Masters Of War

Come you masters of war You that build all the guns You that build the death planes You that build all the bombs You that hide behind walls You that hide behind desks I just want you to know I can see through your masks. You that never done nothin' But build to destroy You play with my world Like it's your little toy You put a gun in my hand And you hide from my eyes And you turn and run farther When the fast bullets fly. Like Judas of old You lie and deceive A world war can be won You want me to believe But I see through your eyes And I see through your brain Like I see through the water That runs down my drain. You fasten all the triggers For the others to fire Then you set back and watch When the death count gets higher You hide in your mansion' As young people's blood Flows out of their bodies And is buried in the mud. You've thrown the worst fear That can ever be hurled Fear to bring children Into the world For threatening my baby Unborn and unnamed You ain't worth the blood That runs in your veins. How much do I know To talk out of turn You might say that I'm young You might say I'm unlearned But there's one thing I know Though I'm younger than you That even Jesus would never Forgive what you do. Let me ask you one question Is your money that good Will it buy you forgiveness Do you think that it could I think you will find When your death takes its toll All the money you made Will never buy back your soul. And I hope that you die And your death'll come soon I will follow your casket In the pale afternoon And I'll watch while you're lowered Down to your deathbed And I'll stand over your grave 'Til I'm sure that you're dead.------- Bob Dylan 1963

Sunday, September 13, 2015

why more than halving the rig count has not diminished the oil glut

our crude oil inventories, which normally fall during the summer months, rose for the 2nd week in a row this week, but unlike last week, where we saw the glut was driven by increase in imports, this week saw a larger drop in refinery throughput than we've seen anytime this summer....our commercial inventories of crude oil, which are watched closely by oil traders and hence influence oil prices, increased by almost 2.6 million barrels in the week ending September 4th, from 455,428,000 barrels at the end of the last week in August, to 457,998,000 in the current report, following a jump of 4.7 million barrels last week, giving us the largest increase 2 week increase in inventories in 5 months....those increases lifted our crude oil in storage to a level 27.7% higher than the 358,598,000 barrels we had stored the first reporting week in September the last year, and the highest for any September in the 80 years that such records have been kept, which had never seen the 400 million barrel level breached before this of that inventory build sent oil prices tumbling, with the near term contract for US crude oil closing the week at $44.63 a barrel, down from $46.05 a barrel last Friday...

underlying this week's inventory building was a further slowdown in refinery operations....although the Whiting Indiana refinery was restarted last week, it may not have hit full stride for this week's report, which showed that refinery inputs of crude oil averaged 16,110,000 barrels per day during the week ending September 4th, 279,000 barrels per day less than the previous week, and the 5th weekly drop in a row...over that 5 weeks, US refinery throughput of crude has dropped by nearly 6%, while our refinery utilization rate has dropped from 96.1% of capacity to 90.9% of operable capacity in the 1st week of September, the lowest refinery usage rate since April 3rd....while production of both gasoline and distillate fuel oils thus both fell, inventories of both major products rose, as our exports of gasoline fell from 835,000 barrels per day last week to 589,000 barrels per day this week, also the lowest level since April 3rd...

while both output of US wells and our imports of crude fell, neither really fell enough to impact that inventory buildup....our field production of crude oil fell from to 9,218,000 barrels per day in the week ending August 28th to 9,135,000 barrels per day in this week's report, which was almost 4.9% below the modern record production of 9,610,000 barrels per day set in the first week of June this year...nonetheless, that was still 6.3% higher than our 8,590 ,000 barrels per day production during the first week of September last year, when the growing global glut had already precipitated a drop in oil prices...meanwhile, our imports of crude oil fell by 396,000 barrels per day to 7,459,000 barrels per day during the week ending September 4th, but the weekly Petroleum Status Report (62 pp pdf) shows our 4 week average of imports still at 7.6 million barrels per day, which is now 0.5% above the same four-week period last year...

