Friday, February 6, 2015
Tuesday, February 3, 2015
From 'The X-Files' to shale, skeptic Berman wants to believe
Please visit my new website artberman.com
Edward Klump, E&E reporter
EnergyWire: Tuesday, February 3, 2015
HOUSTON -- As he ponders the state of the U.S. oil and gas industry, Art Berman is reminded of "The X-Files."
Maybe, Berman said, the message on a poster in Fox Mulder's office is key: "I Want to Believe."
Mulder was a believer in the paranormal as a fictional FBI agent on "The X-Files" TV show, which rose to prominence in the 1990s. Today, the tug to believe is widespread when it comes to U.S. shale, Berman said.
"I want to believe," Berman said during a recent interview in his office near this city's famous Galleria shopping district. "We all want to believe. And I get it. I really do.
"But is that really a smart way to venture out into the world of international politics, if not warfare and economic competition and diplomacy? I don't think so."
Berman, 64, has become something of a household name in energy circles over the past decade as he crunches well data and challenges conventional wisdom about how much -- and at what cost -- natural gas and oil should be expected to come from U.S. shale formations.
While some in the industry have criticized Berman's conclusions, the geologist still studies tight oil and gas plays while continuing his day job as director at Labyrinth Consulting Services Inc., which does work for energy clients.
Berman speaks with a directness and reliance on numbers that reflect his devotion to a rational approach to solving problems and attacking questions. He likes to inject references to the past -- "history doesn't predict the future, but it's unfortunately all we've got," he said -- to make a point about fluctuations in commodity prices or the role of petroleum in World War II.
Berman said the excitement around U.S. energy is natural to understand amid a narrative that the country's outlook has been reinvented through tenacity, belief in itself and technological ingenuity.
"However, let's get a grip on this thing," he said. "Let's put it in perspective."
In fact, he said, a number of countries have much bigger oil reserves than the United States -- and it's important to remember that current production isn't the same as proved reserves, which reflect what's expected to be recovered commercially at a certain price.
"People get confused because we're producing a ton of oil right now," he said. "People just simply don't get that you might be able to ... out-produce all of your competitors without necessarily having any staying power.
"And that's exactly what I see."
Berman's views and analyses on oil and gas trends can be found at a website called the Petroleum Truth Report.
A 'fairly minor player'
A post from Jan. 25 declares, "Tight Oil Production Will Fade Quickly: The Truth About Rig Counts." An entry from Jan. 18 is titled "Dumb and Dumber: U.S. Crude Oil Export." It tackles proved oil reserves, showing Venezuela and Saudi Arabia as each more than 200 billion barrels ahead of the United States.
"In other words, the U.S. is a fairly minor player among the family of major oil-producing nations," Berman said in the post.
Then there's an item from Jan. 20 with the headline "One of These Things Is Not Like The Others: IEA's January Report." Here, Berman includes a chart of liquids production from countries around the world to illustrate what has happened in the oil market. Output from the United States has jumped since the start of 2011, while many other countries are roughly flat.
Berman said he plans to upgrade another site -- artberman.com -- to include writings as well as information about his role as a potential speaker. He said he remains surprised more companies haven't sought to bring him in and understand his views.
Berman worked for Amoco Corp. before his current stint as a consultant. He studied history at Amherst College and geology at the Colorado School of Mines.
He said a piece in Nature last year on what the science journal described as a potential "fracking fallacy" with natural gas has helped to stir conversation. There are different ways to view numbers, Berman said, depending on factors such as the decline rates being used.
"That's my whole point all the way along," he said. "You don't have to agree with me. You don't have to say that shale gas is a commercial failure, which I believe it is. But all you have to come from with the work that I've done is that I'm not an idiot."
Berman always seems up for a discussion, and he met recently with Ed Hirs, an energy economist with the University of Houston and managing director at an exploration and production company called Hillhouse Resources LLC.
As it turns out, Berman said, the two don't have as much in common as he might have thought.
