Zeihan on Geopolitics: Shale Gets Ready to Run

Zeihan on Geopolitics: Shale Gets Ready to Run

A data dump by the International Energy Agency this weekend indicates that OPEC is enjoying its best compliance showing at least since the 1970s, if not ever. Over 90% of pledged oil production reductions have already materialized, with a few countries – most notably Saudi Arabia – overcutting. All together over the course of the past few months, total OPEC output is down just over 1 million bpd. The past two years of low-ish prices have hit non-OPEC producers as well, forcing reductions in their collective output of another 400kbpd. Stores of both crude and refined products have thus dropped across the world. No wonder oil prices have managed to hold strongly over $50 a barrel of late.

The question now is how positive will the impact upon the American shale industry be? In this there are no good guides. The nature of shale has evolved radically not simply since the industry’s modern inception in 2007 (ish), but even more so since the plunge in the price of crude began in mid-2014.

• Since then the most productive wells have become multilateral, with multiple horizontal spurs going off every vertical well shaft. Since each of these multilaterals is crafted by a single drill, the rig count watch is utterly irrelevant.
• Micro-seismic techs are enabling operators to take much -- if not all -- of the guesswork out of drilling and fracking. Such precision drilling means not only looking at the volume of steel used per well or per barrel of output is immaterial, but also that mass layoffs of rig workers can occur with no reduction in oil production.
• Water intensity per barrel of output continues to shrink as liquids pits are replaced wholesale by mobile water tanks. Less water usage means less cash flowing through the oil sector, gutting one of the last few “reliable” means of indirectly gauging end-output levels.

 

All these tech changes (and more) push down the full-cycle break-even cost of oil production, and most certainly steepens the production accelerations for future output. But it isn’t “only” technological innovation that is overhauling the industry. There are other factors in play that will have a much more immediate effect.

• When prices were low, many operators only fracked minimal bits of their wells to start them up -- preferring to wait for a price recovery before fracking them up to full capacity. That time is now, but there is no unified data whatsoever on the size of this “fracklog.” 
• Improved seismic techs enable operators to go back to previous wells and drill additional fairways. Such “indrilling” enables new production into old infrastructure, eliminating the need for new pipes, new leases or new negotiations, while generating new and sustained flows with the newest techs available. 

Whereas technological changes impact national output figures over months to years in a sustainable way, these more mechanical characteristics give big one-off increases in weeks to months.

The only potential short-term ointment-fly I see is financing. Nearly all the shale operators who survived the price plunge of the past two years did so at least in part by borrowing. Even with prospects now brightening, many of them will find it difficult to take on yet more debt to expand operations. Yet even here things look surprisingly good. Capital flight out of Japan, China and the Eurozone continues to set new records. Shale bonds grant foreign investors a place to park their cash that is backed both by hard assets and revenue streams.

In my opinion shale’s next surge is going to not just hit much harder, but much sooner, than most expect. And it is likely about to get a lot better.

What do Donald Trump, Brexit, the Iranian Ayatollah, EU dysfunction, Japanese constitutional revisions and Chinese President Hu’s efforts to establish himself as emperor-of-all-he-sees-for-life all have in common? They are all great for the shale sector. Global instability of all stripes means more capital flight. More risk means higher oil prices means more stable American operators. More international recrimination means more interest in commodities both as an asset class and a security blanket.

This doesn’t “merely” mean that the output curve for the shale industry will be steeper now than in 2007-2013, but that adding a fresh million bpd to U.S. oil output in calendar year 2017 is a lazily conservative forecast. Shale isn’t just likely to overwhelm the entirety of OPEC’s cut, but the entirety of the global reduction in output all by itself.

And that’s just the start. By end-2017 all those new techs should have percolated throughout the shale patch. Full-cycle break-even prices for shale are already below $40. Give it a couple more years and $25 will be within reach.

And then the real shale revolution gets started.

As to what that looks like, sorry, but you’ll have to read the book. Check it out at this link. 

 

 

BOOK PETER FOR YOUR NEXT EVENT

Book Review: The Absent Superpower, The Shale Revolution and the World Without America.

By Rich Kozlovich

The Absent Superpower, The Shale Revolution and the World Without America, by Peter Zeihan is the second book by him I've read. The first was The Accidental Superpower: The Next Generation of American Preeminence which I reviewed here.  Both of these books are impressive.  Since then I've read, and published his articles, with permission, and seen some videos of his presentations.  All very impressive.  The man's clearly brilliant, well versed, well researched, and very good at presenting the information in a way that makes you want to read what he's saying. 

