Peter Tertzakian

Examining the headline plays in the United States, the amount of oil and associated gas that can be brought out of the ground with the grinding pipes and bits of one rig has increased in the range of four-fold since 2012.

Take for example the oil-soaked Permian Basin in Texas. Back in 2012 a rig working in the region for one month could drill enough rock to add 150 BOE/d of average production. Four years later the output from one drilling rig was over 600 BOE/d. In the prime postal codes of the Eagle Ford, the rates are over 1,600 BOE/d! No wonder the OPEC-and-friends cartel is concerned about what’s happening on this side of the world.

The reasons for the productivity improvements are many: Drilling faster and more accurately; employing new-age, alternating-current (AC) electric rigs; migrating to development drilling on multi-well pads; using rigs that “walk” and move quickly from one location to the next; high-grading of prospects to the best areas; and realizing learning-curve effects from completion technologies that are leading to more production from each well.  .....

............
It’s early days yet. Productivity gains have been impressive in a short period of time, in select areas of the vast WCSB. Learning curve effects are just starting to kick in, so the reserve and production potential of natural gas and low-carbon liquids in the wider WCSB is looking promising.
In past columns I’ve made the claim that the recent upturn in the Canadian oil and gas industry – increasing capital expenditures and rig counts – is being driven by innovation, efficiency and speed to market. The Canadian rig productivity data helps to validate that claim, and explains the shift in investment emphasis away from the oil sands toward resource plays in Saskatchewan, Alberta and BC.

Calgary Herald

​Another bright spot has been the results of new fluids Crescent Point has been using to help extract oil from the Viewfield Bakken formation in southeastern Saskatchewan. In tests last year, the fluids improved initial 90-day oil production rates by about 50 per cent.Saxberg did not divulge details about the fluids because they are "proprietary."
"Early results are pretty impressive," he said. "It's pretty exciting stuff in this environment and I think the low-cost environment allows us to do this experimentation and we probably put $50 million of our budget across all of our fields toward that technology."

​Only a matter of time before this diffuses to rest of industry.

 

Genscape
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Zerohedge
North Dakota's largest producer, Whiting Petroleum, announced that it would suspend all fracking, and that Continental Resources has effectively done the same after reporting that it no longer has any fracking crews working in the Bakken shale.
As Reuters reports, Whiting said it would "suspend all fracking and spend 80 percent less this year, the biggest cutback to date by a major U.S. shale company reacting to the plunge in crude prices."

There is just one problem.  Whiting Chief Executive Officer Jim Volker said that "we believe this conservative strategy should help us to maintain our liquidity position and leave us well positioned to capitalize on a rebound in oil prices."
In other words, the moment oil prices rebound even modestly, and according to many the new breakeven shale prices are as low at $40-$50/barrel, the Whitings and Continentals will immediately resume production, forcing Saudi Arabia to go back to square one, boosting supply even higher, and repeat the entire charade from scratch.
And so on.

Zerohedge
Note the parallels to the Canadian market. Resource driven economy, same debt to income ratios.
Jonathan Tepper (the expert on  the 60 minutes piece who called the Irish, Spanish, and USA property bubbles) described the Canadian market in 2013 as one of "biggest housing bubbles in the world". 
See also here and here
Don't act like I never told ya.

Calgary Herald
Some Canadian banks could be forced to preserve capital by raising equity or even cutting dividends if oil prices continue to slump, Moody’s warns in a new report.
In a “severe stress” scenario modelled by the ratings agency, and included in the report to be widely circulated Monday, losses in consumer lending portfolios would exceed historic peaks and capital markets activity at the country’s biggest banks would be significantly crimped.
“Under the moderate stress scenario we modeled, the profitability of Canadian banks will decline but their capital would not be impaired,” David Beattie, a senior vice-president at Moody’s, wrote in the report.
“In our severe stress scenario, however,” he warned, “some of the banks’ CET1 (capital) ratios could fall under 9.5 per cent, in which case we believe they might be required to take capital conservation measures, cut dividends, or raise additional equity.”
In an interview, Beattie characterized the likelihood of the severe stress case as “very remote” and said dividend cuts would be avoided by the big banks “except under extreme duress.”
Still, with oil prices slumping to levels not seen in more than a decade, the ratings agency expects banks will have to absorb the pain of oil producers, drillers, and service companies, as well as consumers in oil-producing provinces.
In the severe stress test scenario outlined by Moody’s, losses in the big banks’ consumer portfolios would rise above the historical peak, and there would be a 20 per cent decline in capital markets’ net income, driving losses to 1.5 times quarterly net income.
In this scenario, unless the banks reduce the payout ratio — the percentage of earnings paid out to shareholders as dividends — or issued shares, “it would take multiple quarters to absorb stress losses through retained earnings,” Beattie wrote.
Among Canada’s biggest banks, Canadian Imperial Bank of Commerce and Bank of Nova Scotia emerge as the “negative outliers” in the Moody’s stress testing.
CIBC’s rank reflects the fact that the bank’s operations are primarily in Canada. The country’s fifth-largest bank also has “considerable oil and gas concentration in its corporate loan book, and a material portion of its earnings comes from capital markets activities,” Beattie wrote.
Scotiabank would face higher stress losses from its corporate loan book and the segment mix of its corporate loans.
In the severe stress scenario, both CIBC and Scotiabank would lose about 100 basis points from CET1, a key measure used to gauge a bank’s capital cushion.
However, Beattie said that doesn’t mean those banks would be the first to have to tap the market for funds through an equity issue, or to reduce dividends.
“Each of the banks is coming from a different starting point in terms of capital,” he said, adding that all Canada’s big banks hold capital well above the regulatory minimum. What’s more, any of the banks could invoke capital conservation measures quickly and pre-emptively if the probability of a severe stress situation were to begin to rise, he said.
Toronto-Dominion Bank is a “positive outlier” in the Moody’s analysis, losing just 53 basis points of CET1 in the severe stress scenario. Beattie said Canada’s second-largest bank by market capitalization has a relatively small oil and gas corporate loan book, despite that book growing considerably over the past year.
TD also has a comparatively low concentration of retail operations in oil-producing provinces, and low reliance on earnings from capital markets, he wrote.
The impact on capital markets activity is difficult to predict, Beattie said, adding that underwriting earnings will be hurt by reduced equity issues in the energy sector, but that could be at least partly offset by mergers and acquisitions activity that tends to take place during a downturn.

