Tag Archives: tight oil

US Crude Oil Production for January 2015 (and Calling the Top)

Time for a switch in focus, from the philosophical yesterday to the prosaic today. It’s that time of the month for some hard numbers from “frack land”, i.e., the good old USA. What is more, I am going to stick my neck out today and call the top for US crude oil production.

The US government agency the Energy Information Administration (EIA) reports monthly crude oil production with a 2 month lag; January 2015 data were published on 30 March. January saw oil production averaging 9.2 million barrels per day, a rise of 14.8% year on year. Over the previous month, production was down slightly. Nonetheless, we did see a month-on-month decline in November only for production to power to a new record again in December.Yet I’m still calling the top.

True, growth has far exceeded what I expected when I started writing this blog. The production surge is indisputable (here, click for larger image).

US Oil Production jpeg

The reason why I didn’t expect to see output rise so far so fast was due to the high production declines rates exhibited by tight oil plays, leading to what many call the ‘Red Queen’ syndrome: the need to run faster and faster just to stand still. So a mea culpa on my side: the US shale oil industry did run faster and faster. With global crude oil prices locked above $100 barrel for three long years, we got both a lot more rigs and, critically, more efficient rigs as fracking technology advanced. This was enough to overwhelm the naturally high depletion rates. Continue reading

Charts du Jour, 17 March 2015: Pump Baby Pump (but Don’t Drill)

I regularly report on the Energy Information Administration‘s monthly US oil production statistics, which show no slowdown in output as yet (see here for latest numbers). Bloomberg, however, has a series of multimedia offerings giving more colour as to what is going on.

First, a nice chart juxtaposing production and rig count numbers (source: here).

Active Oil Rigs jpeg

And for a great animated graphic showing rig count through time and space, this offering (again from Bloomberg) is superb. Below is my screen shot, but to get the full effect click this link here.

Watch Four Years jpeg

Finally, an animation explaining why the crashing rig count has yet to stop production rising. In Bloomberg‘s view, the divergence between rig count and production has many months to run.

National Geographic recently had an article titled “How Long Can the US Oil Boom Last?” which emphasises the longer view. They argue that the US fracking boom is a multi-year phenomenon not a multi-decade one.

But in the long term, the U.S. oil boom faces an even more serious constraint: Though daily production now rivals Saudi Arabia’s, it’s coming from underground reserves that are a small fraction of the ones in the Middle East.

Both the EIA and the International Energy Agency see US oil production peaking out by the end of the decade regardless of short-term oil price fluctuations. Nonetheless, both organisations have underestimated the upswing in tight oil production to date. Overall, it is very difficult to gauge where US production will be in five years time. This is a bigger story than the current spectacular rig count crash, and one I intend to return to in future posts.

Chart of the Day, 28 Jan 2015: Oil, Cornucopians, Peakists and Jeremy Grantham

The stunning collapse in oil and metal prices since last summer (see yesterday’s post) has brought the cornucopians and abundantites crawling out of the wood work. From an (otherwise very good) article in The Economist of 17th January titled “Let there be light”.

An increase in supply, a surprising resilience in production in troubled places such as Iraq and Libya, and the determination of Saudi Arabia and its Gulf allies not to sacrifice market share in the face of falling demand have led to a spectacular plunge in the oil price, which has fallen by half from its 2014 high. This has dealt a final blow to the notion of “peak oil”. There is no shortage of hydrocarbons in the Earth’s crust, and no sign that mankind is about to reach “peak technology” for extracting them.

Frankly, this is just sloppy thinking from The Economist: the second sentence, which talks of a “final blow” to the notion of peak oil, doesn’t follow on from the first.

In short, the paragraph muddles the short term and the long term. Why is a fall in oil prices barely six months’ old a “final blow” to the notion of peak oil? And while fracking shows we are far from “peak technology”, it says nothing about price. Can tight oil keep coming to market for years to come at current prices? I think not. For a longer treatment of oil supply versus oil demand, see my more detailed post titled “Has Shale Killed Peak Oil“.

