North Dakota Bakken Crude Oil

[Gilbert B Norman]

In Tuesday's Times (which I only got to today while the rest of the world plays Christmas), there is an extremely provocative column. The columnist's opinions formerly appeared in the Business section, however he has been "promoted" to the main Op-Ed pages:

http://www.nytimes.com/2014/12/23/opini ... f-oil.html" onclick="window.open(this.href);return false;

Brief Passage (the word "Railroad" appears twice within the column):

And then, of course, there is the effect of the shale revolution in the United States, where oil production has nearly doubled, to nine million barrels a day from five million a day, in the space of six years. The conventional wisdom holds that the Saudis “fear” the influx of shale oil onto the market — as The Wall Street Journal put it on Monday — and that they want to see the price go down in order to drive out some of that shale production.

But the Saudis don’t really fear shale oil. “I’ve heard officials in Saudi Arabia call shale a blessing,” said Robert McNally, the founder and president of The Rapidan Group, who is also affiliated with the Center on Global Energy Policy. “Shale oil is light,” he added. “Saudi oil is medium and heavy, and their real competitors are the Iraqis and the Iranians.” The Saudis can adjust to shale oil more easily than many other countries.

Here is the Journal article to which is referred within the selected Brief Passage (and which on my part still needs a more intensive read):

http://www.wsj.com/articles/why-saudis- ... 1419219182" onclick="window.open(this.href);return false;

While this material is not exactly railroad related, the entire geopolitical universe with regards to worldwide oil production/consumption worldwide is a matter to which any of us participating at this topic should be of great interest and concern.

[gokeefe]

While this material is not exactly railroad related, the entire geopolitical universe with regards to worldwide oil production/consumption worldwide is a matter to which any of us participating at this topic should be of great interest and concern.

I think he nailed it. Absolutely hit it right on the head. The Iraqis and the Iranians are of much greater concern to the Saudis than a few million barrels a day coming out of geographically isolated fields in the middle of North America. In 2015 the Iraqis will increase their production in a single year by as much as it has taken North Dakota to get to in the past 3-4 years (1 million/bpd).

This combined with the likelihood that the Iranians are going to be forced to make a nuclear deal means that somewhere in the range of 2 million bpd extra will be coming out of the Persian Gulf. A lot of the Iranian production (about 1 million bpd) that has come off the market because of sanctions has been replaced by the combined efforts of other producers, including Saudi Arabia and of course additional barrels from the Bakken. This 2 million bpd increase, of which the 1 million bpd from Iraq is a near absolute certainty would represent a 6.6% increase in current supply from OPEC's current production level of 30 million bpd.

[Cowford]

I did a little figgerin' and project that (assuming WTI remains below $60) Bakken production* in ND may dip below 1 MMBPD between April and June. If this pans out, I'd further estimate production may decline to a 850 KBPD range by January 2016.

*This is not to be mistaken as a forecast on CBR volume.

[gokeefe]

I did a little figgerin' and project that (assuming WTI remains below $60) Bakken production* in ND may dip below 1 MMBPD between April and June. If this pans out, I'd further estimate production may decline to a 850 KBPD range by January 2016.

*This is not to be mistaken as a forecast on CBR volume.

Are you assuming a taper due to a slowdown in drilling and new wells coming online?

[Cowford]

Yes, with drilling tapering down to 60% of 2014 activity over Q1. That percentage is based on how much many of the production companies are cutting back their capital budgets next year.

[gokeefe]

So what is the accepted "average" taper rate for the wells?

[Cowford]

I created an average based on input from folks I know in the industry, combined with web-based references. Assumptions: The typical well produces 500 bbls/day initially, with a steep production decline curve. At the end of 12 months, production will have declined 60-70%; in the second year of production, output declines another 35-40%. And so on. There is A LOT of variability in production from well-to-well, of course but (surprisingly to me!), the model I built was only 2% off of ND's latest actual production numbers. The falloff is pretty dramatic. To put it in rail terms, a brand new well could fill a tank car in less than 1.5 days. It would take a ten yr-old well a month to accomplish the same task. This is why I earlier referenced continued production growth being akin to a Ponzi scheme, in that as overall well counts and production rises, you need ever more drilling activity to keep up with the rapidly depleting output of those existing wells.

[Gilbert B Norman]

http://nytimes.com/2015/02/21/opinion/n ... -cars.html" onclick="window.open(this.href);return false;

Gray Lady, much as your journalism has influenced, and even formulated, my thoughts regarding the affairs of this planet we inhabit since I was age eight, you hath added nothing whatever to the issue at hand when you spoke on your page Today.

