More on LTO Economics in the Bakken

The goal for any commercial company is to make as high as possible profit and returns on invested (employed) capital, primarily the owners’ capital, equity.

Light Tight Oil (LTO) extraction from the Bakken and Three Forks formations in North Dakota had a new high of 1,17 Mbo/d in Apr-18 according to data published in Jun-18 by the North Dakota Industrial Commission (NDIC).

This article is an update of this (which has more details on specific costs to which there are small changes) and is a small expansion focused on profitability/financial metrics.

  • Scenarios were run there no wells were added as of Jan-19 (in the Bakken, Three Forks formations) with an initial flow above 1,2 Mbo/d to get estimates on NPV (DCF) and returns for the project and on equity (owners’ capital), ROE and ROI with a sustained oil price of $60/bo and what oil price would provide the project with a 7% return (ref table 1).
    All at the wellhead (WH).
    These runs had cut off end 2040.
    The objectives with such scenario analysis is to establish baselines from which it becomes possible to follow developments in several financial metrics, also adjusted for oil price movements.
    Applied to companies, it provides for benchmarking of companies’ management performances.
  • At $60/bo (and $2,50/Mcf for natural gas) the Bakken project would return about 4%.
  • A 7% return was obtained with a sustained oil price of $73/bo (and $3,00/Mcf).
    • The above estimates do not include costs for acreage, 800 Drilled UnCompleted (DUC) wells with an estimated total cost (employed capital) of $2,0B – $2,4B, any refracking (ref Marathon), flared gas and future costs for Plugging & Abandonment (P&A) for about 12 000 wells started as of Jan-09 to end 2018, estimated at a total cost of $1,8B – $2,4B and recognized write downs.
  • Including the items described above, the estimates show a full cycle return of 7% for the Bakken as one big LTO project would be achieved at a sustained future oil price at about $80/bo [$90/bo WTI].
  • One of the best and most reliable metrics for investors are NPV projections for Equity (Owners’ Capital).
    A NPV projection for equity that comes in at about 0 with a discount rate of 10% (the higher the better) is considered acceptable (reference also tables 1-5).
    This metric allows comparisions across sectors.
  • A run was done to estimate the effects from pushing back the time from where no wells were added with 5 years (from 2019 to 2024) while remaining close to cash flow neutral (all other things kept equal). This reduces the return for both the project and equity (owners’ capital).
    The discounted return on equity (owners’ capital) was lowered from 14% to 10% with $73/bo at WH.
    Alternatively a higher oil price is required to achieve some targeted return.
  • By applying financial leverage in the extractive industries, like oil extraction, it allows to extract the reserves faster (accelerate the depletion). In the Bakken the use of high financial leverage explains the rapid buildup in extraction levels.
    In this article financial leverage expresses the ratio of debt [inorganic funding] to equity [owners’ capital] used in a company’s investment.
    When financial leverage works, it boosts return (acts as a multiplier) on owners’ capital.
    If it does not work (what many companies painfully discovered after the oil price collapsed in 2014), leverage works fast in the opposite direction and destroys owners’ capital.

    • From companies’ SEC reports it was found that there is a huge span in their financial performances in the Bakken, one major big oil company has lost all their equity of $4+Billion [in the Bakken], one was found to have big negative retained earnings (accumulated deficit) of $2+Billion and then there are several companies on trajectories towards varying degrees of profitability.
  • The 3 years, 2015-2017 with the oil price under $50/bo left primarily the wells of the 2014 – 2016 vintages (ref also figure 2), suffering from the low oil price, and it is now projected these vintages could incur total losses (write downs) of $6B – $8B with a sustained oil price of $60/bo.
    These losses are and/or will be recognized on the companies balance sheets (equity, reduced owners’ capital) as the wells end their economic life and are Plugged & Abandoned (P&A).

    • Older vintages and future wells could fully or partially make up (cover) for these losses from their profits at a sustained oil price of $60/bo. A lasting oil price above $60/bo speeds the healing.
      Irrespective of a future higher oil price and how this probable loss is handled by the oil companies, the 2014 – 2016 vintages will for many years provide strong headwinds to the profitability for many companies in the Bakken.
      This is one of the many things that is hard (close to impossible) to identify from the companies’ SEC filings.

This post includes some estimates with some profitability metrics for the average 2017 vintage well for 2 price scenarios and how a company with solid finances and strong discipline can boost discounted return on equity.
This also illustrates why project NPVs, undiscounted cash flows, time to pay outs, ROE and ROI may be poor metrics when analyzing and ranking several projects and/or companies.
Short story, several metrics should be estimated and compared to get the best possible information about the prospects for financial profitability for any project/company.

Figure 1 Bakken annual NCF and Cumulative 2009 to Apr 2018

Figure 1: The chart above shows the estimated net cash flows by year [black columns]. The red area shows the estimated cumulative net cash flow since Jan-09 and per Apr-18. LOE, G&A and interest rates (effective, i.e. adjusted for tax effects) based on a weighted average from several companies’ SEC 10-K/Q filings. Taxes according to what was in force. Price of oil, monthly North Dakota Sweet (NDS) and realized gas price; the average from several companies’ quarterly reports.

NOTE; the chart in figure 1 shows an estimate (red area) on the development of total capital employed (equity and borrowed) (as from Jan-09 to Apr-18) that first needs to be recovered before profits can be made.

