The Power Of Technical Disruption

This is a long and detailed post from Trent Teleko on the oil business.

Texas Fracking and the Death of Big Oil

From the post.

Fracking” plays (Oil Speak Note: Play = producing oil well) are normally for four years, with most of the oil in the first two years. They cost $10 to $15 million. They are profitable at $50 a barrel for a new play and already fracked wells cover their costs at half that price. The “new revolution” technique the oil service firm mentioned doubles those times to four years of high flow with a further four years of declining flow. Depending on whatever drilling costs are involved, this effectively earns them profit at a price as low as 1/2 of the per barrel cost of previously fracked wells over the new well’s longer productive lifetime.

A Big Oil drilling play in the deep ocean, arctic, or politically unstable/corrupt 3rd World nation (This now includes Putin’s Russia) runs between $1 and $5 billion because of all the infrastructure Big Oil has to build to extract and move the large quantities of oil from howling wilderness at the edge of civilization. They run 7 to 15 years.

The disinvestment that this Saudi-caused oil price crash is bringing on will see declines by corruption of existing big-oil-type production in various national oil companies, followed by a massive market share shift to fracking when the reduced-by-disinvestment Big Oil production curves start bumping reduced oil supply into increased oil demand.

CONFIRMING FRACKING IMPRESSIONS
These facts left me with several impressions that I later confirmed.

First, this new extended frack technology is what is driving the “Fracking to Frack-log” drilling decline by the mid-to-large oil industry players in the last 9 to 12 months. Effectively, mid-to-large fracking firms have stopping current style fracking to get a piece of the new technique for the next oil price rise, AKA when the Saudis have burned through their foreign investments and sovereign-debt credit rating.

Second, cheap fracking-type drilling also moves all future oil extraction to places that have certain legal and regulatory regimes for quick market moves. Places like private lands in Texas and other traditional American oil states that have existing transportation infrastructure, laws and regulations for land use plus a stable & (relatively) honest political culture adapted to running them.

The third impression I had of this “Extended Frack-Play” was that those that know of it are in the following groups,

1) They own it and are not talking very much,

2) They are under non-disclosures with teeth for #1 or

3) They are under retainers with silence-related pay-out clauses for #1.

The final impression was that old-style capital-intensive oil drilling has been killed, along with the entire “political economy” around Big Oil that has existed for 100 years. The reality of long term fracking plays kills the return-on-investment calculations for traditional Big Oil oil exploration and development.

The “frack-log” and the new 4/8 year oil-flow fracking technique mean that long term fracking plays simply get to market far faster than do Big Oil style drilling plays like huge off-shore deep-sea oil platforms, or drilling in places like the Arctic National Wildlife Reserve, let alone places with classic 3rd World tribal kleptocracies that are pretending to be nation-states.

The complete lack of political risk premiums and orders-of-magnitude smaller investment for oil production puts Big Oil into a situation of “end run production”. Private capital will not put billions of dollars into an Iranian or Russian oil development in Siberia when a much smaller private investment in Texas, Oklahoma or Louisiana will get them more oil, sooner, with extremely low political risk and trivial infrastructure costs.

I did an hour’s worth of Internet services and called several oil patch acquaintances, sharing those impressions. Most did not know a thing. One told me my impressions were correct but that he could not say more. (See #2 above)

 

The conclusion is that at this point the big oil/petrostate  business model is dead.  The Saudi’s gamble that they could kill the Frackers with low prices has turned out to be a nightmare, for the Saudis.  Not only have they lowered the price beyond anything that the oil states can sustain, but it’s likely that prices will never return to levels that big oil and the petrostates need to be viable.

Lone Star Shale Producers Defy OPEC

Add to that that wildcatters with leases are quietly drilling but capping rather fracking wells means that the frackers can bring production back online as oil prices rise. This fracklog is going to be the petro states nightmare for a long time, more than likely decades.

Read the comments in the post and get a very thorough update on the oil industry. The coming disruptions are going to worldshaking.