Hi all,
As an experiment two open threads were created. Oil and Natural Gas and Non-oil (all other energy related stuff such as solar, wind, EVs, etc).
This is the oil and natural gas thread.
Please put your comments in the appropriate thread.
573 thoughts to “Open Thread- Oil and Natural Gas”
Comments are closed.
Move over Exxon, Russian drillers are the oil world’s top performers
“When oil goes down, the western companies are hurt more than the Russian companies,” said Maxim Edelson, a Senior Director at Fitch Ratings in Moscow. Because Russian tax rates adjust automatically to lower prices the nation’s companies enjoy a buffer to the slump in crude while “a lot of the hit is taken by the government.”
They seem to be saying that an imminent peak in production is unlikely.
““Production costs in Russia are still among the lowest globally…Russian companies can still tap new resources. Rosneft’s…capital expenditure of US$4.20 a barrel is just a sixth of the US$27 a barrel Exxon Mobil spends”
Lukoil break even price:
“Lukoil is known for being less optimistic about oil prices than other Russian companies.
Alekperov said that the current tax system in Russia lets the company feel confident enough even if the oil price goes down below $30 per barrel. The break-even price for Lukoil is $24 per barrel and the company is prepared even if the most negative forecasts come true.
Lukoil is now developing a strategic plan for the next three years and estimates crude prices to be $50 per barrel at the rate of 70 rubles to the US dollar, and $60 if the dollar costs 66 rubles.
Alekperov compares the current situation on the oil market with wine-making.
“I once asked a wine-maker, “Sometimes there’s a good year, sometimes there’s a bad one. Is that how it is in the wine business? “. To which he replied:” No, there is always good wine. Only one year we work more, another year – less.” So that’s what we do now – just work more”, said the CEO.”
http://www.rt.com/business/314702-lukoil-oil-russia-business/
The Russian state is taking the brunt of the oil price fall. But they won’t have the income to sustain a tax system which encourages more production if such production cuts its income. This means we aren’t likely to see Russia’s oil production increase from August- Sepember 2015 levels.
if such production cuts its income.
Not quite sure what you mean by that. Are you talking about increased Russian production affecting the overall world-wide balance of supply & demand?
Yes. The state isn’t likely to approve higher production levels which drive prices down and cut tax revenue. I know the Russian system, it’s easy for the authorities to slow down the permit process for field developments. They also control oil flows via Transneft.
Russia’s oil production is indeed unlikely to increase from the current levels in the near to medium-term future. The Energy Ministry’s base case forecast projects flat oil production till the year 2020.
As regards fiscal revenues, they are also to some extent shielded from the fall in oil prices by the falling ruble exchange rate. In the first half of 2015, Russia’s fiscal deficit was 2.3% of GDP. Of course, this is negative, but many OECD and non-OECD countries had much larger deficits for many years. Thus the anuual average governtment deficits in 15 Euro area countries were 4.0% of GDP in 2008-14, in the U.S. 9.2% of GDP
(http://www.oecd-ilibrary.org/economics/government-deficit_gov-dfct-table-en)
What are your thoughts about the likelihood of a decline from current levels?
This year, production will increase by 1-1.3% y-o-y.
In 2016-2020, Russian oil companies are able to maintain production at or close to current levels (~10.5 mb/d), as new field start-ups can offset declines in mature fields.
Longer-term prospects depend on development of the Arctic shelf and unconventional resources
I don’t think Kara and Beaufort seas developments will contribute much by 2020. The Barents oil prospects are pretty slim.
Longer-term means after 2020
What do you think of Russian LTO, like Bazhenov?
Some companies, including GazpromNeft and Lukoil, are drilling test wells in the Bazhenov shale and are planning to start commercial production by the end of this decade. But large-scale development is unlikely to begin before 2020.
Here is an article in Bloomberg:
Gazprom Pursues Russian Shale Boom Ambitions Amid U.S. Sanctions
June 2, 2015
http://www.bloomberg.com/news/articles/2015-06-02/gazprom-pursues-russian-shale-boom-ambitions-amid-u-s-sanctions
OAO Gazprom Neft, the oil arm of Russia’s state-run gas exporter, said commercial production from its Bazhenov shale formations could start in three years amid U.S. sanctions limiting the transfer of fracking technology.
The company aims to produce about 40,000 barrels of crude a day from the deposits from 2018, Kirill Strizhnev, head of unconventional projects for Gazprom Neft, told reporters in Moscow. That’s about 2.7 percent of Gazprom Neft’s daily first-quarter output of 1.5 million barrels of oil equivalent.
———————————
Meanwhile, Russian operators are actively
developing the Tyumen and Achimov formations, which are deeper, tighter and more complex reservoirs than conventional West Siberian fields, but are still far easier to develop than the Bazhenov shale.
According to Wood Mackenzie estimate,
“between 2009-2014 production from the mid-Jurassic Tyumen formation more than doubled to over 400,000 bpd of oil and was a key factor in stemming the country’s decline. “We estimate that in 2014 over $3.5 billion – around 7% of Russian capital expenditure – was spent on developing the Tyumen formation. However, by 2020, we forecast the formation could account for up to 1 MMbpd – over 15% of West Siberian production – with current oil reserves estimated to be around 6 Bbbl with significant resource upside for producers.”
Russian liquids production hits record levels of 10.7 MMbpd
http://www.worldoil.com/news/2015/7/16/russian-liquids-production-hits-record-levels-of-107-mmbpd
Can the Tyumen stabilise Russian oil production?
14 July 2015
http://www.woodmac.com/public/views/tyumen-oil-production
Not so far back I was told here in no uncertain terms by other regulars that the Russians are working under such tough conditions that their production costs are among the highest in the world and that low wages could not possibly offset the difficulties of working in the far North. Just about all of Russia is in the far NORTH and sfaik just about all her oil as well.
Production (lifting) costs in 2Q15, US$ per barrel of oil equivalent:
Rosneft vs. key LTO producers in Eagle Ford, Bakken and Permian basin
Everything you hear about Russia in the western mainstream media is basically nonsense and deliberate disinformation. That applies to Russia’s energy sector, its political system, its intentions, demographics, military, just about everything.
The western mainstream media (The Economist is a prime example of this) have been claiming for over a decade now that Russian oil output is set to fall into terminal decline. In fact, as we all know, the exact opposite has happened.
What I say above is but a small example of western disinformation about Russia. Now, the reason is what is the driving force behind the institutionalized anti-Russia bias of the West?
The reasons are legion, but the core matter is this: Russia is the one country with such vast reserves of oil, natural gas, coal, gold, copper, uranium, etc etc etc that will benefit enormously in the coming decades by being the core (and lowest-cost) producer of essential raw materials that power the global economy and allow it to function and grow. This is so because as we all know, many resources around the globe are in very advanced stages of depletion and exhaustion. This will provide Russia with immense financial and strategic leverage if not somehow interrupted by the West. This is precisely the reason why such an institution as NATO exists. Why would all the world’s most advanced countries ally themselves against a single country? What are they afraid of? What could they possible have in mind?
There is only one serious answer to this question, and that is that Russia is the only country on earth with the necessary resource base to fatally upset centuries-old western dominance of the globe.
So, back to the oil question, which is obviously the most pressing one. I have become convinced in recent years that Russia’s oil reserves are far, far greater than is generally admitted by anybody involved in the matter. The EIA and IEA know this, the western super-majors know this, western intelligence services also know this, the Chinese and the Japanese also know this and you can bet your bottom dollar that Putin knows it to and also knows that the others know as well. Hence the global crisis in international relations that we are now witnessing.
It is of no small coincidence that Exxon Mobil (the most venerable of the oil-majors) has recently (and under a sanctions regime) acquired massive drilling rights within the Russian Federation that simply dwarf Exxon’s acreage anywhere else (including the USA) It is also of no small coincidence, that Schlumberger has also acquired the biggest Russian driller (also under the current sanctions regime) and is planning to have more than 60% of its international rigs in Russia in the very near future.
So yes, the cost of producing oil in Russia is infinitely lower than what western sources usually like to claim. It’s definitely one of the very lowest on the planet, and it is my calculation that Russia can significantly increase her oil production in the future (hence the reason why KSA invited Russia to join OPEC) with far smaller investments than in most other places.
http://www.bloomberg.com/bw/stories/2004-11-21/commentary-oil-whats-russia-really-sitting-on
http://www.bloomberg.com/news/articles/2015-03-03/exxon-s-russia-exposure-surges-as-long-view-outweighs-sanctions
http://www.businessinsider.com/us-oil-company-just-made-a-17-billion-bet-on-russia-2015-1
http://katusaresearch.com/saudi-arabias-oil-agenda/ —-> Pertaining to Schlumberger’s intended presence in Russia.
Yep.
Russia is most definitely takin’ names and kickin’ ass.
This from Rigzone yesterday:
And here’s what Rosenfelt’s president had to say about predicting the future price of oil:
Now that’s a smart man, but also a man who knows he’s in the driver’s seat.
There is no sign that Russia is relenting. It is going to show the US producers how the cow ate the cabbage:
Why Vladimir Putin Won’t Be Helping OPEC to Cut Oil Production
September 11, 2015 http://www.bloomberg.com/news/articles/2015-09-10/why-vladimir-putin-won-t-be-helping-opec-to-cut-oil-production
[Russia] can tolerate low prices better than many OPEC members. Russia’s budget deficit is projected to be about 3 percent of economic output this year [it was 2.3% in 1H15], according to Finance Minister Anton Siluanov. Saudi Arabia, OPEC’s largest producer, will have a budget gap of almost 20 percent, the International Monetary Fund forecasts.
Russia is comfortable with an oil price above $60 per barrel, Deputy Prime Minister Arkady Dvorkovich said last week. Several OPEC members need more than $100 to balance their government budgets, according to the IMF.
AlexS. You have mentioned before that part of the advantage Russia has at present is that oil is being sold in dollars and OPEX and CAPEX is being paid in rubles (sp?).
Assuming oil prices recover into the 60s-70s range, how much will this affect exchange rates, in your opinion?
Furthermore, as interest rates in Russia are much higher, am I correct to assume Russian oil and gas companies are less likely to engage in reckless CAPEX spending similar to US shale?
I know this view of mine may be very naïve, but I think both US and Russia could benefit from ratcheting down political rivalries and exploring ways each can economically benefit the other. These countries seem to have more in common with each other than either do with almost all of the Middle Eastern countries, and in think it will be folly on the part of both to chose sides in that part of the world, (for example the Syrian mess, the Iran/KSA rivalry, etc.)
Glenn,
Thanks for that rigzone article and quote from Sechin about future price. Go to Fortune-tellers eh!! 🙂
Imagine that. These are not old Russians, these are some new Russians. And compare that with bozos from Shell, Exxons who tell us future price to a cent whenever someone puts a mic in their face.
Russia is the one country with such vast reserves of oil, natural gas, coal, gold, copper, uranium, etc etc etc that will benefit enormously in the coming decades by being the core (and lowest-cost) producer of essential raw materials that power the global economy and allow it to function and grow. This is so because as we all know, many resources around the globe are in very advanced stages of depletion and exhaustion. This will provide Russia with immense financial and strategic leverage
Is this a widespread view in Russia? I’m asking particularly about people with influence in government and other important organizations.
No. Most people are only nebulously aware of Russia’s resource potential, even in the country itself. But Putin very definitely knows it. In fact his doctoral thesis is on this precise issue. The fact of the matter is that after the collapse of the USSR and the subsequent disastrous failure of liberal reforms Russia came extremely close to complete ruin. US strategists are in fact openly declaring this to be their ultimate goal. Back to the main point. Russia had a very lucky escape after Putin took over through an appreciation of energy prices, calculated and careful foreign policy, as well as US preoccupation with Middle East wars. This gave Russia the breathing space to partially recover. Still, and as we are clearly witnessing today, Western hostility towards Russia is still extreme, demanding nothing short of complete capitulation. As Russia is infinitely poorer than the West in terms of capital, then there are only two cards left for Russia to play in order to survive. Military strength and leveraging of natural resources. Keep in mind that Russia is assuming a defensive posture and it is the West (not all Western countries to the same degree though) that is aiming for the jugular. If one listens to Putin’s speeches carefully, between the lines there is a clear offer to the West, and the US especially: Let’s negotiate a grand bargain. If not, then you can be certain that we will resist you to the bitter end.
Apologies. I did not read your question properly.
Yes, the Russian ruling elite (not just the current President) see Russia’s resource potential as the primary defensive strategic asset against NATO hostility. The CIA on the other hand, sees the break-up of Russia into smaller pieces as the only way to prevent a potential Eurasian challenge to US hegemony in the world.
This would be my answer
Stavros Hadjiyiannis said:
Still, and as we are clearly witnessing today, Western hostility towards Russia is still extreme, demanding nothing short of complete capitulation. As Russia is infinitely poorer than the West in terms of capital, then there are only two cards left for Russia to play in order to survive. Military strength and leveraging of natural resources. Keep in mind that Russia is assuming a defensive posture and it is the West (not all Western countries to the same degree though) that is aiming for the jugular.
The hatred of Russia by folks like Brzezinski and Kissinger is nothing short of pathological: irrational hatred which is harmful not only to the Russian people but to the people of the United States and Europe as well. I suppose, however, it’s all part of their dream of a Pax Americana.
Greg Grandin put it well in a recent interview, noting that Kissinger is typically, but mistakenly, described “as a realist or a believer in realpolitik.” Grandin then goes on to add: “But one of the things that I argue is that if we take realism as a belief that the material world exists, that the truth of that world is evident in the facts of that world, then Kissinger is not a realist. He comes out of a certain kind of German irrational, kind of will-to-power idealism. He’s very much influenced by German metaphysicists.”
But the quixotic quest for worldwide “full spectrum dominance” is beginning to have some serious blowback. Pax Americana is beginning to look a lot more like a Pax Mafiosa.
I have a friend here in Mexico. He is Mexican, but of German heritage and he spent many of his formative years living in Germany. He follows German politics closely, and is convinced that there exists a possiblity that Germany will eventually tell the US and NATO to take a hike and throw its lot in with Russia.
He bases this on his observation that financial capitalism has not triumphed in Germany to the extent it has in the United States and the rest of the Anglo-American world, and that there is still a struggle going on between financial capitalists and productive capitalists in Germany. If the productive capitalists were to win out, then they would see their future with Russia — an alliance of Germany’s industrial might with Russia’s vast natural resources. It’s a perfect match, a natural combination in which one completes the other.
He believes the current immigrant crisis in Europe might push Germany in this direction, as it offers a palpable example of the immense human suffering which US/NATO intervention in Iraq, Afghanistan, Syria and Lybia has caused. The role that the US and NATO have played in that region is rapidly becoming intellectually and morally untenable.
I notice a lot of hatred against the US and the West…
Since this is an Oil blog, I will refrain from dissecting the various venom here. If I have to choose between living in a US dominated and a Russia controlled world, I will happily remain in the former.
So what are you saying, that you believe the official line about mysteriously vanishing weapons of mass destruction, and that the transporting of an enormous army, navy, and air force 7000 miles away to destroy a country scarcely known even to the educated American, was all about “freedom”?
I find the Russian production numbers eminently believable. In particular, they report a long, steady decline in natural gas production, which is invariably ascribed to “market conditions”, no matter what the market is doing. Their production no longer has any seasonal variation, which leads me to believe they are out of unused capacity.
I believe finding an excuse other than declining Russian production for not supplying Ukraine and the rest of Eastern Europe with natural gas to be a significant contributing factor in the invasion of Ukraine, although it is one secondary to historical geopolitics.
EU natural gas storage as a percentage of capacity is now at a record low for this time of year. This would be of significant concern, were there not a glut of LNG while the EU has ample unused LNG import capacity.