The payouts were reached late 2022 at $60/bo and late 2021 at $73/bo.

The chart does not give any indication about future profits or losses.

Read the rest of this entry »

The Powers of Fossil Fuels, an Update with Data per 2017

This post is an update and small expansion of The Powers of Fossil Fuels spanning more than two centuries of the history of the world’s energy, primarily fossil fuels (FF), consumption.

  • Between 2002 and 2017 world energy consumption grew with about 39%, world Gross Domestic Product (GDP) by 130% and world total debts by more than 160% (market value and expressed in US dollars).
  • The narrative of the growth story of the world economy (GDP) appears as a rule to leave out two participants:
    1. DEBT and the accelerating debt growth since the 1980’s, more notably since the start of this millennium and how this unprecedented growth in total world debt helped pull forward ENERGY demand.
      Post the Global Financial Crisis (GFC in 2008/2009) the continuity of economic growth became facilitated by concerted policies by the world’s major central banks by their low interest policies and Quantitative Easings (QE).
      Lower interest rates allowed room for more DEBT on most balance sheets and growth in total DEBT is important for continued economic growth.
    2. ENERGY (and primarily FFs) consumption and its strong growth facilitated by the rapid growth in DEBT.
  • Simplistic explained is GDP a monetary measure of the annual volume of transactions.
    These transactions involve the exchange of products and services which require some input of ENERGY and in recent years growing amounts of DEBT allowed for this to happen.
    This illustrates that money/currency is a claim on ENERGY.
    The orderly retirement of the growing DEBT is a claim on future ENERGY.
  • This post also takes a brief look at the recent years’ growth in solar and wind (renewables, RE) and how their growth measured up against FFs since 1990 and Year over Year (YoY) changes for FF and RE since 2000.

Figure 1: The chart shows the developments in total world energy consumption split on sources as of 1800 and per 2017.
Energy sources are stacked according to when these were introduced into the world’s energy mixture.
The black line (plotted versus the left hand scale) shows development in the world’s GDP in current US dollars since 1980 based on data from the International Monetary Fund (IMF).

In the early 1800s biomasses (primarily wood) were humans’ primary source for exogenous energy. Coal was gradually introduced into the energy mixture after the successful development and deployment of the steam engine which gave birth to the Industrial Revolution. Coal is a nonrenewable, abundant and a denser energy source than wood.

The growing use of biomasses had led to deforestation in those areas serving energy intensive industries like mining and metals.

The steam engine and its use of abundant coal as an energy source made it possible to rapidly expand the industrial production, create economic growth and thus the Industrial Revolution was made possible by fossil fuels.

With the most recent discoveries and introduction of fossil oil and natural gas there appeared to be several abundant sources of volumetric dense energy that could entertain exponential debt fueled economic growth.

Fossil fuels represent natures’ legacy stock of dense energy (ancient sunlight) that during some decades has been subject to an accelerated depletion.

Several reports in the media may now leave the impression that we are at the threshold for a smooth transition from FFs to RE (solar and wind).

How does this measure up against hard data for RE (solar and wind) versus FFs?

Read the rest of this entry »

World Crude Oil Supplies per July 2017

In this post I present developments in world crude oil (including condensates) supplies since January 2007 and per July 2017.

  • In this post the world crude oil (inclusive condensates) supplies is split into three entities, North America [Canada, Mexico and the US], OPEC(13) and other Non OPEC [World – {North America + OPEC(13)}] with a closer look at Brazil.
  • For OPEC(13) a closer look at developments of number of active oil rigs versus developments in the oil supplies. This is supplemented with developments in the oil supplies versus the number of active oil rigs for some selected OPEC countries.
  • Looking at figure 07 for OPEC(13) the increase in its supplies as of late 2014/early 2015 followed a period with noticeable growth in oil rigs and likely capacity expansions/modifications of oil process/treatment facilities.
    The accompanying increase in OPEC(13) supplies may simply have been rationalized from a pure business desire to recover the investments (CAPEX) from these capacity expansions.
  • Finally a closer look at developments in petroleum consumption/demand and stock changes for the Organization for Economic Cooperation and Development (OECD).
    The OECD has about half of total global petroleum consumption and a major portion of the global petroleum stocks.
  • “It took a lot of costly oil to bring down the oil price. This is the magic from lots of cheap credit.”

Data from this post is primarily from EIA Monthly Energy Review October 2017.

Figure 01: Figure 1: The stacked areas in the chart above shows changes to crude oil supplies split with North America [North America = Canada + Mexico + US], OPEC and other non OPEC [Other non OPEC = World – (OPEC + North America)] with January 2007 as a baseline and per July 2017. Developments in the oil price (Brent spot, black line) are shown against the left axis.

It was the oil companies’ rapid growth in CAPEX leveraged by cheap debt [ref US Light Tight Oil (LTO)] and expectations of a sustained higher oil price that brought about a situation where supplies started to run ahead of consumption/demand that brought the oil price down. During the run up to the oil price collapse, supplies also grew from other non OPEC (ex North America) from developments sanctioned while the oil price was high and expected to remain so.

Following the oil price collapse several of these developments had to take considerable write downs.

This coincided with increased OPEC supplies in what became widely explained as a bid from OPEC for market share.

Read the rest of this entry »

error: Alert: Content is protected !!
%d bloggers like this: