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Post by sigurdur on Jan 26, 2015 2:48:30 GMT
As a consumer of large amounts of energy, I can tell you that the mood is very upbeat. The ripple effect of lower energy costs will show up in the 2nd qtr of GDP growth.
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Post by icefisher on Jan 26, 2015 4:27:49 GMT
yep, the time it took was longer, but its hard to deny the lure of profits.
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Post by glennkoks on Jan 26, 2015 12:59:02 GMT
Being from ND I will state it isn't nearly as bad as the above implies. Whiting Petroleum actually welcomed the decline. The CEO was interviewed last week. Sigurdur, Why would any CEO "welcome" what one could call essentially a depression in their industry? However, just about every CEO has come out saying something similar. Either they welcome it or they can tighten their belts and survive this much better than some of the others. They are doing their best to protect the value of their business. Speaking from a guy in the industry. Nobody welcomes this. With that being said it looks like Whiting is in better shape than most to deal with this and probably is a target of a M&A by one of the bigger players. This is a really good article about the economic position of some of the smaller producers. www.zerohedge.com/news/2015-01-23/these-shale-companies-will-file-bankruptcy-first-goldmans-best-and-worst-shale-matri
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Post by sigurdur on Jan 26, 2015 13:03:58 GMT
Glenn: He welcomed the price decline because he was tired of paying too much money for services.
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Post by icefisher on Jan 26, 2015 18:03:06 GMT
Being from ND I will state it isn't nearly as bad as the above implies. Whiting Petroleum actually welcomed the decline. The CEO was interviewed last week. Sigurdur, Why would any CEO "welcome" what one could call essentially a depression in their industry? However, just about every CEO has come out saying something similar. Either they welcome it or they can tighten their belts and survive this much better than some of the others. They are doing their best to protect the value of their business. Speaking from a guy in the industry. Nobody welcomes this. With that being said it looks like Whiting is in better shape than most to deal with this and probably is a target of a M&A by one of the bigger players. This is a really good article about the economic position of some of the smaller producers. www.zerohedge.com/news/2015-01-23/these-shale-companies-will-file-bankruptcy-first-goldmans-best-and-worst-shale-matriOvercapitalization is not a good thing for an industry. Most modern CEO's now have formal training regarding business management principles. In the old days this event would have been considered a disaster, now with CEO's with actual educations managing businesses this adjustment is long over due and welcome as wise CEOs have prepared for it. Its hardly a depression, demand remains high! Pricing was excessive relative to production costs and provided an irresistable lure of profits from new entrants, a situation that if it remain unchecked would eventually lead to a far bigger crash with huge excess inventories on the market. CEOs aware of these natural processes would have feared what was happening in the industry, prepared for it, and would look in relief at the steam being let out of the bubble. Its not as positive for individual employees, who are somewhat of a commodity themselves but even they should probably feel some relief if they were aware of the inevitable implications of over capitalization, assuming of course they still have a job. In bygone years CEOs tended to consume their time looking inwardly at their business maximizing their companies operations. Modern educated CEOs now look more at the larger picture such as industry wide product demand, industry inventories and industry production capabilities. If the situation had carried on into a general recessionary period where demand fell off the bodies littering the landscape could have been far far worse and strongly affected all players in the industry. This type of event primarily affects startups (with high leverage or not yet in full production) and inefficient operations that were prospering despite their inefficiencies when not coupled with a general economic recesssion where demand also falls off. My experience is in another industry even more susceptible to over capitalization (land development). I have been predicting this event now for several years. I lived through it in the 70's and 80's. I have been predicting for several years that pricing would fall as sharply as it did in the 1980's. And have some comments regarding it I am sure in the archives of this forum. This chart shows how that has come to play out with peak gasoline prices essentially the equivalent of the 1981 average, the only difference being the longevity mostly brought to us by world governments not wanting to do anything about the situation (as opposed to the position of the governments in place in the late 1970's and early 1980's). Smart CEOs study this stuff diligently planning for the inevitable. Best planning is via diversification. I don't know the best strategies for the oil business but in land development a developer may choose to have a strong position in land and property management as improved lands (even farmland) need to managed (a non-ownership position). Oil industry producers might get into gas stations or a position in the manufacturing and sale of fuel burning engines. I am not expert on the fossil fuel industry but certain general principles exist across all commodity and commodity-like industries. In fact recently back in the fall when gasoline prices hit $3.50 here in California (down from a long span of $4.00+, California has lots of state gas taxes) I was driving with a couple of small business owners and predicted we would see sub $2.50 California gas pricing and perhaps as low as $2.00, though it would have to beat out 1998 to get that low. California is now below $2.50. p.s. much less predictable is the eventual settling prices. Dropping energy prices releases inflationary pressure and the extended period of overpricing may cause to go even lower. But the historic pattern suggests and extended period of low prices, probably below the longterm average (need to calculate in peak oil and the actual prices of production from the various sources to get a better measure and a tighter long term outlook). a close examination of this chart suggests energy prices have followed a path of decreasing price in constant dollars.
