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Tight Oil and The Willing Suspension of Disbelief

College of the Coast & Environment

Louisiana State University November 22, 2019

Art Berman Labyrinth Consulting Services, Inc.


• Any movement, activity or event in nature requires energy• Human society runs on energy

Ø Work requires energy—joules/calories.Ø Subsistence: energy intake = energy expenditure.Ø Surplus: energy intake > energy expenditure.Ø If I accumulate excess energy such as grain, I may choose to have you do some

of my work in exchange for some of that energy.• Money is a call on work

Ø Today, most work is done by oil, natural gas and coal.Ø 1 barrel of oil contains about 4.5 years of human manual labor.

“Energy is and always will be the currency of life” –Nate Hagens


13.1%

30.6%

36.5%

8.3%

2.7% 0.9%

2.5% 5.1%

Windwas2.5%ofU.S.PrimaryEnergyConsumption &Solarwas0.9%v

COAL NATURALGAS PETROLEUM NUCLEAR HYDRO GEOTHERMAL SOLAR WIND BIOMASS

Petroleum

NaturalGas

Coal

EnergyistheEconomyFornow, thatmeansoil,naturalgasandcoal

Source:EIA&LabyrinthConsulting Services,Inc.Table_1.3_Primary_Energy_Consumption_by_Source


9.64

8.97

5.00

10.74

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CrudeOila

ndCondensateProduction(m

mb/d)

ConventionalLower48States

Source:EIA,EIAAEO2019 ,DrillingInfo&LabyrinthConsultingServices,Inc.

U.S.oilproductionpeakedin1970&declinedbyalmost50%by2008Productionsurpasseditspreviouspeakin2017becauseoftightoil

Alaska

Offshore

TightOil

PeakOIl1970

EIA2019/MonthlyUpdates/CRUDE OILPRODUCTIONANNUAL.xlsx.

PrudhoeBay1985

2008

2018


U.S. Tight Oil & Shale Gas Plays


• Conventional oil plays involve drilling reservoir rocks with vertical wells.• After all the commercially attractive conventional fields in the U.S. were discovered and

were in depletion, unconventional plays were the only option.• Tight oil plays (fracking) involve drilling the source rock with horizontal wells.• Tight oil horizontal wells cost 2-3 times more to drill and complete than conventional

vertical wells.• There is considerable fanfare about the new volumes of oil but little discussion about the

cost of the technology and its effect on the price of oil.

Conventional and Unconventional Oil


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CrudeOil+

CondensateProduction(m

mb/d)

ChartTitle

CONVENTIONAL DEEPWATER TIGHTOIL 2000-2011AVG 2019AVGSource:EIADPR,DrillingInfo&LabyrinthConsultingServices,Inc. EIA2019/DUC-DPR/U.S.UNCONVENTIONALVSCONVENTIONALMASTER

AllincreaseinU.S.productionsince2011hasbeentightoil

55%ofU.S.crude+condensateproductionisfromtightoilplays

14%isfromdeepwaterand31%isfromconventionalplays

Conventional

DeepWater

TightOil

2000-2011 average5,440b/d

2019 average12,131b/d

+6,700 bopd


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U.S.ConsumerPricesInflationRateGrowth(AnnualPercent)

WorldOilDemandGrowth(m

mb/d/yr),10-YearU.S.TreasuryBondRate(%)

and2019BrentPriceIndexChartTitle

10-YrTreasuryBondRates INFLATION OILDEMANDGROWTHPOS

OILDEMANDGROWTHNEG CPIBRENTINDEX INFLATIONGROWTH

Highoilprices&inflationcausednegativedemandgrowthduringoilshocksof1970s2011-14highoilpricesnotaccompaniedbynegativedemandgrowthpossiblybecauseoflong-termdeclineininterestrates&inflation

Source:EIA&LabyrinthConsulting Services,Inc. Oil&GasGeneral/Inflation AnnualMaster

InterestRates

2019BrentPrice

Index

Inflation Growth(RHS)

OilDemand+

OilDemand-

Inflation

High OilPrices

1973-74OilShock

1978-80OilShock

2008 FinancialCollapse

FinancialCollapseNegativeDemand


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U.S.Crude+CondensateProvedReserves&ReserveForecast(billionsofbarrels)

U.S.Production&ProductionForecast(m

mb/d)

Source:EIA,EIAAnnualEnergyOutlook 2019 &LabyrinthConsultingServices,Inc.

