Permian Basin & Eagle Ford Shale from a Global Perspective. Art Berman Labyrinth Consulting Services, Inc.

Transcription

1 Permian Basin & Eagle Ford Shale from a Global Perspective Art Berman Texas Energy Council 3 th Annual Symposium Dallas, Texas May, 28 Slide

2 Permian Basin & Eagle Ford Shale from a Global Perspective: The Big Picture Energy underpins natural systems Ø Most people think that the economy is based on money. Money is nothing but a call on work-energy. Ø Energy is the economy. There is nothing on earth like oil Ø barrel of oil = 5,7, BTU =,76 kwh: converted to work = 7kWh. Ø human =.6kWh/day of work 7/.6 = 67days: 4.5 YEARS OF HUMAN WORK. The world ran out of cheap oil 2 years ago Ø Today s WTI oil price $7.5 is 96% higher than the average constant dollar price from of $ Ø That underlies most of the economic problems of today s world. Ø The working class has figured out that their lives are much worse today than 2 decades ago & that is why Donald Trump is President of the U.S. Ø Few understand that American greatness lasted only 2 years after WWII & was a singular event. Technology does not create energy Ø It is a spigot that allows access to energy. Ø Debt has made things seem affordable by selling our energy future forward Ø This led to the miracle of tight oil & shale gas. Ø People want to believe: a few tweaks by politicians and better technology will make America great again. Climate change is real & resulted mainly from over-population. There are no easy solutions except conserving what we need for the future & learning to live with less. Slide 2

3 Putting the Shale Revolution in Perspective April 28 WTI Price of $66.25 is 8% Higher Than Average of $37 in Constant March 28 Dollars 66 U.S. Incremental Ouput: The Major Cause For Low Oil Prices Canada, Iraq, Iran Saudi Arabia and Russia Also Important Contributors CPI Adjusted WTI Prices (March 28 Dollars Per Barrel) $7 $6 $5 $4 $3 $2 $ $ $9 $8 $7 $6 $5 $4 $3 $2 $ $ Jan-7 $24 Avg Feb-7 Mar-72 Apr-73 May-74 $72 Avg Jun-75 Jul-76 st Bubble Oil Shocks --> Massive E&P Investment (North Aug-77 Sep-78 Oct-79 Nov-8 Dec-8 Jan-83 Feb-84 Mar-85 Apr-86 May-87 Jun-88 Jul-89 Aug-9 Depressed Prices Over-Supply, Demand Destruction & Price Deflation Sep-9 Oct-92 $37 Avg Source: EIA,U.S. Bureau of Labor Statistics & Nov-93 Dec-94 Jan-96 Debt-Fueled Economic Expansion & Rapid Growth in China & East Asia Feb-97 Mar-98 Apr-99 May- Jun- Jul-2 $86 Avg Aug-3 Sep-4 Oct-5 Nov-6 Dec-7 2nd Bubble Jan-9 Feb- $5 Avg 24-24Massive E&P Investment (Shale, Deep Water, Heavy Oil) Mar- Apr-2 May-3 Jun-4 $ Over- Supply & Price Deflation Jul-5 Aug-6 Sep-7 Millions of Incremental Barrels of Crude Oil & Condensate Per Day The st Bubble : oil shocks and price increase from $23 to $7/barrel led to massive E&P investments, over-production, demand destruction & oil-price deflation until 998. Second Bubble: : flat global output & growing Asian demand led to increasing oil prices from $7 to $48/barrel by 28. After the 28 Financial Collapse, OPEC cut production then, declining OPEC spare capacity, falling OECD inventories, & near-zero interest rates led to the longest period of high oil prices in history from Over-investment resulted in a massive over-supply, much of it from the United States and Canada. The 2 nd bubble burst in 24 and prices collapsed Jan-2 Source: EIA & Mar-2 May-2 Jul-2 Sep-2 Nov-2 Jan-3 Mar-3 May-3 Jul-3 Sep-3 Nov-3 Jan-4 Mar-4 May-4 Jul-4 Libya Angola Venezuela Mexico Algeria Nigeria Base Sep-4 Nov-4 Jan-5 Indonesia-Ecuador-Qatar-Gabon Mar-5 May-5 Jul-5 Sep-5 Nov-5 Jan-6 Mar-6 May-6 Canada Jul-6 U.S. Iraq Iran Russia Brazil Saudi Arabia Kuwait UAE Sep-6 Nov-6 Slide 3