lower oil prices are apparently starting to bite, because frackers were again pulling rigs from the field last week, leading to the second week of double digit decreases in the rig count for the first time since the beginning of May...Baker Hughes reported that the total rig count fell by 16 rigs to 848 in the week ending September 11th, the largest drop since May 1st, with oil rigs down by 10 to 652 and gas rigs down by 6 to 196; that's now down from the 1592 oil rigs and 338 gas rigs that were operating in the US during the 2nd week of September last year...of those rigs shut down this week, a net 11 were horizontal rigs, 4 were directional rigs, and one was vertical, leaving the total count at 648 horizontal, down from 1342 a year ago, 81 directional, down from 217 a year ago, and 119 vertical, down from 372 a year ago...of vertical rigs idled this week, 2 were platforms in the Gulf of Mexico, leaving 29 working in the Gulf, and one each offshore of Alaska and California, for an offshore total of 31, down from 66 a year earlier...

once again, more than half of the rigs stacked this week had been operating in Texas, which saw a net of 9 rigs idled, leaving 366 in the field, down from the 905 rigs that were working Texas fields the same week last year...both the Permian basin in the west and the Eagle Ford in the southeast part of the state saw 3 rigs go, while one was also shut down in the Barnett shale of north central Texas...that left the Permian with 250 rigs, down from 566 a year ago, the Eagle Ford with 90, down from 203 a year ago, and the Barnett with 6, down from 25 a year ago....4 other major basins saw a reduction by one rig this week: the Williston of North Dakota, now with 71 rigs running, down from 194 a year earlier; the Niobrara of Colorado, down to 29 rigs from 62 a year ago, the Mississippian of Kansas, now down to 19 rigs from 77 a year ago, and the Cana Woodford of Oklahoma, which was reduced to 38 rigs this week, still up from 36 a year ago, and the only shale basin to have seen an increase in rigs since last year...other changes not accounted for by the shale basin counts included the loss of 2 offshore rigs from the Louisiana count, where the state now has 73 rigs, down from 115 a year ago, Wyoming, where the rig count was down 1 to 24 and down from 57 in the same week of 2014, Colorado, which was down 2 to 32 and down from 75 a year ago, and Alaska, which saw an additional rig this week and now has 13, up from 10 a year ago, and is the only state with a year over year increase....

Baker Hughes also released the international rig count with the regional averages for August, which showed the global rig count at 2,226, up 59 rigs from 2,167 in July but down 1,416 from the 3,642 rigs that were operating a year earlier, with most of those year over year reductions in North America...the August gain included an increase of 23 rigs in Canada, which was largely due to rig additions in late July, which boosted the August average over that of July...likewise, all other regions saw increases in their active rig averages; the Middle East netted an increase of two rigs for an average of 393 in August, which was down from 406 in August of 2014...changes in the region included Iraq, which was up 4 rigs to 48, Kuwait, which was up 2 rigs to 46, Qatar, which was up 2 rigs to 9, and Saudi Arabia, which was down 3 rigs to 120...Latin American countries added 6 rigs in August and now total 319, down from 410 a year ago; notable changes there include Columbia, up 5 rigs to 30, and Mexico, down 4 rigs to 41...the Asia-Pacific region added 8 rigs in August and at 220 are down 35 from 255 last year; that included an addition of 3 rigs in Indonesia, which now has 25, 3 more rigs in Malaysia, which is now running 9, and a reduction by 3 to 15 in Thailand...Europe saw a net increase of 1 rig to 109, down from 143 a year earlier; August changes in Europe included an addition of two rigs in the Netherlands, which now has 7, and a reduction by 4 rigs to 16 in Norway...lastly, African nations increased their August count by 2 to 96, which was still down from 125 a year earlier; Algeria, adding 2 rigs to 52, was the only nation on the continent to see a rig count change greater than 1…

when we first started tracking US rigs counts weekly in December of last year, it was because those counts were the only obvious, if imperfect, way to estimate if the extent of the environmental damage being done by the oil & gas industry was changing from week to week; ie, there are no weekly spill counts, no weekly air and water pollution measurements, no weekly count of tanker truck of the rather simplistic assumptions we made early on, as the oil rig count specifically quickly crashed from a high of 1609 in early October to half that by early April, was that we would soon see a corresponding reduction in oil output, knowing that it is the nature of the wells now being drilled for fracking is that there is an initial burst of gas or oil production in the first weeks after a well is fracked, which quickly falls off over the first couple of years, such that output of a typical shale well 2 years after the well is fracked is around 80% lower than it was in the initial months, and gradually tapers off thereafter...however, a number of minor nuances about production that we overlooked have conspired to turn this simplistic rig count to oil output calculus that we once felt was logical on its head...

