“I've attached the latest Musings from the Oil Patch, with the author's permission to post on Fullermoney as always.
“I would encourage readers to carefully peruse the section on EIA estimates of oil production versus the Texas Railroad Commission reported oil production numbers. The net is that US oil production is being meaningfully over estimated by the EIA (over 800,000 bbl/day). You can bet your bottom dollar that the TRRC numbers are darned close to right, since Texas gets a very large chuck of state tax revenues based on those numbers, and the TRRC has about 50 years of experience at making sure the numbers it gets from the producers are either right or a bit bigger than right, but never smaller. Producers want the TRRC to get the numbers that are as close as possible (and not bigger than right), since the penalties for reporting bad data to the TRRC include a suspension of drilling rights in the state of Texas ("not a good thing", in engineering terms).
“The EIA is continuing to use a VERY outdated model for well depletion (the rate at which the oil or gas in a well can be withdrawn). Depletion rates for convention wells vary from 10-25% per year, typically (10% means that you pump 10% less oil in year 2 versus year 1) -- using these models, which were developed using data from the 1920's to the 1980's, gives a computer model of future production that is radically optimistic versus actual experience for shale plays. Shale wells typically deplete by 50% (or more) in the first year, 40% or more in the second year (25% of the original production), and so on -- resulting in dramatically lower production levels after a short period of time. Using the conventional depletion rates for shale plays results in overestimating the future production by multiples!! Shale wells therefore require substantially more maintenance, which, when combined with the higher drilling costs to begin production, result in much larger costs/bbl than conventional wells, hence lower profitability.
It must be understood that the EIA is a US Government Agency that is chock full of anti-drilling and anti-oil people, and reporting that the US is pumping more oil than it is in reality serves their master well. The press picks up this misinformation, and then repeats it as a mantra, resulting in investors misunderstanding the reality on the ground. While oil shale is a growing source of petroleum liquids, it should be understood that it will not make the US energy-independent in a decade without substantial and dramatic changes in public policy. The current administration is doing everything possible to limit the growth of domestic oil supply, short of making it illegal to drill.
I would argue that a more rational government would approve the Keystone XL pipeline (which would bring crude from Canada to the US in large quantities at preferential prices and lower costs), and remove the growing mountain of regulations that are strangling drilling in much of the US. These actions could make North America energy independent in a decade -- I stress North America because the US is not likely to become energy independent within 20 years, even with a much more rational government. A major change in government, with follow-through, could make the combined US and Canada net exporters of natural gas and at least import-export balanced in liquids by 2022. Without this change, Canada will become a major supplier to Asia, and the US will continue to pay the price.
Eoin Treacy's view Thank you for this edition of Allen
Brooks iconoclastic report which
I regard as a must read for the additional perspective it always conveys. Thanks
also for your additional insights.
Considering the US government's record in forecasting crop production, it is conceivable that wide inaccuracies are also evident in oil production figures. We continue to believe that energy independence is a realistic goal but in addition to your conditions, I would also add a considerable increase in natural gas demand as a requirement if this aim is to be achieved.
West Texas Intermediate fell back to test the August and October lows near $78 last week where it found at least short-term support. The more than $10 rally to date has broken the four-month progression of lower rally highs and while there is potential for some consolidation of recent gains a sustained move below $77 would be required to question potential for some additional higher to lateral ranging.
Gasoline prices have lagged somewhat but also stabilised in the region of the October and November lows. A sustained move below the psychological $2.50 area would be required to question potential for an additional bounce.
Natural gas has posted a more than 50% rally in the last 10 weeks from a deeply depressed level. While potential for a consolidation in the region of $3 is increasing, a sustained move below the June low near $2.16 would be required to question medium-term recovery potential.
In the natural gas tanker sector, Golar LNG (3.75%), Teekay LNG Partners (6.86%) and Exmar (11.04%) all found support in the region of their respective 200-day MAs in the last couple of weeks. Cheniere Energy still represents the USA's most likely candidate to begin natural gas exports. Both Cheniere Energy LP (7.26%) and Cheniere Energy found support in the region of their respective 200-day MAs over the last couple of weeks.