In this second podcast episode of The Drill Down with Marty Stetzer, listeners hear the second half of the SPE Gulf Coast Chapter’s New Hire Orientation, a regular day-long training seminar offered by the SPE here in Houston.
This presentation has become the most popular seminar offered by the SPEGCS over the years.
In this introduction to the oil and gas industry, I generally cover current trends and opportunities in oil and gas while my co-presenters dive into more technical topics.
This role fits me personally as my company EKT Interactive has been focusing on new hire training and offering opportunities for those interested in oil and gas to learn more through our e-learning community, starting with Oil 101.
Listen to Part 1 of the SPE Oil and Gas Orientation below:
Get ready for OTC 2016 with our podcasts, interviews, ebooks, and more. We discuss all of the trends and challenges relevant to this years Offshore Technology Conference.
We’ve just completed discussing the current rig count collapse and some of the possible causes. I’d like to then move on to my second topic, the new oil game in the US, and let’s talk about US shale oil and its importance. The slide was in the Wall Street Journal and it was for Mackenzie. It breaks down the total June 2015 US oil production of 9.3 million barrels a day into four categories.
The first is the federal or offshore oil and gas production, which is basically the Gulf of Mexico and offshore California, around 16% of their total production. One of the interesting things about the US is many of the oil wells or some of them are almost 100 years old and are only producing less than three barrels a day. These oil wells are called stripper wells, but there’s hundreds of thousands of them. It accounts currently for 11% of our total production.
If crude prices stay at the $30 to $40 a barrel a day level, this will not be economic. We could lose 11% of our production. Other includes the conventional oil production in some of the fields in the fields around the country. The most important item on this slide is that shale oil now accounts for 60% of our US production. Here you go. That’s almost two-thirds. Here’s another piece of the rule of thirds.
Speaking of the rule of thirds, I learned yesterday from John Farina who you will hear from later today that in shale oil when you drill a Wild Cat well, you have a two-thirds probability of that well being successful. Again, we start to see one-third and two-thirds popping up all over the place in this presentation. Let’s talk about the major US shale plays, which we term as unconventional. In an unconventional play, the shale reserves are considered to be not discrete, but continuous.
You’ll learn in the presentation today, a discussion on a conventional well, which is generally a well that is looking at a reservoir or a set of traps or faults where the unconventional reserves tend to think of those reserves as like a gigantic coal bed that goes for quite a few miles in either direction. In unconventional and shale, economic recovery is the issue. We know the size of the resource. We know how far it extends in multiple directions.
The question is how do we get it out economically? A lot of the economics are related to we need a manufacturing style development rather than a Wild Cat delineation style development that you’ll hear more about later today. I’m going to discuss three of the major shale plays and show their impact on the US reserve situation. You’ll see later an important aspect of our position in the global energy markets.
First is the Bakken shale. The second is the Eagle Ford shale. The third is the Permian basin.
Let’s talk about the Bakken shale. As you can see in this map, it covers quite a few states, North Dakota, South Dakota, Montana, and extends into Canada. You’ve heard quite a bit about the Williston in North Dakota as being probably the most competitive labor and housing market in the US and here’s why. Bakken is considered a major [hydracavern 00:04:08] formation in the Williston Basin.
The USGC, which stands for US Geological Service, estimates there’s 7.4 billion barrels of oil available in the Bakken. This oil is considered a very high quality. It’s called a light sweet crude, ideal for making gasoline in a refinery. In October, the production in the Bakken was 1.2 million barrels a day, up from almost nothing six years ago.
The Energy Information Agency, or EIA, made a November estimate that there was a net decline of about 23,000 barrels a day in the Bakken shale at these low prices, which has caused less and less drilling activity. The production is now holding. We will see how this changes over time if we continue to have low crude prices. The second field is in Texas. It’s the Eagle Ford. Here’s San Antonio. Here’s Austin.
The red of the Eagle Ford is primarily gas reserves. The yellow is liquids or condensate, which is very much like light gasoline or naphtha that you see in paint thinner. The green section is the oil section. Notice it extends from Maverick County all the way up to Washington County, major title basin in Texas. The current production, the oil production, is between 4,000 and 14,000 feet below sea level. I’m sorry, the oil production.
