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  • Texas Fracking and the Death of Big Oil

    Posted by Trent Telenko on May 15th, 2016 (All posts by )

    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 — Dick Cheney — Mr. Halliburton — has endorsed Trump.

    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 —

    http://www.peoplespunditdaily.com/policy/2016/04/27/donald-trumps-america-first-foreign-policy-speech-full-transcript/

    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.

     

    42 Responses to “Texas Fracking and the Death of Big Oil”

    1. Michael Hiteshew Says:

      I’ve been excited by fracking technology and developments for years now. I’ve been trying to get other people to understand how momentous A) the technology is and B) how much oil and natural gas the USA is sitting on as a result. Very few people seem to get it.

      Fracking in deep shale beds:

      http://geology.com/articles/bakken-formation.shtml
      The USGS Assessment for the Bakken Formation ( North Dakota, northeastern Montana, southern Saskatchewan) estimated mean undiscovered volumes of 3.65 billion barrels of oil, 1.85 trillion cubic feet of associated / dissolved natural gas, and 148 million barrels of natural gas liquids in the United States portion of the Bakken Formation. These resources are contained within both conventional and unconventional reservoirs.

      http://geology.com/articles/marcellus-shale.shtml
      In 2011 the Energy Information Administration reported that the Marcellus Shale contained approximately 410 trillion cubic feet of technically recoverable natural gas but the following year the agency revised that number downwards to 141 trillion cubic feet. It is difficult to estimate the amount of gas in a rock unit that varies in thickness, composition and character, and is located thousands of feet below Earth’s surface.

    2. Rich Rostrom Says:

      The Bush clan hates Trump? It could be because the Bushes are close to Saudi Arabia.

      Or it might have something to do with Trump repeating the left-wing charge that “Bush lied” to justify the Iraq War, or his statement in 2008 that Bush should have been impeached and removed from office.

      Incidentally, Cheney never “endorsed” Trump. He stated that he would support Trump, the Republican nominee for President, as he has done for all previous Republican nominees.

    3. Trent Telenko Says:

      I have no sympathy for the Bush clan.

      They don’t fight for America.

      They damned well knew of real WMD in Iraq in 2005-2006 and hid it while the Left went ape-**** and gave us both Pelosi and Obama.

      See:

      Massive Amounts of WMDs Were Found in Iraq
      Posted By: Steven H Ahle February 14, 2016

      http://dailyheadlines.net/archives/25993#

      “The CIA was even able to buy 400 Borak rockets filled with pure Sarin gas. And on top of that, our troops found 5,000 WMDs that the Pentagon kept secret until last year.

      The CIA is still not talking about buying WMDs in Iraq in 2005 and 2006”

      That Trump beats them up on charges the Bushes didn’t fight is karma.

    4. Trent Telenko Says:

      Mike K,

      The thing about this fracking technology is that it cannot be un-invented. The technology exists. The Saudi’s price war cannot destroy the knowledge.

      All they can do is reduce the number of players in the USA and leave the frack-player survivors more efficient. Think about the example of the inappropriate over use of antibiotics creating super-bug infections. And Halliburton seems to be one of the fracking “super-bug” survivors.

      What is going on is that the pillars of technology underpinning large vertically integrated oil companies, and more importantly the underpinning of Petro-nation states, has been shot in the head.

      We are going to see multiple kleptocratic, petroleum funded, nation-states go the way of Venezuela… simultaneously.

      There are huge implications in that thought.

    5. David Foster Says:

      Interesting article, I’ll come back and read it in more detail.

      Pipelines: While some pipelines may become unnecessary, perhaps Keystone XL, pipelines in general are just as important in a fracking-based oil world as in the traditional oil world. Indeed, fracking-lowered prices drive more use of nat gas in preference to coal, and hence drive more demand for pipeline capacity.

    6. Joe Wooten Says:

      Trent,

      Those of us who have lived through the oil boom/bust cycles in Texas have seen many companies come and go. My brother is a production supervisor for a mid-size company that seems to be surviving the current bust. I think Exxon-Mobil will survive the current change. They are a very technically adept company and the current (and past) CEO is an engineer who came up through the ranks. They can pivot fairly rapidly for a super company. They run the best refinery operations of any company and they do not consider their engineering and technical departments as a necessary evil.