[Gilbert B Norman]

Discussion of the BNSF Jo Davies County (near) Galena IL incident is moving forth at these related topics:

http://www.railroad.net/forums/viewtopi ... 7&t=154145" onclick="window.open(this.href);return false;

http://www.railroad.net/forums/viewtopi ... 9&t=159054" onclick="window.open(this.href);return false;

[Gilbert B Norman]

From Crowne Plaza Atlanta Ravinia--

A sobering article appeared earlier this week in the Wall Street Journal:

http://www.wsj.com/articles/oil-shipmen ... 1428348393" onclick="window.open(this.href);return false;

The article is saying shipments are down because production is down. The Saudis have simply acted how anybody who can control a market acts, and as noted, they can because they are politically stable and their oil is "easy" oil with a cost of extraction far less than fracking.

[gokeefe]

The Saudis have simply acted how anybody who can control a market acts, and as noted, they can because they are politically stable and their oil is "easy" oil with a cost of extraction far less than fracking.

I would note that the Kingdom's ability to control the oil market prices comes at a price to them. While their extraction costs remain among the lowest in the world, their national budget and the programs necessary to maintain social stability have an enormous cost. So much so that at current prices the Saudi government is running a deficit well into the billions of dollars. And while it is certainly true that the Kingdom could run 100% deficits for the better part of three decades based on current reserves there's no reason to believe that this is what they want to do to any degree.

Things are not what they used to be for them. Even though they do well financially on their oil production they cannot allow oil prices to stay low for very long without causing inflation due to devaluation of their currency. The fact of the matter is this is not the same position of relative strength that they have been coming from in the past. The United States on the other hand is in much the opposite position. We can handle lower oil prices without serious effects to our economy, in fact they stimulate it, and now the ability to frack oil appears to have "capped" global prices at somewhere around $80/barrel for the foreseeable future.

This is a disaster in the making for the Saudis. I won't even bother writing about what this is doing to Iran, Venezuela, Russia or other petro-states that have funded their budgets for the past 15-20 years using rising oil prices as a cornerstone. Finally, and this part is the real problem in many respects, the return of serious production from Iraq is an absolute disaster for the Saudis who have grown accustomed to little competition whatsoever from their Arab cousins to the north. The return of Iranian production onto the global markets will further depress prices to levels unseen in many many years.

Whatever losses the railroads face from declines in crude oil traffic will be significantly offset by increases in lucrative intermodal shipments as consumer demand begins to forge ahead. We are at the beginning of another great economic expansion in the United States and now that energy is cheap again I see little that could stop it. The national Class I railroads had better be prepared for the crush of demand they are about to see from all manner of different industries.

[JayBee]

Note also that if the price of WTI stays below $55 a barrel for two more months, the North Dakota extraction tax of 6.5% of the wholesale price is eliminated until the price rises above $55 and 24 months elapse.

https://rbnenergy.com/i-cannot-complete ... ude-output" onclick="window.open(this.href);return false;

[gokeefe]

Note also that if the price of WTI stays below $55 a barrel for two more months, the North Dakota extraction tax of 6.5% of the wholesale price is eliminated until the price rises above $55 and 24 months elapse.

https://rbnenergy.com/i-cannot-complete ... ude-output" onclick="window.open(this.href);return false;

The mere knowledge of that potential tax break will serve to depress prices and make it a self-fulfilling prophecy.

[gokeefe]

Innovations such as those described in this New York Times article are why oil will be coming from North Dakota by rail for many many years to come...

But a majority of the major companies are managing to survive by increasingly using techniques traditionally more common to manufacturing plants than to oil fields to achieve economies of scale. In some shale fields where companies typically drill up to eight wells on each production pad, companies are no longer drilling one well at a time. Using rigs that can move on tracks or legs, they are drilling and completing several wells at a time, slashing the time it takes to drill each well. The result has already been a slower decline in domestic shale oil production than many experts had expected, and the promise of a spike in output if the global market price continues to rise as it has in recent weeks. The Energy Department still expects the average daily production for the year to be moderately higher than in 2014, rising from 8.7 million barrels a day to 9.2 million.

[Cowford]

Looks like I'm going to be proved wrong on my production taper. While drilling falloff is actually more significant than estimated (at the end of 2014, a 40% drop was expected; today the YOY actual is -60%), I failed to incorporate the number of crilled, but uncompleted wells. (Never even saw the data on that until a few months back.) I'd guess that, given the MOM changes in wells, 50% of the wells being brought on-line each month were drilled months before. An interesting illustration of production falloff, however, is daily production vs no. of operating wells: Production has stayed relatively stagnant at 1.1 MM barrels/day since September... but the number of operating wells has increased 15%.