Shale Oil Industry Headed For $200
2015 proved to be a tough year for the oil and gas industry. Hundreds of thousands of workers were let go by oil companies, Many oil companies filed bankruptcy, others managed to survive. At one point it looked as if the shale oil industry would cease to exist. Today there’s new light being shed on the future of shale oil.
Oil is setting itself up for prices only a mineral owner could hope for. We’re looking at oil potentially reaching the $200 mark and possibly flying by it. The perfect storm is brewing, here’s what you need to know.
The year 2015 and into 2016 proved to be a major challenge, as many shale oil companies all but stopped drilling. Rig numbers were cut down to levels unseen for some companies. Production slowly started dropping as a whole. As a result of the crashing crude oil prices, oil companies were drilling holes and then capping them. It was not economical to set the wells into production and pay to have it shipped. The cheapest storage point is in the ground.
While shale oil companies had choked back on drilling new wells, existing wells were starting to produce less and less. The existing wells weren’t reaping the rewards of halo fracking. Halo fracking is a term coined from the process of an existing well reaping the rewards from a nearby well getting fracked. Oil companies had discovered if they cinch down their well spacing, that the neighbor wells would benefit from the fracking boosting the existing wells production numbers. It was almost like a 2 for 1 frac job for many wells.
At the same time the number of new wells being drilled was declining and existing wells were losing production, the industry at a whole was losing ground on discovering new oil reserves. When the prices are so low, oil companies can’t afford to be out proving new grounds in hopes of discovering a new oil source.
In order to maintain production levels at a flat rate, the oil and gas industry has to discover and prove a new oil play each year. This is not to boost production, this is just to maintain current levels for the year. Without finding new oil reserves, the industry is falling behind each day. The oil industry has been falling behind for a long time now, and it’s going to have a huge effect on oil prices.
An oil source refers to the total amount of oil in place in a particular area. For the most part, a majority of a resource can’t be recovered, a resource is what could be recovered at a 100% recovery rate based on the estimates for the reserve.
As an example, it is estimated that the Bakken Shale centered under North Dakota contains several hundred billion barrels (bbl) of oil (the resource). However, what is technically and economically recoverable in the Bakken has been estimated at less than 10 billion barrels (<10% of the resource).
The portion that is technically AND economically recoverable at prevailing oil prices may be classified as proved oil reserves. (The same concept applies for natural gas). This means that proved reserves are a function of prevailing oil prices. This qualifier is often misunderstood.
When oil was around $100 a barrel, it was estimated that there was a total of 1.7 trillion barrels of proved oil reserves around the globe.
Each year, companies trading on U.S. exchanges must report the amount and estimated value of their oil and gas reserves. These estimates are done according to U.S. Securities and Exchange Commission (SEC) guidelines, and are provided in each company’s annual report.
The value of reserves is reported as a standard discounted cash flow (DCF), which is typically known as the standardized measure (SM). The SM is defined as the present value of the future cash flows from proved oil, natural gas liquids (NGLs), and natural gas reserves, minus development costs, income taxes and exploration costs, discounted at 10% annually.
Annual reports have now been filed, so the results are in. Of the 125 oil and gas companies in my database that reported proved reserves to the SEC, 92 reported declines in their proved oil reserves. The largest decline was reported by Royal Dutch Shell, which saw a decline of 827 million barrels in its proved oil reserves in 2015. Other large declines were recorded by Occidental (461 million barrels), Hess (246 million barrels), Apache (225 million barrels), and Anadarko (216 million barrels).
Cumulatively, these 92 oil companies reported a decline in reserves at the end of 2015 of about 3 billion barrels (11 billion barrels of oil equivalent if natural gas proved reserves are included). That’s a big number, but it only becomes truly impressive when the value of these reserves is tabulated.
Shale Oil Industry Setting Up For The Rebound
When the dust settles and the numbers are calculated, it’s going to be ugly. We are going to be so far behind pace on meeting demand that the prices of oil will go through the roof.
Get ready for the biggest oil boom you’ve ever seen. When your supply is less than your demand, prices are increased. Depending on the severity of the shortage, it will dictate how much prices will fluctuate. The oil industry is going to be so far behind, we’re going to see oil prices nobody could have ever dreamed about. $200 oil might even be on the cheap side of things if we don’t get back to normal drilling and discovery rates soon.
What does this mean? This means oil companies will be begging people to come to work for them. The shortage of workers will drive the average wage up also. Your oil job that once paid $27 an hour, will now have to pay $33 just to get the spot filled.
The dark side of the story is, the price at the pump will go way up. Gas may be over that $5 mark at the pump. I don’t know about you, but at this point I would happily fill my tank at $5 a gallon if that means putting people back to work.
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