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Permian Reserves May Be Much Smaller Than You Think: Tight Oil and - - PowerPoint PPT Presentation

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Permian Reserves May Be Much Smaller Than You Think: Tight Oil and Long-Term Debt Cycle Arthur E. Berman Labyrinth Consulting Services, Inc. September 11, 2017 Slide 1 Houston Geological Society Labyrinth Consulting Services, Inc. New Age

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Labyrinth Consulting Services, Inc. Houston Geological Society

Permian Reserves May Be Much Smaller Than You Think: Tight Oil and Long-Term Debt Cycle

Arthur E. Berman Labyrinth Consulting Services, Inc. September 11, 2017

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Labyrinth Consulting Services, Inc. Houston Geological Society

8 8 8 12 12 13 25 26 30 37 48 48 98 102 110 153 158 172 266 301 50 100 150 200 250 300 350 Norway Mexico Ecuador Angola Algeria Brazil Qatar China Kazakhstan Nigeria US Libya UAE Kuwait Russia Iraq Iran Canada Saudi Arabia Venezuela Proved Reserves of Liquids (billions of barrels)

The U.S. is the 10th Largest Oil Reserve Holder in the World

Source: BP & Labyrinth Consulting Services, Inc.

New Age of American Energy Dominance

  • We are entering a new age of American energy dominance: Rick Perry.
  • “…we’ve got underneath us more oil than anybody, and nobody knew it until five

years ago.” ---Donald Trump

  • Trump referring to tight oil and today, that means the Permian basin.
  • Global energy dominance by the U.S. is somewhere between aspirational and absurd.
  • 9 mmb/d average 2017 crude oil imports & 7 mmb/d net imports.
  • U.S. is 10th largest world reserve holder between Libya and Nigeria.
  • Not bad but hardly in same class as Venezuela, Saudi Arabia, Canada, Iran, Iraq &

Russia that have on average 4 times more proved reserves than the U.S.

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John Mauldin: An Energy Amateur Masquerading as an Energy Expert

68 72 110 110 135 158 181 263 276 50 100 150 200 250 300 Mexico Venezuela Brazil Iraq Iran Canada Russia U.S. Saudi Arabia Billions of Barrels of Oil

Rystad Energy Global Oil Recoverable Resource Estimate

Source: Rystad Energy & Labyrinth Consulting Servces, Inc.

  • Perhaps the President & Secretary Perry read John Mauldin’s recent work of magical

realism, “Shale Oil: Another Layer of U.S. Power.”

  • Mauldin features a chart showing U.S. is largest reserve holder in the world.
  • So wrong that it defies explanation.
  • Rystad Energy source reveals Maudlin mis-represented recoverable resources as

reserves.

  • Didn’t even show Rystad’s data correctly.
  • Saudi Arabia—not the U.S.—is the largest holder of recoverable resources according

to Rystad. What weight do recoverable resources have in a $50 per barrel world?

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Labyrinth Consulting Services, Inc. Houston Geological Society

EIA Reserve Estimates

million barrels 2014 2014 2015 2015 Production Reserves Production Reserves Williston Bakken ND, MT, SD 387 5,972 421 5,030 Western Gulf Eagle Ford TX 497 5,172 565 4,295 Permian Bone Spring, Wolfcamp NM, TX 53 722 66 782 Denver Niobrara* CO, KS, NE, WY 42 512 58 460 Appalachian Marcellus* PA, WV 13 232 16 143 Fort Worth Barnett TX 9 47 5 33 Sub-total 1,001 12,657 1,131 10,743 Other tight 56 708 83 859 U.S. tight oil 1,057 13,365 1,214 11,602 Basin Play State(s) Table 2. Crude oil production and proved reserves from selected U.S. tight plays, 2014-15

  • The more practical question is, What about the growth potential of the Permian

basin?

  • Pioneer CEO Scott Sheffield claims Permian production may exceed 160 billion bo!
  • Even credible sources like Wood Mackenzie believe that Permian Wolfcamp growth

alone will add 3 million barrels per day by 2024.

  • The EIA estimated that 2015 Permian tight oil reserves were only 782 million barrels.
  • Seems low and much less than the 5 billion and 4.3 billion barrels attributed to the

Bakken and Eagle Ford plays, respectively.