4 Oil Prices & The Long-Term Debt Cycle U.S. Govennment + Consumer + Non-Financial Corporate Debt (Trillions) $35 $3 $25 $2 $5 $ $5 $ Avg WTI Since The Oil-Price Collapse Is 46% Higher Than WTI Avg Debt Began Increasing after 982 Oil Shock & Exceeded GDP By 986 $33 Trillion Est. Total U.S. Debt in 27, GDP $9 Trillion $47/barrel Avg Price $24 Avg Price $2 $ $7 Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statiistics, World Bank, EIA & $ Oil Price Dec 28 Dollars Oil Shocks $7 Avg Price Debt > GDP After Debt Inflection Point 23 $35 Avg Price Debt Inflection Point $88 Avg Price Debt GDP 24 $48 26 $ $ $9 $8 $6 $5 $4 $3 $2 $ WTI Price in March 28 Dollars Per Barrel Petroleum Age after WWII produced unprecedented economic growth. Oil shocks of threatened to end that party. Demand destruction & oil production bubble resulted in 8 years of cheap energy. Debt re-started economic growth & debt-based growth of China challenged oil supply after 24. Second oil shock made unconventional oil possible. Zero-interest rates led to 2 nd oil bubble. Longest period of high oil prices in history. That bubble burst in 24 and oil prices collapsed but without demand destruction. Now, we are near the end of long-term debt cycle but in denial that the economic basics have fundamentally changed since the post-war era. CPI-Adjusted Brent Price (March 28 $/barrel) $25 $2 $5 $ $5 $ $95 $9 $85 $8 $75 $7 $65 $6 $55 $5 $45 $4 $35 $3 $25 $2 $5 $ No Demand Destruction 2-24 When Avg Brent Price Was $2/Barrel Global demand growth increased 2-24 from.9 to.2 mmb/d mmb/d 47-Year Avg Negative Demand Growth (RHS) Positive Demand Growth (RHS) $5 Source: IEA, EIA, U.S. Bureau of Labor Statistics & $ Brent Price LHS (WTI before 975) $2 Brent Avg E Annual Liquids Demand Growth (mmb/d) Slide 4

5 Low Interest Rates Created A Capital Bubble For Tight Oil & The Permian Basin Permian Rig Count Rises & Falls Based on Expectation of $55+ Prices Interest rates increased >5% as oil prices increased 6% ($58 to $5) From 24 to 28 8% 6% -25 Source: Baker Hughes, EIA & 4//8 WTI Price ($/barrel) $2 //8 % $25 Change In Permian Tight Oil Rig Count Lags Price By About 2 Weeks Weeks //7-2 $3 7//7 2% Tight Oil Boom Jan-7 Apr-7 Jul-72 Oct-73 Jan-75 Apr-76 Jul-77 Oct-78 Jan-8 Apr-8 Jul-82 Oct-83 Jan-85 Apr-86 Jul-87 Oct-88 Jan-9 Apr-9 Jul-92 Oct-93 Jan-95 Apr-96 Jul-97 Oct-98 Jan- Apr- Jul-2 Oct-3 Jan-5 Apr-6 Jul-7 Oct-8 Jan- Apr- Jul-2 Oct-3 Jan-5 Apr-6 Jul-7 $ Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statistics, EIA & $35 WTI Price (RHS) 4% 4//7 $ Current Rate.7% $4-5 //7 Interest Rates 5% $45 //6 $4 $5 7//6 6% $55-7//5 $5 8% // Avg WTI Price $48.72 $6 $55 4//5 $6 % $66.25 $65 //5 $7 End QE 3 Nov 24 $7-5 //4 st Gulf War $85 //6 2% $9 $9 $75 7//4 $ $95 $8 4//6 4% $ 4//4 $ $8 5 Weekly Rig Count Change 6% $2 $2 $5 Weekly Rig Count Change 2 Wk Avg (LHS) //4 CPI-Adjusted WTI Price (Nov 27 Dollars Per Barrel) $3 WTI Price (Mar 28 Dollars) Federal Funds Effective Interest Rate (Percent) $4 $3 $ 2% $5 $5 $ $5 $ The oil-price collapse coincided with the end of QE 3 and the beginning of U.S. interest rate increases. Continued low interest rates caused margin hunters to focus first on tight oil and then, specifically on the Permian basin. $3 oil prices brought large capital flows to a select group of producers seen as winners. Tight oil and Permian rig counts have more than doubled since August 26. Rig counts increase with expectation of $55+ oil prices Increased rig count and fear of ongoing over-supply is a major drag on oil prices. OPEC production cuts have balanced oil markets since early 27 & some are now questioning the lower-for-longer paradigm that dominated the last 3 years. Slide 5

