Posted by Trent Telenko on May 15th, 2016 (All posts by Trent Telenko)
It isn’t often you see the death of a major worldwide industry. Last week I saw the death of the “Big Oil” economic model. It just died at the hands of Texas oil frackers who have developed a new “disruptive technology” that has made obsolete all the pillars of technology underpinning large, vertically integrated oil companies. More importantly, the same is true of all the petro-states that nationalized Big Oil’s assets in the 1960s to make all the state oil companies around the world today.
I found this out doing my day job last week as a Defense Department quality auditor visiting a mid-sized oil service company diversifying into federal contracts. The meeting was about issues with the contract they won and touched on others they have bid on. As a side bar at lunch the following points about their main business came up:
1. Oil field spending has died. Rig count in the USA is the lowest it has been since 1940.
2. One oil rig controller company these folks worked with saw a year over year drop of 72% in its business.
3. Another company they supplied had their “Cap-X” budget drop from ~$400 million for 2015-2016 to little over $30 million for 2016-2017.
4. One drilling company they supplied went from 120(+) new wells last year to _12_ this year.
5. This supplier sold a lot of copper tubing for “frack-log” drilling. That is the drilling of holes in good oil-bearing rock without fracking rock for oil immediately — and here is the new part — to take advantage of a new long-flow fracking technique.
While most of the points above are due to the Saudis’ oil price war on Texas frackers. An ex-Big Oil geologist I know put it this way —
The entire reason for the price drop was because the Saudis wanted to destroy fracking in the United States in order to keep us dependent upon them in order to keep them getting a free defense. The Saudis will have to diversify and start spending money on defense before the price goes back up, or they will be in serious trouble.
The technique in Point #5 above marks another “fracking revolution” that is of growing importance to the USA. This new fracking energy revolution will upend the world order as we know it. Political winds willing, America may well be a net hydrocarbon exporter in five to eight years.
Explaining why that is requires some background in Texas oil fracking.
TEXAS FRACKING BACKGROUND
The following is clipped from an e-mail list I participated in which included several oil men. It is a useful background for the hows and whys of the hydraulic fracking oil drilling technique that breaks up oil bearing rock to revive old oil fields:
New recovery techniques, of which hydraulic fracturing is one, have made it economically feasible to re-visit reservoirs that were previously thought to be depleted or simply not productive enough to operate. “Fracking” has allowed the development of shale formations that were not productive by earlier technology.
There is a sand formation in the Permian basin called the Spraberry trend, first developed in the 1940’s, which will allow a driller to find a producing well pretty much anywhere in the counties where it is found. Drill a hole and get a well. Problem is that, after the initial production, this formation became played out and these wells were “stripper” wells (less than 10 barrels a day).
After the bust in the 1980’s, the price didn’t even pay for the electricity to operate the pump jacks on existing wells, let alone cover well servicing operations or new drilling. This formation is underlain by another called the Wolfcamp shale, and there is a lot of activity in that formation these days, especially below 2 miles.
Most of the well sites that I have visited, and the drilling permits that I have reviewed, involve development between 10,000 and 15,000 feet in depth. It takes a lot money to get that deep, but it is apparently worth it right now.
“Fracking” plays (Oil Speak Note: Play = producing oil well) are normally for four years, with most of the oil in the first two years. They cost $10 to $15 million. They are profitable at $50 a barrel for a new play and already fracked wells cover their costs at half that price. The “new revolution” technique the oil service firm mentioned doubles those times to four years of high flow with a further four years of declining flow. Depending on whatever drilling costs are involved, this effectively earns them profit at a price as low as 1/2 of the per barrel cost of previously fracked wells over the new well’s longer productive lifetime.
A Big Oil drilling play in the deep ocean, arctic, or politically unstable/corrupt 3rd World nation (This now includes Putin’s Russia) runs between $1 and $5 billion because of all the infrastructure Big Oil has to build to extract and move the large quantities of oil from howling wilderness at the edge of civilization. They run 7 to 15 years.
