RE: Shale30 Jul 2018 00:09
" I think it’s worth remembering that the cost of production will rise and the extraction rates will fall as rig density starts to have a big effect on recoverable rates". None of this is currently being seen either in the Permian nor in the other key shale areas like Eagle Ford and the Bakken. 1. Shale producers have been really prudent with their budgets this year, in spite of the fact that WTI has been on an upswing. Every single shale producer I track have their Capex spend less than the operating cashflow and that speaks volumes of their spending discipline, after the debacle they'd been through in 2014 when Brent crashed. 2. The US based drilling service providers have squeezed drilling costs lower and are drilling longer holes. I also believe that these costs though can realistically go in one direction from here, and that's UP - I take your point here, Tom. However, the drillers have been finding innovative ways of drilling multiple wells in a compact area, and as long as their acreage is contiguous, they're finding ways to pull more out of the ground.
See an example of drilling strategy from a driller I track - Laredo Petroleum. https://seekingalpha.com/article/4169296-laredo-petroleum-lpi-q1-2018-results-earnings-call-transcript?part=single
We can already see the majority of the deployed rigs in the US are in the Permian, and though cost pressures weren't seen in Q1 at most of the Permian drillers I track, that may change in Q2 - to what extent, we don't know yet. A few Permian drillers are reporting Q2 results this week and there'll be clear indications from their commentary. And the WTI Midland (Permian) differentials because of a lack of pipeline capacity is now blowing up. It's close to $17 for the next 3 months and it may hit the $20 figure soon. This doesn't affect drillers with committed pipeline capacity as they push their oil out to Cushing or Houston and get full WTI pricing. Very soon, drillers WILL have to curtail additional production from the Permian as there's no other way they can move this oil. Trucking capacity just isn't there to move lots of barrels to the gulf coast.
The initial round of shale boom was driven by massive debt fuelled by cheap credit, but the majority of drillers are being prudent with spending more in the face of near-term challenges. We'll know sometime in the next 12 to 15 months where the demand cycle is heading towards, depending on where global growth is headed to, and that may support additional oil being produced in the Permian from late 2019/2020 onwards.
IMO - Global growth will be biggest driver of price in the next few months and if Trumpty doesn't push this too far with China, we should see Brent breaking out into the 80s soon.
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