Author Topic: Energy Sector  (Read 58988 times)

bizaro86

  • Hero Member
  • *****
  • Posts: 1358
Re: Energy Sector
« Reply #470 on: June 20, 2020, 11:09:16 PM »
I know energy has been a graveyard, and I have zero expertise here, but are we not setting things up for a big move up in oil prices? Capex has been slashed, and massive numbers of wells shuttered. Can the spigot really be turned back on that fast when demand returns? Morgan Stanley issued a $190 price target a while ago for these very reasons.
That while ago I think was 12 years ago. Maybe we can agree they were wrong.

Yes, spigots can be turned on fairly easily. There's a lot of supply out there. If you're not talking about a massive increase in demand oil is gonna suck.

Can you elaborate as to why you say that there is a spigot that can be turned back on?

I listened to a podcast today with Art Berman today specifically saying this wasn't the case.

Basically was saying new technology means shale wells deplete MORE quickly/efficiently and that it takes ~10-12 months to get newly discovered wells producing. So if we're not currently exploring/drilling wells, it'll take some time to ramp up to meet that demand once it does normalize.

It definitely isnt a spigot, but I think 12 months is longer than it would take.

Shale wells are in low permeability rock. The hydrocarbons dont naturally flow. That is why they require frac'ing.

As an example, much of the Permian has permeability of say 10 mD. A hydraulic fracture has permeability much higher than that. It varies based in the size of the sand used and the closure pressure, but 10 D would be on the low side. So the permeability in the fracture is at least 1000 times greater.

Flow rate is directly proportional to permeability for a given pressure drop and viscosity (Darcy's law). So at the beginning of a shale well's life while it is governed by the fracture flow it is 1000x more productive. This is a simplification of course, but the assumptions behind it aren't drastically wrong. A shale well quickly and easily produces the fluids that are within the fracture porosity, and then very slowly produces the fluids from the matrix porosity.

So after a sharp initial decline you can expect low decline (at much lower rates) for a long time.

Drilling new wells is required to access the initial flush production again. And that flush production is the only reason US oil production has grown so rapidly. That can be done quickly if a firm has licenses ready to go, especially given current availability for equipment and services. I think a 12 month response is slower than it would take shale drillers to ramp up once they decided to do so. The technical work is fast, and probably mostly done already as those wells were planned. There is no exploring for new oil phase here, it's all development drilling.

What will slow things down is people deciding to drill (and fund drilling) again. They have been bitten so many times you'd think capital providers would have learned...


SharperDingaan

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 3657
Re: Energy Sector
« Reply #471 on: June 21, 2020, 06:05:09 AM »
Just to add to this ...

OLD shale wells are actually pretty good low decline rate assets - as long as the rock is porous.
Raise reservoir pressure (water, CO2 injection) and you both increase flow, and get paid to safely dispose of the toxics (frac water, CO2, etc) that you are injecting. But it's a very different business model, it works better when there are carbon caps (Kyoto Agreement) and CO2 trading (Canada), it's the long game, and it is not viable unless the old field can be bought at cents on the dollar (BK purchases).

Hated by many in industry, as the entire approach is contrary to the bulk of existing practice (lowest cost, immediate production). Increasingly embraced by regulators as the near-term infrastructure solution to new production (more pollution) while staying under the carbon cap (injection removing pollution).

SD


 
« Last Edit: June 21, 2020, 06:12:56 AM by SharperDingaan »

JRM

  • Sr. Member
  • ****
  • Posts: 328
Re: Energy Sector
« Reply #472 on: June 21, 2020, 06:44:30 AM »
Isn't it reasonable to think the U.S. needs to work through some of the 500+ million barrels of oil in storage before prices can normalize?  Especially since some of that storage is temporary in nature?

SharperDingaan

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 3657
Re: Energy Sector
« Reply #473 on: June 21, 2020, 07:36:01 AM »
Storage doesn't get used until the market goes into backwardation (spot > future price). Highest cost storage (floating) drawn down first, SPR last. How fast a draw down depends on the future-spot price, vs the cost of storage at that term.

For the most part, spot is driven by demand vs on-line supply; cut back on-line supply, and spot rises. The limitation is how much storage (additional supply) comes onto the market as the spot price rises, which algorithms are pretty good at predicting. Keep the on-line supply constrained, while demand rises - and spot either rises, or storage rapidly depletes (to meet the incremental demand).

Most would expect WTI spot to settle in the USD 45-50 range, and thereafter a near-term focus on reducing storage to historic levels.
Assuming ongoing capital discipline - too low a price for US shale to start back up.

SD


« Last Edit: June 23, 2020, 05:27:55 AM by SharperDingaan »

bizaro86

  • Hero Member
  • *****
  • Posts: 1358
Re: Energy Sector
« Reply #474 on: June 21, 2020, 08:31:17 AM »
Isn't it reasonable to think the U.S. needs to work through some of the 500+ million barrels of oil in storage before prices can normalize?  Especially since some of that storage is temporary in nature?

Yes. Storage will sell into any near term strength whenever the front month gets close to or higher than the out months.