JPT - Succeeding in the New Pressure Pumping Environment

Pressure pumpers of the future need to overhaul their business models and become efficiency fanatics to succeed in a permanently changed environment, said Energy and Industrial Advisory Partners (EIAP) in its recent The Pressure Pumper of the Future Report.

According to the boutique strategy consulting firm, pressure pumpers faced challenging conditions even before the current industry downturn from decreasing demand, an oversupplied and fractured market, weak frac pricing, and margin erosion from lower pricing and decoupling of sand and chemicals.

The rapid demand destruction from the COVID-19 pandemic and OPEC+ supply increases could not have found pumpers more ill-prepared, said Sean Shafer, EIAP managing partner, as both public and private companies faced balance sheets that were already raising questions about the need for widespread restructurings in the sector.

https://pubs.spe.org/en/jpt/jpt-article-detail/?art=7249

World Oil - Shale oil production may take years to recover, despite a short-term uptick

HOUSTON (Bloomberg) --As oil prices tick up to $40 a barrel following a pandemic-induced plunge, there’s a sense the shale industry is snapping back to life with Continental Resources Inc., EOG Resources Inc. and Parsley Energy Inc. all saying they’re restarting closed wells.

But top industry forecasters are painting a far darker picture. The reopenings, they say, will do little to bring new growth to an industry being increasingly starved of cash by Wall Street after a decade of excess. Even before the pandemic, investors were demanding companies spend no more than they earn. Now, that’s become a major barrier to future growth.

Looking out 18 months, U.S. output will still be around 16% below its peak in February, according to an average of surveys from the IEA, Genscape, Enervus, Rystad and IHS Markit. It will probably be at least 2023 before the U.S. again hits its record close to 13 million barrels a day.

“Nothing is going to be in the money,” said Bernadette Johnson, vice president of strategic analytics at Enverus, a data and research firm. At current crude prices in New York, she added, “very few new wells are being brought on line.”

https://www.worldoil.com//news/2020/6/24/shale-oil-production-may-take-years-to-recover-despite-a-short-term-uptick?id=31307113

World Oil - Recent Dallas Fed survey reveals U.S. producers’ mindset, strategy for moving forward

HOUSTON—A recent survey by the Dallas office of the Federal Reserve System reveals a very somber and wary mindset by U.S. producers toward the upstream oil and gas (O&G) market. And that attitude is reflected in their plans for coping with the Covid-19-affected O&G market. Comments and data were collected from 165 E&P executives by the Dallas Fed during June 10-18 and released on Wednesday, June 24.

Among comments received was this thoughtful look ahead by one Texas producer: “This is a summary timeline for the E&P [exploration and production] industry. First, it was dismal during the ‘lockdown.’ Second, it is/will be miserable during the ‘transition’ (June–December 2020). Third, it will be somber in the ‘new normal’ (2021). The oil industry went in a deep hole in first-quarter 2020. We reached the bottom, and now we are trying to climb up. It will be quite a while (2022+) to get back up the hole, to the pre-COVID-19 level of activity and service pricing.”

https://www.worldoil.com//news/2020/6/26/recent-dallas-fed-survey-reveals-us-producers-mindset-strategy-for-moving-forward?id=31307113

EIA - U.S. commercial crude oil inventories reach all-time high

Commercial crude oil inventories do not include crude oil held in the U.S. Strategic Petroleum Reserve, which totaled 654 million barrels as of June 19. Total commercial crude oil inventories include volumes held at refineries and tank farms, as well as some amount of pipeline fill (crude oil held in pipelines) and stocks in transit by water and rail. When estimating storage capacity utilization, EIA removes the pipeline fill and stocks in transit so that utilization reflects the stocks held at refineries and tank farms as a percentage of working storage capacity.

https://www.eia.gov/todayinenergy/detail.php?id=44256&src=email

Baker Hughes Weekly US Land Rig Count - June 26 2020

The Baker Hughes Weekly Rig Count showed that the US Land Rig Count dropped by only 1 rig this week. This is the lowest level since the start of the COVID-19 downturn. Colorado, New Mexico and Wyoming each dropped a rig while Texas and Oklahoma each added a rig.

Figure 1: Baker Hughes US Land Weekly Rig Count - July 26 2020
(Source: Baker Hughes)

Table 1: Baker Hughes US Land Weekly Rig Count - June 26 2020
(Source: Baker Hughes)

BTU Analytic - Are Solar Developers the Next Frackers

The energy industry is always chasing the next hottest trend, whether it was wholesale power trading in the 1990s, shale gas in the 2000s or unconventional oil in the 2010s. Each of these eras was driven by new technology and plenty of capital. Each era also had a cast of companies that pushed the edge of development and exhibited their own hubris and swagger. As always, as one era ends, a new one begins. Currently, a COVID-driven global recession has curbed oil and gas production growth for the time being. Meanwhile in the US, many large consumer-facing companies such as Facebook, Google and AT&T have sought renewable energy power purchase agreements to further bolster their appeal to consumers. One result is the most aggressive power generation development across all fuel types is now solar. This begs the question, are solar developers the energy industries next frackers? Is the massive buildout of solar development in the US another commodity cycle race to the bottom? Shale gas E&Ps had a decade of easy access to capital as equity markets funded ‘growth at all costs’ strategies. Are solar developers in the same position now or is this time different? This Energy Market Insight will compare historical shale gas production growth rates by play to development of solar generation by ISO to see which development process is more aggressive.

https://btuanalytics.com/power-and-renewables/are-solar-developers-the-next-frackers/

Peak Oil vs Peak Oil Demand

The pandemic has given us an opportunity to understand the impact on the oil and gas industry if we switched from driving cars with Internal Combustion Engines (ICE) to non-ICE vehicles (electric or hydrogen powered vehicles). While the sudden drop in oil demand due to the pandemic is not a realistic scenario, the gradual reduction in oil use for gasoline will be a scenario that will play out in the future. This leads to the question of when Peak Oil Demand will occur and what will that scenario look like. 

When discussing Peak Oil Demand (or just Peak Demand) we should first back up to Peak Oil. Peak Oil is the theoretical maximum rate at which global oil will be produced. This peak could be reached in two ways 1) oil reserves are finite and we reached the maximum production rate that can be sustained by dwindling supplies 2) oil reserves are very large but the cost to produce them becomes too high and they are replaced by a cheaper source of energy.