The disinvestment that this Saudi-caused oil price crash is bringing on will see declines by corruption of existing big-oil-type production in various national oil companies, followed by a massive market share shift to fracking when the reduced-by-disinvestment Big Oil production curves start bumping reduced oil supply into increased oil demand.
CONFIRMING FRACKING IMPRESSIONS
These facts left me with several impressions that I later confirmed.
First, this new extended frack technology is what is driving the “Fracking to Frack-log” drilling decline by the mid-to-large oil industry players in the last 9 to 12 months. Effectively, mid-to-large fracking firms have stopping current style fracking to get a piece of the new technique for the next oil price rise, AKA when the Saudis have burned through their foreign investments and sovereign-debt credit rating.
Second, cheap fracking-type drilling also moves all future oil extraction to places that have certain legal and regulatory regimes for quick market moves. Places like private lands in Texas and other traditional American oil states that have existing transportation infrastructure, laws and regulations for land use plus a stable & (relatively) honest political culture adapted to running them.
The third impression I had of this “Extended Frack-Play” was that those that know of it are in the following groups,
1) They own it and are not talking very much,
2) They are under non-disclosures with teeth for #1 or
3) They are under retainers with silence-related pay-out clauses for #1.
The final impression was that old-style capital-intensive oil drilling has been killed, along with the entire “political economy” around Big Oil that has existed for 100 years. The reality of long term fracking plays kills the return-on-investment calculations for traditional Big Oil oil exploration and development.
The “frack-log” and the new 4/8 year oil-flow fracking technique mean that long term fracking plays simply get to market far faster than do Big Oil style drilling plays like huge off-shore deep-sea oil platforms, or drilling in places like the Arctic National Wildlife Reserve, let alone places with classic 3rd World tribal kleptocracies that are pretending to be nation-states.
The complete lack of political risk premiums and orders-of-magnitude smaller investment for oil production puts Big Oil into a situation of “end run production”. Private capital will not put billions of dollars into an Iranian or Russian oil development in Siberia when a much smaller private investment in Texas, Oklahoma or Louisiana will get them more oil, sooner, with extremely low political risk and trivial infrastructure costs.
I did an hour’s worth of Internet services and called several oil patch acquaintances, sharing those impressions. Most did not know a thing. One told me my impressions were correct but that he could not say more. (See #2 above)
President Ronald Reagan colluded with the Saudis to collapse the Soviet Union through low oil prices. This extended fracking technique means, given the political will, the USA doesn’t need the Saudis to do the same to Russia, Iran, Venezuela… and the Saudis!
(Long term, the Saudis need $100/barrel oil to support their current population.)
One of my email contacts made this Schadenfreude-rich statement: “Prince Mohammad bin Salman is reported to have placed a great emphasis on Saudi domestic non-oil economic development last fall, after having been appointed as the country’s Gorbachev earlier in the year. “
POLITICAL ECONOMY AFTER BIG OIL
The domestic and geopolitical implications of an energy-independent USA are huge and profound. Since I’ve already touched on the foreign policy implications, I’ll start here with the domestic implications for “Big Green”, AKA the environmental movement.
Big Green has a March-of-Dimes-after-the-Salk-Polio-vaccine problem.
The environmental movement arose in part due to real and imaginary environmental abuses of Big Oil, notably its huge infrastructure requirements generating “Not in my back yard” (NIMBY) resistance in many American states. The size and scope of these infrastructure programs required multiple levels of local, state and federal regulatory approval which allowed protracted opposing environmental lobbying and media campaigns. Those campaigns required huge standing organizations, raising and spending money on political lobbying and public education/awareness. This in turn created huge INCOME STREAMS with a familiar pattern of fund-raising consultants getting a percentage of the take, plus ditto for related lobbyist and publicity staff, all of whose livelihoods and identities are wrapped up in environmentalist political action. Big Green is merely one of, albeit now the largest, of many such self-licking ice cream cone institutions in America.
The decades-long Keystone XL-pipeline from Canada and the drilling in the Arctic National Wildlife Reserve (ANWR) are perfect issues for Big Green INCOME STREAM organizations. Extended-play fracking technology using private Texas lands takes away their reason for existing by mooting the need to have either the XL-Pipeline or ANWR oil drilling.
