[SugarSeam]

Hi all. Longtime lurker, first-time poster.

I'm looking for someone to help me understand the process of padlocking a well (due to low prices), and then getting them back up to speed when (of if) those prices rebound. It seems that the cornucopians' final rallying point is to insist U.S. tight production can just seamlessly return to business as soon as price rebounds. You know, "econ 101, bro." ... That kind of thing. Anyhow, I remember seeing pushback on this rather overconfident assumption, but I can't find it. So I'd like to appeal to those much smarter than me.

Isn't it true that once a company shutters production, there's enormous logistical, legal and economic roadblocks to returning to BAU for that company? Huge thanks in advance.

[SugarSeam]

hmmmm.... no one, then? OK

[dinopello]

hmmmm.... no one, then? OK

Impatient after all that time lurking ?

The sure way to get the "experts" to post is for someone who is not in the oil patch to offer up an opinion - so here, I'll see if this works...

I think the answer is - it depends...

[Pops]

I don't know anything either, the correct answer then is:

I doubt anyone is stopping oil from flowing from a completed well.

OTOH, in the New and Improved LTO it isn't that they are shutting in, they are just not drilling more. Decline in those wells happens fast enough to lower production rapidly when new wells aren't coming on continuously.

One other problem springs to mind, who is gonna pay for the next round of new wells? As I understand, most drillers wen't really making ends meet anyway and were just doing the dog and pony show daily to pitch the money men that they needed a bigger truck. I think this is possibly when their little musical chairs game stops and the money boys see that getting a biger truck doesn't help when you are losing money on every barrel.

Or not.

[ROCKMAN]

Sugar - "I'm looking for someone to help me understand the process of padlocking a well (due to low prices), and then getting them back up to speed when (of if) those prices rebound." Here you go. The term you're looking for is "shutting a well in". Essentially closing the valve if it's flowing or turning off whatever pumping equipment being used. And this is very, very rarely ever done for any significant length of time for a number of reasons. First it can actually damage the completion. I've seen commercial wells shut in that wouldn't never produce again when opened up. Second, many lease agreements cancel if a well doesn't produce a commercial amount of production for 30 consecutive days. And the most common reason is that few operators chose to reduce their cash flow. That is particularly true when prices drop. I've seen many more operators do whatever they could to increase production compared to those shutting a well in when prices fall.

But an operator can easily and quickly reduce a well's rate. I have a well flowing 400 bopd. It would take my hand less than 10 minutes to reduce it to 200 bopd. And it's still producing 400 bopd right now.

"...to insist U.S. tight production can just seamlessly return to business as soon as price rebounds." I suspect you're mixing apples and oranges. Most are talking about how quickly companies might resume drilling new wells...not increasing production from existing wells. Very different dynamic then shutting a well in. One of the biggest potential problems is lease expiration: when a company acquires the rights to drill on a lease it's for a limited time. That "primary term" can be 1 year to 5 years. But 3 years is common. But in a hot trend like the Eagle Ford there may be a significant "rental payment": a company pays $1,000 per acre for a primary lease. But at the anniversary of the lease signing the company has to pay the mineral owner another $1,000 per acre if a well hasn't been drilled yet. In my 40 years I've seem companies "drop" hundreds of thousands of leased acres instead of making rental payments.

So what will be the hurdles to having another drilling boom in addition to higher oil prices? Some of the drilling infrastructure will have been sold for scrap but a lot will be mothballed and could be brought back into the service. The next hurdle would be finding experienced hands to work the equipment. And then there's the time lag to take new leases if necessary. But I expect the biggest hurdle by far will be coming up with the capex to pay for a new drilling boom. First, a lot of companies will no longer be in business. And the ones that are will have suffered low incomes and not have much budget available, So the key will be the availability of bank, bond and investor money. There will always be the greed factor helping but most won't soon forget the losses many investors/shareholders just suffered.

But in the end it will still hinge on the price of oil more then any other one factor..

[SugarSeam]

thanks Rock... that helps a lot.

So then is it safe to assume that even a return to stable prices in the $80-100 range within the next 12 months, there will be significant delays in getting U.S. production back to summer 2014 production rates, if ever?

I was fairly confident investors have officially become spooked. Unfortunately that doesn't seem to deter team "No Problem," who all maintain unending faith that this is just a temporary downturn in rig counts, and the climate for U.S. shale production will seamlessly return to "normal" as soon as the price rebounds.

[rockdoc123]

The key with the shale plays in terms of ramping up is the number of wells that have already been drilled but not yet fracked. My understanding is the frack bank is at an all time high. So if there was a rise in prices that looked like it could be sustained many of these wells could be fracked and brought on production within a very short time, given all of the necessary facilities are right there. I saw an article last week with an estimate of the number of wells in this situation, just need to find it again

[evilgenius]

How do companies put together their vehicle and equipment fleets? Are they sub-contracted? If the work slows way down does some guy named 'Vern' drive off with your tanker truck, looking for a place to find steadier work?

The rest of the world has become a sub-contracted mess. Why not this extension of 'Just-In-Time' inventory management theory carried over into all other aspects of business management? Economically speaking, this kind of structure lends itself well to the coming revolution in self-driving vehicles.

Speaking of self-driving vehicles, it looks from here like the way to make money going forward, say ten or fifteen years down the road, would be to have the capital to acquire a fleet of ways to make money, on an automated basis.

[ROCKMAN]

Evil - When it comes to drilling operations the oil patch is virtually 100% subcontracted by Halliburton, Schlumberger, TransOcean et al. Mothball some of the equipment and sell the rest for scrap. But revamping wouldn't kickoff big time until demand pushes prices way back up. And then the problem becomes finding experienced hands/training newbies.

[evilgenius]

Evil - When it comes to drilling operations the oil patch is virtually 100% subcontracted by Halliburton, Schlumberger, TransOcean et al. Mothball some of the equipment and sell the rest for scrap. But revamping wouldn't kickoff big time until demand pushes prices way back up. And then the problem becomes finding experienced hands/training newbies.

What do you think is a profitable way to gain efficiency during any phase of the transition? I was pretty sure you'd say 100% sub-contracted, but felt it wrong to load my post more than I already had. The whole world is that way, moreso now in response to the economic morass, and I'm not certain it is the best response to the future, only it is the one that our current thoughts concerning the marketplace of work allows us to put into practice. Can we change anything about how we think of work that might make that different? And, more specifically, can the oil patch? Maybe the 3d printing world is only the leading edge of automated parts and equipment manufacture, for all things drill stick specific? Maybe H&P's more automated rigs are the right direction, but so much so that the whole thing can be run by a cowboy on horse back with a smartphone, checking up on things occasionally as the self-driving trucks and pieces of equipment do the things they are tasked to do?

I can foresee a future that contains many such price and supply swings, disrupting everyone who hasn't figured out how to ride through them and come out the other side doing something productive. If every time everybody is reeling the threat of a more efficient way won't be a problem. I do think some will figure it out, though. People are good at that.