ProductionForecast(LHS)

42Billion2017ReservesHighestinU.S.Historyfrom+4.4BillionTightOil IncreaseReserveforecastbasedonproductionforecastimpliesstep-changeinU.S.reservelevels

2018-2030annualreserveadditionsbasedon2009-2017historicalaverage

ProvedReserves(RHS)

ProvedReservesForecast(RHS)

Production(LHS)

2017

EIA2019/AEO2019/Table14.OilandGasSupply.xlsx

Not realistic


7.63

10.28

8.38

6.95

8.53

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EIATightO

IlProductionForecast(m

mb/d)

ProvedReserves&

Cum

ulativeProdtion(billionsofbarrelsofoil)

Source:EIAAnnualEnergyOutlook 2019 &LabyrinthConsultingServices,Inc.

Production Forecast(RHS)

CumulativeProduction(LHS)

ProvedReservesDepleted in 2023

IEAtightoilforecastfor11mmb/din2030exceedsEIAAEO2019forecastby7%2019EIAestimatealready+0.7mmb/d(+10%)toohigh

Adjustedforecastsuggestspeaktightoilproductionof8.5vs10.3mmb/din2031

112 billionbarrels

20billion barrels2017Tight OilProvedReserves

EIA2019/AEO2019/Table14.OilandGasSupply.xlsx

2019

2031

Adjusted Forecast(RHS)

91billionbarrels

2026


2.82

2.59

2.092.01

1.77 1.74

1.48 1.45 1.44 1.40 1.37 1.361.24 1.24 1.23

1.15 1.09 1.04

0.57

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4.00

HES CPE FANG LPI PE EPE DVN CXO APA OXY CRZO OAS MUR EOG PXD ECA MRO CLR COP

CapitalExpenditures/CashfromOperationsRatio

ChartTitle

HES CPE FANG LPI PE EPE DVN CXO APA OXY CRZO OAS MUR EOG PXD ECA MRO CLR COP

95%ofsampledtightoilcompanieshadnegativecashflowinQ12019

Source: YahooFinance&Labyrinth Consulting Services,Inc Oil&GasGeneral/SampledE&Ps/SampledE&PsMASTER

Capex/CashFlow>1

Capex/CashFlow

<1

Capitalexpendiures/cash fromoperatingactivities


1.50 1.491.41

1.27 1.09 1.08 1.07

1.00

0.90 0.89 0.86

0.81

0.75 0.75 0.75 0.73

0.610.56

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APA FANG HES CPE PE CXO WLL PXD MRO DVN CLR LPI EOG OAS ECA OXY MUR COP

Norm

alize

dNe

tIncom

e-EnterpriseVa

lue

CapitalExpenditures/CashfromOperationsRatio

ChartTitle

CAPEX/CF NORMNI-EV Linear (NORMNI-EV)

61%oftightoil-weightedU.S.companieshadpositivecashflowinQ32019comparedtoonly50%inQ2

Goodcorrelationbetweencashflow&netincome-to-enterprisevalueratio

Source: YahooFinance, SEC10-Qfilings&Labyrinth Consulting Services,Inc Oil&GasGeneral/Sampled E&Ps/SampledE&PsMASTER

Capex/CashFlow>1

Capex/CashFlow<1

Capitalexpendiures/cash fromoperatingactivities Normalized

NetIncome-EnterpriseValueRatio(RHS)


Oil prices have been substantially lower since 2014And investment has fallen correspondingly


$30.32

$45.18

$57.88

$63.70

$70.75

$56.96

$49.52

$54.81

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TightOilHorizontalRigCount(lagged12weeks)

WTIPrice($/barrel)

Source: BakerHughes,EIA&Labyrinth Consulting Services,Inc. RigCount 2019/MonthlyShaleGas-TightOilRigCountData

WTIPrice

2-monthlagged

(LHS)

$60/barrel

May

2016

Mar

2018RigCount

(RHS)

Dec

Oct 2018

BUYLOW,SELLHIGH!

Tightoilrigcounttripled(2.9x)May2016toMar2018asWTIwentfrom$30to$60

Ithasdecreased-94sinceDecember2018:SELL!!!