The total production is between 4,000 and 14,000 and the oils is in the shallow. It goes from 4,000 feet deep here to 14,000 feet as you approach Corpus Christi. In October, the oil production was 1.4 million barrels a day. Again, the Energy Information Agency made a November estimate as a net decline of about 70,000 barrels a day and the decline pace in the Eagle Ford is increasing. Finally, I want to talk about the Permian Basin. Here’s Midland, Texas.
You can see how many different reservoirs are available in and around Midland. The Permian Basin has probably been one of the longest producing fields in Texas. It’s hard to read this slide, but take my word for it. The estimated resource recovery in billions of barrels is across the top. This [very very 00:06:46] in the Wolf Camp, which are in the Permian, is about 50 billion barrels of recoverable reserves, almost twice as much as the Eagle Ford and almost three times as much as the Bakken.
You can see how important the Permian Basin is. In October, the production in the Permian was about 2 million barrels a day. EIA made a November estimate and there was a net increase of 21,000 barrels a day. The Permian Basin is still a star. I’ve been reading a lot of the operators have been shutting down their activity in the Eagle Ford and moving rigs into the Permian because it’s still relatively economic. How is this thing going to play out over time?
Again, this slide is from the August conference, Crude Summit, that I attended in January. It was put together by Baker & O’Brien, a respected set of industry consultants here in Houston. Across the top is dollars per barrel of oil. Here it is, zero, $20 a barrel, $40, $60, $80, $100, $120. What they’re trying to display here is what kind of economics do you need to keep this shale play in production? Quite a wide range as you can see in the number of estimates.
The X shows where Baker & O’Brien thinks the right estimate is. The Utica, Texas panhandle, Delaware in the Permian, Bakken needs about $80 on average a barrel for break even, but shale is not the same throughout the entire reservoir as you’ll hear later today. Some portions of the shale are more economic to produce than others. Certain portions of the Bakken are economic at $60. With today’s crude price at $50 or below, you’re starting to see slow downs in the Bakken.
Eagle Ford can be economic, some of the fields, at $40. The Marcellus and Utica fields in Pennsylvania and Ohio can be economic as low as $20 a barrel. What this is saying is over time if we continue to have our low crude prices, we are going to continue to see deterioration in some of these shale plays. Any questions before I move on? Any questions or comments on shale? It’s only to remind me Michael.
The last part of the presentation I want to discuss is the global perspective and why a long-term perspective is important. You might remember this from the earlier slide if you’re really paying attention, but let me repeat. As of right now, the global oil production is around 91.5 million barrels a day of which OPEC has 31.5 million barrels a day. One-third is OPEC and two-thirds is non OPEC. Here’s a list of the OPEC countries. It goes in alphabetic order from Algeria to Venezuela.
A factoid that you might not know is that Venezuela is the original founder of OPEC. It wasn’t done in the Middle East. The current small OPEC producers are highlighted in purple. Ecuador, Libya, and [Gutter 00:10:10] don’t really have a big play in how the crude prices develop, but almost all the other countries have a big stake in how the crude price evolves over time. Of the 31.5 million barrels a day of OPEC production, Saudi Arabia is 9.5 million barrels a day.
Here’s another third. When you take a look at the top three producers, Saudi Arabia, Russia, and the US, these top three producers equal OPEC. The important thing on this slide is Saudi Arabia is currently producing 9.5 million barrels a day and exporting almost 8 million barrels a day. There’s not as much demand in Saudi Arabia for oil as there is in the other countries. Russia is producing about 9 million barrels a day and exporting 5 million barrels a day to Europe and some of the Asian countries.
The US is producing 9.3 million barrels a day, but there’s a limit on exports in the US because of the crude embargo that goes back to the early ’70s. Our exports are only less that 0.5 million barrels a day. Again, one-third, one-third, one-third of the top three producers in the world, each of them have about one-third and these top three producers are the same as OPEC.
It was interesting to me to see in late October, early November Mr. Putin was headed to Saudi Arabia to talk with Saudi Arabia about some way of starting to manage their exports to try to get crude price back up a bit. Russia needs over $120 a barrel on their crude production to cover their current budgets. USA is now one the top three players in production in the world and is a global energy powerhouse.