Hirs said Berman works up from a granular level to a wider view, but notes that he doesn't necessarily approach an issue the way an economist might.
"We converge on a few things and diverge on others, which will make for some interesting discussion," Hirs said.
Both men do see a drop ahead in U.S. oil production, according to Hirs. He said they don't agree on areas such as the costs of shale gas and what prices will allow companies to continue producing. A U.S. gas benchmark has been trading recently for less than $3 per million British thermal units.
"I think natural gas production from the shale plays is very sustainable at current prices," Hirs said, adding that the United States needs better infrastructure to deliver the gas.
Questioning the Permian
One company that attracts Berman's attention is Pioneer Natural Resources Co. The Irving, Texas-based producer previously estimated part of the Permian Basin holds about 50 billion barrels of recoverable oil equivalent, according to a 2013 report from the Oil & Gas Journal.
The U.S. Energy Information Administration (EIA) has estimated the country's proved oil reserves at less than 40 billion barrels, according to data through the end of 2013.
Pioneer's website says the Spraberry/Wolfcamp area may contain more than 75 billion barrels of recoverable oil equivalent.
As for the Permian, Berman notes the considerable focus from various producers on the region in West Texas and New Mexico that has been picked over for decades. So why the interest now in the unconventional possibilities of the area?
"There's a real simple answer to that -- 'cause they couldn't get into the Bakken or the Eagle Ford," Berman said, citing the two plays that he said dominate domestic tight oil production.
Berman said he takes seriously commentary that comes from EOG Resources Inc., a Houston-based oil and gas producer whose stock he owns. The company seeks to be a low-cost producer in areas such as the Bakken, Eagle Ford and Permian.
Scott Tinker, the state geologist of Texas, has known Berman for years. While the two don't agree on everything, Tinker said Berman brings a reasonable approach to research that is beneficial.
Tinker said he sees more potential in technology to enable future recoveries than some observers. He also indicates he doesn't expect a sharp decline in U.S. shale gas output.
"I and some others think it will be a more gradual plateau," said Tinker, who's also director of the Bureau of Economic Geology at the University of Texas, Austin. That's barring a dramatic breakthrough in an area such as energy storage.
Tinker said a range of reasonable energy perspectives should be considered, as does Berman. But Tinker takes issue with aspects of the Nature piece on fracking, including its use of the word fallacy.
Politically, Berman describes himself as an independent who both likes and dislikes ideas from Democrats and Republicans. He said government shouldn't be seen as a way to solve all of humanity's problems, although he sees a need for more study when it comes to energy policies.
The recent oil price drop, in oversimplified terms, can be explained fairly easily, Berman said. "We have produced more than we need," he said.
Berman suggests oil prices may climb later this year, although it may not be a big jump as production levels take time to adjust to lower prices. He sees higher oil prices in coming years, including a return to $100 a barrel at some point. A benchmark U.S. oil price has been trading recently for less than $50 a barrel.
"We're way below the effective value of a barrel of oil right now," Berman said.
A country 'in love with technology'
Berman said he gets asked about the idea of peak oil and where it stands. Here, the geologist suggests people don't understand the concept.
"Peak oil is absolutely not about the end of oil, it's about the end of cheap oil," he said.
And that push to find crude in more expensive places has happened, Berman said, noting the focus in recent decades on projects that involve deep water, oil sands, shale and the Arctic.
Yet, despite questions, U.S. oil and gas production has surged in the past decade and started policy debates on everything from exports to environmental regulations.
EIA has said oil production could average about 9.5 million barrels a day in 2016 to become the second-highest U.S. annual average on record, while gas production may continue to rise, as well.
America's Natural Gas Alliance, which promotes the use of gas, said a variety of research shows production has the ability to remain strong for years.
With low prices, companies are driven to produce efficiently while the industry looks to boost demand for gas through outlets such as exports, power generation and manufacturing, according to Erica Bowman, chief economist at ANGA.
Prices eventually could climb to the $4 to $6 range, Bowman said, but exports wouldn't make sense if the cost goes too high. She notes that prices dropped after a blip related to last year's polar vortex.