      The area I grew up in West Texas, Glasscock County, has a lot of producing fields in both Sprayberry and Wolfencamp plays. The latest fracking boom there was concentrating on Wolfencamp plays, but I was told they were also going into old Sprayberry fields and doing the horizontal drilling but not fracking them until the price gets higher. This increases the flows to the re-drilled wells but not as much as fracking does. Some of these fields were old waterflood stripper wells abandoned in the 1990’s when the price fell to $12/bbl.

    7. Trent Telenko Says:

      Joe W,

      Exxon-Mobil can change from being a vertically integrated multi-national (V-I-M) oil company to something else.

      Exxon-Mobil is not attached to any one piece of geography or specific oil-tech play, and it has been trending away from the old V-I-M oil company model for some time.

      The same is not true for Pemmex, nor for a host of other national oil companies.

      The issue at hand is what happens when petro-states can no longer get more petro out of the ground, because…fracking.

      The Saudi’s are playing an economic game of chicken with North American oil producrers — Texas Fracking firms and the Canadains both — hoping to push/scare them into bankruptcy before China and India goes hog wild on cheap oil.

      It will be interesting to see this play out, but the one thing this has certainly done is kill the current generation of “Peak Oil” Chicken Littles.

    8. Trent Telenko Says:

      Joe W,

      Regards the Saudi’s latest oil crash move, in the beginning of 2015, the Canadians were trying to lever the Saudi oil out of the North American market.

      That was a large piece of the XL-pipeline debate was about behind closed doors.

      It was also why “Big Green” was accepting Saudi cash to fight the XL-Pipeline.

      See this regards the “Beavers v. Camel Jockeys” below:

      http://www.rigzone.com/news/oil_gas/a/136622/High_Noon_on_the_Gulf_Coast_Canada_Saudi_Oil_Set_for_Showdown/?all=HG2

      High Noon on the Gulf Coast: Canada, Saudi Oil Set for Showdown

      Catherine Ngai 1/6/2015

      Reuters

      NEW YORK, Jan 6 (Reuters) – As a test of wills between OPEC nations and U.S. shale drillers fuels a global oil market slump, a brewing battle between Canadian and Saudi Arabia heavy crudes for America’s Gulf Coast refinery market threatens to drive prices even lower.

      While the stand-off between the oil cartel and U.S. producers of light, sweet shale oil has captured the limelight in recent months, the clash over heavier grades – playing out in the shadowy, opaque physical market – may put even more pressure on global prices that have halved since mid-2014.

      Two factors will come into play over the next few weeks: From the North, new oil pipelines will pump record volumes of Canadian crude to the southern refineries, many better equipped to process heavy crudes than lighter shale oil.

      From the Middle East, top exporter Saudi Arabia is offering crude at discounted prices in an attempt to defend its remaining share of the important regional market, which has shrunk by more than half in recent months.

      “So far, the Gulf Coast has suffered from an oversupply of light oil, but now there’s competition for heavier crude,” said Sandy Fielden at RBN Energy. With the Saudis already facing fierce competition for their light grades, the arrival of Canadian crude “could add insult to injury”, he said.

      On Monday, Saudi Aramco stepped up its counteroffensive, cutting its monthly U.S.-bound price for Arab Medium for a sixth straight month, putting it at the deepest discount against the regional sour crude benchmark since December 2013..

      The timing of this clash may magnify its market impact as Houston-area oil refiners shut down for maintenance in early spring, further reducing their demand by an estimated 1 million barrels a day (bpd).

      “We’ll see that overhang into the summer, at least,” said one physical crude trader.

      That will put further pressure on U.S. prices and may spur investors in New York and London to extend a sell off in crude futures.

      SPOILT FOR CHOICE

      The looming clash of barrels comes at a time when oil markets already face a global glut expected to last for a year or longer.

      Large volumes of foreign heavy oil reaching the Gulf Coast will give many U.S. refiners more choice after they have upgraded their systems to process cheaper, heavier crudes. The new supply also marks a breakthrough in Canada’s years-long effort to bring its growing Alberta oil sands crude output to new markets.

