Posted on 01/12/2016 12:57:29 PM PST by thackney
Crude oil has become so cheap it could speed the oil market to a recovery.
U.S. crude plunged on Thursday to a 12-year low, an ominous milestone for Houston's oil hub, which already has shed thousands of jobs in the 19-month oil downturn.
With crude now fetching less than $34 a barrel, about half the nation's scattered collection of 400,000 aging, nearly depleted wells may have to be shut in as their product becomes less valuable than their operating costs. Called stripper wells, these produce a negligible amount of oil individually but together account for about a tenth of U.S. output.
"They'll just get turned off," said David Pursell, a top researcher at Houston investment bank Tudor, Pickering, Holt & Co. "It'll get people's attention."
If crude prices languish at current levels for a few months, it could trigger a loss of 400,000 to 500,000 barrels a day of U.S. crude production this year, analysts say. That's roughly the same amount of oil Iran hopes to put back on the market this year once international sanctions are lifted. In other words, a killing blow to half of the U.S. stripper wells could help counterbalance the Iranian crude that industry stakeholders believe will be the world's largest source of increased supply this year.
Idle stripper wells also could amplify a decline in domestic oil production that's already taking place. In the U.S. Lower 48, American drillers are putting out 450,000 barrels a day less than last April, when the nation's production peaked at its highest point since 1970.
U.S. oil output growth outside of Alaska was 20 percent to 25 percent a year from 2012 to 2014 as technology advances boosted production from dense shale formations. As of October, production had grown only 1 percent from a year before.
Production growth is falling because at current prices, it costs an average $19 a barrel more to bring up crude than it's worth. In a report this week, Goldman Sachs said many U.S. drillers are reaching the point where they will have to restructure. The financial firm projected that banks this spring will cut sharply the amount of money oil companies can borrow and that 8 percent of U.S. oil explorers will go into bankruptcy by year-end. Goldman said lenders could lower shale drillers' borrowing bases by 14 percent to 30 percent during a semiannual review that begins in April.
Not covering costs
Shale drillers aren't even close to generating cash flow that covers their costs, and their cost to borrow funds has climbed, said Bill Herbert, a top analyst at Houston investment bank Simmons & Company International.
Declining production eventually will cut into an international oversupply of oil and push prices up.
"The stripper wells are part of it, but the broader narrative is that the rebalancing is happening, it's just that the market doesn't care," Herbert said. "The big wild card right now is the global economy."
Huge amount stored
At the moment, traders are fixated on the massive amount of oil stored in tanks in the U.S., Europe and Asia, and prices probably won't rise until a big portion of that is cleared out. That inventory focus was apparent this week when crude prices skidded amid fears that China's slowing economy wouldn't demand enough crude to drain those inventories.
Traders largely focused on China's slowdown and crashing financial markets, shrugging off a rising conflict between Saudi Arabia and Iran that has the potential to disrupt crude supplies.
"People are concerned this will spread around the world to have an even bigger effect on oil demand," said Andy Lipow, president of Houston's Lipow Oil Associates.
On Thursday, U.S. benchmark West Texas Intermediate crude sank 70 cents to $33.27 a barrel on the New York Mercantile Exchange, its lowest settlement since 2004. Brent, the global benchmark, fell 48 cents to $33.75 a barrel on the ICE Futures Europe.
A sharp supply drop?
Stripper wells could play a key role in shrinking supplies sharply enough that inventories can decline later this year. Energy research firm Wood Mackenzie has previously estimated oil production outside the Organization of the Petroleum Exporting Countries will drop by 700,000 barrels a day this year, with the bulk of that decline coming from U.S. shale plays in Texas and North Dakota.
But if crude prices hover below $35 a barrel for long, the world could lose 1 million barrels a day later this year, which could go a long way to easing the global oversupply, said R.T. Dukes, a senior analyst at Wood Mackenzie.
"That will help bring the market back into balance a little bit quicker," Dukes said. "Stripper wells do help provide a physical floor for crude prices."
Tudor Pickering estimates at current prices the average stripper well, which produces 2.5 barrels a day, brings in $1,800 a month but costs $2,000 a month to operate because of the cost of transporting the oil, electricity, pumps and disposing of water that comes up with the oil. Some 143,000 of those stripper wells are in Texas, with the rest in California, Oklahoma, Ohio, Kansas, Kentucky and other states.