Big Green’s INCOME STREAM organizations must find more villains ASAP to replace Big Oil because Big Oil is dying fast due to the fracking-caused collapse of its economic model. Fracking has already been selected as one such replacement villain. I predict the next public villain will be liquid natural gas (LNG) exporting facilities. Those facilities fit the time horizon of Big Oil perpetual fund raising targets, even if exporting cheap natural gas means the Chinese reduce their carbon/pollution footprint by replacing high sulfur steam-coal power plants with higher-efficiency combined-cycle gas-turbine power plants.
This has already happened. According to the FERC (See: https://www.ferc.gov/industries/gas/indus-act/lng.asp) there are 11 LNG import/export terminals existing with a total capacity of 18.535 bcfd. Of this, the current export capacity (liquefying capability) is 7.3 bcfd.
Although this converts to ~75 bcm (billion cubic meters) of LNG per year, the US only exported ~47 bcm in 2011.
Russia provided 167 bcm (billion cubic meters) of the 270 bcm Europe imported in the same year. Most of US exports went into that 103 bcm deficit.
In 2012 the FERC said there were 13 filed applications for expansions or new facilities capable of liquefying the natural gas with a total filed capability of 16.59 bcfd. Facility construction to include all safety measures takes approximately ten years.
As far as I have been able to determine, the Obama Administration FERC has treated these LNG export infrastructure applications the same way they have the XL-Pipeline – postpone them indefinitely under the guise of pretend studies. The Cheniere Energy Inc LNG terminal application for a $5 billion Louisiana export terminal has been with the FERC for years. And a Hillary Administration would be no different.
AMERICAN FOREIGN POLICY AFTER BIG OIL
Whether America elects another Democrat or a Republican in Nov. 2016, the reality is that America is set to move through energy independence to being a world energy supplier in a five-to-10-year time frame. This will utterly change America’s foreign policy & national security relations. Energy independence via the Oil & Gas Fracking Revolution gives future American leaders huge opportunities to be a “normal” national leaders in the historical, pre-WW2 American trade barriers, political isolationist, and American-unilateral-military-action-only-in-Latin-America senses.
Rather than having to be the “guardian of the Arabian Gulf” to insure the energy supply to the USA & Europe, America will be a direct energy export competitor with Russia, Iran and the Gulf Arabs.
Further, America will be stronger economically and militarily. American discretionary military power will rise as it is no longer pinned so heavily to the Mid-East. This will make Russia, China and North Korea as unhappy — albeit for different reasons — as Saudi Arabia.
In short, rather than being an international globalist, an energy independent or exporting America means American presidents can put American interests first.
If that sounded like a Trump political commercial for his foreign policy speech, please consider the following circumstantial evidence that Trump has been aware of the extended fracking technology for some time.
o Datum — The Bush clan hates Trump and won’t endorse him. The Bush clan are the premiere patrons of the Saudis inside the GOP.
o Datum — The Bush clan has openly broken with Dick Cheney. See what Pres George H.W. Bush’s book said with regard to Cheney.
o Datum — Trump began his anti-Muslim remarks Nov 21, 2015 shortly after the Paris terrorist attacks by bringing up the Muslim celebrations of 9/11/2001 in Patterson, N.J. This was also shortly after Halliburton began its major frack-log drilling plays. Halliburton is one of the biggest if not the biggest player in frack-log drilling.
And now look at what Trump said in his speech here, and fully at the link below —
We will spend what we need to rebuild our military. It is the cheapest investment we can make. We will develop, build and purchase the best equipment known to mankind. Our military dominance must be unquestioned.
But we will look for savings and spend our money wisely. In this time of mounting debt, not one dollar can be wasted.
We are also going to have to change our trade, immigration and economic policies to make our economy strong again – and to put Americans first again. This will ensure that our own workers, right here in America, get the jobs and higher pay that will grow our tax revenue and increase our economic might as a nation.
The last sentence in the Trump foreign policy speech passage above makes a great deal more sense, given foreknowledge of the new extended oil fracking play.
For good or ill, we are now in the post-Big Oil economic age.