I really can’t figure out if there’s something fundamental gone wrong with the Yamal project in general. It’s probably just general corruption in Gazprom and politically-directed obsession with pipes over production which has delayed natural gas production there, but I can’t help getting this sneaking suspicion that when they started going into production, they may have melted through the methane hydrate cap on their fields, leading to this.
All you said is absolutely wrong. If there is sufficient external demand, Russia can easily increase natural gas production by 100 bcm.
Cheap Russian Gas Tempts EU Buyers as LNG Import Growth Stalls
http://www.bloomberg.com/news/articles/2015-09-09/cheap-russian-gas-tempts-eu-buyers-as-lng-import-growth-stalls
• LNG imports into region fall for a third month in August
• Russian pipeline gas flows increase by 20% in August
Europe lowered purchases of liquefied natural gas for a third month in August as buyers boosted purchases of oil-linked fuel through pipelines from Russia.
LNG imports by 10 nations in the region that receive the tanker-delivered fuel dropped 3.4 percent from a year earlier in August, after reaching a two-year high in March, according to data from Genscape Inc. Russian pipeline supplies soared about 20 percent from a year earlier in August, remaining at the highest level this year, tracking declining crude prices, according to data from Gazprom PJSC, the world’s biggest gas producer.
Europe, which imports as much as 70 percent of its gas needs, has increased shipments from Russia as contract prices declined because they follow crude with several months delay.
Russian exports to Europe, excluding the Baltic states and including Turkey, were at 14.3 billion cubic meters in August, unchanged from the previous month, and up from 11.5 billion cubic meters in the same month a year earlier, according to data from Gazprom and the Russian Energy Ministry’s CDU-TEK unit.
Gazprom’s monthly supplies to Europe, excluding the Baltic states, including Turkey
Source: Gazprom, CDU-TEK, Bloomberg
Maximum production keeps going down year after year. The obvious response is to switch the seasonality of exports, so that they now export now more in summer, when after all they have plenty of gas available. If you want to convince me that they aren’t producing flat out, show a jump in exports during winter relative to 2014.
Geh, spam filter yet again.
I don’t dispute that they have very large fields in the Yamal Peninsula which one would think they ought to be able to produce very cheaply and in very large volumes. What I can’t find is any evidence that this has actually yet occurred.
If Russia has ample low cost opportunities, why are they drilling in the arctic?
In Canada’s prairies, crude slump puts first oil patch in reverse
LLOYDMINSTER, Canada (Reuters) – Amid the corn and canola fields of eastern Saskatchewan, oil foreman Dwayne Roy is doing what Saudi Arabia and fellow OPEC producers are loath to do: shutting the taps on active wells.
Hi AlexS,
Your link to Art Berman’s latest article on LTO capex and opex is excellent, I am re-posting it here in case others missed it.
http://oilprice.com/Energy/Crude-Oil/The-Biggest-Red-Herring-In-US-Shale.html
In other words, although the barrels produced per rig is increasing, the barrels per average producing well is decreasing (Figure 1).
Note that Berman’s chart posted below is also a bit of a red herring as the important metric is the productivity of new wells rather than all wells. The 6 month cumulative productivity of new wells in the Bakken has remained relatively constant for the past year or two (possibly increasing a little), the average productivity of all wells has fallen because the completion rate has fallen since last December.
The data Berman gives on capex, opex, free cash flow, and net margin is excellent however.
Fig 1 below
Dennis. I agree with you. Berman hits the nail on the head regarding shale economics.
They are losing big time at $30s-40s oil and sub $3 natural gas. 10Q and 10K review proves it.
Hope this split works. Maybe will encourage some oil an gas interested people to come back.
Shallow,
I’m still here. Just busy with some personal stuff. Berman article was excellent. Zero Hedge even picked up on it.
Kemp at Reuters has something well worth reading:
http://uk.reuters.com/article/2015/09/08/usa-crude-storage-kemp-idUKL5N11E2YE20150908
But.
Been about 14 months X 30 = 420 days since price stated to fall. The alleged oversupply is 2 mbpd. That’s 840 million barrels, folks, well beyond the numbers of storage capacity spoken of in the article.
So it looks more like a bit over a million per day. If this is the case, a relatively minor disruption (KSA/Yemen, Nigeria, Irak etc) would have quite a strong effect.
I believe that oil has one more leg down in the next weeks to about 31 which will bring all kind of stories of bankruptcy.
Or maybe there is no oversupply and never was.
Hi Watcher,
And your explanation for the fall in the oil price is…
That’s not how the world works. Supply and demand is asserted. The burden of proof is on it. I don’t have to find the real murderer.
This link is to an Oxford think tank specializing in energy and resources. I presume Watcher has heard of Oxford and maybe even a few of the scientific giants who over the centuries made their professional home there.
It is rated by the University of Pennsylvania as THE best resource and energy think tank in the world the last couple of years. In a minute I will be back with a quote from one of their publications concerning the explanation for the price of oil.
Here is the summary. The actual post is pretty big but it is free to dowload for anybody interested.
Oxford Institute for Energy Studies > Publications > Presentations > Energy Economics > Global Oil Markets – Current Developments and Future Prospects
Published: 17th July 2015 | By: Bassam Fattouh
In this presentation, given at the Bank of England, Bassam Fattouh looks at current developments in the oil market and explores some short and medium term prospects and concludes with the following observations:
• It is important to be clear about causality; it is supply and demand imbalances that cause stocks to rise and for the shape of the curve to switch to contango.
• High levels of stocks will continue to put downward pressure on the oil price and on time spreads. Until stocks are drawn-down, any potential price recovery will be capped.
• Most pressure will be felt on light sweet crudes and on the Brent structure given that the North Atlantic (ex-US) has become the clearing destination for light sweet cargoes.
• Saudi oil policy is not constant and Saudi cuts should not be excluded but the bar to implement the cut has risen. Saudi Arabia output policy has become less flexible both on the upside and the downside and its signaling power has reduced.
• The perception of the loss of supply feedback to clear markets affects market sentiment, increasing volatility and increasing the risk premium in investment in energy projects.
• Clearing excess supplies through supply and demand adjustment to lower prices is subject to uncertainty and lags.
• So far demand growth has done most of the work, though it has not been strong enough to absorb the entire glut.
• The supply response is yet to come, but global supply has become more varied and the nature of the investment cycle has changed – there are three investment cycles being superimposed on each other: The US shale cycle; the non-OPEC ex- US cycle; and the OPEC/Middle East cycle. The outcome of these combined investment cycles on output is yet to be seen.
• A key question remains: If non-OPEC outside the US falters and OPEC investment does not materialise, can US shale fill the projected gap?
Reading this sort of report leaves ME at least not doubting at ALL that supply and consumption and price are determined by market forces.
The typical user of the word demand almost always uses it improperly in the technical sense of the theory of supply and demand.
It is as a matter of definition an incontestable FACT that DEMAND CANNOT be different from production ( plus or minus any product going into or out of storage.) at any given instant.
Demand properly defined is a FUNCTION that tells us how much end users will buy at a given price. It is NOT a fixed quantity or what the market ”wants”. It is how much the market will TAKE at any given price at any given moment.
Hence the amount or quantity being USED ( plus or minus storage ) at any given moment IS the measure of demand at that moment.
Except for oil going into storage, all the oil being produced is being used at at the current price. PERIOD. All the talk about excess supply and weak demand is simply and purely BULLSHIT smoke and mirrors or worse , ignorance on the part of people who misuse the proper definitions and this misuse contributes mightily to confusion such as Watcher strews right and left.
The oil industry plus the biofuels industry is for now simply supplying so much liquid fuel that the end users just do not WANT it all at the prices prevailing a year or more ago. The end users will buy it, though, if the price is low enough.
You can feed milk to the cat if the price of it is low enough.
My grandparents used to feed some to the pigs when the price of it got down close to nothing at the farm gate.
PRICE can be manipulated thru controlling supply or by rationing and consumption can be manipulated by taxes, substitution of other products, etc.
But in the end there is NOTHING wrong with the basic economic theory of supply and demand.
In a minute I will come back and post the link to the Ü PENN that has that universities rankings of think tanks.
Any body doing research that uses think tank publications should book mark this site.
Hi Watcher,
In science if you want to replace a theory that most agree is correct, you displace it with a better theory. You have no alternative hypothesis. What determines the oil price,
Albus Dumbledore?
Florian,
What do you think will drive oil to $31 a barrel? MSM is starting to point out that below $50 is unsustainable. Hedge funds still have a big short position. What do you see driving prices a further 33% downward?
Hi Richard,
I would love to hear it as well. Maybe Florian subscribes to Watcher’s theory of markets, supply and demand don’t matter (or perhaps do not exist) and price is determined by imaginary forces that exist (or perhaps not) only in someone’s imagination.
There is no spoon … 🙂
I may have to move this to the non-oil thread as we will soon be on to economics and philosophy, rather than oil prices.
Dennis,
I’m just curious. I have seen totally negative coverage in the media for months now. Oil is going to $20, oil is going to $10. Most of this from the folks who predicted $200 not to long ago. I understand some of the negatives are driven by a desire to enhance short positions. I don’t think we’re going above $70 for a while, largely because of probable increases in production by shale players. If we do go above that level I wouldn’t expect it to stay. Even so I’m uncomfortable predicting prices.
I just asked Florian because I’m curious what her thoughts are. Or is she parroting some article or analyst?
I think that another report of presumably high inventory, production or stagnant demand plus some companies seeking protection under chapter 11 will lead to lower oil prices. Mind you, it will only be for a short time until gravity reasserts itself.
If we read many reports about oil companies going bankrupt oil prices will increase.
A note in this week’s Barrons says that Steve Briese is predicting $20 in his Bullish Review of Commodity Insiders. He is saying that there will be a short term move to $55 because the “smart money” has bet on that direction. He does not see follow through above that point. The $20 capitulation low is supposed to happen after the move up. I will be astonished if this happens. It is somewhat interesting that people would imagine that a prediction of this sort is reasonable.
Hi Don,
I am usually wrong on oil prices. Perhaps the low price scenario is that oil demand remains stagnant and LTO output remains flat along with OPEC output. If both of those are correct (I don’t believe that they are) then eventually the World runs out of storage space and oil prices crash.
The more likely scenario is that LTO output falls (if oil prices hold steady or fall lower) and that this will balance supply and demand, eventually LTO supply will drop to a level that allows the oil price to rise.
The actual price level will depend on how quickly LTO output falls, if it falls slowly prices may drop to $40/b until the drop in LTO output balances the oil market.
Note that there will probably be lower output from Canada and the North Sea as well.
I was somewhat surprised:
https://au.news.yahoo.com/world/a/29460370/north-sea-oil-output-to-reach-two-year-high-in-october/
It even says in the article that the North Sea is in decline, but output is rising.
They are estimating production from tanker loads lifted. Some months get an extra tanker load. It’s like having a five paycheck month.
Imagine that. Up is down.
re oil at $20 per barrel
If someone has the chance, please ask these fellows with superlow price predictions – “in order to get to $20 per barrel, what number did you use for global production, and what number did you use for global demand?” Or did you just pull something out of an orifice? I would be very curious to hear what they say.
I’m the one that posted the $20 prediction from the Barrons note and frankly I like your orifice theory. I sincerely doubt that it will happen. I think Dennis has a much more plausible scenario.
From Kemps’ very interesting Reuters article:
It’s interesting that C+C storage at refineries is actually down slightly since 2004, and one can’t help but wonder if condensate makes up quite a bit of the C+C non-refinery storage.
Incidentally, reportedly the bulk of Iran’s floating storage consists of condensate, and they are having difficulties in getting rid of it (I didn’t know that a good deal of Iranian condensate has high sulphur content + other contaminants):
http://www.reuters.com/article/2015/07/29/iran-condensate-idUSL3N1043IU20150729
My comment with normalized global and OPEC C+C, gas and NGL data, with normalized crude and implied condensate data for OPEC:
http://peakoilbarrel.com/jean-laherreres-bakken-update/comment-page-1/#comment-534101
Am i the only one who does not understand the above graph? Why has the production/well dropped this year? I would have thought they were targeting sweet spots and would have at least kept this constant or did the whole collapse of oilprice coincide with the natural peak of most shale oil plays anyway?
daniel,
I’ll take a shot at answering your question.
The reason is decline. With fewer new wells put on line this year, there is not enough new production to offset declines in older wells, so the average for the whole bunch is less per well. That trend should continue unless lots of new wells are added quickly, or the average productivity per new well goes way up, both unlikely IMHO in this current price environment
We aren’t running fast enough and the Red Queen is winning, as predicted. High initial decline rates are brutal and relentless. What intelligent society would go there unless desperately scraping the bottom of the barrel? This is part of what peak looks like, I suspect.
Hope this helps.
Jim
Hi Jim,
Correct, full marks.
Thanks a lot Guys.
I has always assumed we were talking about new wells. The matrix of production/rig is thus even more insane than I have ever thought.
He’s graphing smoothed IP per rig and total production divided by total wells, which is even less relevant. The latter is mostly an indication of well age, and has only been close to stable because with exponential growth, the average well isn’t getting much older. The recent decline of this indicator with a decrease of new wells is completely unsurprising.
Try here, showing around a 15% increase in 2014 and 2015 wells cumulative production increase at 6 months relative to 2013. The effect is a little larger for individual companies, but not all of them switched over at the same time.
That’s it. That’s your huge field new well production increase due to “high grading”. Compare with rigs down 62% y/y and it isn’t hard to guess which way production is heading.
P.S. I seem to have fallen victim yet again to the spam filter, because everyone knows that links mean a post is spam. Release of one copy of my other post would be appreciated.
Blaine there is a gremlin in the software or something, a lot of comments just fail to get posted. It happens to me, it happens to several others who have commented on it happening to them.
Now I save a comment to clipboard and if it doesn’t get thru, I just copy it back and try again. So far I have not had to try more than twice and once is enough almost all the time.
Graphs and stuff like that trip up some of us.
Try again, Ron and Dennis are very easy going and seldom ever censor anything.
I’ve submitted it a few times already. I thought there was some kind of automatic program that dumped it to where an admin could retrieve it, not people censoring the site.
I just lost another comment due to not following my own advice.
Maybe there is something about SOME links that causes the software to reject them.
Hi Blaine,
Some links get caught by the spam filter, not clear why. When there are links in your post, maybe copy and paste to an editor before submitting so you don’t lose your work.
Ron has been busy and I can’t sit in front of the computer 24/7.
I discovered that attaching large images causes a “page not found” error. I have got around that by using Google image search to find thumbnails of the images I want and saving those. I’ve also found a neat little linux command line program that will downsize images as well. Keeping the image sizes below 50kb or so seems to work.
Key point about new wells vs all wells …
With fewer rigs, “all wells” should fall as the group ages.
Line Ledgens Backwards? Also picked up on ZH.
http://www.zerohedge.com/news/2015-09-08/biggest-red-herring-us-shale
I read this article, the guy is pretty good at grinding numbers. He’s only missing a little exposure to the oil field management side, misses some issues that are evident to those of us who have worked the problem for a few decades. But overall he sure is sounder than some of the other article writers we see in these financial publications.
Hell, I forgot to give you a point the zero hedge article missed: when activity gets cut back by 50 % the remaining equipment and personnel are above average. People are much more motivated to work very hard, and management gets much more keen eyed. This improves rig efficiency.
Tom Whipple, ASPO-USA http://peak-oil.org/author/twhipple/
Shallow,
The WSJ has finally caught on to something discussed a few weeks ago here:
http://www.wsj.com/articles/stripper-wells-are-wild-card-in-oil-rout-1441660049
For those who can’t view this article since you must subscribe to view it.
Where US oil output comes from.
June production 9.3 mbpd
Shale 60%
Federal offshore 16%
Stripper wells 11%
other 14%
These numbers were rounded so they don’t equal to exactly 100%
Google seach,
stripper-wells-are-wild-card-in-oil-rout
and you can read the article.
This takes me to the link but I can read only the first few lines.
But copying and pasting the words stripper……….. rout as suggested did take me FIRST to this site:
http://bravogroup.pressly.com/upstreame
It seems to have lots of very good articles that are not behind paywalls and well worth bookmarking..
Farmer,
Great post, particularly the above section with bullet points. I’ll be studying this link for the next few days.
My comments to Florian were to see if she would post a response like yours. Comment boards are full of people stating oil is going to $20 or $10. I even saw a prediction for $8. A lot of these posters are piggybacking the hedge fund shorts and parroting the short spin in the MSM. They can’t tell you why oil is going lower in an articulate argument, it just is. That’s not good enough. Give reasons, it may be something new and unthought of. I wasn’t trying to be sarcastic, merely curious how she came to $31.
I’m getting sick of the short propaganda and shallow arguments that support it. Appreciate your post Farmer.
http://www.rt.com/business/314732-china-oil-contracts-dollar-yuan/
China wants to establish its own yuan-denominated crude oil benchmark.
Not only will you be able to directly
1. bet on relative cross currency moves vs the yuan,
2. bet on future world prices (i.e. future supply, future demand)
3. bet on investor ‘sentiment’, and you can
4. bet on whether or not the Chinese Government will intervene in the futures contracts market…
It’s HIM!
I have no crystal ball, just trying to put the dots together. The oil market has IMO gotten so volatile that a few news stories will shift the price one way or the other – to the extreme, disconnected from the actual physical situation. I am not short – quite the opposite: I am waiting for the bottom to load the boat with quality stocks.
Florian,
I agree on the volatility and the ability of the news to drive price. Wasn’t being sarcastic, just interested in your reasoning.
Florian,
Sorry about referring to you as her. Won’t happen again.
Richard Wrote:
” They can’t tell you why oil is going lower in an articulate argument, it just is. That’s not good enough. Give reasons, it may be something new and unthought of. ”
I can give a reason why Oil “might” see new lows this year: Further economic downturn. There is a chance that if Q3 Corporate earnings are lackluster or dismal, we will see another broad market selloff taking Oil lower with it. There is also a significant chance of a Junk Bond Bubble Pop this fall.I don’t think Oil could go into the twenties or Tens, but perhaps into the high to mid thirties.
At lot of companies made substantial layoff announcements this summer including Tech, Food, Healthcare, Gov’t, Education, Banking, and of course Energy. Which indicates Q3 earnings won’t be smelling like roses.
The short term price of Oil depends on Central bank action in the next 30 to 45 days. If the all start printing more, then Oil will make a quick rebound. If they tighten (Fed Rate hike), or let the markets correct, then we’ll see Oil fall.
Techguy,
Thanks for the comments. I agree that your points can force oil lower. As the market is moving largely on emotional rather than substantive aspects, I can see a test of the upper to middle 30’s and wouldn’t be surprised. A few bad days on economic issues could do it. That said, I can also see the shorts getting spooked and bolting for the exits.
And don’t forget asteroids. Or a nuclear holocaust. There are many unpredictable things which could happen.
The thing that people are missing is that over the long term oil output cannot be sustained at $30/b.
Barring very unlikely scenarios, such as a total collapse of civilization by 2018, oil demand is not going to fall to 50 Mb/d any time soon. Unless that happens any fall in oil prices to under $40/b will be very short lived(less than 3 months). End of story.
Richard The longer these low crude prices continue the more I respect the fellas that predicted this back in 2011 http://www.thehillsgroup.org/index.html
Even a broken clock is correct twice per day. The Hillsgroup stuff is dependent on assuming that value is determined by the energy content of a product.
If you are subscribe to the labor theory of value, this is an “energy” theory of value. Piero Sraffa showed long ago that any good can be used as a measuring stick for all other goods. So we could use gold, silver, labor, energy, bananas, sand, you get the idea, the choice is arbitrary.
That is the reason objective theories of value don’t work and modern economics uses a subjective theory of value based on consumer preferences where consumers maximize their marginal utility. This gives us the demand curve when we add together the demand of all consumers. On the supply side we have businesses maximizing their profits by equating marginal revenue with marginal costs, when all of these individual supply curves are added together we get the market supply. The price is determined by the intersection of these two functions where the quantity supplied is equal to the quantity demanded.
Well I certainly don’t want to defend the Hills Group, whose analysis I consider to be proundly flawed.
But all theories of value which have been posited so far are riddled with empirical problems and conceptual knots.
The postclassical “price” or “utility” theory that you and the the orthodox, neo-classical economists have latched onto — and proselytized as sure truth — is no exception.
As Robert L. Heilbroner pointed out, the price or utility theory of value “is much in tune with the conservative ideology of our time, and indeed helps to create and support that ideology.”
He adds that the “originators of postclassical utility theory were undoubtedly seeking a less ‘subversive’ approach to value” than Adam Smith’s labor theory, at least as they understood it.
In conclusion, he says:
From a view that sees utilities as the fundamental and irreducible building blocks of price, gross national product is a meaningless concept, the “summation” of individual experiences of pleasure and pain. This has no more validity than the summation of the enjoyment of an audience at a concert.”
–Robert L. Heilbroner, “The Problem of Value in the Constitution of Economic Thought”
https://epay.newschool.edu/C21120_ustores/web/product_detail.jsp?PRODUCTID=1790
Hi Glenn,
An alternative hypothesis is …? If you are going to throw out a theory a replacement is needed, you can use the labor theory of value if you wish, but the choice of labor is entirely arbitrary, we could just as well have a capital theory of value and turn Marxian theory upside down and go on about the exploitation of those poor capitalists.
I think the choice of utility is based on the observation that everyone does not place the same value on a good, that value is subjective by nature.
There are definitely problems with Walrasian theory, but the subjective nature of the value theory is pretty far down the list.
Amongst the problems are the failure of labor markets to clear and lack of investment spending during recessions, problems addressed by Keynes which many economists have discarded.
Call me old fashioned but the neoclassical synthesis of Paul Samuelson and others, though far from perfect, is better than the market fundamentalism that passes for economics in many places today.
Perhaps it would help to consider money simply a medium of exchange, rather than as a measurement of “value”.
If we take that point of view, then we’ll simply consider concepts like GDP as a very, very approximate correlate to value, not a measurement of it.
Dennis,
Heilbroner in the article I linked above lists the various theories of value which have been articulated, in historical order, to date. They are:
1) Normative theory of value,
2) Adam Smith’s labor value of money,
3) Ricardo’s cost of production theory of value,
4) Marxian theory of value, and
5) The utility or price theory of money of today’s orthodox, neoclassical economists
As he explains, they are all riddled with empirical problems and conceptual knots, but concludes that “the serving up of normative goals disguised as positive statements is an ancient failing of all social science for which no remendy has yet been found.”
Nick,
Try convincing people that money has no value, or that it ought to have no value, and see how far you get with that one.
Try convincing people that money has no value
That’s not what I said: it’s a medium of exchange, so it’s very valuable…as something to exchange for something else.
But as a larger measure of cosmic “value”? Not so much.
Any Buddhist can tell you that: money is very useful, as long as you don’t get attached to it.
Hi Glenn,
The Ricardian and Marxian theories of value are one in the same, the labor theory of value is an objective theory of value. There is no objective theory of value in neoclassical economics, in a sense there is no theory of value at all. There is a market price for a good that serves to clear the market where quantity demanded is the same as the quantity supplied. Value doesn’t really enter into it. As a consumer I see the price of a good and I am either willing to pay that price or not depending on how I value the good which may be different from other consumers. Price does not equal value if I decide to make a purchase, my subjective valuation of a good simply has to be greater than or equal to any alternative purchase I might make with that money.
I agree there are many problems with neoclassical theory, for example it is not explained how a market clearing price is discovered. Walras posited an auctioneer that could determine a market clearing price.
As in The Matrix, there is no auctioneer.
Dennis,
I’m familiar with the axioms and received knowledge of neoclassical economics and other positivist schools of thought. Nevertheless, human beings rarely engage in value-free behavior.
That is, at least, if we are to believe what the new revolution in brain imaging is telling us.
These findings suggest that emotion plays a bigger role than the cognitive developmentalists had given it, Jonathan Haidt concludes.
The new technology of fMRI can be used to study rationality, which shows that rationality is “crucially dependent on the proper functioning of emotional circuits in the prefrontal cortex.”
“We have affectively-valenced intuitive reactions to almost everything,” Haidt explains. “Reasoning by its very nature is slow, playing out in seconds.”
“Studies of everyday reasoning show that we ususally use reason to search for evidence to support our initial judgment, which was made in milliseconds.”
“The basic idea is that we did not evolve language and reasoning because they helped us to find truth,” Haid concludes; “we evololved these skills because they were useful to their bearers, and among their greatest benefits were reputation managment and manipulation.”
http://edge.org/3rd_culture/haidt07/haidt07_index.html
The Hill Group tries to dazzle with words like entropy and first and second laws of thermodynamics as a cause of oil price decline. Shortonoil is a member of this group and publishes on the peakoil blog. Excerpts:
http://peakoil.com/
shortonoil on Sun, 26th Oct 2014 8:10 am
“And analysts believe the price could fall to as low as $60 a barrel.”We hate to inform these analysts but the price of oil is falling toward $0.00/barrel. That will occur sometime in the 2030-2035 time frame. This is happening because the world’s petroleum supply is depleting, and we are now using the last 25% of the total reserve that is worth extracting. The price of petroleum can not exceed the value of the energy it supplies. The energy it supplies is declining as the energy to produce it is increasing.”
I thought that if a vital product gets rarer and rares then the price goes up. What will happen in 15 years with the 2-3 Billion cars with an oil price of $0.00 as shortonoil predict?
The pharma industry does not care if the oil price would go up to $1000 if the use of one barrel for medicine, cosmetics, etc. generates a multiple of that price. Shortonoil is just talking about the energy used in production and the energy gained in burning.
shortonoil on Thu, 30th Oct 2014 12:08 pm:
Our model projects that the 2015 price of crude will be in the $76 to $66 /barrel range. Drilling in shale at those price levels will certainly slow. With 70% per year decline rates, shale production which accounts for less than 4% of world production, will decline rapidly.
shortonoil on Sun, 2nd Nov 2014 9:30 am :
…. we are pasted Peak. But the reason we are pasted Peak is not because of a supply constraint; there still remains an immense amount of liquid hydrocarbons in the earth’s crust. We are past Peak because it is no longer economically feasible to extract those hydrocarbons. The recent downturn in crude prices is not a coincidence; petroleum’s ability to pay for its own extraction is declining. We have reached the point where the energy provided to the general economy has become insufficient to pay for what is used. Over the next five years petroleum prices will decline dramatically.
shortonoil on Tue, 4th Nov 2014 8:07 am:
Our model indicates that $76/barrel is about the bottom for this year.
shortonoil on Fri, 7th Nov 2014 8:16 am:
Our model puts WTI prices at:
2012….$104.60
2013……96.20
2014……87.40
2015……77.30
2016……65.90
2017……54.20
2018……41.20
2019……26.90
2016 looks like a pretty good guess.
nNgass,
Methinks you may not follow all of their logic on entropy. They do play a fool’s game in predicting oil prices.
The mainstream economic concepts of rarity and increasing price to infinity probably do not apply in the near future, if one grasps the absolutely essential nature of oil to nearly everything in modern society. Unless some kind of alternative makes energy available in the quality, quantity, portability, and suitable low cost of oil, the modern society may have drastically reduced demand for oil.
The going to zero is a trend line, I think, an indication of long term interaction of several factors. I wouldn’t take it as a serious prediction of oil prices at a specific date.
I would be interested in your thoughts on entropy, and the energy cost of obtaining energy, and how you think our modern society will cope with diminishing returns on energy as we grow our population.
It is easy to criticize. the challenge is to be constructive about it. What do you think the reality is since you say theirs is all wrong? What will happen to demand for oil as it gets too costly for modern society to afford?
Your comments are usually interesting and thoughtful. I’m interested in your constructive thoughts as to why their thinking is wrong. What will save us from the box of diminishing returns?
And please spare us a wind and solar song and dance. That belongs on the other thread.
Just curious…
Thanks in advance.
Jim
Unless some kind of alternative makes energy available in the quality, quantity, portability, and suitable low cost of oil
EVs are cheaper and better. They’ll run on coal and gas generated power: none of that “non-oil” wind and solar stuff is needed.
Seriously: an EV costs about 4 cents per mile: fuel would need to be at $2, even for a Prius, to match that. And, of course, a Prius is a partial electric.
If this seems like the wrong post to discuss this, then we can take it over to the “non-oil” post for more detail.
But, you asked the question. Want to know what the primary substitute is, that’s it: EVs.
“I would be interested in your thoughts on entropy, and the energy cost of obtaining energy, and how you think our modern society will cope with diminishing returns on energy as we grow our population.
It is easy to criticize. the challenge is to be constructive about it. What do you think the reality is since you say theirs is all wrong? What will happen to demand for oil as it gets too costly for modern society to afford?”
this should be it’s own posting, but I bet you get some of that song and dance
Hi Jim,
There are two places where the Hillsgroup analysis falls down.
An analysis of the entropy of a system has to be very careful about the system boundry if the Second Law of Thermodynamics is used.
The Hills Group draws a boundry around the petroleum supply system, and ignores energy inputs into that system from coal, hydroelectric and other forms of energy. As long at the energy returned on energy invested (EROEI) of the entire economic system is greater than one (including any thermal and frictional losses in converting energy into work), then the system is viable.
The second mistake is to assume that the value of a good is determined by its exergy (aka net energy). Without realizing it the Hillsgroup creates an “energy” theory of value. This is the second major mistake.
There is no viable objective theory of value because the choice of measuring stick is arbitrary. We could follow Adam Smith, David Ricardo, and Karl Marx by using labor as the source of value, but we could just as easily use gold, iron, sand, or energy, the choice is arbitrary.
Modern economists recognize that there is no objective way to place a value on a good.
Every individual has a different view of how much a good is worth to them. Value is subjective, not objective. The price of a barrel of oil does not represent some objective value, it is simply the amount of money a buyer and seller are willing to exchange so that the oil becomes the property of the buyer. The each buyer and seller takes the price as a given determined by the market and in fact the seller might be willing to sell for half the price and the buyer might be willing to pay two times the current price, but generally buyers are perfectly willing to pay less for a good than it is worth to them and a seller is also willing to sell a good for more than its cost of production (including the expected return on investment).
Whether a barrel of oil is produced has nothing to do with its net energy, it has everything to do with if it can be produced profitably. Oil is produced to make money, not energy.
Dennis,
The Hills group is so loopy that I haven’t been willing to waste the time required to figure it out.
But, we probably shouldn’t grant their premise that net energy has declined dramatically.
Do they provide evidence for that??
.
Dennis Coyne said:
Whether a barrel of oil is produced has nothing to do with its net energy, it has everything to do with if it can be produced profitably.
Hum.
So how does the utility theory of value explain the attached graph?
During FYs 2011, 2012, and 2013 the top fifty largest oil and gas producers in the United States lost an average of $10 per every domestic boe they produced.
And that was with the price of crude oil hovering around $100 per barrel.
Something has gone terribly awry with the utility theory of value.
http://www.ey.com/Publication/vwLUAssets/EY-US-upstream-costs-prices-and-the-unconventional-treadmill/$FILE/EY-US-upstream-costs-prices-and-the-unconventional-treadmill.pdf
,
Hi Glenn,
Neoclassical economics does not have a value theory. The assumption that one is needed is false. Price is not equal to value.
Value is subjective not objective.
Companies can produce at a loss, it is their choice, eventually they become profitable or they become bankrupt.