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Post by glennkoks on Jan 26, 2015 19:43:55 GMT
Glenn: He welcomed the price decline because he was tired of paying too much money for services. Sigurdur, I have no doubt that he was paying to much for services. The oil patch has always been very cyclical and the demand for goods and services reflects the cyclical nature of the business. But to say that he "welcomed" the price decline should be dismissed as as CEO spin. The price has declined so steeply so fast no amount of renegotiation with the service companies is going to restore profitability. It will be interesting to see his quotes when Whiting is "acquired" by another company and his position made redundant.
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Post by sigurdur on Jan 26, 2015 21:12:44 GMT
It may be acquired. Cost per barrel of production for Whiting for producing wells was less than $10.00.
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Post by icefisher on Jan 26, 2015 21:51:43 GMT
It may be acquired. Cost per barrel of production for Whiting for producing wells was less than $10.00. thats the key. capital rushes into zones where profits appear to be in the 30% or better range despite risk. It seems the markets only begin to consider any risk when returns are expected to be less than that hurdle. I have seen it time and again put up a realistic estimate of 30% return and risk is not a factor (it only becomes a factor when the estimates appear unrealistic and/or management is strongly suspect in the honesty/expertise areas). What pushes firms out is high leverage on under development projects and inefficient firms invented out of thin air to greedly jump in on big returns. Wise management does not jump in with both feet but develops at a pace considering the possibility of exactly what just happened. At one point in time in land development the 30% returns invoked wholesale, both feet in, full speed development as greed drove huge projects with massive inventories under development. When the economy switched, interest rates went up the whole house of cards would collapse and even the biggest oldest firms would belly up. In recent decades most major land development companies are managed by people who know this is going to happen and plan for it. Once the damage is done banks are left holding the bag of the unwise development and the wise development company is extremely well positioned to buy up land and partially completed projects at unbelievable bargain prices. Eventually most of recoverable defunct production capability will be put back into production by wise managers not overcommitting to do it all overnight. I would expect that projects would be culled and equipment bought and tranferred a lot like how they take a big Navy battleship out of mothballs, the entire mothball fleet becomes a source of equipment for the few vessels being recommissioned. The more marginal properties will be basically mothballed and put in production as demand, costs, and risks dictate. In the construction trades its pretty disrupting as this type of switch goes on. Construction workers on new development often need to find new work say in remodels, maintenance, or other industries/areas (as many land development turndowns are highly localized). For a construction worker its very important to not get too specialized and learn some of the related skills - (for example remodeling is far more complex than new construction in terms of needed knowledge though there is a lot of overlap). I suspect some of the same dynamics are at work in the oil development patch.
