Has U.S. oil production started to turn down?

by Kurt Cobb

Link to story

The plunge in oil prices last year led many to say that a decline in U.S. oil production wouldn't be far behind. This was because almost all the growth in U.S. production in recent years had come from high-cost tight oil deposits which could not be profitable at these new lower oil prices. These wells were also known to have production declines that averaged 40 percent per year. Overall U.S. production, however, confounded the conventional logic and continued to rise--until early June when it stalled and then dropped slightly.

Anyone who understood that U.S. drillers in shale plays had large inventories of drilled, but not yet completed wells, knew that production would probably rise for some time into 2015--even as the number of rigs operating plummeted. Shale drillers who are in debt--and most of the independents are heavily in debt--simply must get some revenue out of wells already drilled to maintain interest payments. Some oil production even at these low prices is better than none. Only large international oil companies--who don't have huge debt loads related to their tight oil wells--have the luxury of waiting for higher prices before completing those wells.

The drop in overall U.S. oil production (defined as crude including lease condensate) is based on estimates made by the U.S. Energy Information Administration (EIA). Still months away are revised numbers based on more complete data. But, the EIA had already said that it expects U.S. production to decline in the second half of this year.

What this first sighting of a decline suggests is that glowing analyses of how much costs have come down for tight oil drillers and how much more efficient the drillers have become with their rigs are off the mark. It was inevitable that oil service companies would be forced to discount their services to tight oil drillers in the wake of the price and drilling bust or simply go without work. And, it makes sense that the most inefficient uses of drilling rigs would be halted.

But the idea that these changes would somehow allow tight oil drillers to continue without missing a beat were always bunkham promoted by an industry sinking into a mire of overindebedness in the face of lower prices. In order to maintain the flow of capital to the industry--which has consistently spent more cash than it generates--the illusion of profitability had desperately to be maintained. A recent renewed slump in the oil price may finally pierce that illusion among investors.

As Iranian oil exports start to ramp up in the wake of an agreement on nuclear weapons--the Iranians aren't allowed to have any--and the resulting end of economic sanctions, the oil price is likely to fall further, putting even more pressure on U.S. domestic drillers.

OPEC, which has refused to reduce output in the face of slackening world oil demand growth, continues to say that others--such as U.S. tight oil drillers--will have to "balance the market," a euphemism for cutting production in order to push up prices.

It looks as if U.S. drillers may finally be doing just that. Who knew that 45 years after abandoning the role of the world's swing producers*--that is, producers who adjust production up or down to maintain stable world oil prices--U.S. oil companies would be forced into that role again entirely against their will?

*The state of Texas was the world's swing producer up until 1970 through a mechanism called proration. The state regulated the percentage of maximum flow from oil wells in order to adjust production and thus keep prices within a band that made drilling profitable without jeopardizing demand for oil. In fact, the proration program administered by the Railroad Commission of Texas became a model for OPEC.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitzen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Reprinted with permission.

Views: 1888

▶ Reply to This

Replies to This Discussion

Permalink Reply by Undecided About Oil on July 30, 2015 at 8:36am

J.O.

 Business vs Government - that is a very delicate balance of power, for sure.  If governments did not allow O&G monopolies and did not allow collusion then in a properly regulated Free Market, the natural market forces would work much better.  But, I believe that Saudi Aramco is both a State-Owned Business and a Monopoly and it has colluded with other O&G companies & Governments that are members of OPEC.  The US companies are competing against a Nationally Owned Saudi monopoly and everyone else in OPEC.  I think, OPEC should be illegal under US and International  Law.  How can the US O&G industry fairly compete against OPEC?

 

fightSo, we have a 

Permalink Reply by Joseph-Ohio on July 30, 2015 at 9:31am
We agree - but the words 'free market' aren't always compatible with the words 'properly regulated' - and depend on the perspective of the parties interpretting them.

IMHO Rights of Ownership (here in the U.S.A.) are sacrosanct and trump all.

