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Oil Rig Count Falls By 1 As Analyst Warns Permian Reserves Are Grossly Exaggerated

Courtesy of ZeroHedge. View original post here.

For only the second time in the last 27 weeks (and 4th in the last 56 weeks), the number of US oil rigs fell last week (down 1 to 764 rigs). There is a growing concern that the rising rig count has now outpaced the lagged response to pricing and is due to rollover further

Notably the Canadian oil rig count rose by 12 last week.

WTI tumbled to a $45 handle heading into the data after tanker-tracker data suggested OPEC supply was the highest in 2017…

“To really see the market push much higher, we need to see a drumbeat that inventory levels are being pared like the main producers who are cutting production say is happening,” Gene McGillian, market research manager at Tradition Energy in Stamford, Conn., says by phone to Bloomberg. Without that “further gains are going to be kind of tough to come by.”

As a reminder, after rebounding last week, it looks like the Alaskan component of US oil production slowed this week as maintenance work continues in the Alaskan North Slope, but the Lower 48 saw production hit 2 year highs…

And if the government is to be believed that is great news for 'Murica…

We are entering a new age of American energy dominance according to Energy Secretary Rick Perry.

President Trump reflected that view in comments he made last week that “…we’ve got underneath us more oil than anybody, and nobody knew it until five years ago.”

Trump was referring to tight oil production and today, that means the Permian basin.

But as's Arthur Berman notes, global energy dominance by the United States is somewhere between aspirational and absurd.

So far in 2017, the U.S. has imported more than 9 million barrels of crude oil per day, and net imports have averaged more than 7.3 million barrels per day. How exactly can the world’s biggest importer of oil become the supplier upon which other countries depend?

The recently released BP Statistical Review Of World Energy 2017 places the United States 10th in the global ranking of oil reserve holders between Libya and Nigeria (Figure 1). That’s not bad but it hardly puts the U.S. in the same league as energy-dominant countries like Venezuela, Saudi Arabia, Canada, Iran, Iraq and Russia that have on average 4 times more proved reserves than the U.S.

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Figure 1. The U.S. is the 10th Largest Oil Reserve Holder in the World. Source: BP and Labyrinth Consulting Services, Inc.

Perhaps the President and Secretary Perry have been reading John Mauldin’s recent work of magical realism Shale Oil: Another Layer of US Power. It features a chart which shows that the U.S. is the largest oil reserve holder in the world (Figure 2)

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Figure 2. John Mauldin’s Recoverable Oil Reserves chart. Source: Mauldin Economics and Rystad Energy.

The chart is so wrong that it defies explanation.

Its Rystad Energy source data reveals that Mauldin has misrepresented recoverable resources—all oil regardless of commercial value–as reserves—a specific volume that is commercial at today’s oil prices.

It also seems that Mauldin didn’t show Rystad’s data correctly. Saudi Arabia—and not the U.S.—is the largest holder of recoverable resources according to Rystad (Figure 3).

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Figure 3. Rystad Energy Global Oil Recoverable Resource Estimate. The chart shows Rystad’s 2PCX category: proved reserves plus contingent resources plus risked prospective resources in undiscovered fields. Source: Rystad Energy and Labyrinth Consulting Services, Inc.

Rystad’s P1 proved and P2 proved-plus-probable reserve estimates put the U.S. behind Saudi Arabia, Russia and Iran.

There are many other errors in Mauldin’s transcription of Rystad’s data that can be seen by comparing his chart as my Figure 2 with Rystad’s data in my Figure 3. That’s what happens when energy amateurs masquerade as energy experts.

Assessing the Growth Potential of the Permian Basin

So much for U.S. energy dominance today but what about the growth potential of the Permian basin?

Pioneer Natural Resources CEO Scott Sheffield claims that output may exceed 160 billion barrels of oil. Even credible sources like Wood Mackenzie believe that Permian Wolfcamp growth alone will add 3 million barrels per day by 2024.

The EIA, however, estimated that 2015 Permian tight oil reserves were only 782 million barrels (Table 1). That seems low and is considerably less than the 5 billion and 4.3 billion barrels attributed to the Bakken and Eagle Ford plays, respectively.

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Table 1. EIA 2015 Tight Oil Reserves. Source: EIA U.S. Crude Oil and Natural Gas Proved Reserves, 2014

I estimate that there are approximately 3.7 billion barrels of proved Permian tight oil reserves using 2016 10-K SEC filings for leading operators in the plays (Table 2).

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Table 2. Estimated 2016 Permian Basin Tight Oil Play Reserves. Source: Company 10-K Filings, Drilling Info and Labyrinth Consulting Services, Inc.

All the companies in Table 2 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 grounded on a reliable base of 1.7 billion barrels from company filings. The assumption that unknown company reserves will follow 2016 production ratios is reasonable but uncertain.

I imagine that an estimate of only 3.7 billion barrels may surprise many 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. That data indicates that the two leading producers in the Permian tight oil plays anticipate PUD production to peak in 2019 (Figure 4).

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Figure 4. Concho & Pioneer Proved Undeveloped Future Production Expected to Peak in 2019. Source: Company 10-K Filings and Labyrinth Consulting Services, Inc.

Concho’s and Pioneer’s combined peak 2019 PUD production volumes are approximately 25% of their combined 2016 daily production from the Permian basin. That means that the addition of future PUD production may only offset legacy production decline rates.

Anticipated PUD volumes are already included as proved reserves so however we view this data, it does not affect the implied reserves for the Permian basin. 10-K reserve and PUD production forecasts are based on 2016 SEC oil and gas prices. Higher prices would mean higher reserves and PUD production although few now anticipate substantial price changes over the period covered by Concho’s and Pioneer’s estimates.

Tank Theory

Permian tight oil reserves implied by this study are 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 (Figure 5).

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Figure 5. Permian Tight Oil Production Has Reached The Eagle Ford Peak & Is Still Increasing. Source: Drilling Info and Labyrinth Consulting Services, Inc.

To many, this implies that Permian production will continue to increase and will eventually eclipse output from the older tight oil plays. That may be true but, without additional reserves from new plays or deeper layers, it may only reflect rate acceleration followed by steep decline once peak production is reached. Concho’s and Pioneer’s future production forecast suggests that peak production may occur sooner than later.

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 (Figure 6).

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Figure 6. The U.S. Must Double Reserves To Become an Oil-Dominant Producer Even Doubling or Tripling Permian Reserves Not Nearly Enough. Source: BP, EIA and Labyrinth Consulting Services, Inc.

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.

Engineers commonly think of reserves as a tank – you can drain the tank with the best technology at very high rates, and perhaps make some money along the way, but ultimate production is limited by the size of the tank.

I have presented an estimate of tank size using as a basis data from the companies that know most about the plays. If it is even close to correct, American energy dominance should be recognized as just another expression of alternative facts.

* * *

As if more confirmation was needed…the Permian basin has been leading the increase in horizontal oil rig count (+184%)

But, the horizontal oil rig count changes from May 2016 by producers' sources of funding shows that junk bond funded rigs have plateaued!

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