I am reluctant to chip in here but, if the supply side guys will hear me out I have a idea. There is no technology in existence at the moment that will allow long distance air travel using electricity. Therefore, the airline industry is an example where oil is required or it ceases to function. Electricity is used to pump oil out of the ground and I suppose ultimately, could be (is?) used to run the motors on drilling rigs.
There is a situation that exists in Germany during the summer months when electricity prices are driven to very low levels, primarily due to high levels of solar pv production. What is happening is that Germany exports electricity at these times because, their law requires that renewable energy be given priority access to the grid and most baseload plants cannot readily adjust their output to suit renewables.
Turning to the US a somewhat similar issue may exist. From Wikipedia, “North Dakota is a leading U.S. state in wind power generation, producing 6.34 billion kilowatt-hours, 17.5 percent of all in state generated electricity in 2014.[1] As of the end of 2014, 1,886 megawatts (MW) of generation capacity had been installed for wind power in North Dakota.[2] Additional capacity is limited by transmission line constraints. Completion of a transmission line from Fargo to central Minnesota in 2015 will alleviate the problem.[3]
Very favorable wind conditions in the state enable wind farms to achieve capacity factors in excess of 40 percent.”
The transmission line problem described in the above quote indicates that, some wind farms in North Dakota have excess capacity and must curtail their production. Ironically, Texas is anther stae with huge wind resources and a massive amount of installed capacity. (New power lines will make Texas the world’s 5th-largest wind power producer ) What if all that excess capacity could be somehow channeled into oil field operations? Would that not, in effect be turning worthless electricity into valuable oil?
I call BS on the Hills Group analysis. There is value in moving stuff around. A ton of yams produced in rural Jamaica will rot before it is eaten by the people in the area it is produced. Oil is what is going to move those yams to markets where there is demand for them and as long as there is money to be made transporting yams or any other good for that matter, the fuel necessary will be valued on the basis of the profits to be made from moving the goods from where they are produced to where they are consumed.
Ships and airplanes also need oil so, even if the energy used to get the oil amounts to ten times the amount of energy contained in the oil, if it is energy that would otherwise have been unused (curtailed for lack of demand) then producing the oil will have been worthwhile
My view of renewables in this scenario, is that they might be able to reduce the amount of oil used to extract oil, in effect increasing the ratio of barrels of oil produced to barrels of oil consumed in production.
While in theory the idea may make sense, I have no idea whether it could work at the scale of say, oil production in North Dakota or Texas.
Islandboy,
That approach makes sense. Some more thoughts:
Most of the liquid fuel inputs to oil production can be electrified: transportation (especially pipelines and rail); refinery process heat; refinery hydrogen; drill and pump motors, etc.
And, of course, liquid fuel can be produced with surplus electricity. The tech is old and proven, though cost competitiveness requires cheap surplus power that doesn’t exist in large quantities today.
°°°°°Dennis Coyne says:
Neoclassical economics does not have a value theory.
Sure neoclassical economics has a theory of value. It’s called the utility or price theory of value.
°°°°°Dennis Coyne says:
Value is subjective not objective.
Not entirely. The human body has certain material needs which have to be met for its functioning and survival, and these are quite objective.
For instance, how much would a gallon of water be worth (value), or would you be willing to pay for it (price), if you were dying of thirst?
°°°°°Dennis Coyne says:
Companies can produce at a loss, it is their choice, eventually they become profitable or they become bankrupt.
But, if we use the the theory of value that the neoclassical economists do, why would any rational actor choose to produce oil at a loss? And now that the price of crude oil hovers around $50 per barrel, the irrationality is even more evident. How could one miss it? And how does producing oil at a loss enhance, much less maximize, the utility of the investors in the companies?
It seems pretty obvious to me that there’s more going on here than rational actors attempting to maximize their utility by producing oil, as neoclassical economists would have us believe.
Glenn,
Surely the simple explanation is that they’re losing money in the short run, but plan/hope to make money in the long run when prices rise?
One often sees comments that LTO companies were cashflow negative when oil was $100, but that doesn’t mean they were losing money on an accrual basis: 80% of their investment was in the first year of each well, while only roughly 30% of the revenue occurred in the first 12 months. As long as production was growing, they could be cashflow negative but be making money in the long run.
Of course…if prices fall, and you haven’t hedged your production, you’re in trouble…
Nick G says on 09/10/2015 at 10:23 am
“Islandboy,
That approach makes sense. Some more thoughts:”
Actually I was hoping some of the guys with boots on the ground could tell me if the idea of substituting electric power for diesel power could ever make it in the real world. I’m thinking along the lines that the steps to develop a well site would include running high power electric lines and maybe setting up an electric road for the trucks as shown in the pic below.
How expensive would oil have to be to justify setting up that kind of infrastructure for each drill site? Are there any circumstances under which such an approach might be considered?
Hi Glenn,
I would need a reference from a neoclassical text that refers to the neoclassical theory of value. You are conflating price and value, they are not the same. Price theory does not equal value theory.
The value of a good is not objective, it is subjective. Yes water is needed by humans in certain quantities, but the value of a gallon of drinkable water is dependent on the availability of water. If you have none it is worth a lot, if you have a lot it is worth very little. In an objective value theory, such as the labor theory of value it would depend on the labor embodied in that water. Many goods are not absolutely necessary and how much they are worth to an individual is entirely a matter of personal preference. The set of personal preferences of consumers taken together gives us the demand function.
Moving to the supply side utility does not enter into the discussion that is strictly on the demand side. There can be many reasons a rational businessman would produce goods at a loss. In an environment such as farming there are often good years and bad years. You plant a crop and hope the prices are high enough at harvest so that you make money. In the good years a smart farmer saves some money, knowing that there will be bad years.
A rational businessman maximizes their profits (and minimizes their losses). In addition when a business is being built, it is often operated at a loss in the anticipation of future profits as costs come down due to economies of scale or improved production processes as a new product and the process of producing it is perfected. In the case of LTO output, a PDF you linked to (Ernst and Young) explains that producers will produce at a loss while building up output. No doubt they are minimizing losses while waiting for oil prices to recover, hoping other producers will go bankrupt before they do. The drop in oil prices was not anticipated by many.
Why produce oil at a loss? Very simple, not producing oil would mean even greater losses, maximizing profits is equivalent to minimizing losses.
Frankly, there are many cases where neoclassical economics does not work well, but for perfectly competitive markets, it works well enough.
For macroeconomics I prefer a Keynesian approach
Dennis,
No, it is the neoclassical economists who conflate price and value. They do this by claiming that a theory of value, distinct from a theory of price, is not necessary. Their theory of price thus becomes one and the same as their theory of value. That’s why their theory of value is called the “price” theory of value.
But as I noted above, this is totally unrealistic. Human beings very rarely engage in value-free behavior. And as Heilbroner notes, “the neglect of value does not remove the issue from economics but only leads to its covert appearance in harmful form.”
You talk about the value of a gallon of water. You say it’s not objective. But I’d say it’s pretty damned objective, at least for someone who wants to live. You don’t drink, you don’t live. It doesn’t get much more objective than that, and the need to drink water is far from a “personal preference.” There’s a hell of a lot more than “personal preferences of consumers” which give us the “demand function.” Included in that “demand function” are one hell of a lot of necessities.
And tell me, what is your theory of price regarding a gallon of water, distinct from your theory of value, and especially to a person dying of thirst? How do you distinguish between price and value?
And I’m wondering, did you read the essay by Robert Heilbroner? He explains all this very clearly and concisely, and his explanation is not plagued with the circular logic of your and the neoclassical economists’ theorizing.
Neoclassical economists remind me of the famous quote from Oscar Wilde: “They know the price of everything, and the value of nothing.”
Dennis,
And I’m wondering about those “perfectly competitive markets”?
Where does one find one of those? In the same place one finds the Garden of Eden, or the immaculate conception?
Hi Glenn,
Find a better model of the economy and get back to me, there are no perfect models especially in social sciences and there is endless debate within the field of economics.
The other thread would be a better place for this discussion or maybe econobrowser if you would like to talk about economics.
Hi Dennis,
Thanks for your thoughtful reply to my post far up thread. I apologize for my long reply, but this isn’t a simple discussion.
I agree with you, for the most part, but I think I see some things that economics doesn’t fully recognize while looking at the trees rather than the whole forest.
I agree that setting model boundaries for EROEI, or EROI for that matter, is challenging. Just like the assumptions you make (some draw much quibbling) for your modelling, the Hills Group seems to have drawn boundaries for the purposes of their work. We can quibble about boundaries and some of the inputs, but I doubt our desired additional inputs will make much difference in the model outcomes. The details will vary, but the end result, not so much.
For the record, I don’t know squat about the Hills Group beyond some links provided here. They may be selling something like most everyone else, but their bigger picture look at the forest makes sense to me, and provides a perspective I’ve not seen elsewhere.
I’m sure it isn’t perfect, and I still say it is a fool’s game to present anything that even looks like an oil price prediction. I didn’t take their stuff as a price prediction anyway. No offense, but I look at your scenarios as what ifs, not as predictions, and don’t take your price projections too seriously, more like your reasoned opinion.
I should add a bit of perspective. In the early 1970s I took Howard (H. T.) Odum’s Systems Ecology course at University of Florida. It was a revelation in thinking for me. We used analog computers to model energy flows in ecosystems, and other systems, too. One of the things Odum and his grad students had developed was a model of global oil systems, with potentiometers to allow adjustment of the many inputs. The thing that boggled our minds was that crude oil inputs were THE driving energy force. Adjustments of the other inputs had surprisingly little effect. The model lucked out and estimated the timing of peak crude about where JBB indicates the plateau began, about the mid Naughties.
I think economics underestimates the significance of crude oil inputs, probably not quite managing to catch the essence of an irreplaceable resource. The inputs the Hills Group don’t address to your satisfaction are most likely noise in the bigger picture. The analysis of diminishing returns is the pearl of wisdom they share.
Jim
Dennis,
I think that if you will look back up this thread, you will see that it was you who initiated the discussion of values. To wit:
http://peakoilbarrel.com/open-thread-oil-and-natural-gas/comment-page-1/#comment-537088
If you believe the discussion of values is taboo for this blog, maybe you should consider not bringing the subject up?
Dennis,
And by the way, there is a “better model of the economy” than the one championed by neoclassical economists and their neoliberal cohort.
It’s called “regulated capitalism.” It worked quite well in the decades following WWII, if demonstrated, proven performance means anything.
David Kotz, who teaches economics at the University of Massachusetts-Amherst, sets out the difference between it and the current reigning neoclassical/neoliberal model in this post:
“Neoliberalism,” or more accurately neoliberal capitalism, is a form of capitalism in which market relations and market forces operate relatively freely and play the predominant role in the economy… Under neoliberalism, non-market institutions – such as the state, trade unions, and corporate bureaucracies – play a limited role. By contrast, in “regulated capitalism” such as prevailed in the post-World War II decades – in the United States and other industrial capitalist economies – states, trade unions, and corporate bureaucracies played a major role in regulating economic activity, confining market forces to a lesser role.
http://triplecrisis.com/understanding-contemporary-capitalism-part-1/
Hi Glenn and Jim,
I will respond in the Non-oil thread.
Link to new discussion below:
http://peakoilbarrel.com/open-thread-non-oil/comment-page-1/#comment-537744
Please see below where formatting is wider.
Dennis, I quote you from here there and leverage a quote or more from BW Hill and/or shortonoil (et al.) as response(s).
We demand objects that don’t fall apart as quickly. Where is the supply? Oh, ir’s more expensive? Really? In the long-run?
That is quite literally a PR company site.
Thanks sawdust for this summery of production data in that article. I usually never open any links. especially to WSJ, Bloomberg’s and the rest, due to high anxiety attack because of their often misleading content if not outright lies 🙂
I would be curious to know why the headline is claiming that stripper wells would be “wild card” when they are smallest segment of production. Based on what? Cost of production? Cost of shutting down the stripper wells? or because of nature of being Mom & Pop type of operations (meaning no access to “some other people’s” money)
Ves,
It may help to keep in mind that headlines are typically not written by the authors of such articles. An editor who has an agenda and advertising to sell usually writes the headline. It drives good authors insane and out of the field of journalism.
Having been trained as an editor in a past life, I expect headlines to be fluff, and not necessarily representative of content. Knowing that most headlines are shameless crap keeps my blood pressure down.
Jim
Ves,
This is probably because stripper wells, in many basins, are currently uneconomic to repair if there is a failure (or possibly to produce at all, depending on your lifting costs). So if you have a field that is 30% stripper wells (I’m categorizing them as any well producing at or below 5 bopd), as many old waterfloods are, you can expect minimally 10-15% of those a year to fail, and you would not be able to bring those back to production in the current price env’t. A field that is 8% decline now goes up to 10-12% decline because a large number of the stripper wells go down and cannot be brought back online. This furthers the overall oil production on top of shale decline.
Thanks MBP.
So repairing the well due to cost inflation (labor + equipment?) in the current oil price environment is the main cause for possible decline in stripper wells. But if we take your number of 10-15% of possible annual failures on the lowest producing wells (below 5bpd) we don’t get anything close to be “wild card” in terms of change of total oil production levels. Yes it is decline, but we are talking about “stripper wells” after all, and that decline I would qualify as part of cost of doing business with these types of wells.
When oil price increases, the rate at which unconventional wells are drilled will increase so that decline will slow or stop. The fields with stripper wells will not have new wells drilled in them, so their increase in decline is permanent. It’s important because the decline that shale wells is built off of is shallow, but will be irreversibly increased if price stays down for too long.
I have seen high water cut wells go to 100 % water after they are shut in for a long period of time. This makes the decision to defer a workover really painful.
“I have seen high water cut wells go to 100 % water after they are shut in for a long period of time”
Question: What is the likely reason for a shut-in well to go to 100% water cut after its restarted? Would it just be a temporary condition? I am thinking the well ports perhaps become surrounded by water at it take a bit for this accumulated water to be drain permitting the level to drop to the oil layer?
Don’t think of it as “ports”, we call them completion zones, sections of the well casing we shot full of holes to connect the rocks to the wellbore.
Many wells produce from heterogeneous zones, which have different properties. Think of it like a layer cake. The higher permeability zones have a tendency to produce 100 % water late in the well life. This means the oil comes from low perm rock.
When the well is shut in the water zone builds up pressure faster than the oil bearing zone. So now we see a pressure imbalance, the water zone feeds into the wellbore, the oil zone absorbs the water. This is what I call self-water flooding.
When the well is restarted it produces 100 % water. If it’s pumped for a period of time the oil production may return. My record was a well which got self flooded by water coming from a coal zone. That darned well produced 100 % water for two weeks. Suddenly it started to produce oil, and it ramped up to 2400 BOPD 10 % water. I was a happy dude when I saw those test results.
Thanks
This article does describe the plight of stripper well owners pretty accurately. Thank you for posting it.
One thing I think we should all be concerned about, 60% of US production is shale. Wow, that’s pretty high.
Now consider stripper producers are struggling to hold production steady at $40 oil. I bet if we could get to $55-60 in the field most could hang on.
But, shale producers need over $70 oil to hold production steady, and 60% of US oil comes shale. Shale is on the whole less economic than 400,000 stripper wells that by their definition don’t make a lot of oil per well.
I have beaten this to death, shale on the whole is less economic than stripper. 60% of US production is shale. Let that sink in.
Only the totally out of touch with reality financing is keeping shale from absolutely crashing and burning.
Stripper, however, is owned by people who have to pay loans back. So reality is setting in with stripper first.
shallow sand,
The numbers in WSJ article are wrong.
60% of US production (as of June) is 5.58mb/d. This apparently includes total Permian production (LTO+conventional) + some other conventional.
In fact, US LTO production is now around 4.5mb/d (see the chart below), less than 50% of total U.S. C+C.