Business Insider
(Thanks Brent!)
The report, from the energy research firm Wood Mackenzie, says just 4% of the world's oil is unprofitable at $35 a barrel, a price oil was trading near just a few weeks ago.

Those engaged in risk management should note the following past links of mine.

Odds that the Canadian Banking system holds up?

Brent posted this as a reply to a post I made a few days ago. Worth bringing out front.
Here is the paper from the Manhattan Institute.
​"At present, break-even costs across U.S. shale fields range from $10 per barrel–$55 per barrel.50 Delivering North Dakota oil to Gulf Coast refineries and ports by rail can add another $15 per barrel. Using analytics to double output, thus cutting oil costs in half, means that shale break-even costs would drop to $5 per barrel–$25 per barrel. America’s shale fields would then be competitive in volume and in price with Saudi Arabia’s vaunted ultralow-cost oil fields."

Daniel Yergin, founder of IHS Cambridge Energy Research Associates, said it is impossible for OPEC to knock out the US shale industry though a war of attrition even if it wants to, and even if large numbers of frackers fall by the wayside over coming months.
Mr Yergin said groups with deep pockets such as Blackstone and Carlyle will take over the infrastructure when the distressed assets are cheap enough, and bide their time until the oil cycle turns.
“The management may change and the companies may change but the resources will still be there,” he told the Daily Telegraph. The great unknown is how quickly the industry can revive once the global glut starts to clear - perhaps in the second half of the year - but it will clearly be much faster than for the conventional oil.
“It takes $10bn and five to ten years to launch a deep-water project. It takes $10m and just 20 days to drill for shale,” he said, speaking at the World Economic Forum in Davos.


Mr Yergin is author of “The Prize: The Epic Quest for Oil, Money and Power”, and is widely regarded as the guru of energy analysis.
He said shale companies have put up a much tougher fight than originally expected and are only now succumbing to the violence of the oil price crash, fifteen months after Saudi Arabia and the Gulf states began to flood the global market to flush out rivals.
“Shale has proven much more resilient than people thought. They imagined that if prices fell below $70 a barrel, these drillers would go out of business. They didn’t realize that shale is mid-cost, and not high cost,” he said.


Yet even if scores of US drillers go bust, the industry will live on, and a quantum leap in technology has changed the cost structure irreversibly. Output per rig has soared fourfold since 2009. It is now standard to drill multiples wells from the same site, and data analytics promise yet another leap foward in yields.
“$60 is the new $90. If the price of oil returns to a range between $50 and $60, this will bring back a lot of production. The Permian Basin in West Texas may be the second biggest field in the world after Ghawar in Saudi Arabia,” he said.
Zhu Min, the deputy director of the International Monetary Fund, said US shale has entirely changed the balance of power in the global oil market and there is little Opec can do about it.
“Shale has become the swing producer. Opec has clearly lost its monopoly power and can only set a bottom for prices. As soon as the price rises, shale will come back on and push it down again,” he said.

Canadian house prices would drop 26 per cent on average if oil fell to $35 a barrel and stayed there for five years, says the CEO of Canada Mortgage and Housing Corp.
Evan Siddall made the comment at an event in New York on Monday, where he shared with his audience the results of “stress tests” the CMHC ran on Canada’s housing markets.
In this scenario — $35 oil leading to a 26-per-cent house price decline — unemployment would rise to 12 per cent, Siddall said, as quoted at Bloomberg.
West Texas Intermediate, the benchmark price for North American oil, was trading around US$44 as of Tuesday afternoon.
Most analysts today see little chance of a return to $100-per-barrel oil prices anytime soon, but few are forecasting prices to hit $35 and stay there for five years. The parliamentary budget office recently forecast oil prices would rise slowly over the next five years, to US$59 a barrel.