6 The False Premise that Tight Oil Plays Are the New Swing Producer 5.2 Tight Oil Drilling & Production React to Price Signal Like All Other Plays--Slowly U.S. Oil Future is a Bet On a Single Play Permian Basin is the Only Tight Oil Play Producing More Oil Than at the April 25 Peak Following the OIl-Price Collapse $ WTI (RHS) $6 Incremental* Production Since April 25 (mmb/d) Production Max Niobrara Anadarko Bakken Eagle Ford $5 $4 $3 $2 $ $ Jan-5 Mar-5 May-5 Jul-5 Sep-5 Nov-5 Jan-6 Mar-6 May-6 Jul-6 Sep-6 Nov-6 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Source: EIA & Base Permian Bakken Eagle Ford Niobrara Anadarko WTI Price ($/barrel) No factual support for widespread belief that there is a price war between OPEC & U.S. tight oil. OPEC/Saudi Arabia reacted pragmatically to price collapse & recovery. Prime directive not to repeat mistake of production cuts. Just-in-time production is another baseless theory. Shale output reacts to price just like all plays slowly & in long-period cycles. Idea that U.S. shale is the new swing producer of the world also has no basis. Being a swing producer means that there is sufficient spare capacity to turn on and off based on market signals. Shale plays have no spare capacity (they are just-in-time). Even if DUCs provide some spare capacity, there is no decision-making process that governs s of independent producers. Slide 6

