Todd Bennington | Kingdom Exploration Media
kingdomexploration.com
OPEC production cuts and per-barrel prices that recently went as high $65 are being counterbalanced by the U.S. Energy Information Administration’s prediction that U.S. crude production for the upcoming year will be record-setting. [1]
The agency is not without its detractors, however, who say it is overestimating things like the ability of technological developments to continue at a pace that enables increased production [2] while underestimating a turn by shale companies to the more disciplined approach of taking advantage of higher prices to pay down debt rather than expanding drilling operations. [3]
In a recent article at Seeking Alpha, Richard Zeits defends the EIA, saying that its critics need to better demonstrate where the agency’s calculations are allegedly breaking down and present their own detailed quantitative analysis as a basis for comparison. He goes on to say that criticism of the agency would ideally be part of a constructive discourse that helps it improve is forecasting process.
Zeits also notes that it’s the “least protected” category of investors who are most likely to be harmed by listening to possibly unsubstantiated claims made on blogs and in major media.
Todd Bennington | Kingdom Exploration Media
http://kingdomexploration.com
OPEC and non-OPEC producers agreed last Thursday to extend oil production cuts that were set to expire in March until the end of next year. A meeting to review the agreement with an eye toward making any necessary adjustments has been scheduled for June.
Citing also the uncertainty surrounding social and political changes occurring in Saudi Arabia, at least one analyst predicts this could mean oil could reach $80 per barrel next year. [1]
Other factors potentially affecting oil prices include how the political situations in places like Libya, Nigeria, Venezuela, and Iraqi Kurdistan stabilize or deteriorate – as well as how U.S. producers react to price increases.
“If producers in the U.S. increase their rig count over the next few months due to higher prices then I expect another price collapse by the end of 2018,” an executive with one of the Permian Basin’s largest producers is quoted by Reuters as saying. “I hope that all U.S. shale companies will maintain their current rig counts and use all excess cash flow to increase dividends back to their shareholders.”[2]
The International Energy Agency is overly optimistic about the potential for shale production growth over the next decade, writes Oilprice.com editor James Stafford in an article published on Nov. 16.
Stafford cites a handful of reasons why shale may very well not live up to expectations, first noting the steep decline rates seen with shale as opposed to conventional wells.
“(Shale) drilling is like running on a treadmill—more and more wells need to be drilled just to keep production flat,” Stafford writes. “The extraordinary rate of drilling over the past few years means that the industry not only needs to keep going at that frenzied pace, but it needs to expand its rate of drilling to add more barrels.”
Other reasons shale may underperform, according to Stafford, include the fact that prime locations are given drilling priority, meaning it will be less desirable spots that will be left to drill as time goes on. Shale is also considerably less profitable than generally thought, regardless of where oil prices are at, Stafford claims, adding that the industry is being largely driven by what he calls “loose credit” and investors with unrealistic expectations.
In further support of his argument, Stafford goes on to cite skepticism on shale expressed by investment firm Morgan Stanley and an apparent trend seen among some petroleum companies to scale back drilling in favor of paying down debt, which will have a further negative effect on production growth.
Some investors are betting that high oil prices will make a comeback within the next year.
Todd Bennington, Kingdom Exploration Media
Some very optimistic investors are betting that oil prices will rise out of the current $50-per-barrel doldrums, with interest in $100 call options for December 2018 having tripled this past week. [1] [2] But is such an increase at all a possibility, much less realistic, when we’ve seen so much talk about peak demand and oil prices being likely to remain stagnant for as far as is foreseeable? Here’s what a few industry analysts and pundits who expect significantly higher future prices have to say on the matter.
Richard Robinson, manager of Ashburton Investments energy fund:
“We are extremely confident the oil space will be a good place for investors to be over the next three to five years. Historically, a poor period featuring a lack of spending, as we have witnessed over the past five to eight years, has been followed by an equally long period of outperformance.