      Enbridge Inc’s 600,000 bpd Flanagan South pipeline, which runs from Illinois down to the Cushing, Oklahoma, oil hub began commercial service on Dec. 1; Enterprise Product Partner announced that its 450,000 bpd Seaway Twin pipeline from Oklahoma to Freeport, Texas, shipped its first volumes on Dec. 21.

      That promises another quantum leap for Canadian crude after its U.S. Gulf Coast sales already hit a record 274,000 bpd in October, nearly three times as much as a year earlier, according to U.S. data.

      The new flows will compete with other crudes as well. Some refiners see Saudi’s medium crude as a more direct substitute for Mexican and Venezuelan crudes.

      However, some refiners are likely to blend oil sands crude with overabundant super-light U.S. condensate, creating medium blends that may rival Saudi Arabia’s main grade, said Citi global commodities strategist Ed Morse. He warns the clash could set up another tumble in global prices.

      The growing pressure on the Gulf market is already showing up in pricing and inventories.

      Mars Sour , a domestic grade similar to Arab Medium, has fallen to a discount of $1.90 a barrel compared with U.S. crude futures after trading at a premium over 45 cents two months ago.

      Crude oil inventories in the U.S. Gulf have risen to nearly 200 million barrels, a record high for late December and up some 15 percent from a year earlier.

      The build-up comes as Saudi Arabia shifts its focus to fiercely defend what remains of its market in the United States – the world’s largest consumer of oil.

      Until recently, it seemed to be holding its own in part thanks to a major expansion of its joint-venture Motiva Enterprises refinery.

      Saudi crude sales to the U.S. Gulf rose by a third to a record high of nearly 1 million bpd in the two years to 2012, a period where gushing shale production had begun to displace foreign suppliers.

      But this year it has begun to lose ground, with shipments tumbling to 461,000 bpd in October, data from the U.S. Energy Information Administration showed.

      Ironically enough, the decline was driven partly by a one-third cut in imports by Motiva, jointly owned by Saudi Aramco and Royal Dutch Shell.

      Other customers have also turned away. Valero Energy Corp’s cut imports by 85 percent in the first 10 months of 2014, with Saudi purchases falling to just 35,000 bpd, according to EIA data. Marathon Petroleum Co cut Gulf Coast imports to 33,000 bpd in October from 205,000 bpd 10 months earlier.

      While most Saudi customers agree on annual contracts with little room to reduce purchases, the Kingdom’s state oil firm knows it needs attractive prices to retain long-term buyers.

      “As refiners look at Canadian crude availability long term, they’ll be thinking about ways to give themselves more options” said Richard Mallinson, an analyst at Energy Aspects in London.

      (Reporting by Catherine Ngai; editing by Jonathan Leff and Tomasz Janowski)

    9. Mike K Says:

      The WSJ has an article about the Saudis today.

      The new Saudi strategy is to use oil revenues to diversify the economy and build the world’s largest sovereign-wealth fund as the investment engine for development. Ninety percent of the government’s revenues came from oil between 2010 and 2014; with the fall in oil prices, it is temporarily down to about 80%. The new target is to increase non-oil government revenues at least sixfold by 2030. A key step is the proposed IPO of up to 5% of Saudi Aramco, by far the world’s largest oil company.

      This shift is also driven by geopolitical forces—the rivalry with Iran, the need to blunt the appeal of jihadists, and the fraying of the Saudi-U.S. alliance. Saudi Arabia intends to bolster its role in the world and make itself a major force in global financial markets. The nation also wants to raise its status as a geopolitical player: As of 2015, Saudi Arabia had the world’s third-largest military budget, trailing only the U.S. and China, and ahead of Russia.

      I don’t know if those other natural resources, like Uranium, are there and have been identified.

      In his new job Mr. Falih will be in charge of petroleum and an expanded Ministry of Energy, Industry and Mineral Wealth, as it is thought that the country has significant, largely untapped reserves of minerals ranging from phosphates and uranium to gold.

      Hmmm

    10. Trent Telenko Says:

      Mike K,

      You just cannot make Saudi’s work.

      Work story from late 1990’s —

      I was involved with two foreign military sales (FMS) cases with 5-ton trucks. One was for a western nation with 5-ton wrecker trucks, which had air conditioners. The other FMS case was a sale to the Saudis.