3xRigs<$60WTI

193- 558rigsOct

2019

Aug

2019Dec


0.31 0.38 0.38

1.10 1.16

1.18

0.310.35 0.36

1.121.35 1.43

2.25

3.253.75

5.09

6.49

7.057.117.16

21%

17%

18%

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100%

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TightO

ilAn

nualProductionGrow

th(%)

OilP

roduction

(mmb/d)ChartTitle

ANADARKO EAGLEFORD NIOBRARA BAKKEN PERMIAN TIGHTOIL TIGHTOILGROWTH

Anadarko+1%

Niobrara+3%

EagleFord+2%

Bakken+6%

Permian +16%

Source:EIADPR,DrillingInfo&LabyrinthConsultingServices,Inc. EIA2019/DUC-DPR/dpr-data_MASTER

U.S.tightoilproductionincreasedfrom7.05to7.11mmb/dinOctoberProductiongrowthisfairlyflatatabout18%annualized

Most2019growthisinPermian(+16%)&intheBakken(+6%)

ProductionGrowth (RHS)

Nov2019

Dec 2018

Jan 2018


Markets never valued WTI at more than $65/barrelShare prices failed to out-perform WTI after prices reached $70 in May 2018

$66.27$72.26

$77.41 $76.40

$66.24

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WTIPrice($/barrel)

Normalize

dPrice

(2016-2019)

ChartTitle

WTI EOG FANG CXO PXD WTINOTNORMSource:YahooFinance, EIA& LabyrinthConsulting Services,Inc. Oil&GasSupply/SampledE&Ps/SampledE&PsMASTER.xlsx

MarketsnevervaluedWTIatmorethan$65/barrelSharepricesfailedtoout-performWTIafterpricesreached$70inMay2018

WTI(RHS)

CXO

EOG

$65

NormalizedWTI(LHS)


• Inventory is part of supply. Demand is consumption, net imports & movements into & out of inventory.

• A cross-plot of C.I. vs price results in a yield curve.• The comparative inventory yield curve uses C.I. instead of maturity & oil price instead of yield.• The concept is identical.• The yield curve crosses the y-axis at the 5-year average.• That is the “mid-cycle” price, the market-clearing price of the marginal barrel needed to maintain

supply.• The market is short on oil price when C.I. is positive, or more than the 5-year average, & long when

C.I. is negative or less than the 5-year average.• The slope of the yield curve reflects the market’s sense of urgency about supply.

Comparative Inventory (C.I.)

Supply Less Certain

Supply More Certain

Mid-Cycle PriceMarginal barrel or mmBtuprice at the 5-year averageneeded to maintain supply

Yield Curve

Higher Price Needed toMaintain Supply

Lower Price Needed toMaintain Supply

Source: Aperio Energy Research & Labyrinth Consulting Services, Inc.

- +

Market Clearing PriceComparative Inventory-Price Yield Curve


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-50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250

Mar-June 2015FalseOptimism

Late2015-Early2016MarketPessimism

Dec '16- Apr'17Production-Cut Optimism

Early 2014MarketOptimism

U.S.crude +products comparativeInventory (C.I.)Millionsof Barrels

Source:EIA &LabyrinthConsulting Services,Inc.- Aperio EnergyResearch EIA2019/MonthlyUpdates/MER/Table_3.4_Petroleum Stocks_MASTER

WTIPrice($/barrel)

WTIcomparativeinventorycontinuestoindicate$60mid-cyclepriceonblueyieldcurvebutOctoberC.I.isatthe5-yearaverage

suggestingthatpricemayhavebeendevaluedtothegreenyieldcurve

July 2017-2019Yield Curve

2014-June2017Yield Curve

$70May 2018

$71

$50DEC-18

Nov2014$76

Dec2014$59

OCT$53.96

atthe5-yravg


Good and Bad News About Permian Production

• Bone Spring evaluation indicates commercial area is 1.2 mm acres with 3,807 wells = ~300 acre/well spacing—lots of room for “Tier 1” infill.

• Average break-even price is $60/barrel based on company-stated future cash flows from proved reserves.


$10

$12.50 $4.75$4.75

$7.50 $0.50

Here’sthe

Problem

Here’sAnotherProblem

Keeping Them Honest


End of the Age of Oil?