Marion King Hubbert is credited with starting the discussion about Peak Oil when he published a paper in 1956. Hubbert stated that oil reserves were limited and using statistics and probabilities, he determined that the US Supply would reach a maximum production rate in the early 1970's and that global production would hit a maximum rate in the early 2000's. The following chart is the Hubbert Curve for global oil production

Figure 1: M King Hubbert Peak Oil Curve for Global Oil Production
(Source: Wikepedia, https://en.wikipedia.org/wiki/Peak_oil)

In 1956, Hubbert predicted that global oil supplies would have a maximum rate of 34.2 million barrels of oil per day (BOPD) and then begin to fall off. The reality is that in 2019 global oil production was nearly 100 million BOPD and we had an oversupply of oil on the market. The next chart shows Hubbert's prediction for US oil production and actual oil production.

Figure 2: M King Hubbert Peak Oil Curve for US Oil Production
(Source: Wikepedia, https://en.wikipedia.org/wiki/Peak_oil)

Initially, Hubbert's predicted oil production matched actual US production. This gave way to many doomsday prediction about very limited supplies and skyrocketing oil prices. Hubbert was wrong because he did not know or understand what technologies would be discoveries that would lead to many conventional oil discoveries and the release of oil from unconventional(Shale) formations.

While oil supplies are finite, it's unlikely that we will run out oil in the near future. There are too many sources of oil available at the moment, which is driving prices down.  We will likely experience peak oil production within our lifetime as the demand for oil is reduced. 

The idea of peak demand has gained traction in recent years due to the emergence of electric vehicles and the shift to using renewable energy sources. Since nearly 50% of global oil production goes toward road fuels, peak demand will occur as electric vehicles regularly replace ICE vehicles. The following figure shows the oil demand and the impact from COVID-19

Figure 3: Rystad Energy Global Oil Demand and COVID-19 Impacts
(Source: Rystad Energy COVID-19 Report, 13th Edition, June 2020)

In Figure 3, Rystad Energy shows that global oil demand for road fuels was nearly 50 million BOPD. In April, the demand for Road fuels was reduced by nearly 17 million BOPD due to COVID-19 impacts. This sudden loss in demand resulted in very low prices (negative prices) as the supply greatly exceeded demand. In a peak demand scenario, the oil supply will always have the potential to exceed demand, and low oil prices will likely remain an issue. 

Once we hit peak demand, there will still be a lot of work for the oil and gas industry. The following figure shows 2 scenarios from Rystad Energy about the potential for peak demand

Figure 4: Rystad Energy Peak Demand Scenarios
(Source: Rystad Energy OilMarket Analytics, UCube, ServiceDemandCube - March 2019)

In these two, pre-COVID-19 scenarios, peak oil could be reached in 2027 or 2037. If we reach peak demand in 2027, oil production will likely be 100 million BOPD. If we reach peak demand in 2037, oil production will likely be 110 million BOPD. In both cases, oil production flattens out and slowly begins to decline. We will have several years of finding, developing and producing 100 million BOPD before we see the slow decline in production. While we have lots of supply ready to go to the market today, we need to continue to search for additional supplies to meet future needs.

I would expect that the longer term scenario is more likely due to trends in the US Auto Industry. In 2020, it is estimated that there is 287 million registered vehicles in the US. The replacement rate of vehicles (old vehicles leaving the market vs new vehicles entering the market) is estimated to be 15 million vehicles per year (Approximately 5% of the market retires and is replaced every year). 

Based on these numbers, it would take approx 20 years to replace all of the current vehicles on the road (5% every year times 20 years = 100% replacement). The average age of cars in the US continues to increase due to the replacement cost of vehicles and the reliability of current models

In 2019, 330,000 plug in electric vehicles were sold in the US. This represents 2.2% off the 15 million vehicles that were replaced in the market in 2019. If all of the cars sold per year were electric, it would take 10 years for electric vehicles to make up 50% of the US market. Even then, 50% of the market will be driving vehicles that require gasoline.

Everyone reading this will probably witness Peak Oil and Peak Demand in their lifetime. Those of us still working in the oil and gas industry will be faced with many challenges as we try to find new sources of oil in a world where demand for our product is shrinking. 

World Oil - Volatile oil prices hamper New Mexico’s plan to dominate U.S. shale

HOUSTON (Bloomberg) --As Covid-19 shock waves reverberate across U.S. oil towns, perhaps nowhere is their speed and severity more apparent than in America’s newest shale powerhouse.

Just months ago, New Mexico, the third-biggest producer of U.S. oil, approved the state’s largest budget ever, paid for by an oil boom that made up 40% of the state’s revenues in 2019. Now that plan has been slashed by more than $600 million, affecting everything from pay raises for state workers to a program designed to provide free community college to state residents.

Oil-producing states across the U.S. are facing a double whammy with both drilling and overall consumer spending cut back by the pandemic. New Mexico, meanwhile, stands as exhibit A of this boom-to-bust dynamic, with the state’s revenue forecasts plunging and more than 4,600 workers in mining, most of which is oil and gas-related, claiming unemployment insurance in the week ended June 13.

https://www.worldoil.com//news/2020/6/22/volatile-oil-prices-hamper-new-mexico-s-plan-to-dominate-us-shale?id=31307113

Capriole Energy - Caught in a trap: most US E&Ps are burdened in debt, unable to generate free cash and replace decline, even at “normal” oil prices

A couple of months ago I wrote a piece on my website about the five brutal facts that the US oil industry and energy makers must confront while planning for the post-coronavirus world. One of the most brutal facts was that the sector had struggled to make money over the last decade and at oil prices less than $50/bo offered little prospect of doing so in the future. I offered some options to move forward in a progressive way within the energy transition, a ”build back better” plan if you like, starting with a radical re-basing and cost optimization of the US upstream industry. I expected some companies, particularly those with the less attractive assets, to cut their losses and merge with equals, some to try to grind it out through cost-cutting and refinancing with the hope of higher prices in the rebound, and the rest to seek safe haven in Chapter 11 restructuring.

https://www.capriole-llc.com/news/2020/4/20/qt22aqcei7jqbyb7nnhci6xugx961v

Bloomberg - The Big Oil Turnaround

(Bloomberg) -- Every day, traders in London congregate at 4 p.m. to buy and sell North Sea oil for half an hour. The window, as it’s known in the industry, is where competition between the most powerful players in the market sets the price of Brent crude.