      The Saudi armed forces buyers specifically told the Defense Contractor selling them the trucks that they -didn’t- want air conditioning.

      The Reason — Saudi junior officers would never get any work out of their drivers if they did!!

      Sadly, this is a rather common story WRT native Saudi Arabians.

    11. Tom Holsinger Says:

      MikeK,

      “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.“

      The Saudis are doomed. First, they are Arabs with all that entails. Second, their rulers spent generations driving out any competence they didn’t control because competence was, and is, a threat to the Saud clan’s rule. Third, they created a whole society based on useless drones dependent entirely on unearned income. In a desert. Fourth, they fostered a violent nutball culture which will eat them when they relax control enough to permit the existence of economic diversification.

      Interesting times are coming.

    12. Joe Wooten Says:

      The same is not true for Pemmex, nor for a host of other national oil companies.

      Could not happen soon enough for me. I detest all those nationalized companies, and so does this guy.

      http://www.oilfieldexpat.com/

      He thinks that only E-M and maybe Chevron will come out of this one whole. BP, Shell and Total are in deep doo-doo. He regards Pemmex with total contempt for it’s corruption and inefficiency.

    13. Trent Telenko Says:

      Joe W,

      I love the writer over at oilfieldexpat.

    14. Gringo Says:

      Another expat oil blog- by a Brit- is: http://www.desertsun.co.uk/blog/ White Sun of the Desert. It doesn’t confine itself to oil field talk.

    15. Gringo Says:

      He thinks that only E-M and maybe Chevron will come out of this one whole. BP, Shell and Total are in deep doo-doo.

      BP showed its “Beyond Petroleum” colors in the Macondo blowout, by ignoring standard drilling procedures in the events leading up to the blowout. This was no accident, as Pravda would once have said, given some of its “accidents” at Texas City and in the North Sea. I worked for a while with someone who had once worked for BP in pipeline management. He told me that when he recommended repairs, the standard response for upper management was to not repair. Which is why he declined a big promotion in pipeline management, and retired. He didn’t want to be the one left holding the bag.

      He regards Pemmex with total contempt for it’s corruption and inefficiency.

      Which is the standard description for government-owned oil companies. PDVSA, before the Chavez takeover, was an exception to the rule.

    16. Mike K Says:

      “The Saudis are doomed. First, they are Arabs with all that entails. ”

      Oh, I agree. Fracking will be the salvation of the US if the Democrats can be kept away for a decade or so.

      I know a young man, a friend of a friend, who is doing petroleum engineering at U of Arizona. I encouraged him a few years ago when he was freshman engineering student.

      He’s a great kid. He plays classical piano and is a big good looking kid. I’ve been sort of watching all this and sending stuff to his father.

    17. ed in texas Says:

      You’re not the only person seeing this. Bear in mind that John D Rockefeller’s initial operations were exclusively in refining and delivery, not in exploration and development. If you control when and where oil is delivered, you can control the production market.
      The Saudis have been on a buying spree in Gulf Coast refineries.

    18. Joe Wooten Says:

      BP’s refineries were all the old Amoco company facilities, and they were a typical big corporation dominated by money men who considered engineers and technicians as overhead and never hesitated to overrule them. OTOH, Exxon-Mobil, due to the dominant Exxon culture before the merger, though Mobil was good too, lets the engineering set the pace. They have not had a major refinery accident in decades. In fact, the engineering department at E-M makes a tidy sum selling seminars to engineers in all industries on equipment reliability. When I was a young engineer at Texas Utilities at Comanche Peak, the engineering manager had them come in for 4 days to teach us about equipment/system reliability engineering. In an after-class bull session, one of the instructors told us that E-M never stinted on buying the best equipment and sensors as they did condition based maintenance. System engineers tracked the performance of all machinery in their systems and scheduled work based upon performance and were rarely overruled, and then mostly just to wait a short time, weeks at most, until the plant was shut down for major work. BP/Amoco OTOH, ran equipment until failure and always skimped on testing and engineering. I know the refinery in Whiting IN is always having some kind of problem. It rarely operates for more than a few months at time. Em has a refinery a few miles from me here in Channahon IL, and in the 19 years I’ve lived here has never had a major accident that shut it down.

