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Slide 1Labyrinth Consulting Services, Inc. artberman.com
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.
Slide 2Labyrinth Consulting Services, Inc. artberman.com
• 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
Slide 3Labyrinth Consulting Services, Inc. artberman.com
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
Slide 4Labyrinth Consulting Services, Inc. artberman.com
9.64
8.97
5.00
10.74
0
2
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2020
2025
2030
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
Slide 5Labyrinth Consulting Services, Inc. artberman.com
Slide 6Labyrinth Consulting Services, Inc. artberman.com
Slide 7Labyrinth Consulting Services, Inc. artberman.com
Slide 8Labyrinth Consulting Services, Inc. artberman.com
U.S. Tight Oil & Shale Gas Plays
Slide 9Labyrinth Consulting Services, Inc. artberman.com
• 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
Slide 10Labyrinth Consulting Services, Inc. artberman.com
Slide 11Labyrinth Consulting Services, Inc. artberman.com
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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
Slide 12Labyrinth Consulting Services, Inc. artberman.com
Slide 13Labyrinth Consulting Services, Inc. artberman.com
Slide 14Labyrinth Consulting Services, Inc. artberman.com
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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
Slide 15Labyrinth Consulting Services, Inc. artberman.com
35
42
0
5
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55
0
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2049
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
Slide 16Labyrinth Consulting Services, Inc. artberman.com
7.63
10.28
8.38
6.95
8.53
0
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-10
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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
Slide 17Labyrinth Consulting Services, Inc. artberman.com
Slide 18Labyrinth Consulting Services, Inc. artberman.com
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
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
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
Slide 19Labyrinth Consulting Services, Inc. artberman.com
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
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
0.00
0.50
1.00
1.50
2.00
2.50
3.00
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)
Slide 20Labyrinth Consulting Services, Inc. artberman.com
Oil prices have been substantially lower since 2014And investment has fallen correspondingly
Slide 21Labyrinth Consulting Services, Inc. artberman.com
$30.32
$45.18
$57.88
$63.70
$70.75
$56.96
$49.52
$54.81
193
558
617
523
-100
100
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1100
$0
$5
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$95
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$120
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$160
Jan-14
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Mar-19
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Nov-19
TightOilHorizontalRigCount(lagged12weeks)
WTIPrice($/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
Slide 22Labyrinth Consulting Services, Inc. artberman.com
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%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
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9Jan-17
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9
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Nov-19
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
Slide 23Labyrinth Consulting Services, Inc. artberman.com
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
-$30
-$25
-$20
-$15
-$10
-$5
$0
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0
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1.41/4
/16
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16
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18
1/4/19
3/4/19
5/4/19
7/4/19
WTIPrice($/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)
Slide 24Labyrinth Consulting Services, Inc. artberman.com
• 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
Slide 25Labyrinth Consulting Services, Inc. artberman.com
Slide 26Labyrinth Consulting Services, Inc. artberman.com
$20
$25
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$95
$100
$105
$110
$115
$120
-50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250
Mar-June 2015FalseOptimism
Late2015-Early2016MarketPessimism
Dec '16- Apr'17Production-Cut Optimism
Early 2014MarketOptimism
U.S.crude +products comparativeInventory (C.I.)Millionsof Barrels
Source:EIA &LabyrinthConsulting Services,Inc.- Aperio EnergyResearch EIA2019/MonthlyUpdates/MER/Table_3.4_Petroleum Stocks_MASTER
WTIPrice($/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
Slide 27Labyrinth Consulting Services, Inc. artberman.com
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.
Slide 28Labyrinth Consulting Services, Inc. artberman.com
$10
$12.50 $4.75$4.75
$7.50 $0.50
Here’sthe
Problem
Here’sAnotherProblem
Keeping Them Honest
Slide 29Labyrinth Consulting Services, Inc. artberman.com
Slide 30Labyrinth Consulting Services, Inc. artberman.com
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
-100
100
300
500
700
900
1100
2018 2020 2025 2030 2035 2040 2045 2050
Tota
l Wor
ld E
nerg
y D
eliv
ered
(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%.
Slide 31Labyrinth Consulting Services, Inc. artberman.com
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
$20
$40
$60
$80
$100
$120
$140
$160
40
50
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2013
2014
2015
2016
2017
2018
2019
E
OilP
rice(2017$/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
Slide 32Labyrinth Consulting Services, Inc. artberman.com
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.
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