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Post by glennkoks on Jan 26, 2015 23:16:33 GMT
It may be acquired. Cost per barrel of production for Whiting for producing wells was less than $10.00. The cost per barrel is between 10-20 dollars for most of the shale play. Thats simply the cost of getting it out of the ground. Does not include the actual cost of drilling the well, fracking, leases, royalties etc. They will keep on producing no doubt. They will have to get cash anyway possible. So will the rest of the world. But they won't keep drilling. I doubt there are any American shale drillers that can make money with oil less than 55.00. And that is factoring in cost cuts from all the service companies etc. Most are probably not profitable below 60-65. I also agree with the article. There will be 50 or less rigs drilling in ND by the end of 2015. Currently there are 156. The costs in the Bakken shale are just to high. Lack of infrastructure, pipelines etc.
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Post by sigurdur on Jan 26, 2015 23:31:57 GMT
Glenn: You just confirmed what the CEO of Whiting said. Let pipelines, etc catch up. We know there are about 25 billion barrels of oil in the Bakken. That is a lot of oil. Needs a slowdown so that the wet gas can be captured etc.
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Post by sigurdur on Jan 26, 2015 23:35:05 GMT
ND is going to spend 870 million on roads etc. The Samdpiper pipeline should be done in 2 years. That will lessen the rail pressures. Help with recoverable costs.
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Post by glennkoks on Jan 27, 2015 2:51:44 GMT
Glenn: You just confirmed what the CEO of Whiting said. Let pipelines, etc catch up. We know there are about 25 billion barrels of oil in the Bakken. That is a lot of oil. Needs a slowdown so that the wet gas can be captured etc. Sigurdur, I hope it is a slowdown and not a shutdown. I lived through the mid eighties where the oil and gas industry was shut down for years. Look for more and more bankruptcies, M&A's, Layoffs and people leaving the oilfield for other more stable occupations. They cannot put the shale genie back in the bottle but it may be a good long time before profitability and growth is restored. In the meantime, expect lots of small business failures in ND. Hotels, restaurants, convenience stores, trucking companies etc...
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Post by icefisher on Jan 27, 2015 3:32:47 GMT
It may be acquired. Cost per barrel of production for Whiting for producing wells was less than $10.00. The cost per barrel is between 10-20 dollars for most of the shale play. Thats simply the cost of getting it out of the ground. Does not include the actual cost of drilling the well, fracking, leases, royalties etc. They will keep on producing no doubt. They will have to get cash anyway possible. So will the rest of the world. But they won't keep drilling. I doubt there are any American shale drillers that can make money with oil less than 55.00. And that is factoring in cost cuts from all the service companies etc. Most are probably not profitable below 60-65. I also agree with the article. There will be 50 or less rigs drilling in ND by the end of 2015. Currently there are 156. The costs in the Bakken shale are just to high. Lack of infrastructure, pipelines etc. Well not having accounting information available its hard to figure. Leases and royalties are typically heavily pinned to profitability numbers. Lower profitability generally only means lower royalties and leases. It won't go to zero but it can get close as lease and royalty values are determined on highest and best use (the land use that produces the most income). Thus current net income of shale oil op from an entity standpoint may not say a lot with leasing and royalties in as costs. What would the price of oil need to be without those two items considered?
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Post by sigurdur on Jan 27, 2015 5:12:59 GMT
Bakken shale was and is at a disadvantage. Refineries are set up for heavy crude and Bakken is very very sweet crude. The 2nd disadvantage is pipeline access. The Keystone II was/is committed to 150,000 barrels per day. That pipeline would have increased returns approx $9.00/barrel. The sandpiper, if built, has approx the same return. That would have left approx 400,000 barrels per day to be railed.
The main reason Obama is against the Keystone II is because it would have allowed further development of the Bakken.
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Post by sigurdur on Jan 27, 2015 5:16:16 GMT
He can't stop the Sandpiper directly, but the Minnesota EPA and the Fed EPA are throwing up large roadblocks. The ND route has been approved, the Minnesota section is in litigation.
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