    19. Joe Wooten Says:

      The Saudis have been on a buying spree in Gulf Coast refineries.

      Let ’em buy all they want. If they operate and maintain them like they run their nation, reliability will eventually suffer. I got to know a few Saudis at UT when I was in engineering school back in the late 1970’s. They were lazy and openly cheated on tests. I got stuck with a pair of them in a lab and had to finally get the instructor to have them do their own test reports separately. They would never offer to help write, assuming they could just get a free ride. In a later class I got stuck with 3 Iranians during the Khomeini revolution in spring 1979. They were only marginally better, with one of them always reading his koran instead of doing the tests.

    20. Mike K Says:

      “They were only marginally better, with one of them always reading his koran instead of doing the tests.”

      The Saudis spent a lot of money on American doctors in the 70s. I don’t know about now, but I knew guys that made on the order of $100k a month to go there and run things. Of course, wives were never going to go there.

    21. Trent Telenko Says:

      >>I got to know a few Saudis at UT when I was in engineering school back in the late
      >>1970’s. They were lazy and openly cheated on tests. I got stuck with a pair of them
      >>in a lab and had to finally get the instructor to have them do their own test reports
      >>separately.

      I had similar experiences at UTEP.

      There were Saudi’s outside engineering tests staging verbal fights outside the class in in Arabic, which a included yelling the answers to various questions on the test being taken.

      I found out about them from a non-Saudi Arabic speaking teaching assistant who lived in my dorm.

    22. Mike K Says:

      Former Egyptian PM, Mohammed Morsi, has a PhD in Materials Science from USC. I wonder if he cheated. He supposedly worked in the US as an engineer.

      I had thought his PhD was in Petroleum Engineering, which USC has had a big program in for 50 years with many Arab graduates. It was originally funded by the Saudis, I think.

    23. Trent Telenko Says:

      Tom H. said —

      >>The Saudis are doomed.

      No joke there, because of this —

      >>Third, they created a whole society based on useless drones dependent entirely on unearned income. In a desert

      Which is what keeps me awake nights.

      Most people have not thought through the implications of sub-$50 a barrel oil for the long term. The Saudi Arabian budget is built on the assumption of revenues from $100 a barrel oil. Other oil states are not much better. Most are far worse.

      Extended play fracking caps the high price of oil for the long term — IMO, at least two decades — at $50 a barrel with prices cycling as low as 1/2 that as the normal oil price range.

      Kuwait, Libya and the Arabian peninsula cannot support their current populations without a lot of long term oil income — an income stream that no longer exists. The lessons of Libyan refugees for Italy are stark.

      What the heck happens inside Saudi Arabia when they can’t pay foreigners to keep the water desalination and power plants going?

      In a place much better climatically, the near term future will see waves of Venezuelan “economic migrants” on America’s various Southern borders from the collapse of the oil economy there.

      Any bets on “Venezuelan Boat-people” showing up in Puerto Rico before the November 2016 election?

    24. Jonathan Says:

      The Iranian dictatorship also depends on oil revenues, and needs higher prices than SA to maximize revenue. Obama bailed them out with money from accounts unfrozen in exchange for their playing along with his phony nuclear deal. They are, thus, successfully following the North Korea biz model, but they are more of a threat than NK because their demographics incentivize the mullahs to act sooner rather than later. Russia is in a bad situation too. We should do fine if we can keep the coming turmoil offshore, but that may not be possible.

    25. Grurray Says:

      I know the refinery in Whiting IN is always having some kind of problem. It rarely operates for more than a few months at time

      It has to be the worst refinery in the US. The reason gas in Chicago is the most expensive in the country is because of how inefficient and mishap-prone it is. They just completed a multi-billion dollar upgrade last year that was years late. They’re now tooled up to handle heavy crude from Alberta just in time for the market collapse.

      The thing that could sink the fracking boom isn’t prices too high or too low, but both. If there’s too much volatility then too much leverage will be chasing the wrong investments. Another problem is the Arab funded opposition.

      Extended play fracking caps the high price of oil for the long term — IMO, at least two decades — at $50 a barrel with prices cycling as low as 1/2 that as the normal oil price range.