"Iran and other Middle Eastern volumes aren't going to outstrip the declines in non-OPEC and the demand growth that we expect this year," Dukes added. "You go from that oversupply to a market that begins to teeter on the undersupplied side in less than a year from now.
I hope this does not play out till after the election.
Any shutoff of wells in an effort to boost the price will play into Left-Populist conspiracy theorists and boost someone like Bernie Sanders.
This is my thinking. The price will stay down until all the marginal producers shut in.
When oil was over $100/bbl I remember reading about a guy who drilled a stripper well on his property even though it would only produce about 4 barrels a day. I don’t know if his investment ever paid for itself.
It would be very unusual to “drill” a stripper well.
Typically it is an old well that already paid for the drilling and infrastructure and was slowly still running.
http://www.wsj.com/articles/bp-to-cut-about-4-000-exploration-and-production-jobs-1452605175
BP to Cut About 4,000 Exploration and Production Jobs
Cuts are in response to low oil prices and restructuring after Gulf of Mexico disaster
Yes, it was an unusual case. I think drilling the well cost him $100k.
Stripper Well threads are always good for a few extra bumps unrelated to the original topic...
Hah!
There will be an interesting phenomena occurring in years to come as gradually more and more of the producing wells in this country are from unconventionals.
Due to its nature, unconventionals produce at dramatically steep early declines but over time, between 7 and 12 years after initial production, the rate of production decline is very, very low, almost constant.
This causes a long ‘tail’ wherein little decline is seen, and this tail could last decades.
Just think of hundreds of thousands of these wells are producing on average say, 10 bopd, almost without decline.
It will alter significantly this country’s production modeling.
However, keep an eye out for the unstable political situations in Venezuela and Nigeria, the two biggest non-Arab oil producers within OPEC. If either if these countries’ oil production shuts down due to political turmoil (especially in Venezuela), a large fraction of the world’s oil production goes offline, and that could immediately send the price of oil through the roof.
I don’t think that is a great change from our existing conventional wells. The later years that is.
The United States has an estimated 771,000 marginal wells in production - about 410,000 oil and 361,000 natural gas wells.
https://nswa.us/custom/showpage.php?id=25
I believe the Saudis have been flooding the market to put American oil drillers out of business. Once those companies are bankrupt, domestic production is down and the price is up, they will cut production. Is that a conspiracy theory?
There are several Nations depending on oil money to keep their country stable. Saudi Arabia will far outlast most of these. They won’t deplete their cash reserves. Other countries will fall apart first and the result will raise oil prices.
Angola, Algeria are some others.
http://graphics.wsj.com/lists/opec-meeting
Mission accomplished for Obama. He is taking money from rural families with small stripper wells that help many elderly Americans make ends meet and is importing oil from our enemies in Iran so they have billions to develop nuclear bombs to destroy Israel and America. Shame on our spineless GOP for not doing anything to stop this curse on our land.
I’ll never understand these “panties in a wad” scare stories. This is nothing more than the dynamic balancing of supply and demand in a free market. High-cost wells get taken out of service first. Supply falls to meet the demand curve. When prices rise, wells get put back into service.
Maybe the authors would like to write stories in communist countries where supply and demand simply are not allowed to operate. Of course, if they did that there, they would lose their heads pretty quickly.
Stripper wells, went taken out of service typically will never come back.
If the production is stopped beyond a certain time, it has to be plugged with concrete.
Given the low production rate, if prices rise, nobody will spend the money redrilling a known very low producer.
You are missing the entire point:
The very nature of these wells, with long laterals, fracced into extremely tite formations, causes very prolonged periods of time to occur to get much production decline.
Most conventional strippers are not the same. They are in more permeable formations and are vertical. Very different mechanisms of production.
As an example: I observed a Bakken well that produced +10 years and afterwards producing at low rates that had a well that encountered virgin pressure only 100’ away from the wellbore.
We are talking about massive pressure differentials within a horizon that causes oil to ‘bleed’ into a fracture system almost constantly, with a well suffering little observable decline.
A marginal unconventional horizontal, stage-fracced well is a completely different animal than most of the wells currently classified as stripper.
This is the beginning of another cycle, and you can see how it works. OTOH, there’s more to abandoning a stripper well than just “shutting it off”. It costs some money, and some marginal wells may be kept in production just to avoid the expense, especially if crude prices may rise in the foreseeable future.
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