Two months ago, every trader wanted to sell cargoes and none were keen to buy. Now the window has transformed into a bull market, where bids outnumber offers 10 to one and prices are surging.

https://www.rigzone.com/news/wire/the_big_oil_turnaround-22-jun-2020-162491-article/?all=HG2

JPT - Carnage Continues To Curtail Oilfield Services Sector

While much has been written on the outlook of US oilfield services (OFS) jobs, the newest numbers are the most startling yet.

In May alone, that sector alone lost nearly 15,000 jobs, according to research by the Petroleum Equipment and Services Association (PESA), an OFS trade association, using data from the Bureau of Labor Statistics (BLS). Year-over-year, that represents a decline of 13.5% or 105,000 jobs. And from February to May alone, jobs in the sector declined 11.1%.

Total job losses due to pandemic-related demand destruction amount to 84,000. OFS employment is down from May 2019 and now stands at its lowest point since 2017. Losses were heaviest in April, totaling 59,666 jobs.

https://pubs.spe.org/en/jpt/jpt-article-detail/?art=7236

World Oil - Oil prices continue their rise, albeit slowly, since April’s crash

NEW YORK (Bloomberg) - Oil turned around last week’s setback, extending a slow but relentless rise since falling into negative territory in April.

U.S. benchmark crude futures rose 2.3% Friday to close at the highest level since March 6. The 9.6% increase for the week marks the seventh gain in the last eight weeks. Oil traders Vitol Group and Trafigura Group and exporter Saudi Aramco all talked up the strength of the demand recovery in recent days, and prices for some of the world’s major oil products have begun to roar higher. OPEC+ gave reassurance on output cuts on Thursday.

“You had three key ingredients making the market climb this week,” said Thomas Finlon of Houston-based GF International. A drop in U.S. refined product inventories, OPEC compliance and falling crude inventories at Cushing, Oklahoma, all contributed to the price strength, he said.

https://www.worldoil.com//news/2020/6/19/oil-prices-continue-their-rise-albeit-slowly-since-april-s-crash?id=31307113

Baker Hughes Weekly US Land Rig Count - June 19 2020

US Land Rig Count decreased again this week, down 11 when compared to the previous week. The Permian continues to lead the decreases, down 5 rigs from the previous week (45% of the total lost this week).

Looking at the industry, there are a lot of signs that we are reaching a bottom in activity

• oil and gas prices are stabilizing at higher levels 
• global supply and demand is close to balancing 
• OPEC+ has agreed to extend production cuts which should result in a supply deficit starting in August

As long as there isn't another round of COVID-19 related lockdowns, the oil and gas market should be soon begin to slowly recover.

Figure 1: Baker Hughes US Land Weekly Rig Count - June 19
(Source: Baker Hughes)

Table 1: Baker Hughes US land Weekly Rig Count
(Source: Baker Hughes)

RigZone - Permian Operator Fully Digitizes Completions Ops

Permian Basin oil and gas producer Parsley Energy achieved a 22-percent gain in efficiency in its most recent quarterly review after fully digitizing its completions operations, Cold Bore Technology Inc. reported this week.

“About five years ago, we made efficiency a priority,” Agustin De Fex, Parsley’s senior manager for completions, remarked in a written statement emailed to Rigzone.

The efficiency improvement followed Parsley’s integration of Cold Bore’s “SmartPAD” completions operations system, according to Cold Bore. The company stated that its technology incorporates valve positioning, pressure monitoring sensors, field data collection systems and proprietary software to provide “ultra high resolution” hydraulic fracturing data with analytics.

https://www.rigzone.com/news/permian_operator_fully_digitizes_completions_ops-19-jun-2020-162465-article/

World Oil - Global pandemic cost oil industry 84,000+ jobs, PESA research shows

HOUSTON - Research by the Petroleum Equipment and Services Association (PESA) found that employment in the oilfield services and equipment (OFS) sector fell by nearly 15,000 jobs in May, bringing total job losses due to pandemic-related demand destruction to more than 84,000. OFS employment is down 105,000 jobs from May 2019 and now stands at its lowest point since 2016.

Using Bureau of Labor Statistics (BLS) data, PESA, in consultation with researchers from the Hobby School of Public Affairs at the University of Houston, estimates OFS sector jobs in the U.S. dropped from 764,189 in February to 679,281 in May, a decline of 11.1%. Losses were heaviest in April, totalling 59,666 jobs.

https://www.worldoil.com//news/2020/6/18/global-pandemic-cost-oil-industry-84-000plus-jobs-pesa-research-shows

Rystad Energy - US fracking slowdown set to add at least two years of backlog work as DUC wells pile up

The slowdown in US fracking activity that the Covid-19 pandemic-driven downturn brought this year has caused an inventory increase of about 750 drilled but uncompleted (DUC) wells just in the last three months, a Rystad Energy analysis of major liquid basins finds. The backlog, which will likely increase in June, is equivalent to about two years of fracking at the current pace.

When it comes to the regional trends for the inventory of drilled wells awaiting frac services, we see a particularly strong build-up in the Permian Basin where almost 500 wells were added over the past three months. All other major liquids basins combined saw a build-up of about 270 wells in the same period.

https://www.rystadenergy.com/newsevents/news/press-releases/us-fracking-slowdown-set-to-add-at-least-two-years-of-backlog-work-as-duc-wells-pile-up/

Rystad Energy - Global OFS demand is set for a 25% decline in 2020. Here is how the recovery will unfold

Global demand for oilfield services (OFS), measured in the total value of exploration and production (E&P) company purchases, is set for a massive 25% yearly drop in 2020 as a result of the Covid-19-caused downturn, a Rystad Energy analysis shows. Spending is expected at $481 billion this year and take the first step on the road to recovery in 2021, when it is forecast to tick up by just about 2%.

The recovery will accelerate further in 2022 and 2023, with OFS spending by E&Ps reaching some $552 billion and $620 billion, respectively. Despite the boost, purchases will not return to the pre-Covid-19 levels of $639 billion achieved in 2019.

https://www.rystadenergy.com/newsevents/news/press-releases/global-ofs-demand-is-set-for-a-25pct-decline-in-2020-here-is-how-the-recovery-will-unfold/

World Oil - Edge LNG lands new project to monetize stranded Marcellus gas

PENNSYLVANIA - Edge LNG has been selected by EXCO Resources to capture and liquefy gas from a stranded well in the Marcellus Shale. Initial operations are underway and expected to continue through 2022.