      The Marcellus formation is what Pennsylvania and Ohio sit on top of. They’ve barely scratched the surface. A large portion of it is in New York, but the Democrats refuse to touch it. The areas south of it in Kentucky and Tennessee are now finding their own oil without the stranglehold of leftist government.

      Illinois fought anti-fracking groups for years and finally received approval from the bizarre and corrupt regulatory process, but then investment dried up. The political obstacles are gone, so any momentum from higher prices, favorable investment conditions, or anything will spur significant production.

    26. Mike K Says:

      Spengler, David Goldman, points out the dire terms of Iran’s demographic problem.

      Positive demographics are a result of societies that are forward-looking and self-confident, he said.

      “A lack of desire for children is typically a symptom of civilizational decline,” and the Muslim world is currently witnessing such a phenomenon, he avers.

      Europe is going through a similar phase and there are obvious parallels with the Muslim world, he says, pointing out that when “traditional societies encounter the modern world and lose self-confidence, traditional behavior such as religion, childbearing, and other cultural patterns change radically.”

      “In Iran this occurred in one generation, while in Turkey it took two.”

      The estimated birthrate in Iran is around 1.86 children per woman for 2013, below the replacement rate of two births per woman, according to the CIA World Factbook. However, many demographers think Iran’s fertility rate is even lower, at around 1.6 to 1.7.

      He also believes that existential wars, like that between Islam and the West, end only when 30% of the young, military age, men are dead.

      Nations do not fight to the death, but they frequently fight until their pool of prospective fighters has reached a point of practical exhaustion. In most cases, this involves reaching the 30% mark where casualties are concerned.

      Wars of this character demarcate many turning points in world history. They include the Peloponnesian War, the Thirty Years War, the Napoleonic Wars, the American Civil War and, at least in some respects, the two World Wars of the 20th century. The 30% solution appears yet again in Germany’s casualty figures during the Second World War. Germany lost 5,330,000 of 17,718,714 men aged 15-44 years, or again 30% of the total.

      There are disturbing similarities in these wars to the present situation in Western Asia.

      Spengler and Richard Fernandez are my two go to guys to understand the world we live in.

      Yet despite this unparalleled record of destructiveness Walters notes that Communism retains enormously good press. “According to a 2011 Rasmussen poll, 11% of Americans think that communism would better serve this country’s needs than our current system.” Its core ideas are popular with Bernie Sanders’ followers. Only 3 years ago Jeremy Corbyn, the current leader of Britain’s Labor Party, expressed satisfaction with the program of the Venezuelan Bolivarian revolutionists. He tweeted “thanks Hugo Chavez for showing that the poor matter and wealth can be shared. He made massive contributions to Venezuela & a very wide world.” David Sirota writing in Salon at almost the same time as Corbyn’s tweet fulsomely praised “Hugo Chavez’s economic miracle.” Miracle: for there was no other word for it.

    27. Mike K Says:

      “A large portion of it is in New York, but the Democrats refuse to touch it. ”

      New York state is held hostage by the city and is dying. Los Angeles and San Francisco hold California hostage in similar fashion but Orange County has been booming and defying the Democrats. The only exception is the north corner that is heavily Latino.

      The rest of the state is prostrate and dying.

    28. Trent Telenko Says:

      MIT Technology Review also thinks that the “Big Oil” economic model is dying,

      See:

      Big Oil Companies Have Already Become Dinosaurs
      https://www.technologyreview.com/s/601471/big-oil-companies-have-already-become-dinosaurs/

      I’m not so sure this applies to the petroleum-engineer dominated corporate culture of Exxon-Mobile.

      However, the rest of the “Big Oil” firms — Chevron, BP, Shell and Total — seem over-run with Scott Adam’s style “Pointy Haired” corporate managers, or worse, political hacks catering to “Big Green” and “Social Justice Warriors” INCOME STREAM organizations.

      This will not turn out well. /Rimshot

    29. Grurray Says:

      Speaking of Big Green, last week the EPA hit frackers with new regulations that will cost them over $500 million per year. Obama’s final term scorched earth policy continues.

    30. Trent Telenko Says:

      http://www.oilfieldexpat.com has this very useful link that makes the case that the Saudi’s are not out to kill American Shale oil production.

      “It’s Chinese Demand Crashing, Stupid”

      Check out —

      December 31, 2014 The Oil Price Decline: No Conspiracy Theories Need Apply –

      http://streetwiseprofessor.com/?p=9051#sthash.gz96O6c0.dpuf

    31. TangoMan Says:

      Regarding Big Oil’s future. Recall that the Rockefeller’s bailed out of oil a few years back. What was the real deal there? The story was about how they were upset with “climate denial.” On the one hand, having heirs who are deep into liberal fashionable nonsense and love to virtue signal is a very plausible story. On the other hand, big money has smart advisors and the Rockefellers have a deep talent pool backing them up, so maybe the smart johnnies could read the tea leaves long before others.

    32. Trent Telenko Says:

      Too borrow a saying from a college buddy — “The Cheese doth get binding”

      The Saudi’s are having major cash flow problems.

      See:

      Saudi Arabia Considers Paying Contractors With IOUs
      by Matthew Martin and Archana Narayanan
      May 18, 2016 — 9:56 AM CDT

      http://www.bloomberg.com/news/articles/2016-05-18/saudi-arabia-said-to-consider-paying-contractors-with-ious

      Saudi Arabia has told banks in the country that it is considering giving contractors IOUs to settle some outstanding bills, according to people with knowledge of the discussions.

      A projected budget deficit this year is prompting the government to weigh alternatives to limit spending. Contractors would receive bond-like instruments to cover the amount they are owed by the state which they could hold until maturity or sell on to banks, the people said, asking not to be identified because the information is private.

      Contractors have received some payments from the government in cash and the rest could come in “I-owe-you” notes, the people said.

    33. daedalus mugged Says:

      Trent, as I am sure you know, but for the benefit of everyone else: oil and nat gas fracking are very similar, but not identical. Do you know if the extended frack technology which approximately doubles the duration of level of output is applicable to oil fracking only, or does it have comparable effects in NG fracking?

      Much lower global political implications, but still very significant on a continental scale.

    34. Trent Telenko Says:

      daedalus mugged,

      The people who know the answer to that question are not talking to me.

    35. Tom Holsinger Says:

      Daedalus,

      My understanding is that natural gas is the “froth” on oil, as opposed to tar sands. Basically if the oil is thin enough to be pumped, it is thin enough for natural gas to be there too. Natural gas production is inherent in oil pumping, and is often flared off in the oil extraction process. The proportions of oil to natural gas produced by well vary depending on the deposit, the extraction process, etc. And natural gas can be located, drilled for and pumped by itself, depending on the local geology.

    36. Jason In LA Says:

      daedalus mugged:

      The answer to your question is yes. “Extending the laterals” has been performed successfully by Comstock Resources in the Haynesville Shale. This has notably increased Nat Gas production and improved well economics. Their laterals now extend 10,000′ compared to the original 4,500′. I am sure others have done the same elsewhere.

    37. Daedalus Mugged Says:

      Thank you all.

      Tom, what you describe is ‘associated’ gas, which used to be the primary domestic source, but is now a minority. Most US gas drilled today is targeted as gas, not targeted as oil, and comes with some gas. For example, the much discussed Marcellus has virtually no crude, although a lot of NGLs (ie propane) in the western part. The Utica, overlapping, under and a little to the west of the Marcellus has much greater oil potential, but has not made a big an impact yet.

      Jason, I gather there is more to the new techniques than longer laterals. Longer laterals with the same fracking techniques would (I expect, not a fracking engineer) increase the initial, and total, production, but would not seriously change the shape of the decline curve. So a well with 9k foot laterals would produce twice as much as a 4.5k one, but it would produce ~2x in every period, but not make it last longer. The new special sauce seems to be a, or a series of, techniques to keep the small fissures in the rock open and producing longer before they gradually collapse over a few years.

    38. Gringo Says:

      A further point about oil/gas combos is that deep wells , say 30,000′ are gas wells,because at that depth, pressure and temperature will break down the larger oil molecules into smaller gas molecules.I am rusty regarding greater precision on oil/gas demarcation depths.