“The lack of spending always comes home to roost. With inventories soon to balance, the psyche of the market should move and the questions posed by investors will also change. With the dynamics currently in place, we expect to witness significant opportunities as the oil price moves higher.” [2]
Pierre Andurand, hedge fund manager
“In 2014, after four years at being around $110 a barrel, most analysts were saying we’d never see prices go back below $100 … Now everyone is arguing we’re never going back there, but I don’t really buy that the cost of production has gone down structurally or that electric cars will have a big enough impact on demand.” [2]
Energy Aspects, consultancy firm:
“If demand does not slow, the world will need far more oil than the (shale) oil sector can offer at $50. We are not saying that there is too little oil. There is plenty. Our point is there is not enough oil at $50. We don’t deny that demand growth can slow materially from around 2026 … But legacy projects peak this decade, well before demand is likely to, setting up for an imbalance.” [2]
Nick Cunningham, energy analyst:
“But demand continues to rise—the IEA just upgraded its demand growth estimate for 2017 to 1.6 million barrels per day (mb/d). If that level of demand growth continues for a few years, it will more than devour the excess supply on the market. Even a more tempered growth rate would strain supplies toward the end of the decade, absent a corresponding uptick in production. [3]
Neil Atkinson, head of the International Energy Agency’s oil markets and industry division:
“There are still not enough signs of investment beginning to return, and that raises the risk of tightening of the market in the next five years and a risk to the stability of oil prices. There is at least a possibility of going back to the situation we had 10 years ago where oil prices were very, very high at a time when demand was growing.” [3]
Jodie Gunzberg, head of commodity and real asset indics at S&P Dow Jones Indices:
“When we look at the index data, we can see the price could move even as high as $80 to $85 (a barrel).” [4]
Some other factors potentially contributing to higher prices:
• Planned cuts by OPEC and non-OPEC producers of 1.8 million bpd through March of next year.
• Continuing political instability in producer countries such as Venezuela, Libya, and Nigeria.
• The Kurdish independence movement and potential retaliation from Turkey, which could possibly take 500,000 bpd of Kurdish oil off the market, at least temporarily.
• Modest current production spare capacity (though there is a record level of oil in storage), as well as a current lack of industry investment in new sources of supply. [3]
• A 2020 price spike predicted by the IEA.
Kingdom Exploration LLC is ready to help put investors in appropriate position to take advantage of any potential dramatic increase in the value of oil. Contact Sean Pruitt, founder and president, at sean.pruitt@kingdomexploration.com.
Arthur Berman is a geological consultant with almost 40 years of experience in the petroleum sector. Berman takes what he says is a realistic, as opposed to pessimistic, view of the future of tight oil plays, saying that the popular narrative in which they represent the answer to all the world’s energy problems constitutes a kind of magical thinking rooted in a desire for wish fulfilment rather than rational observation.
“The narrative is that we’re just tearing it up, particularly here in the United States with all these shale plays and yet the preponderance of evidence says we’re not finding new reserves, return on capital employed is at historic lows, and overall the performance of the companies that are engaged in these activities is just not too hot,” Berman recently told an interviewer.
According to Berman’s reading of International Energy Agency data, a further glut of oil supplies will be seen in 2018 and oil isn’t likely to remain much over $50 a barrel for the next several years. However, eventually current supplies and reserves will become exhausted, says Berman, causing oil to spike dramatically in price and remain high, with no immediate solution to the crisis to be found in technological innovation.
Some of the interesting points Berman makes in the course of stating his argument include the following:
Oil companies tend to continue operations even when it is not profitable to do so in order to maintain cash flow, service debt, and keep shareholders happy.
Capital markets, central bank policies, and credit markets are all oriented toward maintaining more energy production.
Oil reserve discoveries have been declining since the 1960’s or 1970’s and 2016 discoveries represent the lowest level of reserve replacement since 1947. This is partly due to a lack of investment in exploration.
Shale plays do not represent exploration. Instead, they are field development and represent a finite source. According to the U.S. Energy Information Administration, tight oil reserves represents 18 billion barrels of oil. Yet the U.S. alone uses 5 billion barrels a year and therefore tight oil plays are unlikely to provide the United States with energy for decades.
Shale plays are popular in part because they cost less than new exploration which demands considerable capital investment before extraction can begin.
Unconventional oil plays, such as tight oil or deep sea, make up 60 percent or more of U.S. oil production and there’s no going back to more conventional development in the U.S. on a widespread basis.
Faith that future technological advancements will resolve the energy crisis in the short term is unrealistic, according to Berman.
Lastly, of the three major U.S. shale plays, Berman says he believes the Bakken and Eagle Ford are essentially done in terms of growth, though they will continue to produce for some time. The Permian therefore holds the burden for growth but has the problem of high water production. This is important because disposing of water is expensive and indicates a loss of reservoir energy in the form of dissolved gases that facilitate extraction. Berman predicts that by 2020 it will be obvious that the Permian can’t make up for the declines in the Bakken and Eagle Ford, and prices will begin to spike as a result. This will be bad for the global economy but represents an opportunity for investors.
More information can be found at artberman.com.
Those looking for alternatives to investment in the U.S. shale plays may wish to learn more about Kingdom Exploration’s project currently being developed in British Columbia, Canada. Visit http://www.kingdomexploration.com/canada/ and contact Kingdom Exploration President Sean Pruitt at sean.pruitt@kingdomexploration.com.