I've not seen analysis like this except in two places.  Stratfor news and the information put out by Dr. Jack Wheeler.  I've found he worked for Stratfor as the Vice President of Analysis and left to form his own company in 2012 called Zeihan on Geopolitics, which explains the similarities.

That was the appetizer, now for the main course. 

He proposes, and very well I might add, fracking has changed the geopolitical dynamics dramatically, and will continue to do so even more in the future.  His book starts out explaining fracking, how it's done, how it has improved technologically, and how the costs related to fracking have dropped to the point where prices being charged by Saudi Arabia will no longer matter.  Recently he publish an article showing how the figure he states in the book is now ever dramatically lower.  Fracking is changing the world, and he breaks this down into three sections.

In Part I, Shale New World, he describes how fracking works, and I've asked around, and for a layman he's spot on, except I don't think you can get a pipe to turn 90 degrees.  Otherwise - I now know more about fracking than I ever expected to.  For those of us who aren't all that interested in the techie stuff is a bit boring, but it's essential as foundation for the rest of the book.

Part II is called "The Disorder", which includes what he terms The Twilight War, the (Next) Gulf War, The Tanker War, The Sweet Sixteen and It's a Supermajor World. 

Part III is The American Play with chapters on "Tools of the Trade", "Dollar Diplomacy in Southeast Asia", "Dollar Diplomacy in Latin America" and "Shale New World". 

I'm totally impressed with the background research he's done on all the problems the world is facing.  For years I've understood the importance of geography and demography in the world geopolitics, but I never fully appreciated both until reading his books.  However, there are some caveats to my enthusiastic review.

First, he goes on to explain what a mess Putin is facing in Russia and then goes on to claim, without foundation, Putin has stashed billions of dollars no one knows about in order to attack Eastern Europe at some unknown time for some unknown reason. 

His analysis of what would happen if America walks away, leaving Europe to defend itself alone, is I think spot on, but in both books it's clear Russia is breeding itself out of existence, the economy is on the verge of collapse and their military is a mess with the exception of their special forces.  I see no earthly reason why Russia would want to attack anyone that would require a full out effort.  Furthermore, dictators don't stash money away to attack someone.  They do it to run away and live in luxury.  So why is the brilliant man saying this?  I will deal with that further.

His analysis of South America and Latin America is so well done it gives you an entirely different view of why these countries are where they are economically.   Because of South America's geography there is nowhere near the amount of trade you would expect among them, but neither have there been many wars.  His analysis as to future American diplomatic and economic policy to Latin and South America is eye opening. 

He's made it clear there's no other nation on the Earth that has the geographical advantages like the United States, assuring economic success, except Argentina, which in the 1920's was one of the richest nations on the Earth, until the socialists took over.   His work clearly demonstrates why countries who adopt socialist policies turn poor countries into cesspools and rich countries like Argentina into a mess.  It will be interesting to watch our Southern neighbors make major changes with regard to the United States, or face economic problems that will become insurmountable. 

All of Asia's problems will center around energy, transporting it safely, and where it's going to come from.  His analysis of China's military capability is impressive in demonstrating they're really good at putting on a big show, but the reality of their geography, demography, economics and a true evaluation of their military capability to impose their will outside their own nation is limited, including use of their naval forces.  Japan will become a much bigger player militarily in that arena when the U.S. becomes more - well, let's say judiciously isolationist.  In short - if there's no benefit there will be no involvement.  You may find Australia's role in all of this interesting, especially since he clearly believes American, Australian and New Zealand involvement won't deminish nearly as much as it will with the rest of the world.

I don't agree with is his views on Global Warming.  He states in the book some criticize him for being a liberal and some for being a conservative.  In explaining his views on Global Warming it demonstrates he's a liberal - he says so - which I find interesting since there are two things liberals hate more than anything.  History and facts, and he excels at both.

However, it explains his hard take on more Russian aggression, Global Warming and failing  to deal with the two most important movements in world events, the Muslim invasion into the west, and the efforts by the United Nations to create a one world government, and promoting the Anthropogenic Global Warming fruad is essential for them to attain that end.  All of which are tenets of current leftist theology.  He's too well researched and too intelligent to not be aware of all of this and the facts surrounding it all.  And I ask why would a man that brilliant be a liberal?

So do I recommend reading his book?  Absolutely! 

I would give it five stars on history, five stars on current events, five stars on analysis and four on conclusions.  When reading his books you will gain insights needed to understand why the world works the way it does, and allow you to become even more aware of how worthless the media really is.  After gaining those insights you can draw your own conclusions, and you may or may not choose to accept his.  However, there is one thing that really bugs me, there's no index in this book