"There's going to be a lot of ups and downs in terms of what is the right balance between efficiency and price, but what you've seen is the companies are still making it work," she said.
Berman said energy companies obtained funding for exploration and production in the wake of the financial crisis several years ago as money left real estate. Many producers have negative cash flow and large amounts of debt, he said, but have attracted attention for continued production growth.
That could be tested. Berman said money may not continue to be available for struggling exploration and production companies, although he doesn't rule it out completely.
With oil, companies can't break even in many unconventional plays when the price is less than $80 a barrel, if costs such as operations and debt are included, Berman said, noting that individual wells may vary.
Berman doesn't limit his thoughts to oil and gas. Despite talk of dropping costs, he sees a limited role in coming years for solar in the nation's portfolio.
"In the next 10 years, I don't think solar is going to be a big factor in our energy decisions and our energy policy decisions," he said. "It's not meant as a slight on solar. That's the way the numbers work for me."
Do some of his positions almost suggest Berman doesn't expect much from changes that come from improved technology? He said he works with information that's available -- not dreams about what might happen, such as using a laser to drill a well.
"We're in love with technology in this country," Berman said. "We have more faith in technology that doesn't yet exist than we do in God."
Sunday, January 25, 2015
Tight Oil Production Will Fade Quickly: The Truth About Rig Counts
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U.S tight oil production from shale plays will fall more quickly than most assume.
Why? High decline rates from shale reservoirs is given. The more interesting reasons are the compounding effects of pad drilling on rig count and poorer average well performance with time.
Rig productivity has increased but average well productivity has decreased. Every rig used in pad drilling has approximately three times the impact on the daily production rate as a rig did before pad drilling. At the same time, average well productivity has decreased by about one-third.
This means that production rates will fall at a much higher rate today than during previous periods of falling rig counts.
Most shale wells today are drilled from pads. One rig drills many wells from the same surface location, as shown in the diagram below.
(click image to enlarge)
The Eagle Ford Shale play in South Texas is one of the major contributors to increased U.S. oil production. A few charts from the Eagle Ford play will demonstrate why I believe that U.S. production will fall sooner and more sharply than many analysts predict.
The first chart shows that the number of active drilling rigs (left-hand scale) in the Eagle Ford Shale play stabilized at approximately 200 rigs as pad drilling became common. The number of producing wells (lower scale), however, has continued to increase. This is because a single rig can drill many wells without taking the time to demobilize and remobilize. In other words, drilling has become more efficient as less time is needed to drill a greater number of wells.
(click image to enlarge)
The next chart below shows Eagle Ford oil production, the number of producing wells and the number of active drilling rigs versus time.
(click image to enlarge)
This chart shows that production growth has not kept pace with the rate of increase in new producing wells since mid-2012. That is because the performance of newer wells is not as good as earlier wells.
The final chart shows that the rate of daily production is now more dependent on the number of drilling rigs than on the number of producing wells. Rig productivity--the barrels per day per rig--has increased but average well productivity--the barrels per day per well--has decreased. In other words, production can only be maintained by drilling an ever-increasing number of wells.
(click image to enlarge)
Average rig productivity has almost tripled since early 2012. Average well productivity has decreased by one-third over the same period. This means that every rig taken out of service today has more than three times the impact on daily production as before pad drilling became common.
Most experts do not anticipate any significant decrease in U.S. tight oil production in the first half of 2015. Their analyses may not have accounted for the effect of pad drilling and the decrease in average well productivity.
Using the Eagle Ford Shale is as an example, U.S. oil production should fall sooner and more sharply than many anticipate. This will be a good thing for oil price recovery but maybe not such a good thing for the future profitability of the plays.
Tuesday, January 20, 2015
One of These Things Is Not Like The Others: IEA's January Report
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Remember the Sesame Street song?
One of these things is not like the others,
One of these things just doesn't belong,
Can you tell which thing is not like the others
By the time I finish my song?