One of the most vocal advocates of the ‘peakist’ or ‘depletist’ hypothesis is Jeremy Grantham, who has used The Quarterly Letter of GMO as a platform for his views. The chart below is taken from The Third Quarter 2014 letter (click for larger image):

U.S. Average Hourly Manufacturing Earnings:Oil Price per Barrel jpeg

Grantham points out that in 1940 one hour’s work for an American engaged in manufacturing could buy 20% 0f a barrel of oil. At the twin peaks of oil abundance–1972 and 1999–the same wage could buy over a barrel of oil. But those days, he argues, are long gone. According to Grantham, this has implications for not only oil markets but also for the energy underpinnings of global economic and productivity growth.

Yesterday, I also argued that the rapid slowing to the Chinese economy was the likely culprit behind the havoc in commodity markets rather than a breakthrough in one particular extraction technology. As evidence, I noted how iron ore and copper prices had collapsed along with the oil price, despite the fact that you can’t frack for copper and iron ore.

The critical question now is what will happen to supply in the face of sluggish demand. Tight oil production is dramatically different from traditional oil production due to the accelerated nature of the depreciation schedule. Fracked fields deplete quickly, so to maintain production you must continually invest. If you don’t, aggregate production falls fast–that is, within a year or two. So we won’t witness a decade long excess capacity work-out as you would have seen in previous oil price busts: supply should adjust to demand at breakneck speed this time around.

Consequently, while we are not at “peak technology” for oil extraction, we possibly are at “peak cheap technology”. If so, forget all talk of “final blows” to peak oil.

Data Watch: US and Global Crude Oil Monthly Production November Releases

On November 27th, the U.S. government agency The Energy Information Administration (EIA) announced provisional U.S. crude oil production figures for September 2013. Key points:

  • September crude oil production was 233.8 million barrels, equivalent to 7.8 million barrels per day (bpd)
  • Change over September 2012 on a barrel-per-day basis: +18.6% y/y
  • September total crude oil plus natural gas liquids reached 315.0 million barrels, equivalent to 10.5 bpd

As can be seen from the chart below (click for larger image, link to original data here), the fracking of tight oil formations in the U.S. has made a major impact on U.S. crude production over the last few years. The critical question is whether the current large year-on-year percentage growth rates in oil production can be sustained. On the current trajectory, the US is set see production pass its peak of the 1970s.

US Field Production of Crude Oil jpeg

Growth rates for both crude oil production by itself and crude plus natural gas liquids remain robust, continuing to track in the high teens. The situation for oil is in marked contrast to that of U.S. natural gas, where production growth has stopped.

The differentiator here is price. Both tight gas and tight oil are expensive to produce compared with the conventional alternatives. Accordingly, production investment requires a high product price to remain feasible. U.S. natural gas prices are down roughly by half from their average level in the 2005 to 2008 period (removing the temporary 2008 spike). By contrast, the price of West Texas Intermediate, the U.S. benchmark oil price, remains near all-time highs (again excluding the very short-term 2008 spike).

Given crude oil is a globally traded commodity, U.S. production numbers need to be placed in the context of world supply and demand. In its latest Oil Market Report dated 14 November 2013, the International Energy Agency (IEA) recorded global ‘all liquids’ production of 91.8 million bpd for October 2013.

OPEC and Non-OPEC Oil Supply jpeg

Full quarterly IEA world supply-and-demand figures, including Q3 2013 supply estimates, can be found here.

Prices have eased in recent weeks after the threat of a military strike against Syria was removed. Moreover, the detente between the US and Iran has also opened up the prospect of more Iranian crude coming on to global markets in 2014.

Shale and the Ridiculous Talk of Revolution

How do you tell if we have a revolution in either Resource X or Product Y? Simple. Volume goes up and price goes down. Think computing power. Now that’s a revolution.

So do we have a revolution in the production of tight oil in the U.S.? Let’s take a look at the projections of the U.S. government agency the Energy Information Administration (taken from an EIA staffer’s presentation to accompany the publication of the Annual Energy Outlook 2013; click for larger image):

U.Sl Oil Production jpg

So according to the EIA’s numbers, we have a five-year bump in production which puts us back to the level of output in 1990 and then a gentle decline out to the year 2040. Good, but hardly revolutionary.

And price (note in inflation-adjusted dollars)? Well, that goes up:

EIA Oil Price jpg

Continue reading