first and most obviously, the rigs that were pulled out and stacked early on were those drilling in the less productive areas of the respective basins anyway, so their removal had a correspondingly minor impact on the output of the basins from which they were being pulled....then there's the delays to production resulting from the increasingly common practice of drilling multiple wells from a single pad; it's usually not until the drilling is complete on the last of those wells that the rig is taken down that the fracking begins; that meant that a large portion of the record number of wells that had been drilled in early 2014 when prices were high had not yet been fracked when prices began to fall, and a result, many operators delayed the expensive fracking, hoping for higher prices for that initial burst of output, resulting in what came to be called "the fracklog", wherein by early March over 3,000 wells had been drilled but not fracked when oil prices first fell below $50 a barrel, a count which quickly grew to more than 4,700 uncompleted wells by late addition, over the period of lower prices for oil, drillers laid off their slowest rig crews, cut costs, developed enhanced drilling and fracking procedures, such that they're now getting more wells drilled by each rig they're operating; by earlier this year, the average time to complete a well fell from 21 days to 17 days in the Eagle Ford, while drill times in the Bakken dropped from 15 days per well late last year to 13 days per well by the second quarter...more recently we've read of the introduction of walking rigs, which move around on hydraulic legs, greatly reducing the time & expense of dismantling a rig and trucking it to a nearby site...other are developing “supersize” fracking techniques, whereby multiple laterals are extended by thousands of feet more than usual to frack a much larger area from the same well; if lateral lengths can be doubled, output per well can be quadrupled...the August Drilling Productivity Report (pdf) from the EIA has complete details for the current productivity changes in 7 major basins which are being drilled horizontally, including the Marcellus and the Utica, for both oil and gas in each, based on drilling data through July and projected production through there's been quite a decoupling between the number of rigs drilling and the output of oil, something we can best illustrate with a few graphs..

the first graph below, which comes from Zero Hedge, includes the US oil rig count and US crude production over the last 30 years on the same graph; the rig count is in red and is noted by the first column of figures on the right, while our crude oil production in thousands of barrels per day is in dark blue and is shown in the farthest right column on graph...note that because EIA production figures are for the week prior to their release and that rig count figures from Baker Hughes are for the current week, the latest change in the rig count is not shown, so that the end date of both graphs reflect data as of September 4th...also note that although the rig count graph shows zero, the production figures begin at 4 million barrels per day so that the two graphs line up over the years prior to 2005...since then, we can see that the rig count has actually been relatively elevated as compared to production, with the 2009 to 2014 period representing an eight-fold increase in drilling activity which was only accompanied by a doubling of our oil output...clearly, despite all the hype accompanying the shale revolution, the ultimate production per drilling rig was much greater in the prefracking era that it was at the height of the fracking boom...

September 11 2015 rig count vs production

the second graph from this week that we found relevant comes from a widely distributed article by petrogeologist and oil market analyst Arthur Berman titled The Biggest Red Herring In U.S. Shale...the graph clearly shows oil production per drilling rig in tan, in barrels of oil per day as shown on the left margin, and oil production per well, also in barrels of oil per day, as shown on the right margin...Berman is accurately showing, with a slight degree of deception, that despite that fact that production per rig is going up (his red herring), production per well (and hence profits per well) has been declining...that production per rig would increase while the rig count in dropping should be intuitively obvious; it's a simple fraction wherein the denominator is shrinking...that production per well would shrink is what we already knew about fracking; since production is all in a rush in the early months, and tapers quickly thereafter, the only way to increase production would be to drill increasingly more wells to replace the production from those wells that are being depleted...if you look at that blue line, it appears that production per well is declining rapidly; however, if we look closely at the barrel counts on the right margin, you see they're from 110 to 135 in increments of 5; whereas the production per rig metrics on the left are in increments of 100...what the graph shows is accurate, of course, as long as you're aware of the optical distortion resulting from the different scales..but the bottom line to all this is that the rigs drilling for oil today have nothing to do with the amount of oil being produced during the same time frame, and those that are bragging that production per rig is climbing are telling you nothing more than that the rig count is falling...

September 11 2015 production.per rig, production per well

(from Focus on Fracking, where there’s more…)

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