0%

20%

40%

60%

80%

100%

120%

2018 2020 2025 2030 2035 2040 2045 2050

Per

cent

of T

otal

Wor

ld E

nerg

y D

eliv

ered

Chart Title

Coal Liquids Renewables Natural gas Nuclear

Renewables to increase from 15% to 28% of world energy consumption by 2050 as coal decreases from 26% to 20% and liquids decrease from 32% to 27%

Natural gas will remain at 22% & nuclear will decrease from 5% to 4%

Source: EIA & Labyrinth Consulting Services, Inc. EIA 2019/EIO 2019/table_f1_WORLD ENERGY CONS BY FUEL

Coal

Liquids

Renewables

Natural Gas

Nuclear

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100

300

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1100

2018 2020 2025 2030 2035 2040 2045 2050

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l Wor

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(Qua

drilli

on B

tu)

Chart Title

Coal Liquids Nuclear Natural gas Renewables

Consumption of all world energy sources expected to increase by 2050Renewables and natural gas increase the most

Coal and liquids increase the least

Source: EIA & Labyrinth Consulting Services, Inc. EIA 2019/EIO 2019/table_f1_WORLD ENERGY CONS BY FUEL

Coal +12%

Liquids +22%

Renewables +166%

Natural Gas +44%

Nuclear +35%

• Consumption of all world energy sources expected to increase by 2050.• Renewables and natural gas increase the most.• Coal and liquids increase the least.• Renewables to increase from 15% to 28% of world energy consumption by 2050. • Coal decreases from 26% to 20% and liquids decrease from 32% to 27%.• Natural gas will remain at 22% & nuclear will decrease from 5% to 4%.


Peak Demand?

$21.17

$51.57

$107

.26

$31.60

$43.58

$18.72

$114

.39 $1

25.67

$46.20

$71.90

$65.74

45.3

55.854.5

64.1

57.9

64.9

54.6

66.5

63.5

75.1

64.4

64.7

$0

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E

OilP

rice(2017$/barre

l)

SupplyandDem

and(m

mb/d)

Source:IEA,OPEC, BP,U.S.BureauofLabor Statistics&Labyrinth Consulting Services,Inc.

BrentPrice(WTIbefore 1975)

LHS

Demand

Supply

-6.2mmb/d

-10.7mmb/d

Worlddemandgrowthhasbeenremarkablyconsistentataverageof1.25mmb/dannuallysince1970

Only7outof49yearsofnegativedemandgrowth(1980-83,1985,2008-09)

+20.5mmb/d

+18.8mmb/d

IEA/IEAMASTERFILES/IEAMASTER.xlsx


Concluding Thoughts• Energy is the economy and oil is the master energy

resource.• Oil will continue to dominate the world energy

landscape for decades because no other energy source can meet global needs.

• Unconventional oil has bought the world a few decades of high density energy but does not offer a meaningful long-range alternative.

• Humans have never gone from higher- to a lower-density energy source.

• While increased use of renewable energy is inevitable and desirable, it is not a satisfactory substitute for oil.

• A transition away from an oil-weighted energy supply will be complex, costly and lengthy despite supporting arguments or preferences.

• There is no clear way forward that includes sustaining current levels of energy use.

• The best path forward is to stop looking for improbable solutions that allow us to live like energy is still cheap, and find ways to live better with less.

Slide22LabyrinthConsultingServices,Inc. artberman.com

ConcludingObservations• Energyistheeconomyandoilisthemasterenergyresource.• Oilwillcontinuetodominatetheworldenergylandscapefordecadesbecausenootherenergy

sourcecanmeetglobalneeds.• Unconventionaloildoesnotofferameaningfullong-rangealternative.• Whileincreaseduseofrenewableenergyisinevitableanddesirable,itisnotasatisfactory

substituteforoil.• Atransitionawayfromanoil-weightedenergysupplywillbecomplex,costlyandlengthydespite

supportingargumentsorpreferences.• Thereisnoclearwayforwardthatincludessustainingcurrentlevelsofenergyuse.• Thebestpathforwardistostoplookingforimprobablesolutionsthatallowustolivelikeenergy

isstillcheap,andfindwaystolivebetterwithless.

tight oil and the willing suspension of disbelief college ... · labyrinth consulting services,...

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