The End of Common Sense

This Novi chart was just hatched and sent to me by a buddy. It is lower 48 onshore conventional oil production from the United States by year, 2014 to year 2024. You can make it larger by clicking the thingy, upper right hand corner.

Prior to 2010 conventional production in the U.S. had an annual decline rate of something in the order of 3.25% that changed periodically with oil price increases and decreases. In 2011 the price of West Texas Intermediate began rising, by 2012-2013 it had spiked to $141 and was averaging consistently for several years in the mid $90's. Vertical rig counts increased and that 3.25% annual decline rate was arrested; conventional production rose by several hundred thousand BOPD before plateauing Ocotober 2013. You need to remember this conventional oil was low to mid-gravity, much of it had higher sulfur content than light tight oil from shale wells, was paid for, as in all profitable, and every barrel of it was absorbed in America by American refineries. This was the good oil America needed.

Unfortunately the shale oil gig came along in 2009 and with other people's money LTO grew from nada to 4.3 MM BOPD in no time, was dumped on an otherwise balanced world oil market and by mid-2014 the price of oil fell to the mid $60's, accordingly. OPEC got the blame for the price collapse but this chart, below, shows clearly it had been reducing its production prior to 2014 trying to keep oil prices from falling. Whatever OPEC was doing in that regard, the U.S was doing just the opposite.

So in early 2015 OPEC said screw that shit, we need to teach these shale oil boys a lesson, and raised its production levels. Prices fell to the low $50's, even the $40's. The American shale industry cried foul. It felt OPEC should have cut, given up market share, all for American shale oil.

By mid 2016 OPEC had second thoughts about its own revenue streams and starting cutting production again; prices went back up into the mid $90's and the U.S. shale sector went ape shit, again, with other people's money, and over the next six years increased its production another 4.5 MM BOPD. All on credit. And once again, ate into OPEC's market share. This all corresponded nicely with the lifting of the export ban in 2016 and every BO of U.S. shale oil growth beginning mid 2016 was exported to foreign countries.

Today the U.S, shale oil sector is draining itself as fast as possible, well productivity is falling, associated gas now represents about 45% of the production stream from a shale oil well, is mostly flared, debt is increasing again and both oil and gas prices are falling from U.S overproduction. Its lost somewhere between $350-$500B dollars since inception and still has long term debt in excess of $150B. There is really NOBODY in charge of an out of control sector of the U.S. oil industry in desperate need of money to stay afloat. Regulatory agencies normally in charge of sanity, like the Texas Railroad Commission, or on the take with campaign funds and picking their nose.

The current Prez wants to drill baby drill and lower the price of oil to $50. LTO exports average 4.3 MM BOPD and there is $400 billion of LNG exports built, about to be built and trying to get permitted to export LNG. OPEC has lost market share and you decide for yourself if its pissed about U.S. flooding the oil market using borrowed money. Its all so stupid somebody show write a book about it.

Lost is this U.S. shale oil/ OPEC pissing match, and failure to manage, American conventional oil, including in the Gulf of Mexico, starting declining and never recovered. Sixty (59%) of conventional oil production, the good stuff, the stuff that stayed in America, has been lost. Capital dried up in favor of easy, low risk shale oil. Shale oil drove leasehold costs up for the conventional oil industry in America by 1000% (Aubrey was paying $5,000 an acre and 25% RI) and drilling and completion costs more than doubled between 2012 and 2022. Some 400,000 wells have been abandoned since 2014 in America's oilfields and are currently inactive, shut in or orphaned and awaiting tax payer money to plug. Tens of thousands of men and women lost their jobs.

On a very personal level I blame the Texas Railroad Commission Commissioners for the entire shit show. There are four of them to blame the past 15 years and I will remember.

The entire shale oil phenomena occured on the back of debt and the sector, in spite of the dung heap about free cash flow, to the contrary is not in the black yet. Public shale oil companies are borrowing money to pay investor dividends. Without other people's money shale oil can only support 400 rigs in all shale oil basins. Its drilled its good stuff, for the sake of over 10 billion barrels of exports to foreign countries and its got nearly 160,000 HZ wells to plug and abandoned in the next decade. In a few more years American shale oil is set to fall off a cliff.