OK. Which curve on this chart is not like the others?
(click image to enlarge)
It's the U.S. and Canada's oil production curve over the past several years.
That's why oil prices have fallen: too much oil for the demand in the world. The tight oil from North America is the prime suspect in the production surplus that's pushing down oil prices.
Now that you know the answer, let's talk about IEA's January report that was released today. Here are my main takes from the report:
- The fourth quarter 2014 supply surplus was 890,000 barrels per day (see the chart below). That is the difference between supply and demand. We can argue about whether it was mainly supply or mainly demand-I've stated my belief that it's mostly supply-but that's the difference between them. That is why oil prices are falling.
- This surplus amount is 170,000 barrels per day greater than in the previous quarter.
- Demand in the first half of 2015 will be 900,000 barrels per day lower than in the fourth quarter (see the second chart below). 1st half demand is usually lower than 2nd half but that means that prices could fall again.
- 3rd quarter 2015 demand will increase by 1,530,000 barrels per day and 4th quarter demand will increase another 420,000 barrels per day. That is a lot and would take demand to record highs. This should go a long way towards moving prices higher.
(click image to enlarge)
(click image to enlarge)
Now, these are only estimates and IEA is notoriously wrong in their forecasts but that's what we have to work with. They don't estimate production which is too bad but the report says that 2015 production is now revised down 350,000 barrels per day from previous estimates. IEA expects that most of that will happen in the 2nd half of 2015 after North American tight oil production starts falling.
So, where does that leave us? The problem is mostly about supply but demand has to increase if we're going to fix the surplus problem in 2015 because supply is not expected to fall that much.
I think this means that prices will increase in 2015 but not a lot unless something else happens. That something else will probably be an OPEC and Russia production cut in June after the next OPEC meeting.
Remember, the supply surplus in the 4th quarter of 2014 was less than 1 million barrels per day. OPEC can easily accommodate this and has made bigger cuts as recently as 2009.
Some geopolitical crisis could also happen in the coming year and that might add $20/barrel or so. Negative things for a price increase could also happen like demand not growing as much as IEA forecasts or production not falling enough.
When do oil prices stop falling? No one knows and this data doesn't have enough resolution much less reliability to help answer the question.
EIA, however, may offer some help here. EIA publishes monthly world data and, in the chart below, they show supply and demand in approximate balance for November and December of 2014.
When do oil prices stop falling? No one knows and this data doesn't have enough resolution much less reliability to help answer the question.
EIA, however, may offer some help here. EIA publishes monthly world data and, in the chart below, they show supply and demand in approximate balance for November and December of 2014.
(click image to enlarge)
That may signal that prices will find a bottom as soon as this balancing is felt by the market. Or not.
Sunday, January 18, 2015
Dumb and Dumber: U.S. Crude Oil Export
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Exporting crude oil and natural gas from the United States are among the dumbest energy ideas of all time.
Exporting gas is dumb.
Exporting oil is dumber.
The U.S. imports almost half of the crude oil that we use. We import 7.5 million barrels per day. The chart below shows the EIA prediction that production will slowly fall and imports will rise (AEO 2014) after 2016.
(click image to enlarge)
This means that the U.S. will never be self-sufficient in oil. Not even close.
What about the tight oil that is produced from shale? That's included in the chart and is the whole reason that U.S. production has been growing. But there's not enough of it to keep production growing for long.
(click image to enlarge)
Total tight oil reserves are 10 billion barrels (including condensate). The U.S. consumes about 5.5 billion barrels per year, so that's less than 2 years of supply. Almost all of it is from two plays--the Bakken and Eagle Ford shales. We hear a lot of hype from companies and analysts about the Permian basin but its reserves are only 7% of the Bakken and 8% of the Eagle Ford.
Tight oil comprises about one-third of total U.S. crude oil and condensate reserves. The U.S. is only the 11th largest holder of crude oil reserves (33.4 billion barrels) in the world with only 19% of Canada's reserves and 12% of Saudi Arabia's reserves.