7 Shale Cost Reductions 9% Industry Bust, % Innovation and Efficiency Oil & Gas Well Drilling Producer Price Index (985 = ) Dec-85 Oct-86 Aug-87 Jun-88 4-Fold Increase In O&G Well Drilling Producer Price Index From Because of Higher Cost of Unconventional Technology 4% Decrease After Oil Price Collapse but 7% Increase in 27 Apr-89 Feb-9 Dec-9 Oil & Gas Well Drilling Cost Index (LHS) Oct-9 Aug-92 Jun-93 Apr-94 Feb-95 Dec-95 Oct-96 4-Fold Increase in O&G PPI Because of Unconventional Oil & Gas Source: U.S. Federal Reserve Bank, EIA & Aug-97 Jun-98 Apr-99 Feb- Dec- Oct- Aug-2 Jun-3 Apr-4 Feb-5 Dec-5 Oct-6 Aug-7 Jun-8 Apr-9 Feb- WTI Oil Price (RHS) Dec- Oct- Aug-2 Jun-3 Apr-4 Feb-5 ~4% Decrease From Deflation Dec-5 +7% Oct-6 $4 $3 $2 $ $ $9 $8 $7 $56.64$6 Aug-7 $5 $4 $3 $2 $ $ WTI Price ($/barrel) NYMEX WTI Futures Prices ($/Barrel) $5 $ $5 $ $95 $9 $85 $8 $75 $7 $65 $6 $55 $5 $45 $4 $35 $3 $25 $2 $5 $ $5 $ $7.26 OPEC Decision Not To Support Prices Nov 24 OPEC+ Decisions & Actions Have Affected Nearly Every Price Point Since Oil Prices Collapsed in 24 WTI has Increased $27 Since OPEC+ Production Cuts NYMEX Futures Price $74.9 $43.46 $6.43 $38.24 Source: EIA, Quandl & $26.2 OPEC "Freeze" Proposed Feb 26 $5.23 $6/barrel $5.6 $43.32 OPEC+ Cut Nov 26 $54.45 $42.53 OPEC+ Cut Extended Jun 27 OPEC+ Cut JMMC Mtg $7.73 Jan 28 $66.4 $55.4 OPEC+ Cut Extended Nov 27 Jun-4 Jul-4 Aug-4 Sep-4 Oct-4 Nov-4 Dec-4 Jan-5 Feb-5 Mar-5 Apr-5 May-5 Jun-5 Jul-5 Aug-5 Sep-5 Oct-5 Nov-5 Dec-5 Jan-6 Feb-6 Mar-6 Apr-6 May-6 Jun-6 Jul-6 Aug-6 Sep-6 Oct-6 Nov-6 Dec-6 Jan-7 Feb-7 Mar-7 Apr-7 May-7 Jun-7 Jul-7 Aug-7 Sep-7 Oct-7 Nov-7 Dec-7 Jan-8 Feb-8 Mar-8 Apr-8 May-8 Lower costs of shale production widely attributed to technology and efficiency. Price deflation accounts for 9% of lower costs because of a depression in the oil industry; % is because of technology & efficiency. That is over for now and prices increased 8% in 27. Shale growth has more to do with outside capital supply than break-even prices. Investors need to believe that significantly higher prices are coming. Buy low, sell high not a sophisticated concept but was responsible for capital flow into tight oil after price bottom in early 26. Smart money has always believed in limits to oil supply. That will drive the next inflow of capital as markets understand the limits of tight oil supply. Slide 7

8 Two of the Largest Tight Oil Plays are in Texas: Eagle Ford & Permian EIA Forecast for Permian Basin Tight Oil is to Recover to.3 mmb/d in 222 & Then Decline to.2 mmb/d by mmb/d 25.3 mmb/d 222 Crude Oil & Condensate Production (mmb/d) Eagle Ford PERMIAN BASIN PLAY.2 Source: EIA & Crude Oil & Condensate Production (mmb/d) EIA Forecast for Permian Basin Tight Oil is to Peak at >3.5 mmb/d in 244 & Then Decline to 3.4 mmb/d by 25 Spraberry Wolfcamp 3.54 mmb/d 244 Avalon-Bone Spring The Eagle Ford Shale play is expected to recover to.3 mmb/d by 222 & then decline to.2 mmb/d by 25. The Permian basin plays are anticipated to grow from 2.2 mmb/d in 28 to more than 3.5 mmb/d by 244 & then decline to 3.4 mmb/d by Source: EIA & Slide 8

9 Eagle Ford Shale Case History Provides a Different Perspective Semi-Log Plot of Rate vs. Time, Log Log Plot Rate vs Time, Rate, bbls or Mscf/month Monthly Rate, bbls or Mscf,, EOG 23 OIL 57, ,69 Max b Di EUR Points = Actual Data Line = Forecast Oil = Green, Gas = Red GAS 53, , ,, Points = Actual Data Line = Forecast Oil = Green, Gas = Red Months from First Production Time months Semi-Log Plot of Rate vs. Time, San Antonio Log Log Plot Rate vs Time Houston, Corpus Christi, DVN 24 OIL 3, ,863 Max b Di EUR Points = Actual Data Line = Forecast Oil = Green, Gas = Red Rate, bbls or Mscf/month EAGLE FORD SHALE PLAY Monthly Rate, bbls or Mscf, GAS 7,.45.2,, ,, Points = Actual Data Line = Forecast Oil = Green, Gas = Red Months from First Production Time months Top 6 Eagle Ford operators were evaluated: Chesapeake, ConocoPhillips, Devon, EOG, Marathon, & Sanchez. Standard rate vs time decline-curve analysis was used to match production and determine EUR (estimated ultimate recovery). EUR is decreasing because the play is over-drilled & wells are interfering. Better technology results in higher initial production rates but also higher decline rates. Technology does not create energy. Slide 9