It remains to be seen whether the Administration current or next Administration will allow exports so that we can play in the global market. That’s the point I want to make on global perspective. Notice that the one-third, one-third, one-third seems to be cropping up. What’s the industry been doing with these low crude oil prices? I’m sure you’re reading about the number of job losses and it’s exceeding 250,000. Most of those job losses are related to rig count.
We’re down almost 1,000 rigs and there’s about, some people have estimated between 100 and 120 jobs per rig. That accounts for a huge portion of the job decline. Both the operators and service oil companies are starting to merge. Baker, Hughes, and Halliburton announced their merger and that’s currently in process of being approved. Schlumberger has just announced acquisition of Cameron as another merger to try to get some efficiencies in a declining market.
There’s been hundreds of wells drilled because the industry is seeing cost savings from the service companies that could make it 30% to 40% cheaper to drill a well. However, they’re not completing them. They’re going to wait to do the fracking and the completion work until they see how the crude prices turn out. There’s also been a ton of new technologies developed over the last 24 to 36 months that are really coming into blossom. One is to refrack wells.
In the heat of battle when a lot of wells were being fracked, we didn’t have the data and the technology to analyze how efficient those frack jobs were. We’re going back in and refracking the wells. A technique called microseismic is now enabling you to measure the efficiency of your fracks online in real time. There’s also been developments and changes in the propence used, which you’ll hear more about today that make the new wells much more efficient than the wells that were drilled as the boom started to heat up.
The other important point to note, over the years everybody’s been watching rig count, but for the US producers, rig count may not be a good indicator. We’ve got some good data back to 2007 on natural gas. On the left hand scale is the natural gas price. It’s measured in dollars per million BTUs and it ranges between six to eight, peak to peak around 13 in 2008 and has been now bouncing around between two and four for the last five or six years.
The gas rig count declined in line with the natural gas price decline. It was in the range of 1,500 rigs as you can see on the right scale, dropped to between 800 and 1,000 and is now running around 250 rigs as these low gas prices continue to stay in effect. However, the orange line is US gas production in billions of cubic feet per day, BCFD. It’s continued to increase over time even though the rig count and the price has declined. Thanks for your time.
Let me make a quick summary of your key takeaways. What about this rule of thirds? Maybe it’s not supply. Maybe it’s not demand. Maybe it’s not OPEC in the Saudis. It’s just the rule of thirds that is driving our business. Wouldn’t that be strange? As you know, the US rig count drop is the steepest in 30 years. An important takeaway is small swings in supply demand, huge swings in price. If we get tightening of supply demand, we could see the price fly up.
Each note OPEC nation has a different agenda on crude production because each of them have different budgets and require different crude price. Long-term, the economists think the oil demand is there, especially as India and China continue to industrialize and the middle class population of those two countries continue to increase. US shale plays are very important. It’s two-thirds of our US production and some are still profitable.
Last but not least, rig count may not tell the whole story on the oil supply surplus and the global factors are the most important driver of oil supply. Some say that the oil price is expected to stay low through 2016. Beyond that, it’s anybody’s bet. However, in Houston we have a fellow named Mattress Mac who has gallery furniture. He’s one of the most innovative entrepreneurs that we’ve seen in the last 30 years.
He’s saying if you buy $7,000 or more of gallery furniture, you’ll get it for free if oil is over $85 a barrel by the end of this year. Mattress Mac is an eternal optimist and we hope he’s right. Thank you for your time. If you’re interested in learning more of the fundamentals of oil and gas, please go to our website www.EKTInteractive.com. We’ve put together a new Oil 101 series that covers not only the upstream, but midstream, which is the transportation and processing section of the industry, and downstream which covers refining and petrochemicals.
These two pieces of the business are doing quite well with low crude prices. We’ve also got some good background on the history of oil, the description of business processes and risk, and some of the industry trends that are affecting us as we go forward. If you have any questions or any comments, appreciate you contacting me either at my website or email address or at my phone number listed on this slide. Thanks again.
The presentation will be loaded on the SPEGCS.org website in the next week or so.