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Labyrinth Consulting Services, Inc. Houston Geological Society

Permian 2016 Proved Oil Reserves (kbo) 2016 Tight Oil Production (kbo) PCT OF Total 2016 Production CONCHO 321,026 37,315 9.3% PIONEER 283,647 45,538 11.3% ENERGEN 199,575 10,468 2.6% LAREDO 167,100 9,146 2.3% RSP PERMIAN 164,700 11,040 2.7% DIAMONDBACK 139,174 14,892 3.7% PARSLEY 136,536 11,763 2.9% EP 81,800 3,973 1.0% DEVON 81,000 16,211 4.0% CIMAREX 74,300 17,920 4.5% CALLON 71,145 8,509 2.1% SUBTOTAL 1,720,003 186,776 47% TOTAL 3,696,999 401,459 100%

Reserve Estimate Using 2016 10-K SEC Filings (Annual Reports)

  • I estimate that there are approximately 3.7 billion barrels of proved Permian tight oil reserves

using 2016 10-K SEC filings of leading operators in the plays.

  • All the companies in the table differentiated Permian reserves from other company reserves.
  • Those companies accounted for 47% of all tight oil production in 2016. I used that as a

scaling factor to estimate the contribution of companies such as Anadarko, Apache, EOG and OXY that did not separate Permian from other company reserves in their 10-K filings.

  • The estimate is founded on a reliable base of 1.7 billion barrels from company filings. The

assumption that undifferentiated company reserves will follow 2016 production ratios is reasonable but uncertain.

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22,600 53,132 60,093 61,515 57,047 4,907 10,373 13,299 9,538 7,128

10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 2017 2018 2019 2020 2021 Proved Undeveloped Future Production (Barrels of Oil Equivalent Per Day)

Concho & Pioneer Proved Undeveloped Future Production Expected to Peak in 2019

Pioneer Concho Source: Company 2016 10-K Filings & Labyrinth Consulting Services, Inc.

Assessing the Growth Potential of the Permian Basin

  • Only 3.7 billion barrels may surprise those who buy into the vision of American energy

dominance.

  • Others may accept the estimate but argue that Permian plays have significant growth

potential that the Bakken and Eagle Ford do not.

  • Concho and Pioneer included tables in their 2016 10-Ks that projected future

production from proven undeveloped (PUD) reserves: peak PUD production in 2019.

  • PUDs only ~25% of their combined 2016 daily production from the Permian basin.
  • Future PUD production may only offset legacy production decline rates.
  • Also, PUDs already included in proved reserves.
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0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 Jan-00 Jun-00 Nov-00 Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Millions of Barrels of Oil Per Day

Permian Tight Oil Production Has Reached The Eagle Ford Peak & Is Still Increasing Bakken Eagle Ford Permian

Source: Drilling Info & Labyrinth Consulting Services, Inc.

Tank Theory

  • Implied Permian tight oil reserves less than accepted estimates for the Bakken and Eagle Ford

plays.

  • Permian production, however, has already reached peak Eagle Ford levels and is still increasing.
  • Doesn’t this mean it will continue to increase & eclipse output from older plays?
  • Without additional reserves from new plays or deeper layers, it may only reflect rate acceleration

followed by steep decline once peak production is reached.

  • Tank Theory—you can drain the tank with the best technology at very high rates but ultimate

production is limited by the size of the tank.

  • Concho’s and Pioneer’s future production forecast suggests that peak production may occur

sooner than later.

  • Already, some operators are having problems with increasing gas production.
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Bakken EUR, Gas-Oil Ratios & Water Cut Trends

100 200 300 400 500 600 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960 Oil Production (Barrels of Oil Per Day) Months of Production

Oil Production Decline Rates For Recent Years Are Greater Than For Previous Years For Top 8 Bakken Producers 2016 2015 2014 2013 2012 2016 Declining Faster Than All Previous Years Despite Higher Initial Rates 2015 Declining Faster Than Previous Years 2014 Declining Faster Than Previous Years

Source: Drilling Info & Labyrinth Consulting Services, Inc.

20% 25% 30% 35% 40% 45% 50% 55% 60% 1 2 3 4 5 6 7 8 9 10111213141516171819202122232425262728293031323334353637383940414243444546474849505152535455565758 Percent Water Months of Production

Water Cut Increased In The Last 3 Years For Top 8 Bakken Producers

2016 2015 2014 2013 2012

Source: Drilling Info & Labyrinth Consulting Services, Inc.