Based on the EIA’s statistics for June:
Alaska accounts for 5.2% of total C+C production
Federal offshore 15.7%
LTO 48,4%
Lower 48 conventional 35,9%
If the share of stripper wells is indeed 11%, Lower 48 conventional ex stripper wells is ~25%
U.S. tight oil production million barrels of oil per day
Source: EIA (Adam Sieminski presentation, July 29, 2015)
AlexS. Thank you for pointing out the error. I should have thought about those numbers rather than taking them as fact.
Permian does get counted as LTO 100% by others also, when it obviously is not.
48.4% is still a high number. US could lose a lot of bopd in a hurry.
Since this is an open thread about oil… I would like to ask the well respected folks on this blog your opinion to a question. I know it is a stab in the dark but everyone’s experience with oil makes your stab better than mine!
Given that we are on the undulating plateau now, when do you all think the decline curves will start to get steep? What year do you think the downward slope of Hubbert’s curve will begin (say declines of more than 4%) for C & C?
Karen,
Only a lack of oil demand due to a Global depression is likely to result in a steep decline in oil output. The decline rate for World C+C output will be 2% or less if there is adequate demand for oil at oil prices that enable oil companies to drill profitably.
In 20 to 30 years under a high oil price environment that does not result in a Global depression we might see a transition to other modes of transportation (EVs, rail, light, rail, busses, etc), this eventually might lead to a lack of demand for oil without an economic crash and possibly a faster decline in C+C output than 2%. I doubt this would happen before 2050 in the absence of a worldwide economic depression.
Hi Karen,
A medium scenario with a World URR of 3400 Gb (2800 Gb of C+C less extra heavy oil and 600 Gb of extra heavy oil sands from Canada and Venezuela). Decline rate remains less than 2% until 2100 (right axis).
See http://oilpeakclimate.blogspot.com/2015/07/oil-shock-models-with-different.html
and chart below.
Dennis,
That’s a very good reply.
And, yet, it illustrates the problem of Oil vs Non-Oil posts: how do you draw the line when so many “Non-Oil” factors (Public Policy, substitutes, efficiency, general economics, etc) affect oil supply & demand?
Hi Nick,
Yes that is true to an extent. There are many comments that solely talk about EVs or sea ice extent that are clearly not about oil or natural gas. We get into discussions about philosophy and evolutionary psychology and really get pretty far off topic in many cases. Those discussions can easily be classified as n0t-oil.
Also one can discuss alternatives without ruffling feathers, people are more likely to listen in that case. Just my experience that when you insult people you tend to turn them off.
comments that solely talk about EVs or sea ice extent that are clearly not about oil or natural gas. We get into discussions about philosophy and evolutionary psychology
Really, things aren’t that clear. EVs are very important for oil demand. Sea ice is an indicator of climate change, and climate change could force public policy changes that sharply reduce oil demand. Psychology discussions are really about whether and how humanity will change public policy to…sharply reduce oil demand.
So…the line between Oil and Non-Oil is very fuzzy. Ron agrees: he’s the one who has repeatedly brought up the questions about alternatives to oil, that brought so many responses.
when you insult people you tend to turn them off.
I agree. I try never to do that. I assume you’re thinking of Mike’s comments: if you look closely, you’ll see that I never insulted Mike. He was simply stressed out by low oil prices, and angry that I was underlining the reality: it’s time to transition away from oil.
Nick,
Valid points. I agree with you and Dennis that it’s difficult, if not impossible to discuss oil and not bring alternatives and policy issues into the discussion. The separate thread does bring focus, but runs the risk of missing that one comment that could really matter. Yes, wading through a lot of climate discussion and minutiae on ev’s gets tiresome to us oil folks sometimes but I think it’s a price to be paid. We are discussing peak oil here.
In regards to Mike, you don’t see some of your comments as insulting. He did. I think he felt that your comments about oil being a filthy habit were aimed not only at the business, but at those who pursue it as well. Only Mike really knows.
Frustrations aside, all views are important. Particularly when you’re dealing with a subject as complex and important as this one. I’m glad some of you “ev” guys are on this thread too.
Hi Richard,
I agree a little, this is just a trial to see how it works.
To be honest Ron just let me put this up and it is not likely to continue as I didn’t get his explicit approval for the two thread idea.
I think he would tend to agree with Nick’s view about not separating stuff. That is the last I will say as it belongs on the other thread, (if I were to follow my own rules).
The reason Nick wants to force the issue is he would rather see things not change.
I would rather that we not piss off the oil guys, which makes the site worth visiting.
If Nick would like to have an audience he should not insult people and should learn to recognize when he is insulting as in “it’s a dirty, nasty business…”, when referring to someone’s primary endeavor.
Sigh.
I never, ever said “filthy habit”, or “it’s a dirty, nasty business”
Ever.
I did use the phrase “oil is risky, dirty and expensive”. “dirty” in this context referred to pollution. I also said that we were addicted to oil, as have several US presidents including the (kind’ve) oil man George Bush. But, the real reason he was angry was that I said that the oil business was historically not essential (that’s a long discussion…), and that we needed to transition away from it ASAP (and Mike said so). He made up those other phrases, in the middle of being angry.
This is a basic, unavoidable conflict: oil industry guys are not going to be happy to be told that their industry should be phased out ASAP.
Right?
Nick,
My apologies for misquoting you. Yes we need to replace oil. Not a one of us is going to dispute that ultimately. Yes, it hurts to know you’re in an industry that is headed for massive change, and ultimately the history books. I imagine whalers were as difficult as we are sometimes. As I said in my previous post, alternatives are as critical to the peak oil discussion as oil is. Some posts do get well off the discussion. I skim those. I value the posts on the subject other than oil. I learn from them. As far as pissing off the oil people, or the EV people, or the doomsday crowd, oh well. Discussion and the dissemination of knowledge that flows from it is what matters.
Dennis, its a noble effort you are making to draw blurred lines between oil and non oil related issues here on POB; it is not going to work, however, with guys like Nick not willing to honor those lines.
For example, it is perfectly reasonable to suggest that sometimes those lines are “fuzzy,” but not reasonable to say, once again, as though it were a broken record, (Mike) was angry at my (Nick’s) “underlying reality: that its time to transition away from oil.” That is anti-oil rhetoric that is going to piss people off in the oil business. Anyone who does not see that exactly for what it is, an anti-0il “agenda,” needs to have their head examined.
Nicky, you are insulting me now because you don’t think I would be reading your horseshit. I did not “make things up because I was angry,” or because I was “stressed over low oil prices.” Who the hell are you to psycho-analyze me anyway? I can’t speak for anyone else, like you seem to think you can for me, but maybe some people think it is necessary to draw some kind of distinction between analysis of peak oil dynamics and your anti-oil agenda. You can’t draw a distinction, maybe other’s can.
If I had some crayons I draw this in the sidewalk for you, pardnor: there are hundreds of thousands of good men and women working around the clock, around the world, away from their families, often doing dangerous work, so the world can consume 93 million barrels of oil per day with no worries. They are NOT doing that so weenie necks that have never gotten a blister a day in their lives can sit around on their asses criticizing the oil and gas industry, hoping it all ends tomorrow so these men and women have no more jobs and can’t feed their families anymore. Your agenda circumvents a normal “conflict” between someone proud of his industry and someone who wants it to end tomorrow. You wish ill will on others. Ever been to Nigeria, or Iraq, or Mexico? I didn’t think so.
I did say we are transitioning away from oil, yes sir; slowly but surely. I also said that oil cannot end tomorrow, that entire world economies rely on oil and natural gas production and people will starve to death, ASAP, if you get what you want, ASAP.
You insult hard working people that right now, around the world, are being laid off by the tens of thousands. They are afraid they cannot take of their families anymore. For you to want that, to make a point about your climate change/EV/ solar panel sense of “reality,” stinks. Maybe I am the only one who thinks that, so be it. It stinks.
Are we clear now?
Mike
Richard,
Thanks. We agree.
From where I sit Mike, it appears you are indeed high-strung and prone to hurl insults. You let your emotions rule your World when responding to someone who communicates in a calm manner and with the intent of using reason. For you, there is no discussion, only the cage match with the desperation of landing the knockout blow. If you want to make your points in the discussion, your current demeanor presents a formidable self-inflicted obstacle. I can see you’re really upset about this. I honestly think you ought to sit down calmly, take a stress pill and think things over.
There’s no unavoidable conflict.
There is oil and natgas.
There is solar, wind, EVs and global warming.
Done.
Go and sin no more.
What’s the problem here ? If you don’t like what someone has to say, don’t read it. It’s not like anyone here reads everything Mac has to say. Do you ? Well, no one should be reading every comment. Grow up and deal with it ! It’s only a blog.
Dam, get a life or at least a dog
Mike,
Nicks’s “I was underlining the reality: it’s time to transition away from oil” stuck in my craw too.
From Nick’s previous comments, it’s pretty easy to glean that he believes that “to transition away from oil” is going to be a snap.
This is quite a departure from reality, to say the least. Folks like you try to bring him back down to Earth.
Nick’s departure from reality, however, pales in comparison to that of Hal Floyd, whose only rhetological strategy seems to be to attack the messenger.
Thanks, Glen.
Look, I don’t have a job in the oil industry that I am worried about losing, I provide jobs and it is offensive to me for people who cannot see that oil is in every aspect of their lives to want, and continuously rant about waning an immediate end to my industry. Nick knows that cannot happen, what is the point then? The point is to express an anti-oil agenda, even on a peak oil blog, even it appears when some attempt is being made to separate oil and non oil conversations.
I checked in for the first time in a couple of weeks and my name is being used and it appears I have gone to counseling without even knowing about it. I responded. You can’t pop into POB for the first time and rail on me without knowing how long this has gone on.
I don’t expect people to understand how difficult our business is, the fear that so many people have about the well being of their families. You have to be there, knee deep in it, tired and hot and dirty; struggling with payroll, not knowing what happened or why. And what is happening right now has nothing to do with “free enterprise, that’s laughable. I think most people these days are void of empathy. So be it. Gasoline is cheap, that is all they care about.
I have several dogs and a life operating lots of oil wells and trying to keep my employee family together. Please leave me out of this debate, there is no need to use my name, to find clever ways to blame me for expressing anti-oil rhetoric.
Honor that and carry on.
Mike
Mike said:
I don’t expect people to understand how difficult our business is….
You have to be there, knee deep in it, tired and hot and dirty; struggling with payroll, not knowing what happened or why. And what is happening right now has nothing to do with “free enterprise, that’s laughable.
Well it was certainly too difficult a business for me, and that’s the reason I bailed out of it back in the 80s.
I just wasn’t prepared for the huge swings in fortune, from euphoric highs one day to the depths of despair the next. And like you indicate, one has little control over these events, “not knowing what happened or why.”
My comfort zone requires more stability.
And then like you say there’s the thing about having other people’s welfare in your hands. That’s a huge responsibility for any person of good character.
Mike,
Glad to see your comment. I appreciate your perspectives coming from a world I don’t know.
My favorite uncle was a tough character who did not “suffer fools” well, and you remind me of him. He used to say, the world is full of people gobbled up with the dumbass. Some of them waste our time here. Nicky is like someone else’s poorly disciplined and ill-mannered child, best ignored since it isn’t close enough to receive appropriate behavior modification treatment.
Don’t let the bas—ds grind you down. Keep saying your piece. We need to hear your messages from the oil patch, even if the children can’t handle the message.
Jim
I don’t know if it’s worth the attempt, but I’ll give this another try, for the last time, I hope.
Mike: I wasn’t insulting you. I was actually just saying that I didn’t use the inflammatory language that you used, and then others referred to.
I also wasn’t insulting you by describing you as angry. It’s clear that you’re angry, and I don’t blame you for being angry at your situation. I, and many friends and family, have been in the same situation and been angry too. That’s normal.
But, I didn’t create your situation – it’s just the normal boom & bust cycle that many commodities go through. It’s very painful, but it’s not related to the larger discussion of the future of oil, vs alternatives.
And, for the record, I’ve never suggested that we should transition away from oil “immediately”. When I say ASAP, I mean with all due speed: we should be planning for the change, in order to minimize it’s pain.
The current kind of disaster in the oil patch comes from a lack of planning!
I hope that helps put this thing to rest.
Richard,
“The separate thread does bring focus…”
Yes. The other thread is there for detailed discussion of topics with non-oil focus; it isn’t being blocked out or done away with.
Many commenters here have said or suggested that the single thread had become unwieldy. The response we’re seeing on this thread right now suggests that splitting the discussion is welcome to oil hands and to those who come here to learn from them, and that seems appropriate to me on a blog named Peak Oil Barrel. I’d like to see the two-thread format continued.
+1
Jim
DC,
It seems to me that comments about EVs or Arctic sea-ice extent in the context of the dynamics of oil and NG are appropriate for this thread, but comments that simply launch from that dynamic and never look back are not.
I like the two threads, myself. Reading this one today gives a breath of fresh air after going through screen after screen of comments which could be traced back, with effort, to something oil-related, but which could just as well be found on a site that has nothing to do with peak oil.
I mentioned on the last post the need for moderation on the part of all of us who comment here so as not to leave the burden to you and Ron. The initial choice of which of the two threads to place a comment on would be an example, pointing to the value of having two threads.
Yeah, no harm in readers letting Ron know what changes they’d like in the focus of his blog. Still, we should be clear – you’re talking about changes.
Ron is the one who has repeatedly brought up the questions about alternatives to oil, that brought so many responses. He likes talking about a wide range of stuff that are either closely or loosely related to energy. As far as he’s concerned, it’s not off topic.
Nick G,
I’m talking about Dennis Coyne’s experiment, mostly.
As to changes, well, Ron has send quite a few times that he’s so fed up that he’s thinking of dumping the whole thing. That suggests to me that DC’s experiment is worth the attempt.
I don’t remember him saying that, and I’ve been reading things pretty thoroughly. I remember him expressing frustration, but nothing that strong. Do you happen to remember a Post where he said something like that?
Nick G,
Ron has said that a couple of times when arguments and ad-homs have got really heated, most recently in the post US Oil Production Nears Previous Peak, right after Mike said he was leaving the site. The unpleasantness has often been centered around the amount of comment that seems, at best, only slightly related to oil concerns–the kind of thing that inspired Dennis Coyne’s current experiment.
Yeah, I looked back at those comments – I see what you mean. And everybody who’s ever had a blog has felt that way at times.
That’s really the hardest part of running a blog: dealing with people who are fighting.
I think it all boils down to whether your career/livelihood or focus is on the supply side of the oil business or the demand side. For those of us not involved in the prospecting for, extraction of and supply of oil, it is easier to focus on and comment on demand side issues such as, efficiency, alternatives, EVs etc. I try to bring stuff to the attention of folks here that, I think can have an impact on the demand side and being a resident of an island that depends heavily on oil to generate electricity, I view renewables as a significant demand side factor.
Right now, it seems supply issues are the major influence on oil prices so, I am very much interested in what is going on in the Eagle Ford and the Bakken and will continue to read stuff here. The knowledge I have received here has enabled me to contribute comments to news stories about oil in the local newspapers that, are much better informed than the vast majority of comments and the moderators have approved many of them. I have this site and before it, theoildrum.com, to thank for the ability to contribute to the debate in my neck of the woods.
Suck it up, this is how Capitalism works
You know those Socialist French are big into Nuclear
Where I see the discussions getting bogged down are projections about the immediate and long-term futures.
Yes, there are many factors which will affect fossil fuel consumption, but if we go too far out into the future, we’re all just speculating.
I think the oil thread is best confined to current realities and near-term projections.
I’m saying this as someone who is interested in alternative energy technology. But I find that while many of us can find a meeting of the minds on current fossil fuel realities, we are more all over the map after we get past a certain point in time. And that leads to a lot of disagreements that don’t really have to do with gas and oil.
