U.S and represents 150 billion dollars of long term debt. Long term shale debt is more than that by 40-50%, I believe, with the next 40 companies on the tight oil sector list and God knows how much private debt.
This chart is three years old and since then over $325 B of mergers and acquistions have occured. Debt was swapped, shareholder equity diluted.
Haynes and Boone have $89 B of upstream tight oil debt already written down by bankruptcy. Googe it.
Bonds are a big deal in the sector today because nobody else will loan it money; those are impossible to track. Debt is going up, not down as many projected. Many pundits over the years have estimated that nearly $500 B of debt and shareholder equity has disappeared in the tight oil and gas sector; I have no idea how much has been lost in the past but current debt I place somewhere between 235 and 285 billion dollars.
THAT DEBT HAS TO BE PAID BACK. Judge the shale revolution only when it has.