    39. Andrew Says:

      I know this post is a few days old, but to anyone who is still reading…

      What is the best way for someone outside of the oil and gas industry to invest in the potential fracking boom? I live in Ohio, and it is likely that the Marcellus and Utica shale exploration here will reap dividends in the future. Right now it is still relatively limited.

      I’m curious what people in-the-know think about how amateur investors should involve themselves in the industry.

    40. Jeff Says:

      My only issue with this story is state production reporting. We are all required to report well production at least monthly, and it becomes public record after a brief waiting period. Trust me, every operator gathers the reported production data and plots the results compared to their own wells. If your neighbors wells are breaking the decline curve by that much, you’ll be wanting to know why, and it would be the talk of the industry.

    41. Trent Telenko Says:

      Jeff,

      Most oilmen know how other oilmen find their data.

      What the oil guys forget is they can’t hide the purchases they make from their oil equipment suppliers and especially their oil equipment supplier quality staff who vets the specifications.

      Confidentiality agreements from various firms oil exploration firms mean the Oil Equipment suppliers won’t talk about what is covered by the agreement from any particular exploration firm with outsiders. But people who work for those oil equipment supplier can and do compare notes from the various agreements, which they report to their management in order to predict future business.

      As for your state reporting requirements, consider that total reported production yield per month may follow the ‘proper decay curve’ for a well…but the amount of time pumped per day on the few new fracking technique validation wells that have been drilled may be only a fraction what old fracking technique wells are.

      Consider as well that there were a whole lot of marginal fracked wells drilled by mid-to-large sized players on a production line equipment purchase basis with a lot less “skull sweat”. Simply because spending the extra time engineer and order a long lead time ‘tweeked’ well designed for maximum yield efficiency at a specific site didn’t make sense if you could get 10 less than perfect well equipment sets at 30% less than a perfect design much sooner and get more total oil volume at $100 a barrel.

      Some of those less then perfect wells may have been refracked with the new technique and are hiding the improved decay curves ‘within the noise.’

      My advice for tracking this stuff down is to look closely at the business acquisitions and the Geologist new-hires for the last 18-months by all the firms doing “Frack-log” drilling.

    42. Trent Telenko Says:

      Andrew,

      Fracking — gas or oil — is a very anal retentive, precise process step, procedure with a lot of “secret sauce” in exactly what is in the working fluid and how/when the hydraulic ram effect is applied to fracture rocks.

      The very best frackers are so ‘geology analytic’ and ‘specialized equipment design heavy’ that they seldom buy drilling equipment without an absolute guarantee of a series of non-standard equipment specs geared to the site the equipment is to drill.

      This is so proprietary nobody bothers patenting it to keep the lawyers and government regulators from slowing things down.

      Most of the real wealth in the small fracking firms is the secret formulas in the heads of the head geologists and the knowledge/people network of the CEO’s smart phone (the replacement for the rolodex).

      This is driving the big corporate oil suits, the Leftist environmentalist crowd and particularly their tools in the EPA mad.

      Both the Russians and Chinese have tried hard to replicate Texas Fracking.

      Fracking might be a technological answer for declining ex-Soviet oil field, but the Russians are ill-suited culturally to deploy it.

      Corrupt managers and marginally functional drunks don’t do precise process steps worth a Sh…er….well.

      The Chinese threw a great deal of money at trying to replicate Texas oil and natural gas fracking and found, among other things, that their rock geology was ill-suited to the techniques they purchased/obtained/stole.

      Texas frackers might have been willing to do the research for the Chinese for a percentage, but the Chinese cannot be trusted to keep a deal to the satisfaction of the highly distrustful Texas small oil company fracking crowd.

      The Texas oil equipment supplier way with the Chinese has been to assume the Chinese would steal anything that Texans sold to them after they copied the first few items purchased.

      So Texan’s in the oil business simply structured Chinese deals so all the profit was in the front end of the deal — AKA they assumed all future production was a lie and got their profit up front.

      Once word got around about Chinese business practices, this became the only way the Chinese could deal with the American oil business in Texas. (Note: This is at least 10 year old story I got as the Fracking revolution was gaining a head of steam.)

      This Chinese theft/trust issue applies in Spades WRT Russians.

      The Chinese are calculating and predictable thieves.

      The Russians are cheating, violent and unpredictable thieves.