(click image to enlarge)
In other words, the U.S. is a fairly minor player among the family of major oil-producing nations. For all the fanfare about the U.S. surpassing Saudi Arabia in production of crude oil, we are not even players in reserves. What that means is that we may temporarily pass Saudi Arabia in production because it chooses to restrict full capacity, and U.S. production will fade decades before Saudi Arabia's production begins to decline.
Let's put all of this together.
- The U.S. will never be oil self-sufficient and will never import less than about 6 million barrels of oil per day.
- U.S. total production will peak in a few years and imports will increase.
- The U.S. is a relatively minor reserve holder in the world.
How does this picture fit with calls for the U.S. to become an exporter of oil? Very badly. For tight oil producers to become the swing producers of the world? Give me a break.
Perhaps we should send congressional proponents of oil export like Joe Barton (R-TX), Ted Cruz (R-TX) and Lisa Murkowski (R-AK) to "The Shark Tank" TV show to try to sell their great idea to the investors and judges.
I'm out.
**See my previous blog "U.S. Advises Oil Companies How to Break The Law" for discussion of the light oil and condensate refining issues, and The Energy Policy and Conservation Act that bans crude oil export.
Sunday, January 11, 2015
The Oil Price Fall: An Explanation in Two Charts
I offer a simple explanation for the recent fall in oil prices in just two charts.
Oil prices move up and down in response to changes in supply and demand. If the world consumes more oil than it produces, the price goes up. If more oil is produced than the world consumes, the price goes down.
That's where we are right now. The world is producing more oil than it is consuming. The price of oil goes down. It's that simple.
The chart below shows when the world has been in a production surplus and a production deficit since 2008. Right now, we are in a production surplus so the price of oil is going down.
(Click image to enlarge)
The important thing to take away from this chart is that the production surplus is smaller so far than the last time this happened between March 2012 and March 2013. Then, oil prices fell quickly but recovered in about a year. The difference between these two events, however, is that monthly average oil prices have fallen 27% so far but only fell 18% in 2012-2013.
The difference is found in quantitative easing (QE), the Federal Reserve Board's policy of pumping huge amounts of money into the U.S. economy.
QE ended in July 2014, the exact month that oil prices started falling. What a coincidence! This is shown in the chart below.
(Click image to enlarge)
What is the connection between QE and oil prices? World oil prices are denominated in U.S. dollars so the more the dollar is worth, the lower the price of oil and vice versa. That's a well-known fact.
When the Fed started printing money like crazy after the Crash in 2008, the value of the dollar was kept artificially low compared with other currencies. The ever-weakening U.S. dollar dampened the impact of production surpluses and deficits on the price of oil.
When QE ended in July 2014, the dollar got stronger and the price of oil went down as it always does when this happens. The coincidence of the end of QE with the onset of a production surplus created a perfect storm for oil prices.
There is nothing especially different about this latest oil-price fall compared to any of the others except the end of QE. It's not really about shale or the Saudi decision not to cut production. It's about a relatively ordinary oil-production surplus that happened at the same time that QE ended. And, there are few geopolitical fear factors now to mask the production-consumption balance as there have been in recent years (that will change, I am certain).
What's the message? Oil prices will recover and I doubt that we will see years of low prices as many have predicted.
(Click image to enlarge)
Monday, January 5, 2015
The Real Cause Of Low Oil Prices: OilPrice.Com Interview With Arthur Berman
In a third exclusive interview with James Stafford of Oilprice.com, energy expert Arthur Berman explores:
• How the oil price situation came about and what was really behind OPEC’s decision.
• What the future really holds in store for U.S. shale.
• Why the U.S. oil exports debate is nonsensical for many reasons.
• What lessons can be learnt from the U.S. shale boom.
• Why technology doesn’t have as much of an influence on oil prices as you might think.
• How the global energy mix is likely to change but not in the way many might have hoped.
OP: The Current Oil Situation - What is your assessment?