The agreement will see Edge LNG deploy its fully mobile, truck-delivered LNG equipment to the Marcellus site, including three Cryobox liquefaction units, with the potential to expand through the rapid deployment of additional units.

The unique process, created by Galileo Global Technologies and deployed exclusively by Edge LNG in North America, can be delivered to any site accessible by road. After set-up and safety checks, production can begin within hours, with minimal investment required of the site owner and no need for pipeline infrastructure.

https://www.worldoil.com//news/2020/6/10/edge-lng-lands-new-project-to-monetize-stranded-marcellus-gas

JPT - BP Slashes Up to $17.5 Billion in Assets; Cites Pandemic for Swifter Shift to Net Zero

BP has announced it will write off up to $17.5 billion from the value of its assets when it reports its second-quarter results, after cutting long-term oil and gas price forecasts.

The impairments are set to raise its debt burden and increase pressure to reduce its dividend.

BP lowered its benchmark Brent oil price forecasts to an average of $55/bbl until 2050, down by around 30% from previous assumptions of $70.

BP shares were down 4.3% at 1418 GMT on 15 June.

The second week in June, BP said it would cut about 14% of its workforce in response to the coronavirus crisis and to support CEO Bernard Looney’s strategy.

https://pubs.spe.org/en/jpt/jpt-article-detail/?art=7188

World Oil - Oil prices climb as fears build of a coming supply squeeze

NEW YORK (Bloomberg) - Oil reversed losses as investors shifted focus from a potential resurgence of Covid-19 outbreaks and toward supply-and-demand fundamentals.

Crude futures in New York rose about 1% on Monday after earlier falling as much as 5.2%. The recovery came as equity markets pared losses. Iraq cut term oil sales to multiple Asian and European refiners, according to people familiar with the matter.

“Even as the global markets are in the grips of a resurgence of risk aversion tied to new Covid outbreaks in China and the U.S., oil fundamentals are still moving in the right direction,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas.

https://www.worldoil.com//news/2020/6/15/oil-prices-climb-as-fears-build-of-a-coming-supply-squeeze

Spears & Associates - Where Does Consolidation Leave Frac Services?

Basic Energy Services sold their trucks when they closed their frac business at the end of 2019. I see these trucks on frac jobs throughout the MidContinent today… I think at least one, perhaps two, new frac service companies were launched with the closure of BAS frac. And why not get in business if the cost of launching is almost zero?

https://spearsresearch.com/insider

World Oil - Chesapeake’s fate marks the end of an era in U.S. shale

HOUSTON (Bloomberg) --It will go down as wildest of the shale wildcatters, the overreaching pioneer of fracking techniques that minted vast fortunes and, now, have left behind ruin.

At long last, financial reality has caught up with Chesapeake Energy Corp., avatar of the boom and subsequent bust of North American shale.

Chesapeake’s spiral toward oblivion accelerated this week with executives said to be preparing for a potential bankruptcy filing, signaling the imminent end of Chief Executive Officer Doug Lawler’s 7-year campaign to turn around the troubled gas explorer. For a company that’s been skirting disaster for most of the past decade, the Covid-19-driven collapse in world energy prices merely added one more exclamation point to a tale of risk, hubris and debt.

https://www.worldoil.com//news/2020/6/12/chesapeake-s-fate-marks-the-end-of-an-era-in-us-shale

Baker Hughes Weekly Rig Count - June 12 2020

The Baker Hughes Rig Count shows a loss of 5 rigs this week, the fewest rigs lost since March 20. The current rig count stands at 266 (down 1.85% since last week). The Permian rig count decreased by 4 rigs, a 2.85% drop from the previous week. 

Oil prices will likely remain locked in a range of $35 to $40 for the next several weeks. Oil consumption is beginning to return and OPEC+ supply reductions will remain in place through July. These factors should allow for US rig count to hit bottom and stabilize over the next couple of weeks.

Table 1: Baker Hughes Weekly Rig Count - June 12 2020
(Source: Baker Hughes)

Figure 1: Baker Hughes Weekly Rig Count - June 12 2020
(Source: Baker Hughes)

JPT - ConocoPhillips CTO: The Shale Revolution Will Be Digitized

The oil and gas industry’s current downturn is only 3 months old. But the swiftness with which the global crude markets were brought down by the ongoing global pandemic is likely to leave an impression that will be felt for many years to come.

One of the unknowns remains the full impact that this new cycle will have on technology development and the ambitious roadmaps that large operators, especially, have touted as the route to their future.

Greg Leveille, the chief technology officer of ConocoPhillips, is among those charged with paving that path and said despite the turmoil, “We haven’t changed our direction to any significant degree” when it comes to the international major’s technology priorities.

https://pubs.spe.org/en/jpt/jpt-article-detail/?art=7166

OilPrice.com - Country With World’s Largest Oil Reserves Has Only One Rig Left

The collapse in oil prices and the tightening U.S. sanctions against Venezuela have accelerated the decline of the oil industry in the country sitting on the largest crude oil reserves in the world.

As of May, Venezuela’s rig count plunged to just two, data from Baker Hughes shows, as production slipped by 16 percent to 645,700 barrels per day (bpd), Bloomberg reported on Thursday, citing documents containing production data it has seen.

Of the two active rigs in Venezuela last month, one was working at an oilfield and another one was drilling for gas, according to Bloomberg. Those rigs are working in the Orinoco oil belt, where Venezuela’s state oil firm PDVSA operates oilfields in joint ventures with foreign firms, sources familiar with the matter told Bloomberg.

https://oilprice.com/Energy/Crude-Oil/Country-With-Worlds-Largest-Oil-Reserves-Has-Only-One-Rig-Left.html

BTU Analytics - https://btuanalytics.com/shale-production/appalachia-production-on-the-rebound/

Both natural gas production and demand in the US continue to drop in an ever-steepening race to find a bottom in the current market environment. LNG liquification continues to plummet hitting levels not seen since early 2019. While demand remains soft, natural gas supply is also reacting to low prices. In the middle of May, EQT began the curtailment of 1.4 Bcfe/d of production, and on May 26 provided an update indicating curtailments would last through 2Q2020. Today’s energy market insight will look at how Appalachian production is performing post curtailments and where it may go for the balance of 2020.

https://btuanalytics.com/shale-production/appalachia-production-on-the-rebound/

Rig Count Response to Oil Prices - Can we see a trend from past data?