Hi Boomer,
I disagree. First we only know that peak oil will be in the future, we will only be able to agree about when it will occur after it has happened. A site about what has happened in the past would be of little interest to me. The very near term future might be interesting, but it will only be a discussion of peak oil if Ron is correct in his prediction.
Discussion of anything in the future is always speculation, we don’t know what the oil price, output or anything will be tomorrow. On output we don’t even know what it was for the past few months (the data gets revised all the time).
If we go back to the previous version, where we combine topics, I am fine with that. I’m just saying that we seem to be bogged down once we get too far into the future. Now if most people are fine with the disagreements and long threads on those subjects, I’m fine with them too. I read everything here.
But I do understand why some of the oil guys (who do contribute a lot to the discussions) get frustrated and wonder why they should be here.
Hi Boomer,
Yes, I see your point now. I think you are saying charts and discussions which go beyond the near term (I will arbitrarily say 2020) should probably be in the “non-oil” thread. Sometimes people wonder what the “experts” (which I am not) think will happen in the future.
For the most part there are few experts besides Colin Campbell, Jean Laherrere, the USGS and a few other experts that are willing to speculate.
They(the oil experts) usually say nobody knows what will happen in the future and they are 100% correct IMO.
http://seekingalpha.com/article/3493766-crude-oil-the-psychotic-horse-in-a-burning-barn
Got distracted above here is the link to the OXFORD site I mentioned upthread.
http://www.oxfordenergy.org
They do studies on a lot more stuff than just oil.
Here is the link to the University of Pennsylvania site that ranks the credibility of various think tanks.
http://repository.upenn.edu/cgi/viewcontent.cgi?article=1008&context=think_tanks
These links are very useful tools for serious researchers.
In my estimation the only people LESS likely to lie than universities of such long established reputations are the Vestal Virgins- and we don’t seem to be getting any current oil news from that front.
Farmer,
Interesting link, thanks.
Dr. Michelle Foss wrote an interesting paper for Oxford Inst of Energy Studies back in 2011. Kind of ancient history now, but illustrative of her work.
http://www.oxfordenergy.org/2011/12/the-outlook-for-u-s-gas-prices-in-2020-henry-hub-at-3-or-10/
——-
Dr. Foss works for the CES/BEG/UT now…and CES is affiliated (supported by?) the James A. Baker III Inst. for Public Policy (#4 on the energy list).
Info about some of the corporate sponsors of CES from the bakerinstitute.org website:
http://bakerinstitute.org/center-for-energy-studies/membership/
Anyway, you may find her recent cost figures for US dry shale natgas quite surprising. Trying to find out more details, but $8 per MCF? $13 if you wish to cover capital cost?
http://www.beg.utexas.edu/energyecon/thinkcorner/CEE%20producer%20benchmarks%20part%202.pdf
Also from List Above : Deeper Drilldown to Answer the Ultimate Question. What’s LTO Really cost?
—————
Summary
Examination of US shale oil producer breakeven prices: Bakken, Eagle Ford and Permian Basin.
Examination of global oil producer breakeven prices and US efficient shale production marginal costs.
Brief discussion of informational market techniques and the benefits of investor awareness.
————-
Who do you Trust? Kunstler’s Theorists OR Mauldin’s Believers
http://seekingalpha.com/article/3475906-oil-shale-production-breakeven-and-marginal-costs-moving-the-goalposts?li_source=LI&li_medium=liftigniter-widget&li_campaign=related-
There is no generally accepted definition of the term “break-even” in day to day English. There probably is such a definition in the professional dictionaries used by economists and accountants, and I seem to vaguely remember reading one that took into account ALL costs including opportunity costs etc.
There is a man down the road who has a million bucks tied up in land and equipment and cows who is probably NETTING maybe ten thousand bucks on his actual farming operation. He insists he is making a little money, that he is more than breaking even, and is telling the truth no doubt AS HE SEES IT. But he is only counting his actual expenses related directly to his small herd of beef cows, some hay, a little for the vet, a few bucks paid to a farm hand to keep up the fences and feed for him once in a while etc.
He is in actuality losing his shirt because his property taxes alone are in excess of his supposed net.
Another guy has a building that sat empty for a while rented out as a junk shop, which pays his property tax bill and insurance bill at least. He IS netting a few bucks on an annual basis- but he understands that if he needs a new roof next year he will be in the hole for years at his current rental rate. So – he in his own words says he is better than breaking even in the short term but losing in the long term.
When the Interstate was built here some years ago, a lot of years now, a bunch of businesses on the old highway went broke in a hurry- businesses that were dependent on travelers.
But nearly all the buildings thus emptied have been sold at much reduced prices and the present day owners are obviously mostly making a go.
The previous owners couldn’t “break even” but the new owners, with a third or a quarter as much money borrowed to pay for their new locations, are doing ok.
My Dad made a few bucks – on an annual basis- the last few years we farmed- on average. But long term we were losing our shirts big time, with most of the equipment past due for replacement and the trees getting old and productivity dropping.
“Break even” is a Humpty Dumpty word, it means whatever the user of it intends it to mean.
NORTH SEA OIL INDUSTRY RISKS COLLAPSE AS ENERGY PRICES FALL
http://www.rt.com/business/314614-oil-sector-shutdown-uk/
“Samuel, who’s in charge of reviving the sector, warned of a possible “domino effect”, when one company leaves an area of the North Sea, and others have to share more of the cost of maintaining infrastructure. While in some fields several companies share the cost of pipelines and processing plants, it will be impossible for them to bear those costs if one or more of them leave.”
U.K. North Sea Oil Industry Warns Investment May Fall 80% to ’17
September 9, 2015 —
http://www.bloomberg.com/news/articles/2015-09-08/u-k-north-sea-oil-industry-warns-investment-may-fall-80-to-17
Investment in U.K. North Sea oil and gas projects could drop as much as 80 percent by 2017 as the collapse in oil prices forces the industry to cut back.
Capital investment across the industry of 14.8 billion pounds ($22.8 billion) last year will probably decline by 2 billion to 4 billion pounds annually to 2017, Oil & Gas U.K., an industry lobby group, said in its annual economic report Wednesday.
“This great industry of ours is facing very challenging times,” Deirdre Michie, Oil & Gas U.K.’s chief executive officer, said in a statement. “Exploration for new resources has fallen to its lowest level since the 1970s” and few new projects are gaining approval from “hard-pressed” companies, she said.
The U.K. North Sea is one of the world’s most expensive areas to operate and resources that were first tapped in the 1960s are depleted. Employment supported by the industry has shrunk by 15 percent since last year and the lobby group predicts more reductions.
“Last year, more was spent than was earned from production, a situation which has been exacerbated by the continued fall in commodity prices,” Michie said. “A continued low oil price will inevitably cause companies to reflect on the long-term viability of their assets.”
Cost Reductions
The industry has become more efficient as prices declined, leading to an estimated 22 percent cut in the cost of operating existing assets by the end of next year, the report said. Average operating cost per barrel across all fields will fall from about $26 a barrel this year to $23 by the end of 2016. Brent crude, the regional benchmark, traded at about $48 a barrel Tuesday.
These efforts also resulted in “better output from many existing fields,” Mike Tholen, the industry group’s economic director, said in the statement. “We expect the rate of decline in production from those fields to slow significantly over the next two years.”
Oil output from the North Sea rose in 2014 and is expected to rise again this year, according to the International Energy Agency, as projects approved when prices were above $100 a barrel come online. The current gains are a temporary relief for an industry facing long-term decline and the IEA expects output to fall again in 2016.
=============================================================
North Sea oil areas at ‘serious risk’ of shutdown
Financial Times, September 7, 2015
http://www.ft.com/cms/s/0/46de1262-52e6-11e5-8642-453585f2cfcd.html
There is a “serious and urgent risk” that parts of the North Sea oil industry will be abandoned unless energy companies join forces to become more efficien.
…there could be a “domino effect”, where one company quits an area of the North Sea, leaving others to share more of the cost of maintaining infrastructure. In some fields, for example, several companies share the cost of pipelines and processing plants. If one or more companies leave, others may be unable to bear those costs alone.
In recent months several oil majors have announced their intention to sell off assets in the North Sea as declining production and lower prices take their toll. Shell said in July it would shrink its portfolio in the region, while France’s Total last month offloaded $900m of assets in the area.
… “whole areas of the continental shelf” could be shut down if critical infrastructure is decommissioned too soon.
Looks like India subsidizes oil products about 22%. This is 17.5% of the population of the world with price determined by govt decree.
Pakistan spends between 4-8% GDP on oil and nat gas subsidy. Add 2.5% to the population.
And oh look (from 2010, no change to policy since):
China’s domestic fuel prices are among the lowest in the world, equal to about 61 percent of prices in the United States, 41 percent of Japan, and 28 percent of England. The longer it waits, the more painful it will be when it tries to remove the subsidy.
Let’s see, that’s another 19% of the world population with oil/fuel prices determined largely by gov’t decree.
I believe that sums to 39%. I’ll leave as an exercise for the reader to find the other 11% of population who don’t worship at the altar of oil supply and demand.
BTW sportsfans, before you brand this a backward policy, agricultural and fishing subsidies represent 40% of the EU’s budget.
Chinese gasoline prices are not less than US prices, they are about $3/gallon, in the US the average price is $2.40/gallon. The price is not determined by government decree, there may be some subsidy, but that is just one part of determining the price, all governments subsidize oil to varying degrees, beyond that the price is determined by the market.
India’s gasoline prices, also determined mostly by the market and higher than US gasoline prices at present. there are 3.7854 liters per gallon, Indian price is $3.48/gallon for July 2015.
Global gas prices at
http://www.globalpetrolprices.com/gasoline_prices/
US is less than most nations except OPEC nations due to low taxes.
Oh wait, taxes? Sounds like more govt decree.
You’re again losing any leg to stand on.
Watcher,
There are proximate causes and ultimate causes.
Market fundamentalists don’t like to acknowledge or talk about ultimate causes, because to broach the subject of structural explanations debunks the reigning “free market” mythology.
Furthermore, to admit the extent to which governments intervene to set or influence oil and other energy prices, as well as a great many other non-energy prices, undermines another foundational myth of America’s secular religion — rugged individualism.
James Baldwin said it best. “The tendency has really been,” he said, to dismiss white Americans as “the slightly mad victims of their own brainwashing.”
What always amazes me is that peak oil theory is a dissident theory, and what intrigues about these threads is that, despite the unorthodox nature of peak oil, many, if not most, of the commenters on these threads are hopelessly orthodox when it comes to other areas of their thinking.
Hi Glenn,
I am very familiar with unorthodox economic theories. Taxes and subsidies are handled very nicely by Walrasian Theory. Nobody is claiming that there are no taxes or subsidies or that they should not exist ( I am very far from a market fundamentalist.
What theory do you like, how about an apple theory of value? Old Farmer Mac could get on board with that one 🙂
See my comment above. Here’s the link:
http://peakoilbarrel.com/open-thread-oil-and-natural-gas/comment-page-1/#comment-537106
peak oil theory is a dissident theory
Not so much. There are two parts to PO theory: the idea that oil will decline sooner than the conventional wisdom, and the idea that this decline will have much greater impact than the conventional wisdom.
The first part is just timing. The important part is the second. This idea is an amplification of the conventional wisdom of the oil industry: that oil is essential, and it’s production should be a top priority to be facilitated by whatever help the industry wants and needs.
Hi Watcher,
So these governments have decreed that gasoline prices should increase, based on the charts from trading economics. Why would they choose to make their citizens suffer? Why aren’t these governments overthrown for “decreeing” higher gasoline prices?
You don’t even have a floor.
Since when did Indians pay for gasoline in USD?
Hi Rune,
As there was no 🙂 , I will assume you are serious.
I believe the price paid in Ruppees was converted to US Dollars at market exchange rates. I used the website at the link below
http://www.tradingeconomics.com/india/gasoline-prices
The following website gives current petrol prices in Dehli 61 Ruppees per liter
http://www.mypetrolprice.com/2/Petrol-price-in-Delhi
66 Ruppees/ US Dollar so current price is 0.92 US$/liter at market exchange rates.
How would you suggest we compare US petrol prices to Indian petrol prices?
In the US we pay about 45 Ruppees per liter at market exchange rates.
Petrol is more expensive in India than in the US, contrary to what Watcher claims, and the price of petrol is not decreed by the Indian government, they decide on taxes and subsidies for petrol just like every other nation, but the change in petrol prices is mostly determined by the World oil market.
Dennis,
I was not joking!
It apparently comes as a big surprise on you that Indians pay in Rupee and further that the Rupee has depreciated versus the US dollar.
”In India, currency depreciation explains more, but not all of the disparity between crude and fuel pricing.
Retail gasoline prices in India were cut by 3.2 percent in rupee terms as of Tuesday, taking them down to 61.20 rupees per liter (92.2 U.S. cents), while diesel dropped 1.1 percent to 44.45 rupees.
This takes the decline in gasoline prices to 10.6 percent since September last year, again well short of the halving of crude prices, while diesel fared better, with a 24.6-percent fall.”
http://www.reuters.com/article/2015/09/02/us-column-russell-asia-fuel-idUSKCN0R213E20150902
The chart below showing developments in petroleum prices for Delhi (India) leaves a different impression from what you are peddling.
Hi Rune,
No Rune, I was not surprised at all to learn that India has its own currency, maybe Norway does as well. 🙂 Nor was it a surprise that the Ruppee has depreciated relative to the US dollar. Typically when comparing prices in countries with different currencies, the market exchange rate is used with one of the country’s prices for easy comparison. I found a site with a chart of petrol prices in US Dollars and thought it would be clear.
I did not understand what you were trying to get at as the chart accounts for the depreciation of the Ruppee in US dollars already and matched the chart you posted for petrol prices.
What I was peddling is that the price of petrol in India is not determined by government decree, but is determined by markets. In India’s case it would be a combination of foreign currency markets (which would determine the exchange rate of Ruppees for US Dollars) and the oil market (which would affect the price of petrol).
Do you agree with Watcher? He said:
Looks like India subsidizes oil products about 22%. This is 17.5% of the population of the world with price determined by govt decree.
Full comment at:
http://peakoilbarrel.com/open-thread-oil-and-natural-gas/comment-page-1/#comment-536976
My reading of that comment is that petrol prices worldwide are set by government decree. I do not agree with that proposition.
I made no claim that the exchange rate between the rupee and us dollar is fixed, the chart I posted adjusts the exchange rate at each point in time and pretty much matches your chart. But you can disagree if you wish, while I agree with you.
Unless perhaps you agree with Watcher 🙂
Hi Rune,
I think I see it now. There was a much more substantial increase in the petrol price over the 2008 to 2012 period in Ruppees due to currency depreciation. In June 2008 the exchange rate was 43 RP per 1 USD and in June 2015 the exchange rate was 64 RP per 1 USD. Strangely on your chart this works out to about the same price in USD for June 2008 and June 2015 for Indian petrol at about $1/liter in each case. For US consumers, petrol prices fell from $1.20/l to $0.82/l.
You are correct that I was missing how strongly movements in exchange rates can change fuel prices. I may not be alone among US citizens that think in terms of oil being priced in dollars and miss this foreign exchange effect.
For the Indian living in Dehli petrol has increased in price by 2.9% per year since June 2008 on average, while for the average US citizen petrol prices have fallen by an average of 5% per year from June 2008 to June 2015.
I stand corrected on the trend over time.
It is surprising that if Watcher’s contention that fuel prices are decreed by the Indian government that they would choose to increase the fuel prices for their citizens by 2.9% per year instead of decreasing them by 5% as was the case in the US. Perhaps markets had some influence.
Interesting that you first answer on something you did not understand and end up writing a new post.
I was not commenting on Watcher’s comment!
Why bring it up? Why not stick to the subject.
And India reduced their fuel subsidies in 2015.
http://articles.economictimes.indiatimes.com/2015-01-18/news/58200783_1_fossil-fuel-subsidies-oil-prices-energy-subsidies
Hi Rune,
Yes I did not understand at first the point you were making.
