Friday, March 22, 2013

North Dakota TIght Oil by the numbers

Given the media's reporting on the increase in domestic Oil production for the U.S. I thought I would point out that the stock market does not think much of "Tight Oil/Shale Oil". The Oil Service Index, NYSE - OIH, has gone essentially nowhere during this dramatic increase in production and absolute BOOM in rigs and wells. ("Servicers" provide all of the actual drilling and pipe equipment for the "Producers/Exploration & Production" companies. The E&P companies are really engineering investment banks.)

The economics of Tight Oil production in the U.S. don't look so hot to me upon examination. Please feel to check my math.

South Dakota Oil production averaged 660,000 bpd in 2012. The average price for WTI in 2012 was approximately $85. That's $20.5 billion dollars worth of Oil per year - about half the annual revenue of G.E.

I estimate 60,000 people working directly or indirectly for the Oil industry (a yearly population increase of 12,000 for the past 3+ years and 24,000 workers living in "temp housing" not counted) in North Dakota. When I say "indirectly" I am not including government services or healthcare. It is almost certain that an additional 20,000 police, road crews, utility, nurses, etc... personnel were required to support the efforts of those 60,000 oil industry workers.

Revenue per industry worker = $341,000 if my estimates are correct.

Sounds pretty good, right? Especially compared to G.E.'s revenue per employee of $133,000.

I don't think so. In fact, I don't think the project is terribly attractive at these prices, and that would explain the end of growth in rig count. 100% of the N.D. workers are U.S. based, as opposed to G.E.'s 44%. Infrastructure spending by the N.D. oil industry is off the charts. Truck drivers are earning well into 6 figures. Entire towns are going up over night.

A conventional oil field yielding production of 660k bpd would need no more than 3000 and perhaps less than 1000 workers to service production.

I am trying to gather info on day rates for rigs in ND and other infrastructure expenses (if anybody has anything please let me know)... but my personal financial sense tells me that that expense is going to be several times greater than the labor expense, and never mind the environmental and water costs.

So what's up with the media? I am not sure. Every one of these stories/articles are bought and paid for by some very interested party, and my bet is that it is a politically driven.

1 comment:

tweell said...

Hard information is difficult to come by, it seems. The problem is that rigs have a wide range of prices depending on age and capabilities; I expect that drilling can also vary greatly hole to hole even tapping the same field.

All these articles detailing the increase in oil output somehow credit our Dear Leader while failing to mention that the feds haven't allowed any drilling on federal land.