500 1,000 1,500 2,000 2,500 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960 Gas-Oil Ratio (Cubic Feet Per Barrel) Months of Production

Gas-Oil Ratio Increases Every Year For Top 8 Bakken Producers 2016 2015 2014 2013 2012

Source: Drilling Info & Labyrinth Consulting Services, Inc.

  • EUR decreased & decline rates increased for wells with 1st production after 2013.
  • Gas-oil ratios increased & then decreased.
  • Water cuts increased for all wells with 1st production after 2013.
  • These trends suggest depletion and that the play has been over-drilled—not conclusive without pressure data.
  • Pioneer’s Permian basin GOR has increased 28% since November 2016.

500 1,000 1,500 2,000 2,500 1/1/12 3/1/12 5/1/12 7/1/12 9/1/12 11/1/12 1/1/13 3/1/13 5/1/13 7/1/13 9/1/13 11/1/13 1/1/14 3/1/14 5/1/14 7/1/14 9/1/14 11/1/14 1/1/15 3/1/15 5/1/15 7/1/15 9/1/15 11/1/15 1/1/16 3/1/16 5/1/16 7/1/16 9/1/16 11/1/16 1/1/17 3/1/17 5/1/17 7/1/17 Gas-Oil Ratio (cubic feet/barrel)

Pioneer's Permian Basin Gas-Oil Ratio Has Increased 28% Since November 2016

Source: Drilling Info & Labyrinth Consulting Services, Inc.

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48 35 50 100 150 200 250 300 350 Venezuela Saudi Arabia Canada Iran Iraq Russia Kuwait UAE Libya US Nigeria Kazakhstan China Qatar Brazil Algeria Angola Ecuador Mexico Norway Azerbaijan Oman India Vietnam Australia Malaysia South Sudan Egypt Permian Billions of Barrels of Liquids

The U.S. Must Double Reserves To Become an Oil-Dominant Producer Even Doubling or Tripling Permian Reserves Not Nearly Enough

BP EIA

United States

Source: BP, EIA & Labyrinth Consulting Services, Inc.

Permian Basin

U.S. Reserves Must At Least Double To Become a Top-Tier Reserve Holder

  • This study represents one scenario that may provide context for the claims and

expectations about future production potential for the Permian basin.

  • Aside from weak growth in the offshore Gulf of Mexico, or some return to growth in

the Bakken and Eagle Ford plays, it is the only current basis for the crude oil portion of emerging American energy dominance.

  • For the U.S. to move into the top tier of oil producing countries, reserves must at least

double from accepted estimates by BP, EIA and other credible organizations.

  • In some upside scenario in which Permian reserves of 3.7 billion barrels somehow

double or triple, that still will not be nearly enough for the U.S. to become energy dominant in oil.

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Low Oil Prices & The Long-Term Debt Cycle

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $0 $5 $10 $15 $20 $25 $30 $35 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

WTI Price in 2016 Dollars Per Barrel U.S. Govennment + Consumer + Non-Financial Corporate Debt (Trillions)

Oil Prices 2.4 times Higher After 2004 Than 1986-2004 In 2016 Dollars Debt GDP

Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statiistics, World Bank, EIA & Labyrinth Consulting Services, Inc.

Oil Price

Oil Shocks $69 Avg Price $86 Avg Price $34 Avg Price

Debt > GDP After 1974-1986 Oil Shocks

$23 Avg Price

$48

$45/barrel 1950-2016 Avg Price

Debt > GDP After 1986

3.5 2.7 3.5 4.1 3.4 2.2 2.9 1.1 1.2 1.7 1.4 1.8 1.1 0.4 0.5 0.6 0.1 1.0 1.5 1.7 1.3 0.5 1.8 1.8 0.8 0.6 1.6 3.1 1.4 1.0 1.5 3.1 0.9 1.1 1.0 1.2 1.9 1.3 1.5 1.4

  • 0.8
  • 0.4
  • 1.3
  • 1.9
  • 1.5
  • 0.4
  • 0.2
  • 0.6
  • 1.0
  • 2.25
  • 2
  • 1.75
  • 1.5
  • 1.25
  • 1
  • 0.75
  • 0.5
  • 0.25

0.25 0.5 0.75 1 1.25 1.5 1.75 2 2.25 2.5 2.75 3 3.25 3.5 3.75 4 4.25 4.5 $0 $20 $40 $60 $80 $100 $120 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E Annual Liquids Demand Growth (mmb/d) CPI-Adjusted Brent Price (December 2016 $/barrel)

No Demand Destruction During The 2012-2016 Oil-Price Collapse

Source: IEA, EIA, OPEC, BP, U.S. Bureau of Labor Statistics & Labyrinth Consulting Services, Inc.

