The Shale Oil Revolution: Who could win In North America and Argentina?

Thursday, Jul 21 2011 by
11
The Shale Oil Revolution Who could win In North America and Argentina

The oil market is nervous. As we have highlighted over here, Chinese demand remains the main concern. China's oil imports fell to an eight-month low in June, 5.7% lower than the month before and down by 11.5% year on year. The figures add to concerns that the Chinese government will slow growth with a sharp tightening of monetary policy, in response to consumer price inflation running at 6.4 per cent last month despite five interest rate rises since October. Meanwhile, Saudi Arabia has increased production to a record 9.6mbpd, an increase of 800kbpd from January, and Iraq reached record output of 2.75mbpd, almost back to pre-war levels. As of June, IEA inventories remain above the 2006-2010 average. However, I still receive doomsday messages about supply. And I say, don’t worry, supply is adequate. Now the Shale Oil revolution is upon us. Remember what shale gas did to natural gas prices? Down 54% from the peak. Imagine what shale oil can do. Peak-Oil defenders, gas lobbies and environmental groups all said shale gas was not economical below $8/mmcfe, they said that it was a “bluff” and that the decline rates would make the “fad” disappear as soon as natural gas reached $6/mmcfe. It reached $2.5/mmcfe (now at $4.5) and the rig count is at all-time highs (890), companies continue to make good returns (18% IRR) despite pressure pumping and service costs rising, the environmental concerns are being addressed swiftly and adequately and decline rates have proven to be significantly less aggressive. The NY Times battle against shale gas, driven by half-truths and questionable analysis, is lost. No one denies the massive resource base, even in Europe and China, and the opportunity to supply cheap, abundant energy. 

Well, shale oil could generate a similar transformation impact for the oil market.

Last Thursday we met in London with twenty North American oil companies and a representative of the Energy Information Administration (EIA). We only talked about one issue: the revolution of Shale Oil, which could be a transformational force in the oil market. The United States has over 24 billion barrels of recoverable oil in shale and Argentina over 200 million barrels of recoverable shale oil. Abundant oil supply delivered thanks to hydraulic fracking, a tried, tested and proven extraction technology. Companies like Anadarko, Oasis and Marathon are already developing shale oil fast. Repsol could benefit from this revolution in…

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Disclaimer:  

Daniel Lacalle's views expressed in this blog are personal and should not be taken as buy or sell recommendations.


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4 Comments on this Article show/hide all

William Davison 22nd Jul '11 1 of 4
8

To give a sense of scale to Oil shale numbers quoted.

The US has over 24 billion barrels of recoverable oil in shale which is about 10 months of world supply.

Argentina's 200 million barrels of recoverable shale oil is less than 2.5 days of World consumption.

Estimated US production 510,000 barrels/day in 2012 is 3% of US daily consumption. For the US to halve oil imports would required 10x the 2012 estimate, or 36% year on year growth rate from now to 2020, assuming their conventional oil production is maintained.

"Shale oil is economically viable at $60/bbl. If we assume $100/bbl, each well repays its total investment cost in eight months. Three times faster than a conventional oil well." Conventional oil production costs are nearer $30bbl than $60, so I think that needs explaining?

$60/bbl is similar to some Canadian Oil sands costs, so Shale oil will not lower the cost of oil much and there is not going to be enough of it by the time of the predicted oil crunch in 2012.

I think I will trust in Tullow and Afren in Africa and Cairn off Greenland and BG off Brazil instead. Or Oil service companies like Petrofac, Amec, Wood Group, Weir Group and Lamprell, better to sell the gold digger his equipment than prospect for gold yourself.

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thegreatgeraldo 22nd Jul '11 2 of 4
1

Meanwhile Saudi Arabia has reached a record level of production of 9.6 million barrels/day, Iraq has surpassed 2.7 million barrels/day and Russia has surpassed 10.2 million barrels/day.

Although Saudi consumption has reached a new record this year (2.8mmbblsd) & other OPEC countries are seeing rising consumption. North Sea production (UK & Norway)has dropped around 2mmbblsd over the past decade & Mexican production is on the slide.....

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marben100 30th Jul '11 3 of 4

Thought I'd better crosspost to my post here, where I express severe doubts about the economics of shale oil and gas, and offer evidence from Petrohawk's figures. It would be better if any discussion of that topic were continued here.

It seems that I am not the only one with doubts (fearing another Enron) and the SEC has just issued broad ranging subpoenas to enable it to investigate the matter. I applaud them for being proactive and will be most interested in the outcome:

 

The subpoenas reflect the regulators’ interest in determining whether companies are overstating how their gas wells perform and how much gas these companies can profitably extract over the long term.

It is not clear how many subpoenas were sent. John Nester, a spokesman for the commission, declined to comment.

“The use of subpoenas makes clear that the S.E.C. is taking a formal, not a casual, look at the matter,” said a market research report on Thursday by Robert W. Baird & Co., an international financial services firm. The report also noted that subpoenas do not mean that the commission intends to take action against any particular company, and that estimating reserves is not an exact science.

In a separate note, Gerard G. Pecht, a lawyer with Fulbright & Jaworski, told clients that the subpoenas were focused on the actual performance of shale gas wells compared with how companies were projecting their performance, according to an article on FuelFix.com, an energy news Web site. Mr. Pecht did not respond to messages seeking comment.

The subpoenas also request documents related to discrepancies between what companies are telling investors about the costs of shale gas versus what they are reporting in federal filings.

 

Regards,

Mark

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marben100 30th Jul '11 4 of 4
1

I have one more question for any shale gas/oil enthusiasts: can they point me at any pure shale gas company that generates a positive free cashflow, after CAPEX?

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About Dlacalle

Dlacalle

Fund manager in Oil,Gas and utilities. I was voted Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters' Extel Survey 2011, the leading survey among companies and financial institutions. More than 21 years of experience in the oil, gas and utilities fields from corporate to investment banking, research and fund management.  more »


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