Arthur Berman: The current situation with oil price is really very simple. Demand is down because of a high price for too long. Supply is up because of U.S. shale oil and the return of Libya’s production. Decreased demand and increased supply equals low price.
As far as Saudi Arabia and its motives, that is very simple also. The Saudis are good at money and arithmetic. Faced with the painful choice of losing money maintaining current production at $60/barrel or taking 2 million barrels per day off the market and losing much more money—it’s an easy choice: take the path that is less painful. If there are secondary reasons like hurting U.S. tight oil producers or hurting Iran and Russia, that’s great, but it’s really just about the money.
Saudi Arabia met with Russia before the November OPEC meeting and proposed that if Russia cut production, Saudi Arabia would also cut and get Kuwait and the Emirates at least to cut with it. Russia said, “No,” so Saudi Arabia said, “Fine, maybe you will change your mind in six months.” I think that Russia and maybe Iran, Venezuela, Nigeria and Angola will change their minds by the next OPEC meeting in June.
We’ve seen several announcements by U.S. companies that they will spend less money drilling tight oil in the Bakken and Eagle Ford Shale Plays and in the Permian Basin in 2015. That’s great but it will take a while before we see decreased production. In fact, it is more likely that production will increase before it decreases. That’s because it takes time to finish the drilling that’s started, do less drilling in 2015 and finally see a drop in production. Eventually though, U.S. tight oil production will decrease. About that time—perhaps near the end of 2015—world oil prices will recover somewhat due to OPEC and Russian cuts after June and increased demand because of lower oil price. Then, U.S. companies will drill more in 2016.
OP: How do you see the shale landscape changing in the U.S. given the current oil price slump?
Arthur Berman: We’ve read a lot of silly articles since oil prices started falling about how U.S. shale plays can break-even at whatever the latest, lowest price of oil happens to be. Doesn’t anyone realize that the investment banks that do the research behind these articles have a vested interest in making people believe that the companies they’ve put billions of dollars into won’t go broke because prices have fallen? This is total propaganda.
We’ve done real work to determine the EUR (estimated ultimate recovery) of all the wells in the core of the Bakken Shale play, for example. It’s about 450,000 barrels of oil equivalent per well counting gas. When we take the costs and realized oil and gas prices that the companies involved provide to the Securities and Exchange Commission in their 10-Qs, we get a break-even WTI price of $80-85/barrel. Bakken economics are at least as good or better than the Eagle Ford and Permian so this is a fairly representative price range for break-even oil prices.
But smart people don’t invest in things that break-even. I mean, why should I take a risk to make no money on an energy company when I can invest in a variable annuity or a REIT that has almost no risk that will pay me a reasonable margin?
Oil prices need to be around $90 to attract investment capital. So, are companies OK at current oil prices? Hell no! They are dying at these prices. That’s the truth based on real data. The crap that we read that companies are fine at $60/barrel is just that. They get to those prices by excluding important costs like everything except drilling and completion. Why does anyone believe this stuff?
If you somehow don’t believe or understand EURs and 10-Qs, just get on Google Finance and look at third quarter financial data for the companies that say they are doing fine at low oil prices.
Continental Resources is the biggest player in the Bakken. Their free cash flow—cash from operating activities minus capital expenditures—was -$1.1 billion in the third- quarter of 2014. That means that they spent more than $1 billion more than they made. Their debt was 120% of equity. That means that if they sold everything they own, they couldn’t pay off all their debt. That was at $93 oil prices.
And they say that they will be fine at $60 oil prices? Are you kidding? People need to wake up and click on Google Finance to see that I am right. Capital costs, by the way, don’t begin to reflect all of their costs like overhead, debt service, taxes, or operating costs so the true situation is really a lot worse.
So, how do I see the shale landscape changing in the U.S. given the current oil price slump? It was pretty awful before the price slump so it can only get worse. The real question is “when will people stop giving these companies money?” When the drilling slows down and production drops—which won’t happen until at least mid-2016—we will see the truth about the U.S. shale plays. They only work at high oil prices. Period.
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