Positive Demand Growth (RHS) Brent Price LHS (WTI before 1975) Negative Demand Growth (RHS) 1.2 mmb/d 30-Year Avg

  • Petroleum Age after WWII produced unprecedented economic growth.
  • Oil shocks of 1974-1986 threatened to end that party.
  • Demand destruction & oil production bubble resulted in 18 years of cheap energy.
  • Debt re-started economic growth & debt-based growth of China challenged oil supply after 2004.
  • Second oil shock made unconventional oil possible. Zero-interest rates led to 2nd oil bubble.
  • Longest period of high oil prices in history.
  • That bubble burst in 2014 and oil prices collapsed but without demand destruction.
  • Now, we are near the end of long-term debt cycle but denying that the economic basics have

fundamentally changed since the post-war era.

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Low Oil Prices Created A Capital Bubble For The Permian Basin

  • The oil-price collapse coincided with the end of QE 3 and the beginning of U.S. interest rate

increases.

  • Continued low interest rates caused margin hunters to focus on the Permian basin.
  • $30 oil prices brought large capital flows to a select group of producers seen as winners.
  • Tight oil and Permian rig counts have more than doubled since August 2016.
  • Increased rig count and fear of ongoing over-supply is a major drag on oil prices.
  • Failure of OPEC production cuts to quickly balance oil markets has tightened capital flows

since March.

0% 1% 2% 3% 4% 5% 6% 7% $0 $20 $40 $60 $80 $100 $120 $140 $160 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Federal Funds Effective Interest Rate (Percent) CPI-Adjusted WTI Price (2016 Dollars Per Barrel)

Lower Oil Prices Correspond With Higher Interest Rates & End of QE 3 in Late 2014 WTI Price (July 2017 Dollars) Interest Rates

Interest Rate Inc. From 0.09% to 0.12% End QE 3

Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statistics, EIA & Labyrinth Consulting Services, Inc.

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Labyrinth Consulting Services, Inc. Houston Geological Society $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110

  • 25
  • 20
  • 15
  • 10
  • 5

5 10 1/10/14 3/10/14 5/10/14 7/10/14 9/10/14 11/10/14 1/10/15 3/10/15 5/10/15 7/10/15 9/10/15 11/10/15 1/10/16 3/10/16 5/10/16 7/10/16 9/10/16 11/10/16 1/10/17 3/10/17 5/10/17 7/10/17 WTI Price ($/barrel) Weekly Rig Count Change

Rig Count Weekly Change Suggests Permian Break-Even Price Is $55-$60/Barrel

$55 $60 Source: Baker Hughes, EIA & Labyrinth Consulting Services, Inc.

Weekly Rig Count Change WTI Price

Change In Permian Tight Oil Rig Count Lags Price By About 6 Weeks Weeks

Rig Count Rises & Falls Based on Expectation of $55-$60 Prices

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30 35 40 45 50 55 60 100 105 110 115 120 125 130 135 140 145 150 12-Sep-16 12-Oct-16 12-Nov-16 12-Dec-16 12-Jan-17 12-Feb-17 12-Mar-17 12-Apr-17 12-May-17 12-Jun-17 12-Jul-17 12-Aug-17

Concho

Close WTI 30 35 40 45 50 55 60 120 130 140 150 160 170 180 190 200 210 12-Sep-16 12-Oct-16 12-Nov-16 12-Dec-16 12-Jan-17 12-Feb-17 12-Mar-17 12-Apr-17 12-May-17 12-Jun-17 12-Jul-17 12-Aug-17

Pioneer

Close WTI

Estimated net flows into and out of U.S. energy stock funds

THE WALL STREET JOURNAL Source: Morningstar Note: All data are full-year except 2017, which is through July. .billion 2012 ’13 ’14 ’15 ’16 ’17

  • 4
  • 2

2 4 6 8 $10

30 35 40 45 50 55 60 80 85 90 95 100 105 110 12-Sep-16 12-Oct-16 12-Nov-16 12-Dec-16 12-Jan-17 12-Feb-17 12-Mar-17 12-Apr-17 12-May-17 12-Jun-17 12-Jul-17 12-Aug-17