10 Belief About Improving Well Performance & Falling Break-Even Prices Re-Examined Was The Best Year for Top 6 Producers in the Eagle Ford Shale Popular Belief About Improving Well Performance & Falling Break-Even Prices Must Be Re-Examined $54 37 $ $5.36 $52 EUR (S of Barrels of OIl Equivalent) $ Break-Even Price (RHS) EUR (LHS) $ $5 $48 $46 $44 Break-Even Price ($/boe_ 3 $ $ Source: Drilling Info & $38 24 Was The Best Year for Top 6 Producers in the Eagle Ford Shale both in terms of EUR (estimated ultimate recovery) and break-even oil prices. EIA Annual Energy Outlook 28 released in late March corroborates this. Popular belief about improving well performance & falling break-even prices must be re-examined. Slide

11 27 Well Performance Appears Even Worse Than 26 EOG 26 & 27 Wells Eagle Ford Wells Have Steeper Decline Rate Than Wells From Previous Years Despite Higher Initial Production Levels Conoco Phillips 27 Eagle Ford Wells Have Steeper Decline Rate Than Wells From Previous Years Despite Higher Initial Production Levels 4, 25, 35, 3, 2, Monthlly Oil Production (barrels) 25, 2, 5, Monthly Oil Production (barrels) 5,, 27, , Months of Production Source: Drilling Info & 5, Months of Production Source: Drilling Info & Sanchez Energy 26 & 27 Eagle Ford Wells Have Steeper Decline Rates Than Wells From Previous Years 9, 8, 7, Monthly Oil Production (barrels) 6, 5, 4, 3, 2,, Months of Production Source: Drilling Info & Slide

12 Reconciling Study EUR Observations With Operator Claims This study shows that Eagle Ford wells for top operators average 3 kboe but many operators claim EURs that are considerably higher. Part of the disparity is explained by BOE conversion factors: a barrel of NGLs is counted the same as a barrel of oil even though its energy content and value are less than half of a barrel of crude oil. A 6: natural gas to boe conversion accurately reflects energy content but 4: better expresses value including NGLs. Sanchez shows how it arrives at 877 boe for an average Comanche Area well. Using the value-based approach, the average Sanchez Comanche well is 572 boe--a difference of 35%. 877 boe also represents a 3-Stream EUR consisting of multiple zone completion in upper & lower Eagle Ford & Austin Chalk. This is somewhat misleading and represents possible not proven reserves. It is unclear how representative Comanche Area 3 is of Sanchez s average wells. Slide 2

13 Proved Reserves vs Production Forecasts Do Not Agree.6 EIA Eagle Ford Production & Forecast (AEO 28) Exceeds Proved Reserves by 2 Billion Barrels of Oil 3.8x Reserve Growth Improbable & Not Seen in any Known Analogue Fields billion barrels Production (mmb/d) WTI in 27 $ x (RHS) % of Price Increase.6 9 Production in Excess of Proved Reserves.78 bbo (RHS) Proved Reserves 4.6 bbo (RHS) billion barrels.4 8 Reserves ( billions of barrels) & WTI in 27 Dollars x 4 Production & Forecast (LHS) Source: EIA & EIA estimates of Eagle Ford proved reserves have been been quite stable for several years at about 4 billion barrels. Converting EIA s production forecast indicates that proved reserves will be reached by 225. Another 2 billion barrels will subsequently be produced at modestly increasing forecasted oil prices. This combined with the well performance study suggests that Eagle Ford production growth is unlikely and that reserves should be exhausted at current production rates in ~7 years. Slide 3

