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I would love to show you an unbiased analysis of long-term economics of individual shale wells, I have a few. But, confidentiality. I can say that: First of a

by D_Alex 8y ago

I would love to show you an unbiased analysis of long-term economics of individual shale wells, I have a few. But, confidentiality. I can say that: First of all the picture is quite complex, and of course not all wells are the same. Second - talking "in general" - the break-even oil price for shale oil wells has declined quite dramatically, from around $80-100 in 2014 to $40-50 today, with current wells costing less and producing more than wells of 4 years ago. However, third: The improved economics are not primarily a result of technological advances. Rather, the lower well cost is largely due to lower rig rates and cheaper and more efficient labour. The lower rig rates are not sustainable in the long term, they are low only because it is better to have the rig working and earning at least a little money (not enough to justify buying a new one in the future) than rusting away in a yard. Labour productivity gain is partly explained by the fact that the only the most experienced and efficient crews are now working, and higher well productivity is partly due to only drilling the very best prospects. The quality of crews and prospects is a barrier to raising production further. In summary, I believe the shale boom is an economic oddity. Whether it continues for any length of time depends on the oil prices. At the current prices, it is not sustainable. Corollary: If the oil price is effectively set by the true cost of shale oil, we should expect that the price of oil will rise to $80-100/bbl in the medium term.

ianai 8y ago
How many years do the laborers have left? Is it less than the medium term of raising prices to 80-100/bbl? I’m trying to figure out whether the current situation is likely to grow prices relatively linearly or more suddenly - if technological improvements aren’t possible.
- D_Alex 8y ago
  >How many years do the laborers have left? Is it less than the medium term of raising prices to 80-100/bbl? I don't think the ageing workforce is a huge problem, if that is what you are asking. The labour pool can smoothly absorb new entrants to replace the retirees. The problem is that if a rapid expansion of workforce is needed - eg in response to increased demand for rigs if oil prices jump into the $80-100/bbl range - the quality of the labour pool will suffer, the productivity will decline and costs will increase. Are the prices likely to grow suddenly? In some scenarios (eg effective OPEC action, ME conflicts) - certainly. More interesting is what ought to happen in a "business as usual" scenarios. I see it as a race between the decline in production from major "conventional" fields, the growth in energy demand esp from India, China and the "little tigers", and the transition to renewable energy and the "electric economy". My pick is that the speed of the transition to renewable energy will not be sufficient to compensate for the other two factors, and that we will see an increase in the oil prices to $80-100/bbl by 2020, which will enable new production to be brought on stream profitably.

by D_Alex 8y ago

ianai 8y ago

How many years do the laborers have left? Is it less than the medium term of raising prices to 80-100/bbl? I’m trying to figure out whether the current situation is likely to grow prices relatively linearly or more suddenly - if technological improvements aren’t possible.

D_Alex 8y ago
>How many years do the laborers have left? Is it less than the medium term of raising prices to 80-100/bbl? I don't think the ageing workforce is a huge problem, if that is what you are asking. The labour pool can smoothly absorb new entrants to replace the retirees. The problem is that if a rapid expansion of workforce is needed - eg in response to increased demand for rigs if oil prices jump into the $80-100/bbl range - the quality of the labour pool will suffer, the productivity will decline and costs will increase. Are the prices likely to grow suddenly? In some scenarios (eg effective OPEC action, ME conflicts) - certainly. More interesting is what ought to happen in a "business as usual" scenarios. I see it as a race between the decline in production from major "conventional" fields, the growth in energy demand esp from India, China and the "little tigers", and the transition to renewable energy and the "electric economy". My pick is that the speed of the transition to renewable energy will not be sufficient to compensate for the other two factors, and that we will see an increase in the oil prices to $80-100/bbl by 2020, which will enable new production to be brought on stream profitably.