Seems to me these days Domestic Rights of Ownership are being attacked by both industry and government - and that is just not correct. Rights of Ownership need to be protected not diminished / dismantled / rendered impotent.

Also (to address another facet of your reply) I conclude that S A and OPEC are not allied with the U.S.A.

As far as competeing with them on the world market is concerned I don't think it possible. Short of pulling out from protecting their production we have no leverage. That's what I think needs to happen. If they want us there they'll have to become better allies and look out for our interests too - meaning stop flooding the world with their bargain basement socialized production and forge a treaty / trade agreement with us to that end.

No Treaty / Trade Agreement then it's Tariffs and Embargos and whatever else goes along with not being allied with us.

JMHO
Permalink Reply by Joseph-Ohio on July 30, 2015 at 7:47pm
Also, monopolies aren't free markets.

There is no market in the instance of a monopoly - it's a monopoly.
Permalink Reply by Joseph-Ohio on July 31, 2015 at 1:59am
The way I see it, as the 'lull' continues and domestic E & Ps cannibalize the smaller (technologically weaker ?) among themselves; the domestic industry moves closer to 'monopolization' itself.

How 'good' is that insofar as 'competition' is concerned ?

Not very I think.

What are the chances that the larger (technologically stronger ?) are not just buying out the 'competition' to eliminate competition ?

I think at least plausible myself.

Maybe that's the 'Grand Plan' ?
Permalink Reply by Frank Walker on July 30, 2015 at 11:41pm

If US oil production has not already begun a downturn, Obama's despicable Iran deal should provide the coup de grâce.

And who knows what other damage our Muslim-sympathizer-in-chief will do in the next seventeen and one half long months.  In fact, while his coup de grâce for our oil industry is a worry, a larger concern is the coup de grâce he is imposing on America itself, in its entirety!  All of our necks are on the line for that one!

Persons who voted for Obama obviously favored dismemberment of America and its greatness. To such people I say:  you were successful.  Under King Obama the once dominant USA has been transformed into the USSA . . the United Stoners and Sodomites of America.  I hope you Obama voters are happy.

Permalink Reply by Joseph-Ohio on July 31, 2015 at 2:07am
Hope you're over estimating the impact on all of us.

Don't want to see a 'caliphate' (along with the rest of your points) empowered by 'election' myself - none of it suits my values.

However your concerns appear realistic to this reader.

Wake up and smell the coffee U.S.A. !
Permalink Reply by Undecided About Oil on July 31, 2015 at 3:47am

J.O.

The rig count has fallen from peak 1,600 to 200.

How can you say, "Hope your overestimating the impact".

The impact on ..

1) Rig Count

2) Related jobs ( losses )

3) Owner Royalties ( or lack thereof ) 

4) O&G Profits ( uhmm, I mean LOSSES )

has been devastating ...

The 20 year O&G "BOOM" in Youngstown, Ohio has reversed after just 3 years ...

"Vallourec Star to lay off up to 80 workers at Youngstown steel mill"

http://www.crainscleveland.com/article/20150709/NEWS/150709803/vall...

"... U.S. Steel in Lorain, which laid of more than 600 workers last year ..."

If you are in the wrong O&G sector your life just crashed and burned after 3 short years. Only if you don't have a family member who is now unemployed, would you say, "I hope you are overestimating the impact"

Maybe this is temporary, maybe not? But I do know that you cannot house and feed your family on unemployment wages.

Permalink Reply by Joseph-Ohio on July 31, 2015 at 5:22am
Less your reply I wrote (earlier) 'I hope' he over estimated 'impact'.

There are other issues Frank discusses (beyond the rig count drop and the very serious employment cuts you mentioned in your reply) and I still say 'I hope' he over estimted their impact.

Hope is still only hope - the impact is the impact - know that I sympathize and am on your side.

RSS

© 2024   Created by Keith Mauck (Site Publisher).   Powered by

Badges  |  Report an Issue  |  Terms of Service