My charts for Chinese and Indian petrol prices were a response to Watcher’s comment that the oil price has nothing to do with supply and demand for oil. Watcher seems to think the oil price is determined by government decree, the chart was intended to show that these two governments seemed to have “decreed” that petrol prices should rise over time.
What I was “peddling” in those two charts was that I disagree with Watcher.
I agree with your point that it would have been better to have posted the charts in Chinese Yuan and Indian Ruppees, admitted my mistake and apologize for offending you.
I will try to be more careful in the future.
I believe that India has eliminated price controls on gasoline. I think they’re thinking about it for diesel, so I’d guess they’re reducing the margin between the market price and the state-controlled price.
Price controls require subsidies to importers & refiners, which have been killing the Indian federal budget.
The Reuter’s article doesn’t take into account fixed costs: it seems to assume that retail prices should drop as quickly as crude prices, which makes little sense.
It is SIMPLEMINDED to argue that supply and demand theory does not work or does not apply simply because a government taxes a commodity at a high rate or subsidizes its sale by paying part of the cost of buying it.
If I give my kid an allowance to subsidize what he earns on his paper route, and he chooses to spend it on sneakers , it has the same effect on the quantity of sneakers made and sold as if he earned the whole amount on the paper route.
Countries that subsidize oil consumption consume more oil due to effectively lowering the price of it to consumers.
Should be easy to prove it then.
Hi Watcher,
Already done. Try reading some economics. When a theory is widely accepted, the way the world of science works is you propose a better theory. On that score you fail. Saying “prove it” convinces no one.
So where’s your proof?
Oil prices since 1970 can be explained very nicely by supply and demand movements. Just one example of many.
The proof is found in any microeconomics textbook. Where is your alternative hypothesis?
to call is economics a science is deeply offensive. i don’t think peons like us are fully aware of what goes on at the cme. for example, when paper oil or gold gaps downward on a several billion $ notional spikedown, who was selling? the cme will never tell us. in fact it only takes $100 million/day of cold hard cash to increase the volume of paper oil by 10%. is that something that goldman sachs and the fed can do? well they admitted to injecting $3B /day into the fixed income market, so why not?
What do those non-industry folks want to learn from the few here that have worked in the business? Are there specific things, outside of adding insight on comments, that people here want to know about? Geology, petroleum engineering, etc?
Hi MBP,
One thing I have asked about in the past is decrease in well productivity as the sweet spots run out of room and wells are drilled in less productive areas. I would expect the EUR of the average new well will gradually decrease as this occurs and if we assume a constant well completion rate (for simplicity) that some maximum rate of decrease in new well EUR might be reached (assuming that wells can continue to be profitably drilled). What annual rate of decrease seems reasonable? In my models for the Bakken and Eagle Ford a reasonable rate seems to be in the range of 5% to 40% depending on the well completion rate (high rate of decrease when more wells are completed each month). You would probably defer to the petroleum engineers, but Fernando never wants to answer this question, nor Mike, maybe you or Richard would have a guess. I know this will vary from field to field, I am just looking for a reasonable range.
Dennis,
My guesses wouldn’t be worth much as the engineering side is my weak point. I’m a geophysicist. Questions on the acquisition of seismic, processing of said seismic, and interpretation of seismic fire away. I’ve been interpreting and supporting drilling for 15 years now. Since I’m a partner in a small company I’ve had to become more strategic and pick up a broader knowledge. I’m also conventional. Unfortunately on a lot of specific land and engineering questions related to unconventional my knowledge isn’t deep. Not to beg off, I just not comfortable that far out on a limb. Sorry Dennis.
Not a problem, most people don’t like to guess. You are not alone, nobody seems to want to do that.
I could answer it here, but I have an idea. Part of the reason the oil guys are hesitant here is that there is a lack or reception to what we say here. I sometimes feel as if what I say as points of knowledge are heavily questioned by people who have no experience. So, what if there was a way for industry people to instill some firsthand knowledge to those here. Even if its a few paragraphs per question (like the one you asked above) in a combined post every once in a while, it allows us to try and teach everyone else something about the industry, and hopefully help with the divide between industry and non-industry people.
I know this is a peak oil blog and I have no idea if that would help, but I’m just trying to help with the divide.
MBP. I’m glad to see you posting again. I’d like to know your views on all facets of the Permian Basin as it seems to still have the most long term potential for oil USA lower 48 onshore.
shallow sand,
In its 2013 Hart Energy DUG Conference presentation, Pioneer Natural Resources included a graphic which shows the progression of oil and gas development in the Permian Basin over the past few years.
file:///C:/Users/Glenn/Downloads/2013-04-03%20Pioneer%20DUG%202013%20Conference%20Presentation.pdf
The first response to the high oil prices (which began in the naughties) was to go back into the old spraberry fields and redrill them on denser spacing. Originally drilled on 160-acre spacing, most operators began a program to infill drill on 40-acre spacing. Some, like David Fasken, even drilled on 20-acre spacing. From a very cursory peek at cumulative production figures, it looks like Faskens’ wells will achieve EURs approaching those wells drilled on forties.
As the graphic shows, recoveries were enhanced by:
1) Changes in Texas Railroad Commission regulations which allowed commingling everything from the Clearfork to the Atoka.
2) Massive frac jobs.
3) Better geology
These factors, combined with the high oil prices, also allowed the area of the play to be greatly expanded.
Then in 2011 the first horizontal shale well was drilled. It looks like the horizontal shale wells have better economics than the old vertical wells completed in conventional reservoirs. Most operators therefore abandoned their vertical drilling programs, and there was a rush to shale. Of course the Permian shale is very new, and much depends on what sort of production tails the shale wells have.
And on this forum I think it goes without saying that neither the vertical wells completed in conventional reservoirs nor the shale wells are economically viable with current oil prices.
The long-term potential of the Perian Basin is not only enhanced by the vast geographical area the oil shales cover, but the height of the shale colunm. In the Balken and Eagle Ford we’re talking in the tens or hundreds of feet, whereas in the Permian Basin we’re talking thousands of feet.
Here’s a graphic of the May 2014 RSP Permian investor presentation. It shows how the various shale zones are stacked one on top of another, like pancakes. I think it was Scott Sheffield who said it’s like having ten Balkens or ten Eagle Fords stacked on top of each other.
And this map from Concho Resources 2014 annual report illustrates the vast geographical area the shales cover.
Besides the Midland Basin there’s the Delaware Basin and the New Mexico shelf.
Now whether “little oil” will manage to hang onto much of this, or will get squeezed out and most of it will get bought up by “big oil” during the current downturn, is an open question.
What does MBP think the URR of the LTO plays in the Permian basin will be? Does 15 Gb sound about right? I am ignoring conventional production and the cumulative production through Dec 2013. The RRC of TX suggests about 29 Gb more oil will be recovered from the Permian basin (I assume this is Texas only) and I am guessing half will be from LTO, maybe another 5 Gb from New Mexico (WAG). It would be interesting to see what a geologist thinks or a petroleum engineer, or a geophysicist.
Price determines everything, so it depends. Are you looking for URR at a certain price, or the technical recoverable oil in the ground?
Assume the AEO Reference case for oil prices is correct.
Oil prices will not remain low forever so the TRR will get us pretty close to the URR (the URR is likely to be about 80% to 90% of the TRR). You can also assume total output from 2011 to 2060, and assume there is no total collapse of civilization between now and 2060 and no financial crises worse than the 2008/2009 crisis between now and 2060.
Thanks MBP,
Hopefully Ron will see your post, it is up to him how this blog is run. I just help out when he is busy if I can.
Oh well, until someone enlightens me I will just keep guessing on EUR decrease.
Note that to make such guesses I pick a number for the number of new wells added each month (170 new wells per month in the ND Bakken/Three Forks) and choose a reasonable number of total wells drilled 38,000 total wells based on NDIC and David Hughes estimates. Then I use the USGS April 2013 Bakken Assessment of 7.4 Gb of undiscovered technically recoverable resources (TRR) for the F50 estimate for all of the US Bakken and 5.8 Gb for North Dakota Bakken/Three Forks. I add proved reserves at the end of 2012 (3.2 Gb) and cumulative production (0.5 Gb) for a minimum estimate of 9.5 Gb for the total TRR. Jean Laherrere often mentions that 2P reserves should be used rather than 1P (proved) reserves and these are conservatively 40% higher so 2P reserves would be 4.5 Gb (1P=3.2 Gb). Using 2P reserves the TRR is 10.8 Gb.
Based on 170 new wells per month, 38,000 total wells and assuming the EUR decrease starts in June 2015 and gradually increases to its maximum annual rate 12 months later, I adjust the annual rate of decrease of average new well EUR so the TRR matches the USGS estimate of 10.8 Gb. An EUR maximum annual rate of decrease of 4% results in a TRR of 10.5 Gb, when conservative economic assumptions are added fewer wells are profitable (29,700 wells instead of 38,000 wells) and the economically recoverable resources (ERR) is reduced to 8.7 Gb.
Spreadsheet with TRR scenario at link below:
https://drive.google.com/file/d/0B4nArV09d398MXN3N2VJeGJZWW8/view?usp=sharing
Spreadsheet with ERR scenario at link below:
https://drive.google.com/file/d/0B4nArV09d398OUREd1BlblBlVHc/view?usp=sharing
Economic assumptions:
8,500,000 initial well real cost (dollars) on Dec-15
6 OPEX $/barrel 10% annual increase
6 other $/barrel
26.5% royalty+tax on wellhead revenue(refinery gate -transport)
14 transport $/barrel
13% nominal discount rate (3% annual inflation)
9,753,800 final real well cost Oct 2020
3% annual increase in real well cost from Jan 2016 to Oct 2020
all costs in constant 2015$
Chart with ERR scenario for North Dakota Bakken Three Forks below.
I noted that Fernando has suggested that a nominal annual discount rate of 10% ( a real annual discount rate of 7% assuming a 3% annual inflation rate) would be more appropriate. In this case my model would have the OPEX of a new well increasing at a 7% annual rate (in constant 2015$) from $6/b in month 1 to $25.8/b in month 259 when the well is abandoned at 11.5 b/d output (in the previous model it was a 10% annual rate of increase in OPEX).
This results in more wells drilled profitably and ERR increases to 9.7 Gb.
Economic assumptions same as before except as noted above (discount rate and OPEX).
Chart below.
Hi MBP,
Hopefully you don’t mean me. Usually when I ask questions about oil it is not intended as a challenge (when talking to you, Mike, Fernando, et al), it is to try to understand what you have said or fill in gaps in my knowledge (canyons might be more apt regarding the oil industry). The stuff I have learned from Mike, Shallow sands, Rune, Enno, and Fernando I have used to try to improve upon Rune Likvern’s original Red Queen model.
I wasn’t speaking at one particular person, but that the tone of discussion degrades towards bashing oil and gas many times on this blog. Similar to Godwin’s Law, but for hydrocarbons.
That is why I took some time off here, as negativity isn’t really my thing. I am welcome to questions from people, or even questioning where I come up with data from, but there is a way to ask it where it doesn’t come across as personal attacks. I’m not saying anyone here ever intentionally did that, but the perception of many is that is happened from time to time.
As long as people as genuinely interested in learning and thoughtful discussions, I am opened to participating.
Hi MBP,
Thanks I appreciate that you, Mike, Rune Likvern, Shallow sand, and Fernando participate.
Hopefully the people that refer to the oil business as “dirty” will realize that the word is taken literally and figuratively by many. Some might even venture that it is a “dirty” word.
Hopefully NickG will choose his words more carefully in the future. The oil experts would be missed much more by most of us.
Well, again, I used the phrase “oil is risky, dirty and expensive”. “dirty” in this context referred to pollution. And, really, I don’t think that was the problem. Part of the problem was the overall message. But perhaps the biggest problem was simply a mistake: the oil guy who would prefer to remain nameless thought I was cheerleading for the bust. I wasn’t. I think the current bust in the oil patch is an unnecessary disaster, and could have been greatly reduced by better planning – the kind of planning I argue for.
I should say: I have full respect for people who do the hard work of oil production.
Oil is like alcohol: it’s good for you in moderation, and bad for you in excess. In excess, it can hurt your budget, drive away your friends, and injure your liver. Well, the world has been on a bender since WWII, and we’ve hurt our budgets, driven away friends, and our collective liver has been badly injured. That means we need to reduce our consumption as soon as possible.
As long as the vineyards and the bottlers are honest about the benefits AND risks of drinking, it’s not their fault: it’s the customers who need to drink in moderation.
What is needed is higher oil prices as that will help the oil industry and it will encourage people to buy more fuel efficient cars and gradually transition from oil to other forms of energy for transportation as oil output declines. A worldwide oil cartel might help to bring stability to the price of oil.
I agree – higher oil prices are needed.
At this point, I think it’s going to be tough to get oil importers like the US to go along with a cartel. And even Saudi Arabia is afraid of higher prices, as they know what you know: higher prices will incentivize alternatives. KSA wasn’t just aiming at LTO when they decided to increase production: they were targeting EVs and increased vehicle efficiency.
So, at this point I’m afraid the bust will just have to play out, with the painful process of high cost oil producers being forced out, and prices coming back up to a point of equilibrium. It seems likely that we won’t see $100 oil for a little while.
Hi Nick,
I agree the cartel idea wouldn’t fly easily, but in an unstable price environment there may be a lack of investment in the oil industry which leads to volatility that can be very damaging to the economy. There is a good reason why the oil industry operated for years with the RRC setting oil prices through production quotas, then a brief period of instability until OPEC got its act together around 1987/8 and then relative price stability with a few exceptions (2000, 2008) until today when OPEC has failed to act.
I disagree that Saudia Arabia is worried about $80/b oil, they just want back their market share and will shoot themselves in the foot to get it.
This is PRIMARILY a peak oil blog.
Ron lists other stuff it is about right up top.
It’s his choice and while he may see fit to change his mind, he has not yet done so.
Here are the things he indicates are within the scope of the blog.
xxxx
HOME
ENERGY AND HUMAN EVOLUTION
NON-OPEC CHARTS
OF FOSSIL FUELS AND HUMAN DESTINY
OPEC CHARTS
THE COMPETITIVE EXCLUSION PRINCIPLE
THE GRAND ILLUSION
WHAT IS PEAK OIL?
WORLD CRUDE OIL EXPORTS
xxxxx
Now there is seldom anything found in the comments that can’t reasonably be construed to fall into one of these categories, or at least the cracks between some of them.
All my rambles about agriculture for instance are tied in the end to fossil fuels, human destiny and the grand illusion. I try to help folks who did not take any econ classes at university understand oil markets by comparing them to markets in agriculture that are more easily understood without formal training.
Discussions of human nature involving specifics such as evolutionary psychology versus the traditional social sciences fall squarely into the category of human evolution and energy since an understanding of our nature throws light on our collective use of energy in future times.
I do think having separate threads is a GREAT idea.
MBP,
I am mostly interested in financial/economics dynamics of it.
When the low price period starts, like the one from end of summer of last year, I have a feeling there is not much producers can do besides laying off the staff and praying that somebody else start shutting off the wells. Hedging only works if there is ongoing volatility but in case of price dropping 60% and staying low for long time hedging is short term band-aid. Demand can only go so far up annually and that’s about it. All other crap that we have been hearing about drill efficiency, drill now frac later, or savings with use of “toilet water” for fracing, or will trade the use of the my rigs for some imaginary future stake in oil production is just simply crap. It can save you few bucks short term, few months, few quarters, but if this price stays 2 years then what we have is a disaster on global scale.
Ves,
Maybe for the US and other high-cost producers “a disaster.”
But after the interregnum, maybe nirvana for Saudi Arabia and Russia?
It is, after all, an economic war which we see being played out before our very eyes.