Since the downturn began, I have seen several reports comparing this downturn with previous downturns. As everyone knows in the oil and gas industry, this downturn has been one of the fastest decreases in oil price, rig count, frac fleets, etc in the history of the industry. In recent weeks, oil prices have hit bottom and rallied back to nearly $40. This post will look at the the response of rigs to oil price changes to determine if their is a relationship with rig count recovery.

Baker Hughes Rig Count has data that goes back to 1987. In Figure 1, I plotted Baker Hughes Weekly Rig Count versus the Weekly Price of WTI (West Texas Intermediate)  from the Energy Information Agency (EIA) from 1987 until June 5, 2020.

Figure 1: Baker Rig Count vs WTI Price - Since July 1987
(Source, Baker Hughes, EIA)

Looking at the data, you can see that there is a relationship between oil price peaks and valleys and rig count peaks and valleys. I labeled 6 points where there were clear rig count reductions. While there are multiple ups and downs in the rig count before Point 1, there isn't a relationship to oil price that can be observed.

At each point on the chart, I am going to focus on the oil price and rig count during this period. I will compare the rig count response time to the change in oil price. The goal is to understand if there is a historical relationship between the peaks and valleys of oil price and rig count. I will use a 10% increase in rig count from the rig count bottom to indicate rigs are recovering

Figure 2: Baker Rig Count vs WTI Price - Point 1
(Source, Baker Hughes, EIA)

Point 1 clearly shows that 1997 was a completely different time than today. The US Oil and Gas Industry was focused on drilling conventional formations and vertical wells in 1997. At that time, oil price peaked at $26.30 ($41.58 in 2020 dollars) in January 1997. It began a long, slow fall over 102 weeks to bottom at $11 ($17.30 in 2020 dollars) in Dec 1998. 

The time between peak oil price and peak rig count was 34 weeks. Rigs fell for 85 weeks to end at 488 rigs in the US. When oil hit a bottom of $11, it took 17 weeks for the rig count to hit bottom. The Rig Count rebounded by 10% within 5 weeks of it hitting bottom.

Figure 3: Baker Rig Count vs WTI Price - Point 2
(Source, Baker Hughes, EIA)

At point 2 (figure 3), the US Oil and Gas Industry was still focused on vertical drilling of conventional formations. WTI peaked at $35.91 ($53.47 in 2020 dollars) in Nov 2000 and fell over 52 weeks to bottom out at $18.18 ($26.33 in 2020 dollars) in Nov 2001. The Rig count peaked at 1293 rigs in July 2001 and fell to 738 rigs over 38 weeks.

The time between oil price peak and rig count price peak was 33 weeks. When oil hit bottom, it took another 19 weeks for rig count to hit bottom.The rig count rebounded by 10% within 5 weeks of hitting bottom

Figure 4: Baker Rig Count vs WTI Price - Point 3
(Source, Baker Hughes, EIA)

In July 2008, oil prices peaked at $142.52 ($169.72 in 2020 dollars). Shale gas and horizontal drilling was just beginning to catch on, with 30% of the US rigs drilling horizontal wells. The rig count peaked at 2031 rigs in Sept 2008.

Oil prices fell from $142.52 in July 2008 to $32.98 ($39.27 in 2020 dollars) in Dec 2008. Rig Count fell from 2031 rigs in Sept 2008 to 876 rigs in June 2009. During this down turn, oil prices fell quickly but the response from the rig count was much slower. This was due to the fact that operators were focusing on gas drilling rather than oil drilling. During this period gas prices fell from a peak of $13.20 per mmBTU in July 2008 to a low of $2.18 per mmBTU. Since this time gas price have rarely approached $4 per mmBTU.

The response from rig count bottom to a 10% increase from the bottom was 8 weeks during this downturn.

Figure 5: Baker Rig Count vs WTI Price - Point 4
(Source, Baker Hughes, EIA)

At Point 4 (figure 5), there does not appear to be a correlation between rig count and gas or oil prices. Oil prices during this time were in a range between $112.30 in April 2011 and $79.43 in April 2013. This was the period of transition in the industry, as we shifted from mainly vertical wells to horizontal wells. 

Figure 6: US Land Rig Count by Trajectory
(Source, Baker Hughes)

As Figure 6 shows, the percentage of rigs drilling horizontal wells went from 60% to 80%. Older rigs were being retired and new, more efficient rigs were being deployed. While there is a rig decrease, this decline is not tied to commodity prices. As we drilled more horizontal wells we could get more oil with fewer wells, resulting in a natural rig count decline.

Figure 7: Baker Rig Count vs WTI Price - Point 5
(Source, Baker Hughes, EIA)

At point 5 (figure 7), oil prices peaked at $106.69 in June of 2014 and then declined over 86 weeks to $30.02 in Feb 2016. During this period, there were a few plateaus where oil prices appeared to stabilize, with a few increase in price, but overall decrease.

Rig count peaked at 1931 rigs in Sept 2014 and fell to 404 rigs in May 2016. Rig Count followed oil prices over this time, hitting plateaus and then dropping as oil prices continued to decrease. Once the rig count finally hit bottom, it took 7 weeks for the rig count to rebound by 10%.

Figure 8: Baker Rig Count vs WTI Price - Point 6
(Source, Baker Hughes, EIA)

Point 6 (figure 8) is our current 2020 situation. With this data, you could argue that we have been in a downturn since Oct 2018 where prices peaked at $75.13. Since then both oil prices and rig count have been decreasing. 

At the start of 2020, oil prices peaked at $62.09 and hit a weekly low of $3.32 mid April. This price decrease happened over a period of 16 weeks with an especially hard fall due to COVID-19 oil consumption decreases. Over this same period rig count has dropped from 793 rigs to 284 rigs on June 5, 2020. 

Looking at the data, once oil prices hit bottom, the rig count usually hits bottom within 14 to 17 weeks. At the writing of this post, oil prices hit bottom 7 weeks ago. Due to the sharp decline, I expect rig count to hit bottom within the next 3 weeks, faster than the previous downturns. 

