SAME SONG, OIL VERSE? - Platts article.

Shale oil drillers should heed lessons of shale gas: Raymond James analyst

Washington (Platts)--16Jul2012/344 pm EDT/1944 GMT

Now that shale oil producers are replicating the efficiency and effectiveness many showed getting natural gas from rock, will they know when to stop, or will they drive West Texas Intermediate to unprofitable lows as they have done for gas?

Raymond James analyst John Freeman thinks it may be another case of "drill baby drill," with little attention to the market's price signals.

But he points out in a note to clients Monday that his analysis shows that 18 of 20 shale oil plays break even or make 10% profit even at prices below his forecast for West Texas Intermediate to reach $65/b by 2013.

"Plain and simple, E&P producers have become too good at extracting oil and gas" Freeman said. "On the back of seemingly constant improvements in drilling efficiency and well productivity, we must ask ourselves, have we 'drill, baby, drilled' ourselves a little too deep?"

He acknowledges that producers do not live in world driven solely by price: they have pipeline commitments, acreage to hold by production and efficiency considerations that seem to dictate drilling through price troughs.

Nonetheless, oil should not shrug off the lessons of shale gas, he said.

"Natural gas prices have traded below $6/Mcf for more than three years -- and appear to be mired at sub-$4/Mcf levels for another three years," Freeman wrote. "As we now turn our sights to the remarkable surge in domestic oil supply, we must ask ourselves, how low do prices need to go in order to really slow down drilling?"

Of the 20 shale oil plays Freeman looked at (he excluded the Utica and the Tuscaloosa Marine Shale for lack of data), only Oklahoma's Cana Woodford rich gas shale and the Cleveland-Tonkowa in the Texas Panhandle and Oklahoma don't break even at $65/b WTI, although they do at current prices.

The other 18 earn even some minimal return at $65/b WTI, and some, notably South Texas' Eagle Ford oil and condensate shales, earn quite a bit, breaking even at under $50/b WTI.

But the Cushing price is rarely the only consideration. "As prices start to hover at levels where rigs should get 'whacked,' E&Ps are more prone to ride out the storm for what could be perceived as a temporary price drop rather than risk losing efficiencies by dropping a rig and cancelling an already trained completion crew," Freeman said.

"Hedges aren't set in place to protect cash flow from wells that are brought online throughout the year, but rather to stabilize the cash flow of existing production, which provides more wiggle room for capital expenditure and existing drilling plans even when things get dicey," Freeman added. "Lastly, and this should be of little surprise, drilling to hold leases does still exist.

"Ultimately, it remains to be seen whether the industry has learned its lesson from the gas-drilling frenzy, but we're not counting on it," Freeman concluded. "So, while we might not make many Facebook friends in the energy space [with his $65/b call], at least we still have Twitter. #WeWarnedYou."

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Permalink Reply by w.r. frank on July 16, 2012 at 12:24

As long as US imports 50% of its daily oil requirements, and the Brent/WTI spread if $15/bbl, I dont see what the problem is for increasing oil shale production for the foreseeable future. NGL might be another thing.

Less B?

Permalink Reply by dbob on July 16, 2012 at 13:00

Frank - The production cost of some of the oil in the middle east is something along the lines of $10/bbl. Figure in transport costs, and that oil costs something like $15/bbl.  The countries in that region that depend on the currency from foreign exchange to keep the wheels greased, and for the most part need to make money in order to stay stable.  Particularly if the world wide economy is not strong, a lot of new U.S. production coming online has a potential to push prices lower - and the folks in the mid-east have to keep selling to keep their economies going.  

Permalink Reply by Skip Peel - Mineral Consultant on July 16, 2012 at 13:18

There's also the question of refinery capacity and preference for grades of crude.  Anticipating future supply of imported heavy crude some refiners made facility upgrades to handle those requirements.  How they can deal with increasing supplies of lighter domestic crude in the short term may be a challenge.  Then there is delivery.  Crude that can not find transport to matching refiners has been a problem and may remain so for some time. 

Some exploration prospects may be affected by depressed crude prices if the perception is for an extended period of time for prices below the target particularly if those companies have tight credit constraints and cash flows that are limited by depressed natural gas prices.

Permalink Reply by GoshDarn on July 16, 2012 at 13:44

dbob:

Yep, it seems that a number of analysts are starting to finally get a whiff of where oil might be headed.  And, y'know, I've been on that particular page for a good while now.

So I'm glad to see that there are others (who are running numbers and) who are extrapolating into the same conclusion.

Finally, per a sidebar note:  Was told that condensates are the easiest to refine.

Permalink Reply by dbob on July 16, 2012 at 14:36

GoshDarn

The only problem with my recognizing the potential for a problem is my inability to do anything  about it, short of going out and buying a Hummer.   I'm along for the ride.

Permalink Reply by adubu on July 16, 2012 at 15:36

GD--yep--- condensates is the lightest of crude --it's like fine wine-- you can almost run it in your car without refining it.  Also on another note Maybe We don't need the TC Pipeline-- can just use our own oil-- since crude is gobal commodite price will be maintant on the high side of 70-80 for many years to come except for occasion spike and decline for short periods of time. I doubt it will end up in a Secular market like Coal is entering presently. dbob get you a Hummer and convert it run on CNG

Permalink Reply by dbob on July 16, 2012 at 15:42

Adabu,  

If the world economy doesn't get better, I don't see a floor at 70 - too many people, both foreign and domestic, need the cash flow.

Permalink Reply by adubu on July 16, 2012 at 16:12

dbob-- don't have that good of cyrstal ball and you are correct it will go below 70 maybe back to $10 as it did I beleive in 1999. As I said will have many spikes up and down over next 30 years are more each short time span. Your prediction as good as any and all can show data to support opinion.

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