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Since mid 2014 markets have been highly influenced not only by an increasingly

dominant unconventional oil production, but also by an increasingly fuzzy


unconventional perception. The speculative market signals are definitively not being
clearly captured by traditional producers, neither by traditional traders.
OPEP is no longer capable to deliver the cohesion once it was able to do, as its
most influential members are now looking mostly after their own interests, and
geopolitics are more changing, inconsistent and confusing. Furthermore, markets are now
more aware than ever about the abundant oil & gas reserves, and the rising threat of
renewable energy for the short to mid term. A sudden collapse of the barrel well below
the $30 price range is now a very feasible scenario.
As most NOC/IOCs are desperately trying to squeeze more revenue out of each
barrel, independent producers are actively looking after slimmer and more efficient
structures and portfolio to reduce exposure to CAPEX expenditure, yet nothing seems to
have change so far since the beginning of the shale oil saga.
Independent producers are looking closely at hedging options, while trying to
reduce their failure envelope for its regular operations. Clearly speaking, borrowing
potential is really getting tighter for the independent producers, as market instability is
more and more pronounced.

Threshold oil price for field operations activation has being unmistakably defined
within a range of $43-$45 per barrel for about 66% of the independent producers in the
US, which dictates the strength/weakness ratio for the lower/upper 16.66% each, in a
normal distribution curve.
Based on historical performance, there has not been any proof of a clear
improvement in the US field operations since the oil price collapse in June 2014; on the
contrary, they are actually showing more planes of weakness, as the threshold price
seems to be increasing.
Since 2013, US independent producers have been increasingly accumulating
drilled but uncompleted wells (DUC) at a growing pace. The rate and behavior at which
DUCs are being accumulated have changed drastically since mid 2014, when the oil
price collapsed.
The trend suggest that prior to June 2014, DUC cumulative volume was driven by
the potential speculative hedging opportunities, where as after June 2014 it has been
mostly driven by operational costs and borrowing implications. Furthermore, DUC
accumulation rate has changed with time, showing that a more costly operation is actually
occurring in the US fields, as the cut off WTI price seems to be moving upwards with
time, confirming our previous statement.

Nevertheless, there seem to be some confusing response in the neighborhood prior


and after the November16 OPEC agreement, where market perception played a key role,
as DUCs behaved opposite to what it was actually expected.
Based on all of the above, one can clearly conclude that independent producers
are currently showing signs of an increasing financial stress and operational decay, which
can certainly put at risk the success of the shale oil in the very near future. This can be
explained perhaps, as the result of one or more of the following elements:

- Increasing
o operational complexity
o borrowing costs
o marginal costs
- Decreasing
o rig efficiency
o reserves replacement ratio

Shale oil can not and will not compete against conventional oil, as lifting and
even worst, marginal costs naturally has a detrimental ratio of at least 3:1 when compared
to conventional oil. Venezuela is among the most privileged producers simply because of
the beneficial geographic location, and solid reserves volumes with an upside potential
which only needs to fine tune operations and focus man power to become more efficient,
more cost effective and more productive to be the dominant pole in the fossil energy
arena.
Millan Arcia Einstein: Senior upstream adviser and SME. Has published around 11
highly specialized technical papers internationally, and more than 80 articles in a number
of journals, blogs and newspapers including; Soberania.org, aporrea.org,
NoticiasVenezuela.org, Plattsblog, Oilpro.com, Las Armas de Coronel, The Slush Pit
(Oklahoma Oil & Gas News), Energy Economist, and Los Angeles Times.

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