Energy expert Scott talks Bakken, Permian, OPEC and energy tech

Over the past decade, the energy industry has made some major technological advancements. In fact there has been so much progress, the term “energy tech” made its way into headlines, annual reports and even basic everyday jargon.

This technology has allowed oil companies to reduce their overhead, increase profits and drilling efficiencies.

Dr. Loren Scott is a prominent member of the energy community for many reasons, including his work on impact studies, forecasting services, analysis of policy proposals, and general economic analyses. Consulting clients include BP, ExxonMobil, Entergy Corporation, J. P. Morgan Chase, Capital One Financial, Nucor, Sasol, and a diversity of others.  Scott has also been a featured speaker at several Bakken events over the past ten years.

Scott sees energy tech as one of the key components in allowing oil companies to drill at a lower price than many anticipated, even in the Gulf of Mexico.

“The break even point in the Gulf of Mexico was somewhere between $70-to-$80-a-barrel,” Scott said. “They have gotten that down to somewhere around $50-to-$60-a-barrel.”

Scott said many oil companies are taking the model they have used in shale plays like the Bakken to lower the breakeven price.  For example, in the Gulf, companies are working with energy partners like Schlumberger and Edison Swift to lower their rates.

Scott used the Gulf of Mexico as an example because it shows how technology and ideas from one shale play can be used in other areas, however, that doesn’t necessarily mean the Bakken is in any trouble with competition from offshore drilling.

“They’ve gotten that breakeven point down, but it is still about $55-to-$60-a-barrel, which make them uncompetitive with you guys (Bakken),” Scott said. “It is still cheaper to go into Permian Basin, the Bakken or the Niobrara and drill there.”

To some, energy tech can can have a flip side to the innovation coin.  In some circles there is even a phrased coined to illustrate how much technology has impacted the energy industry – the downside of technology.

This phrase is meant to summarize all the rig related jobs that have been replaced by a robot and how technology has allowed a quicker completion time.  Scott disagrees with the “downside of technology” and continues to see it as a boon for the industry.

“We’ve had technological change going on for centuries, as a matter of fact it has gotten exponential and yet we have not had a problem with total employment,” Scott said. “If anything the oil and gas companies have been having a hard time finding people.”

Scott added that one of the ways companies are saving money is reducing the labor costs.

“In some places the rig floors out in the newer rigs in the Gulf of Mexico are almost totally mechanized.  You don’t have really have roughnecks putting slips in to catch the pipe and so forth.  It is getting more and more robotic,” Scott explained.

With the advent of robotics and new technologies, Scott sees the job offerings in oil and gas evolving beyond the traditional roughneck type jobs.

“There is still jobs for people to do besides being a roughneck on a rig,” Scott said. “People have to build the robots, run the robots and learn how to do all that so I am not to worried about the ‘downside of technology’.”

He also addressed how technology has been creating more efficient fracs and well extraction too.

“I remember when I started talking to people in the Bakken, back in 2007, a typical well would get 100-barrels a day in the first year, now they are getting 1,100-to-1,200-barrels a day,” Scott said. “They are just getting smarter and smarter about harvesting the fields.”

Scott then transitioned into the Bakken shale play and what the future looks like from his energy and economic eyes.

“Like the other shale plays, the Bakken is showing the cleverness and ingenuity of the American capitalists,” Scott said. “The breakeven point has dropped from around $60 or $70 to now into the $30’s and $40’s.”

The ability for oil companies to work with their partners and suppliers has allowed drilling to happen at $45-a-barrel in the Bakken, whereas five years ago that wouldn’t have been the case. Scott added it can become a bit of a curse if not properly understood.

“That is kinda a curse for us because in January OPEC said they were going to cut their production by about 2% or so and see if they can boost the price,” Scott said. “And they did. They boosted the price to $55 and the people in the shale play went back into the shale play.”

The actions and price increase influenced by OPEC allowed shale play players to start drilling again and frac the DUCs (Drilled But Uncompleted Wells), according to Scott.

“So suddenly you had US oil production starting to grow again,” Scott said. “And it was growing enough to offset the OPEC reductions.”

Scott added this created an environment where the price really never came back down again because of all the oil being extracted from the shale plays.
When asked about OPEC’s influence and whether the production cuts will continue at the end of May, Scott sees a bright future for the Bakken and other shale plays.

“What I think is going to happen is not only are they going to extend the production cuts, but I think there is a good chance they might add to the production cuts,” Scott said.

Scott defended his prognostication by asking people to role play.

“Put yourself in the position of the OPEC treasurer, the guy who is collecting the money,” Scott said. “What has happened since they put in their cuts?  They reduced their output by about 2% and the price of oil went up about 15%.”

Using an economic formula of total revenues are price times quantity, Scott explains how in the end more money is being generated with only a minor cut in production.  Furthermore many of the foreign countries, like Venezuela and Libya, are having economic issues creating a difficult environment for them to be competitive with the United States.

“I think they (OPEC) are going to look at this and say ‘huh’,” Scott explained. “We lowered our output a little bit and we got a big increase in percentage change of price and our revenues went up.  Let’s try this a little bit more.”

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