Vanguard

Close WTI

Energy Stocks Have Suffered in 2017, Permian Stocks More Recently

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WTI Probably Stuck in High $40 to Mid $50 Range Through December 2017

$0 $20 $40 $60 $80 $100 $120 800 850 900 950 1,000 1,050 1,100 1,150 1,200 1/1/10 1/1/11 1/1/12 1/1/13 1/1/14 1/1/15 1/1/16 1/1/17 WTI Price ($/barrel) Ivnetories of Crude Oil + Products (mmb)

Inventories Are Somewhat Down From Record Levels--The Difference Between Inventories & The 5-Year Average (C.I.) Is Also Near Record Levels

Source: EIA & Labyrinth Consulting Services, Inc.

5-Year Inventory Average (LHS) WTI Price (RHS) Inventories (LHS)

99 mmb Gap 100 mmb Gap

Record Inventory Level

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110 $115

  • 50 -40 -30 -20 -10

10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250

Most Likely December 2017 C.I. Range 40-75 mmb $50-$56/barrel Demand For Refined Products Is The Key

Comparative Inventory (C.I.) Millions of Barrels WTI Price ($/barrel)

Source: EIA & Labyrinth Consulting Services, Inc.

$40 $55

Mar-June 2015 Optimism 2014-2017 Data Mid-cycle price Late 2015-Early 2016 Pessimisim (Cushing > 80% Capacity) OPEC Production Cut Optimism

End August

Most-Likely Dec. 2017 C.I. Range 40-75 mmb $50-$56/barrel

Mid-Feb Sept 1

  • Comparative inventory (C.I.) is the key to understanding oil prices and potential future trends.
  • The oil price collapse resulted in the largest increase in inventories and C.I. on record.
  • C.I. has fallen 112 mmb since mid-February but the gap between inventories & the 5-year

average is still very large.

  • Flat yield curve of WTI vs C.I.—large decreases in C.I. do not create meaningful price increases.
  • Most-likely range of C.I. indicates possible year-end WTI price range of $50 to $56/barrel.
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Closing Thoughts

  • An appropriate context for the Permian basin & U.S. tight oil plays is necessary.
  • Reserves are relatively small & costs are relatively high but the plays provide a just-in-time supply that has

disrupted traditional markets.

  • The global leverage of tight oil plays is almost entirely negative and they are wholly dependent on

managed money for their survival.

  • Capital supply may not continue to be as available as it has been.
  • Most production forecasts assume business-as-usual, not a global economy near the end of a long-term

debt cycle.

  • It is unlikely that proven Permian reserves can deliver forecasted production. This will require adding

reserves from new plays or pools.

  • Those who celebrate tight oil play innovation should consider the desirability of more years of depressed
  • il prices.

0.50 0.40 0.00 0.00 0.40 0.50 0.30 0.00 0.00 1.30 0.80 0.87 0.92 1.60 1.86 2.09 1.26 2.11 1.28 0.46 1.42 0.20 0.45 0.29 0.31 0.82 1.37 0.38 0.28 $0 $20 $40 $60 $80 $100 $120 $140 $160

  • 2.5
  • 2
  • 1.5
  • 1
  • 0.5

0.5 1 1.5 2 2.5 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418 Brent Price (December 2016 Dollars Per Barrel) Market Balance (Supply Minus Demand mmb;d)

World Market Balance Suggests Increasing Over-Supply Going Forward Brent Price (RHS) Supply-Demand Surplus (LHS) Supply-Demand Deficit (LHS)

Source: IEA, EIA, OPEC, BP & Labyrinth Consulting Services, Inc.

Q2 2017 Q2 2018

48 35 50 100 150 200 250 300 350 Venezuela Saudi Arabia Canada Iran Iraq Russia Kuwait UAE Libya US Nigeria Kazakhstan China Qatar Brazil Algeria Angola Ecuador Mexico Norway Azerbaijan Oman India Vietnam Australia Malaysia South Sudan Egypt Permian Billions of Barrels of Liquids

The U.S. Must Double Reserves To Become an Oil-Dominant Producer Even Doubling or Tripling Permian Reserves Not Nearly Enough

BP EIA

United States

Source: BP, EIA & Labyrinth Consulting Services, Inc.

Permian Basin