#487. 2014 Trends That Excite Agracel – Trend 6: Growing Economic Impact of Low American Energy Prices, Part II

Trend 6:  Growing Economic Impact of Low American Energy Prices – Part II

Last week, we looked at how low energy prices are driving where to locate manufacturing plants. This week, will conclude that trend with a more in-depth look at this “energy boom”.

This is High-Tech Manufacturing, Not Exploration!

The huge difference of shale production when compared to conventional oil production is that the producers in these shale plays are less explorers for oil than they are manufacturing operations. While there are variations in production, the outcomes are far more predictable and with less variation. The focus is on improving returns by reducing costs. And, just like manufacturers these companies are seeing almost every aspect of their business improving:

• Production is up
• Costs per well are coming down
• Wells are being drilled faster and more efficiently
• Estimated recoveries per well are improving
• Estimated recoveries per section of land are increasing through down spacing

It is a classic application of the learning curve, and with each passing year the productivity from drilling and producing from shale wells is improving, something the shale skeptics have completely overlooked. Examples abound of how these improvements are occurring, but look only at the number of fracs per well. When the first horizontal wells were drilled they did an average of three fracs. By 2011 the number had increased to 30. Today it is over 40/well. An innovator in this subset of the revolution is Dan Themig, founder and CEO of Packer’s Plus, a leader in “packing the well” for these fracs. Themig’s firm, based in Calgary, has several thousand employees scattered around the world. He was born and raised in nearby Vandalia, IL.

These shale wells, while much more expensive than conventional domestic wells, often costing over $10 million/well to drill and finish, have an incredibly rapid payback for the producers. Continental Resources, the leading Bakken producer, claims it can achieve a 20 to 25 percent return on these wells with oil prices as low as $60 per barrel, rising to 50 to 65 percent when oil is at $100.

A return trip for me to Williston, ND in September 2013 confirmed both how early we are in this shale revolution and the longer term impact it could have upon our economy for decades into the future. Williston is in the center of the Bakken play and has more than tripled in size since I was there in the mid-2000s.

The economic developer for Williston, Tom Rolfstad, has been there since the 1980s and is a wealth of information on what is going on in an incredible boomtown. When I asked him what inning the Bakken was in, his response was, “We are still in the first inning. We’ve drilled about 6,000 wells to date, but have another 160,000 to go, perhaps more.” He went on, “Most of the wells that have been drilled have been done to stake out leases, which typically have clauses in them allowing them to lapse if there is no production within three years of signing. Now, those drillers have staked their claims, have production going, and are focused upon methodically developing the land in a systematic and methodical way. It’s more of a mining operation than an oil production one, as they have a 99% success ratio on each well.”

Oil producers in the Bakken are just starting to explore other shale layers under it, including the Three Forks play. There are dozens of these multi-layer shale fields in each of the Big Four.

Washington: Are You Paying Attention?

>We hope that Washington D. C. is paying attention to how this revolution is taking place. Too often it seems that the government thinks that they have to subsidize something to get more of it for citizens. Think of unemployment, disability, food stamps, and mortgage debt. But, there is another way, as seen by the incredible expansion of energy production in the USA. The mystery force, unknown to many politicians, is called liberty. Because of it the USA now produces a third more natural gas and a third more oil than it did just six years ago.

When you look at a world map of shale energy deposits, the USA has a very small percentage of the total, but yet 99% of world production from shale comes from this country. Unlike other countries, which own and control all sub-surface property rights, America’s more entrepreneurial private ownership has encouraged and spurred a rapid ramp-up in production. And, it wasn’t the big majors (ExxonMobil, Shell, BP, Chevron, etc.), but smaller independent firms that risked small fortunes in hopes of turning them into very large ones.

While President Obama speaks with pride about this increase in energy production during the past six years, it was liberty, not help from Washington DC that increased output. According to the Congressional Research Service, oil production on federal land fell by 6% and natural-gas production by 21% from 2008 to the end of 2012.  All of the increase in oil and gas production has come from private lands!

Without the increase in American production, oil prices would be much higher today, not stuck around $100 a barrel. American consumers are saving $100 billion a year, even as American producers are making great profits. Clearly a win-win for all!

Thank you for following our Trends! We are excited about our future, not just for Team Agracel, but our business partners as well. We believe the future is very bright and we are ready for the ride!