The data has shown that we usually see a 10% increase in rig count within 5 to 8 weeks of hitting the bottom. Assuming that the bottom rig count is near 250 rigs, we could expect to see an addition of 25 rigs through August and September. As oil prices hover near $40 and service costs stay low, it would be fairly easy to add 25 rigs across all of the basins. The true wildcard is the potential for a second wave of infections from COVID-19. If there is a negative impact on oil consumption due to a second wave, then rig count will remain depressed into 2021. 

EIA - EIA raises its 2020 crude oil price forecast in the June STEO

Brent crude oil prices rose in May, reflecting a tightening in the global oil market balance. Initial data show that increased global oil demand and a high adherence to production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) drove the price increase. In the June 2020 Short-Term Energy Outlook (STEO), EIA forecasts that Brent crude oil prices will average $37 per barrel (b) in the second half of 2020, up from a forecast of $32/b in the May STEO (Figure 1). EIA forecasts that the price of Brent crude oil will average $48/b in 2021—unchanged from the May STEO forecast. Forecast rising crude oil prices reflect an expectation of declining global crude oil inventories in the second half of 2020 and in 2021. EIA expects that high inventory levels and ample spare crude oil production capacity will limit upward price pressures in the coming months, but as inventories decline into 2021, those upward price pressures will increase.

https://www.eia.gov/petroleum/weekly/

BTU Analytics - Roll Call, pt. 2 – Global Liquids Supply Outlook

Last week, BTU Analytics’ Energy Market Insights touched on how the various outlooks for global liquids demand have vastly different implications for the recovery of the oil industry. While getting a complete picture on how oil demand recovers will take time, global supply is also in flux and will significantly impact any recovery in crude supply. Recently, conversations amongst Saudi Arabia and Russia to potentially extend the deepest cuts agreed upon in the April production deal for up to two more months, combined with reports of a lack of curtailment compliance in Iraq and Nigeria, has shed light on the uncertainty of global liquids supply going forward. This commentary will compare various scenarios on the path of OPEC+ production and how that could impact the path to recovery.

https://btuanalytics.com/crude-oil-pricing/roll-call-global-liquids-supply-outlook/

JPT - What Damage Is Wrought by the Rush to Shut In Wells?

It has been a few months since the collapse of the Vienna Alliance talks and the full, global extent of coronavirus (COVID-19) started to become apparent. While oil prices have improved somewhat and some optimism has emerged since then, it's clear that the damage wrought during that short stretch of time will be severe and long lasting.

This is certainly true in US upstream activity, which will of course subsequently affect the water market. Our research suggests that US land drilling and completions (D&C) water demand will decrease 48% during 2020 as a result of the capital spending reductions leading to drastic reductions in D&C activity levels. However, with a rebound in activity expected in 2022, the overall D&C water market will in fact grow at a 7% compound annual growth rate from 2020 to 2024.

The Permian activity reduction will significantly affect its market share in terms of drilling water demand. This basin accounted for 41% of total US drilling water requirements in 2019, but during 2020 it is expected to account only for 28%. The Permian Basin and Mid-Continent will be the main drivers for the fracture water demand reduction, accounting for 56% of the volume reduction in 2020.

https://pubs.spe.org/en/jpt/jpt-article-detail/?art=7146

OilPrice.com - Why Saudi Arabia Will Lose The Next Oil Price War

Saudi Arabia has instigated two oil price wars in the last decade and has lost both. Given its apparent inability to learn from its mistakes it may well instigate another one but it will lose that as well. In the process, it has created a political and economic strait-jacket for itself in which the only outcome is its eventual effective bankruptcy. OilPrice.com outlines why this is so below.

The principal target for Saudi Arabia in both of its recent oil price wars has been the U.S. shale industry. In the first oil price war from 2014 to 2016, the Saudi’s objective was to halt the development of the U.S. shale sector by pushing oil prices so low through overproduction that so many of its companies went bankrupt that the sector no longer posed a threat to the then-Saudi dominance of the global oil markets. In the second oil price war which only just ended, the main Saudi objective was exactly the same, with the added target of stopping U.S. shale producers from scooping up the oil supply contracts that were being unfilled by Saudi Arabia as the Kingdom complied with the oil production cuts mandated by various OPEC and OPEC+ output cut agreements.

https://oilprice.com/Energy/Energy-General/Why-Saudi-Arabia-Will-Lose-The-Next-Oil-Price-War.html

World Oil - EIA data suggests official U.S. oil stockpile figures are too high

NEW YORK (Bloomberg) --Oil traders and analysts scrutinizing U.S. inventory data for signs of a market recovery are being confronted by an odd situation: the math just doesn’t add up.

Various government data sets including stockpiles, production, imports and exports are signaling that current official figures on at least some supplies are excessive. While it’s unclear where exactly the discrepancy lies, the difference could potentially signal a more bullish outlook for crude prices as they claw their way back after diving below zero in April.

The excess is showing up in the U.S. Energy Information Administration’s so-called crude supply adjustment factor -- the difference between stockpile numbers and those implied by production, refinery demand, imports and exports. That has averaged negative 980,000 barrels daily over the past four weeks -- the largest in records going back to 2001, and equivalent to more than 27 million barrels.

https://www.worldoil.com//news/2020/6/4/eia-data-suggests-official-us-oil-stockpile-figures-are-too-high

EIA - Canada is the largest source of U.S. energy imports

Canada is the largest source of U.S. energy imports and the second-largest destination for U.S. energy exports behind only Mexico. Energy is an important component of trade between Canada and the United States. In 2019, based on the latest annual Standard International Trade Classification (SITC) data from the U.S. Census Bureau, energy accounted for US $85 billion, or 27%, of the value of all U.S. imports from Canada. Crude oil and petroleum products accounted for 91% of the value of U.S. energy imports from Canada and 89% of the value of U.S. energy exports to Canada.

https://www.eia.gov/todayinenergy/detail.php?id=43995&src=email

Rystad Energy - Glut no more: Fresh OPEC+ cuts point to crude and condensate supply deficits through 2021

The forced oil production shutdowns and the extension of the generous OPEC+ voluntary cuts into July will not only balance the Covid-19-hit global crude and condensate demand, but are deep enough to create a monthly deficit starting from June 2020 and continuing uninterrupted until at least the end of next year, a Rystad Energy analysis shows.

The oversupply, which sent WTI oil prices into the negative earlier this year, is a thing of the past as long as OPEC+ compliance stays strong and the oil demand recovery trajectory isn’t radically altered. The last surplus month appears to have been May, when crude and condensate production exceeded demand by about 6.1 million barrels per day (bpd).

June is now already set for a global production deficit of about 1.5 million bpd. The imbalance is forecast to reach 4.6 million bpd in July, 4.2 million bpd in August and, after being reduced a little during the remainder of 2020, peak at 5.2 million bpd in January 2021. Although the shortfall will ease after that, Rystad Energy estimates that monthly deficits will remain throughout next year.

https://www.rystadenergy.com/newsevents/news/press-releases/glut-no-more-fresh-opec-cuts-point-to-crude-and-condensate-supply-deficits-through-2021/

Baker Hughes Weekly Rig Count - June 5 2020

The Baker Hughes Weekly Rig Count showed that US rigs continue to decrease this week, dropping 18 more rigs to 271 rigs. This week, the Permian Basin lost the fewest rigs since March 20, losing only 7 rigs. The Eagle Ford rig count dropped 32% this week, dropping 8 rigs. Looking at the rig count trends, the other basins have reached bottom in the last couple of weeks. 

With oil prices holding onto their recent gains, I would expect that we should hit the bottom of the rig count in the next couple of weeks. There are many reports that operators are opening up their shut in wells, which should result in increased production. Hopefully we will see an increase in drilling as all of the shut in wells are returned to production and the natural decline in production continues to push prices higher.

Figure 1: Baker Hughes Weekly Rig Count - June 5 2020
(Source: Baker Hughes Rig Count)

Table 1: Baker Hughes Weekly Rig Count Comparison
(Source: Baker Hughes Rig Count)

BTU Analytics - Roll Call – Global Liquids Demand Forecast Review

The last several months were marked by unprecedented destruction of demand for liquids globally, which sent forecasts from early 2020 into a tailspin. Most forecasts currently agree that the negative impacts to demand from COVID-19 have the deepest trough in the second quarter of 2019, but the variance in magnitude has larger implications relating to the speed at which global inventories will be drawn down and the path to full demand recovery. Aggressively modeling global liquids demand recovery by the end of 2020 could drive crude prices high enough to alter today’s supply outlook. Today’s commentary will examine the forecasts published in May 2020 from IEA, EIA, and OPEC in relation to BTU Analytics’ current outlook and what they imply about longer-term liquids demand outlooks.

https://btuanalytics.com/crude-oil-pricing/roll-call-global-liquids-demand-forecast-review/

World Oil - OPEC+ extends production cuts through July on deal with Iraq

LONDON (Bloomberg) --OPEC+ is set to extend production cuts to prop up the oil market after a breakthrough in high-stakes negotiations, and the cartel could meet as soon as this weekend to sign off on the deal.

After almost a week of wrangling, OPEC+ leaders Russia and Saudi Arabia clinched a tentative deal with holdout member Iraq, according to a delegate. The pair were pushing Iraq to stop shirking its share of cuts and even to compensate for failure to comply with cuts in the past.

The agreement -- though still to be ratified -- means OPEC+ will extend its record production curbs for another month until the end of July. Brent crude, the global benchmark, edged higher, nearing $40 a barrel.

https://www.worldoil.com//news/2020/6/4/opecplus-extends-production-cuts-through-july-on-deal-with-iraq

RigZone - Global Gas Market Still Extraordinarily Oversupplied

(Bloomberg) -- The specter of negative prices is hanging over energy markets more than a month after oil’s unforgettable crash below zero.

While crude has staged a rapid recovery after a deal by the biggest producers to curb a surplus, the $600 billion global gas market remains extraordinarily oversupplied. Traders and analysts say the worst may be yet to come as demand falls and storage nears capacity, creating the ideal conditions for negative prices in some parts of the world.

It shows just how far the global energy industry is from recovering from a pandemic-fueled slide in demand and signals more pain for producers from the shale fields of Texas to Australia’s Curtis Island. Unlike the oil market, there’s been no sign of a coordinated response to address the glut, meaning the fallout could be deeper and longer.

https://www.rigzone.com/news/wire/global_gas_market_still_extraordinarily_oversupplied-03-jun-2020-162282-article/

World Oil - Shale’s reawakening begins as oil holds above $30

HOUSTON (Bloomberg) - Early signs of a shale rebound are becoming evident as crude prices emerge from their dramatic collapse earlier this year.

EOG Resources Inc., America’s largest shale-focused producer, plans to “accelerate” output in the second half after shutting in about a quarter of its crude in May, exploration chief Ken Boedeker told an RBC Capital Markets conference Tuesday. Permian producer Parsley Energy Inc. is also turning wells back on just weeks after closing the taps, and producers in North Dakota’s Bakken formation are also easing the rate of shut-ins.

Oil has steadily gained in the past month after virus-related lockdowns caused the price of West Texas Intermediate to collapse to minus $40 a barrel on April 20. While the U.S. benchmark is still about 40% below its January high point, it’s now above $35, which means some wells closed to save cash are now profitable again. Futures were up 2.9% to $36.47 at 1:45 p.m. in New York.

https://www.worldoil.com//news/2020/6/2/shale-s-reawakening-begins-as-oil-holds-above-30

Why do we look at EBITDA per Frac Fleet?

If you are trying to compare the profitability of frac service providers , you will quickly come across the term EBITDA per Frac Fleet (or just EBITDA per Fleet). While many people accept this measurement as a way to compare frac providers, a little research shows that not all numbers are the same.

EBITDA stands for Earnings Before Income, Taxes, Depreciation and Amortization and it is used to measure a companies profitability. Using EBITDA will allow you to compare the profitability of peers in an industry or area because it looks at the profitability from the company's core operations before the impact of debt, interest, and depreciation are taken into account. It allows for a more apples to apples comparison of companies.

EBITDA is does not fall under the Generally Accepted Accounting Principles (GAAP) as a measure of financial performance and the EBITDA calculation can vary from one company to the next. When calculating EBITDA per fleet, nearly all oilfield service companies reference Adjusted EBITDA which usually removes the impact of one time items such as disposal of assets, impairments, inventory write downs, etc. When presenting EBITDA or Adjusted EBITDA in a corporate report, the company will have a section in their earnings report or slide deck that explains how they made their calculation. 

The goal of using EBITDA per fleet is to be able to make an apples to apples to comparison between companies. Most service companies will mention their EBITDA per Fleet number during their quarterly calls. If they do not mention their EBITDA per fleet number, it is possible to calculate it from the Financial Statement. The following table is a list of the EBITDA per fleet for several of the active frac service providers in the US.

Table 1: Annualized EBITDA per Frac Fleet 
(Source: Corporate Earnings Reports, VDK Consulting Analysis)

The first question when looking at this list is "Why aren't Halliburton and Schlumberger on this list?" The main problem with calculating EBITDA per fleet is trying to determine the EBITDA that is associated with only the frac fleets. The Halliburton and Schlumberger financial statements show their groups or segments, that usually have data for several different product lines. They very rarely discuss the number of working frac fleets, making it very difficult for the public to determine their EBITDA per fleet.

RPC (also know as Cudd) changed their reports in Q4 2019 and made it very difficult to determine the EBITDA for just their frac services. I stopped trying to calculate the number Cudd when they made these changes.

The NexTier Oilfield Solutions EBITDA per fleet is skewed based on how they present their data. The EBITDA per Fleet number above is from the Completion Services segment which includes Frac and wireline revenues. NexTier has released Gross Profit (GP) per fleet in the last two quarters for their integrated frac and wireline crews. 

Gross Profit is Total Revenue generated minus the Cost of Revenues (the expense it takes to generate revenue). The following Table is a list of Gross Profit per Fleet for several active service providers.

Table 2: Annualized Gross Profit per Fleet 
(Source: Corporate Earnings Reports)

While both calculations are different, there is a good correlation between the two measurements. For this post, I will focus on EBITDA per fleet.

Now that we can compare service providers, what are considered good values for EBITDA per fleet? While there is no hard and fast rule on EBITDA per fleet profitability, the following list is the range I use to judge the profitability of EBITDA per fleet

• EBITDA per Fleet > $12 million per year is good
• EBITDA per Fleet between $6 million and $12 million per year - okay
• EBITDA per Fleet below $6 million per year - not good.

When looking at EBITDA per fleet on a quarterly basis it is very important to make sure that it is an annualized number (ie, figure out EBITDA per fleet for the quarter and multiply by 4 for 4 quarters of the year). All of the data shown is annualized.

One of the main reasons that $6 million is the cut off is due to the amount of money that is required to keep a frac fleet running. This is known as Maintenance CapEx and it typically costs between $4 million and $6 million annually to keep a frac fleet up and running. If your EBITDA per fleet is less than your maintenance costs, your frac fleet is losing money every time it leaves the yard.

Looking at Table 1, ProPetro, NexTier, Mammoth and Liberty had very good quarters. Patterson-UTI, and Quintana had very rough quarters and will be making changes to their structure in order to improve their profitability. Mammoth was the surprise of the quarter, with a huge increase in EBITDA per Fleet with, on average, 2.7 fleets active in Q1.

We should expect Q2 2020 EBITDA per fleet results to be down due to the impact of COVID-19. Frac revenues will be down significantly in Q2 as many oil companies suspended their completion programs at the start of the quarter. At the time of writing this post, Primary Vision stated that there were 45 frac fleets running in the US. At the start of March, there were nearly 300 active fleets in the US. I would expect Q2 and Q3 EBITDA fleet numbers to be down and then we should see some recovery in Q4. 

Oil Gas Facilities - India Looking To Store Oil in the US Petroleum Reserve

India may soon follow in Australia’s footstep with plans to store crude oil within the US Strategic Petroleum Reserve (SPR). The country’s minister of petroleum and natural gas Dharmendra Pradhan said that government is exploring the possibility of investing in the US to store crude oil.

Pradhan said that India has taken advantage of lower crude prices and has created reserves and stored 38–40 million mt of crude oil which equals 20% of the annual oil demand of the country.

https://pubs.spe.org/en/ogf/ogf-article-detail/?art=7123

JPT - ESG and Energy Transition: Balancing Value and Values in a Post-Pandemic World

When Shell slashed its dividend by 66% on 30 April, it not only sent shock waves through financial and business communities throughout the world, it “tore up the industry’s financial playbook,” according to Laura Hurst at Bloomberg. Amid the chaos and damage churned up by the pandemic, what had long been unthinkable—the world’s largest supermajors ceasing to defend their dividends at almost any cost, given the importance of payouts to North American investors—suddenly became fact. The last time Shell had slashed its dividend coincided with World War II, nearly 80 years ago. ­Equinor also cut its dividend, and ExxonMobil froze its dividend for the first time in 13 years.

Asked whether the long-held strategy of sacred payouts to shareholders was sustainable in the current situation, Shell Chief Executive Officer Ben van Beurden said, “I would say, no.”

“I think a crisis like this has the potential to catalyze society into a different way of thinking,” van Beurden said.

https://pubs.spe.org/en/jpt/jpt-article-detail/?art=7079

World Oil - Oil piled up in storage worldwide will be OPEC’s next challenge

LONDON (Bloomberg) - While OPEC has helped global oil markets recover from the coronavirus crisis, the cartel will soon face a new challenge: the mountain of unwanted crude that piled up during the pandemic.

When the Organization of Petroleum Exporting Countries and its partners meet in just over a week, the unprecedented accumulation of oil inventories should have finished. Vast production cuts by the cartel, along with a recovery in demand, will have brought the market back into balance.

Yet by that time more than a billion barrels of crude will have poured into the world’s storage tanks, according to a range of analysts and consultants. Burning through the remaining surplus -- a key driver for the next move in crude prices -- will be OPEC’s next big obstacle.

https://www.worldoil.com//news/2020/6/1/oil-piled-up-in-storage-worldwide-will-be-opec-s-next-challenge

BTU Analytics - Sharp Drops in Natural Gas Production

As BTU discussed in last month’s Energy Market Insights, oil shut-ins across various US oil production regions have resulted in a drastic drop in US oil production over the last several weeks. Today’s commentary will revisit implied oil shut-ins across several basins based on updates to our modeled daily gas production. The basis for this analysis relies on the nature of associated gas production in liquids-focused plays. Because these plays produce significant volumes of natural gas in addition to crude oil, measuring the impact of shut-ins to gas production serves as a proxy for shut-ins to crude production.

https://btuanalytics.com/shale-production/oil-curtailments-impacting-natural-gas/