It Is A New World

Fracking has changed the oil business in a fundamental but not obvious way. Time frames are changing. Things that used to be understood are now in flux. Lets look at supply and demand issues. Price no longer works the way it used to in order to balance supply and demand.

In response to Saudi efforts to lower supplies by lowering prices – the market has not worked as expected.

“It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run. The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience,” said a recent stability report by the Saudi Central Bank.

The cost of putting in a well (investment) requires oil above $45 a bbl. The price of oil required to keep the oil flowing (maintenance) is $20 a bbl.

Even as U.S. shale hedges are about to expire, some of the imminent bankruptcies would not result in wells getting abandoned, it would only result in cheaper acquisitions of bankrupt companies by their much bigger competitors. Once oil prices again rise to $60 per barrel levels, the bigger oil companies would naturally ramp up their production levels which would in turn increase U.S. crude oil production.

Here is the biggest deal. The very short time between the start of drilling and the flow of revenue.

“As shale has dramatically reduced the time between when producers commit capital and when they get production from several years to several months, oil prices now need to remain lower for longer to keep capital sidelined and allow the rebalancing process to occur uninterrupted,” they said.

Ah. but that is not all. We don’t just have fracking. We also have refracking.

Halliburton and Schlumberger tout refracking as a cheap way of adding barrels because it avoids drilling new wells, which can cost several million dollars each.

One way to refrack involves injecting tiny rubber-coated balls and reactive fluids that can later dissolve in a well to seal off existing fissures in rock. This boosts pressure. Then, new cracks in rock that release oil are created with a pressurized frack slurry of sand, water and chemicals.

It is not yet clear how much business refracking will generate.

Refracking is not yet a production technique. That will take several years. If it is viable it will lower the price at which drilling a well looks profitable.

I think oil prices will fluctuate in a very narrow range for some time to come. Not counting political factors.

Update: 9 Aug 2015 1627z

Another very good look at the fracking revolution. They discuss the mis-estimating by everybody of fracking costs and returns and American ingenuity. They also claim that oil prices above $27.50 a bbl will encourage fracking. And that number may decline further as more ingenuity is applied to the field.


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3 responses to “It Is A New World”

  1. Frank Avatar
    Frank

    Simon: “Here is the biggest deal. The very short time between the start of drilling and the flow of revenue.”

    Ayn Rand’s character, Ellis Wyatt, the original fracker:
    “The two hours I saved are mine – as pricelessly mine as if I moved my grave two further hours away…”

  2. Simon Avatar

    Frank,

    Not only are the hours his. Most important is that they are not the bank’s.

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