14 Proved Reserves vs Production Forecasts Do Not Agree billion barrels 3.5 Production & Forecast (LHS) 3 Production (mmb/d) WTI in 27 $ x (RHS) Production in Excess of Proved Reserves bbo (RHS) billion barrels 5% of Price Increase Proved Reserves 4.96 bbo (RHS) Reserves ( billions of barrels) & WTI in 27 Dollars x EIA Permian Production & Forecast (AEO 28) 36 Billion Barrel Reserve Growth > Total U.S. Proved Reserves of 35 billion barrels 8.2x Reserve Growth Improbable & Not Seen in any Known Analogue Fields Source: EIA & EIA estimates of Permian proved reserves have grown but latest forecast is ~5 billion barrels. Converting EIA s production forecast indicates that proved reserves will be reached by 222. Another 36 billion barrels will subsequently be produced at modestly increasing forecasted oil prices. This suggests that while Permian production growth is likely, reserves will be exhausted in ~4 years. Slide 4

15 Permian Proved Reserves Are Greater than EIA 26 Estimate SEC -K filings for the largest Permian producers were used to compile company estimates of 27 proved reserves. Results were scaled according to their percentage of 27 total production. Crude & condensate proved reserves are estimated to be 6.3 billion barrels. All but 3 mmb of this increase were because of higher oil prices in 27 vs. 26. About /3 of proved reserves are undeveloped. This analysis suggests that at present production rates, Permian tight oil reserves will last approximately 7 years (224). Slide 5

16 Permian Basin & Eagle Ford Shale from a Global Perspective 35 Permian Basin & Eagle Ford Tight Oil Plays Have Respectable 3rd Tier Liquids Reserves Compared With Producing Countries in the World 9 Tight Oil Is a Marginal Business At Best 73% of Companies Lost Money (Capex > Cash From Operations) Based on -K Filings for Full Year *Chesapeake has not filed a 27 -K but Capex-Cash Flow cannot be calculated because cash from operations was negative through Q3 27 Proved Reserves of Liquids (billions of barrels) Permian Basin Eagle Ford Source: EIA & Ratio of Capital Expenditures to Cash From Operations Lose Money Capex > Cash Flow Break Even Make Money Cash Flow > Capex Venezuela Saudi Arabia Canada Iran Iraq Kuwait UAE Russia Libya Nigeria US Kazakhstan Qatar China Brazil Algeria Mexico Permian Angola Ecuador Azerbaijan Eagle Ford Oman Norway South Sudan India Vietnam Egypt Indonesia Yemen Australia Parsley Oasis Hess Sanchez Callon Energen Concho Whiting Laredo Newfield Source: Yahoo Finance & Statoil Marathon Apache Pioneer EOG Diamondback Devon Continental Murphy OXY EPE ConocoPhillips Tight oil plays are an important, late addition to world oil supply. Tight oil has added substantial short-term volumes that have disrupted oil markets. Permian basin and Eagle Ford plays have respectable 3 rd tier reserves compared with world producing countries. Reserve estimates should not be taken too literally because the record of discovering new supply beyond reserve expectations has been consistent. Still, unconventional oil was only possible with higher oil prices, zero-interest rates & massive outside capital. Tight oil has consistently lost money & lost money in 27. The perception that recent prices are low must be placed in constant-dollar context. Our rush to produce, consume and export as fast as possible is based on a false belief that supply is inexhaustible. The assumption that a seamless transition to renewable energy is as delusional as most popular misconceptions about oil. Humans have never gone from higher to a lower density source of energy. Energy is the economy & a lower energy density economy will be nothing like the post-wwii U.S. economy. Slide 6