Glenn,
I can’t seem be able to post any post. maybe later. technology eh 🙂
Hi Ves,
Not sure why your post got caught in the spam filter. There were a bunch of posts that seemed to be repeats, if I missed something let me know.
I didn’t realize all the work Ron does. I thought the blog ran it self and Ron just put up posts, not true.
Glenn,
True, the word “maybe” is certain constant in our life. I remember that ancient Chinese story “Maybe” and I am paraphrasing just one part:
“Farmer’s son was riding his horse through his dad’s rice fields and fell from the horse and broke both of his legs. Villagers came the next morning to visit the farmer and told him that they worry how he will survive without his son’s help in the upcoming harvest and that is very bad luck to what happened with his son. The farmer replied with just one word “Maybe”.
The next morning army officers come to the farmer’s house to recruit men for upcoming war. But they saw young farmer’s son with both broken legs lying on the bed and just left….”
So “Maybe” is exactly what is happening with all these technological improvements in oil extraction. Promising nirvana aka energy independence with fracing, drill efficiency, and salvation through technology gave us the opposite. The only thing that we succeeded was bankrupting most of the conventional world oil industry. So I don’t even get emotionally involved in any “new” and “promising” technological salvation through EV’s, fusion, solar, wind, algae or whatever it is on the daily “specials”. I just say “Maybe”. We just don’t know.
Whiting is a company that has been discussed quite a bit on these boards. Earlier today the CEO Jim Volker said he plans to operate within cash flow in 2016 and does not plan to use any of his $3.5 billion borrowing base capacity. I’ll leave it to others to debate the likelihood.
I’m mostly here to learn more about decline rates and what that means for specific oil producing areas in the US and, to a lesser degree, the overall US economy.
I came here to gain a better understanding about how long an area like the Bakken will be in boom times. What is time span of the boom-and-bust cycle and what happens when the bust comes?
The unconventional side of this is a new game, so its hard to say. The Permian busted in the 80’s and never really recovered until this current boom. As long as price is economic for production, there will be a boom. When it drops below what is needed, which I will say is $70-$75, it can’t be sustained. I can’t give a guess on where price will go, and anyone who says they have a fool-proof way to tell where it is going is full of it.
Now decline rates are different, as they are something I know about. What in particular are you interested in?
MBP. How are the economics looking for CO2 projects in the Permian, both existing and new?
How do those economics compare to LTO economics in PB?
Operating them still seems to make money, even at this price, but expanding or purchasing more CO2 isn’t a great deal atm. Those who control both the CO2 and production (Kinder Morgan, Oxy) are better off than those who have to purchase CO2 from someone else.
The only things making money right now are the conventional fields under primary/waterflood/CO2.
Hi MBP,
Based on Baker-Hughes rig data there were about 240 horizontal rigs drilling for oil last fall and about 150 rigs today. Is most of the current drilling activity for conventional oil in the Texas Permian Basin (I have assumed you are in Texas rather than New Mexico)?
Are the companies continuing to develop the LTO plays in the TX Permian even though it makes little sense to drill at current oil prices?
I double checked the number of horizontal oil development rigs in the Texas Permian Basin from Sept 5, 2015 and one year ago.
Today it is 150 rigs, one year ago was 243 rigs and the high point in the last 12 months was Dec 26, 2014 at 276 rigs.
Are there a lot of Drilled Uncompleted (DUC) Wells in the TX Permian?
..
Now decline rates are different, as they are something I know about. What in particular are you interested in?
I’m been interested in the Bakken to see what the future might be for the Wattenberg field.
When the bust comes? The local motels and honkytonks go belly up. On the other hand we get a really good opportunity to buy used furniture and guns.
I’m wondering if the information below is nonsense or what.
http://nanoscale.blogspot.ca/2015/09/nano-and-oil-industry.html
Nano and the oil industry
I went to an interesting lunchtime talk today by Sergio Kapusta, former chief scientist of Shell. He gave a nice overview of the oil/gas industry and where nanoscience and nanotechnology fit in. Clearly one of the main issues of interest is assessing (and eventually recovering) oil and gas trapped in porous rock, where the hydrocarbons can be trapped due to capillarity and the connectivity of the pores and cracks may be unknown. Nanoparticles can be made with various chemical functionalizations (for example, dangling ligands known to be cleaved if the particle temperature exceeds some threshold) and then injected into a well; the particles can then be sought at another nearby well. The particles act as “reporters”. The physics and chemistry of getting hydrocarbons out of these environments is all about the solid/liquid interface at the nanoscale. More active sensor technologies for the aggressive, nasty down-hole environment are always of interest, too.
When asked about R&D spending in the oil industry, he pointed out something rather interesting: R&D is actually cheap compared to the huge capital investments made by the major companies. That means that it’s relatively stable even in boom/bust cycles because it’s only a minor perturbation on the flow of capital.
Nothing much in the article. I think nanos and chemicals can be lumped in the same family. We already use and are doing research on chemical and isotope tracers. We also have particles we can inject which swell in the rocks, blocking water flow. I’ve seen nano research proposals and programs which, for the most part, looked like pie in the sky ideas. But I assume something will come out of it. However, nothing will have a revolutionary impact on recovery factor. We are stuck with CO2, polymers, tailoring water ions, solvents added to steam, and things like that. I believe this is true simply because we don’t really have new ideas, we are just refining ideas from 10 to 30 years ago.
Hi MBP,
Any thing and everything that is not so narrowly technical I cannot understand it is greatly appreciated.The physical world is sort of like a jigsaw puzzle and you and the other hands on guys help me put a few more pieces in the right spot here and there.
In general terms I have been able to make sense of everything you and Mike and Fernando and the other guys who work in the industry have had to say so far.
Keep posting.
I hope my comments comparing oil to agriculture in respect to how and why the markets work are making sense and helping novices see thru the smoke and fog the msm cranks out- not to mention the stuff our resident cranks turn out.
There’s a great old saying to the effect that the more things change, the more they stay the same.
I got a question.
How long would it take oil . . . pushed down to a lower depth and higher temp . . . to change into nat gas?
Motivation of the question is to determine if there is a way to permanently damage an oil field.
Some of that would depend on temperature gradient, which varies from place to place.
In west Texas, I don’t know of any oil fields below about 15,000 feet.
Good question,
I don’t know of a way to raise the temp of a reservoir enough to damage an oil field, but there are plenty of other ways that we can. As for time to make that change, that depends on the temp (and thus depth) that the oil was pushed too. You calculate a TTI (time-temperature index of maturity) and based off of that number, you will get the type of hydrocarbon being produced. This is generally a calculation for source rocks to determine the probable type of hydrocarbons that are being released. To get the TTI, you use the r multiplier for the temp range (100-110 C is 1, is halves for every 10 C below 100 and doubles for every 10C above 110) by the time in millions of years that it was at that temp (this is called a Lopatin Chart). For example, 81 million years at 110-120 C produces a TTI of 162 (81*2), which is just outside the max oil generating range of 15-160. So the last 2 million years would probably be spent producing wet gas. To get outside the generation of wet gas, you would need to get the TTI over 1,500. Hope this helps some.
Some. Was looking for time frames of weeks, not millions of years.
A surface burst of a nuke should push it down and raise the temp even more than via gradient. Not really required to burn it up. Just make it non oil. That would be civilization deadly enough — to lose most of the oil quickly.
BTW what are the other ways you had in mind that can permanently damage a field?
A surface burst would be hot, but for such a short amount of time I’m not sure you could change a whole field of oil to gas. You would need some crazy high temps (thousands of C) to get it really fast. Usually, oil maturity is sped up by intruding volcanics.
There are probably more ways to hurt a field than there are to help it. Injection incompatible water, injection above fracture pressure, frac’ing into a OWC, producing too fast and blowing past the bubble point (East Texas), blowing down the gas cap, producing in an unconsolidated formation without reinjection and allowing for subsidence, etc. It’s pretty easy to mess a field up.
A really neat way to do it is to inject water containing salts which lead to deposition of untreatable deposits in the producing wells.
You could try injecting bacteria. Mixing the injection water with water from a ditch works good. The bacteria can sour the crude, and the H2S can be so bad the producing wells need to be replaced.
I’m watching pdvsa murder giant oil fields in Venezuela by not injecting gas in a gas cap, allowing oil to move from the oil zone into the gas cap. A portion of the migrating oil can not be recovered, ever.
Pdvsa is also killing the heavy oil fields by producing them without any pressure maintenance. This allows water influx into the oil zones, and precludes the use of thermal methods in the future. The net effect is to cut reserves by 70%.
Good answers. At some point in the past I recall reading someone claiming that is why Cantarell died. They killed it.
The surface burst blast was not supposed to be about heat. It was supposed to push the oil deeper, but I’m pretty sure there’s no experimental data on this. Doug and I discussed genetically modified oil spill cleanup bacteria to survive at those depths/temps, but it looked like a challenge.
It does strike one as a powerful form of terrorism, or threat thereof, for someone to have control of a HUGE field and uncork this sort of thing.
Even a big nuclear bomb will not raise the temperature of the ground directly at the blast site noticeably a few hundred feet below the surface. The blast is hot enough to vaporize the first few hundred feet creating a big crater but rock and water do not transmit heat at extremely high rates.The blast energy is long gone elsewhere before it has time to move by conduction to great depths.
Bunkers a few hundred feet below the surface are generally considered safe from nukes- unless the entrances are blocked.
Rephrase your question this way. How deep and for how long does oil have to be buried before it cooks down to gas?
I have seen this question answered before and answered by the pros but I can’t be sure I remember the answers.
As best I can remember there is relatively little oil found below about fifteen thousand feet but quite a lot of gas. The time frame is in millions of years but how many escapes me.
“(Continental or the Company) today announced plans to spend approximately $300 to $350 million less than its previously approved capital budget for 2015 to better align spending with cash flow at current commodity prices. The Company plans to defer well completion activity, except for where it has contractual considerations or it accomplishes specific strategic objectives. Continental is also reducing its operated rig count in the Bakken from 10 to eight rigs by the end of the month.”
http://money.cnn.com/news/newsfeeds/articles/prnewswire/DA96015.htm
How very professional of them. And timely, before the revaluation of collateral in 3 weeks.
It would be about now that companies would have learned if the Fed’s monitoring taskforce for that revaluation process have any authority to do anything but watch.
Thanks for the link Rune.
I’m still trying to figure out the SCOOP economics given the limited lease operating statements and production histories I have reviewed from that area.
In the article they mention capital expenditures were supposed to have been $2.7 billion, so this is about a 12% reduction (using 325/2700) in capital spending.
This is exactly the kind of thing needed to get the oil market back in balance, hopefully other LTO focused companies will follow suit, reduce output and then oil prices can recover to $75/b by early 2016.
That is the best case scenario, it will more likely be mid 2016 before prices recover to a level that makes LTO drilling profitable as there is a considerable lag that I fail to appreciate. If OPEC cuts in December, it might be a quicker oil price recovery, I would not bet on that happening au this point.
As Watcher loves to point out, I have been wrong on oil prices before. Don’t invest based on what I think will happen to oil prices, do the opposite.
Shallow, yrw!
From Continental’s Q2 15 SEC 10-Q.
“Cash capital expenditures excluding acquisitions totaled $1,952.7 million and $2,008.7 million for the six months ended June 30, 2015 and 2014, respectively.”
“In its August 5, 2015 earnings press release and on its August 6 earnings conference call, the Company noted actual capital spending was trending below its $2.7 billion non-acquisition capital expenditures budget and further noted that, if weak oil prices persisted, the Company would take additional measures to balance capital expenditures with reduced cash flow.”
So from the recent press release (linked to above) CAPEX (non acquisition) for 2015 will be max $2.4 Billion.
In H1 2015 they spent $1.95 Billion, which leaves ($2.40 – $1.95 = $0.45) Billion for H2 2015.
There is now some twenty days left of Q3 2015.
Rune,
Continental is not alone. Look, for example, Whiting capex guidance:
AlexS, thanks!
Changes in CAPEX tells an interesting story.
And Chesapeake Energy capex guidance (US$ mn)
Sorry,
implied 2H15: 1044
Wow. Maybe little to no drilling in the 4th quarter? They may continue to complete a few DUCs, but they may have used up most of their capital budget, already.
As of today Continental still has 9 active rigs in the ND Bakken, total rigs are 71 for all companies, so 12.6% of the rigs are Continental rigs.
Thanks.
Bakken Active Rigs by Company Sept 10, 2015 from NDIC
Mike,
Welcome back. I was hoping you would keep posting.
Yes, I’m glad Mike is back, too. His perspective is welcome.
Likewise about hoping Mike sticks around!
Having two threads is a good accommodation and apparently costs nothing except a couple of minutes to post the extra thread.
Quite a lot of us are into the LARGER aspects of the energy and environment question as much as the SPECIFIC question of oil supply.
I want to know everything I can about the production end of the industry but my understanding of peak oil has evolved from expecting a sharp peak to expecting a rounded peak with a more or less flat plateau for a few years and this understanding leaves me focused on how we may or may not adapt to a slowly declining oil supply.
Almost 80 comments on oil. Rejoice ye oil people. All hail Dennis. Dennis, we will ignore all the mean and nasty comments about you in the future. Cheers. And Rune pipes up with even more good news on Continental.
I say all this as I’m getting my ass handed to me in the market. I’m hearing scuttlebutt about November being an important month for the fracking side of the house and their balance sheets. Banks wondering how they’ll recoup their money. Hedges off. Berman’s article had numbers that included hedges if I remember correctly and the numbers were still horrific. It’s still probably going to get worse before it gets better. I’m still in survival mode and grinding my teeth. I’ve killed a bunch of rattlesnakes which usually makes me feel better but not this time.
HR, I think you said something like hand to hand combat.
I liked that analogy, although a big black cloud that just won’t move might work too.
Or maybe getting taken out to the wood shed and being beaten with a 2″x4″.
Third quarter has been extremely painful. Hope we can just get back to $50 in the field Q4 and then say good riddance to 2015.
Yeah it’s a dogfight right now. I should have known it would be a bad year after five or six rattlesnakes almost got me. It was an omen I suppose. You ever notice how their camo is so much more effective in the low light of the early morning? And in the calm morning air the sound of the rattler seems to vibrate in your ears and gets louder and louder. And you can’t see them because there’s not enough light but you know they are at your feet and you better not move. The sooner 2015 is in the rear view mirror the better.
Let’s hope 2016 is not worse.
HR,
You can eat rattlers, you know. They can be a little oily but that will depend on how you cook them.
Waste not, want not–of course, you don’t want them at all but hey! they were there first.
Yeah, they’re hard to spot in the morning when they come out to warm up. And they don’t learn that roads are poor warming surfaces for snakes.
shallow,
I do not expect oil going up very much over the next year. We have not seen a confirmed low on the charts, so there will be another low over the next months. It all depends on shale. If shale reduces capacity by 2 mill barrels by end of next year, oil has a chance to go up end of 2016. If shale resists any cuts, it will take probably much longer. The situation is different for natural gas, which will soar quite soon. LNG (Cheniere) , which has been quite resilient so far, just took a hit. The stock fell below the 200 and 50 moving average, in the point and figure chart it fell through a double bottom. LNG needs low natgas prices and is a harbiger for much higher natgas prices in the future.
I’d say the decisions Janet Yellen, Putin and the Saudi princes make will have a lot more to do with the future price of oil than your charts.
If you can perfect your charts to the point where they can predict that, you will be onto something.
Glenn,
Charts alone do not the trick, yet the combination of fundamentals and charts are quite effective and served me very well. Since months I have warned people that oil prices will not go up in the short term. Of course many people flat out did not believe me to their own peril as they have lost quite something. Oil cannot go up short term as the dollar is too strong (hence low worldwide demand ) and only much lower US oil production will weaken the US dollar. This is exactly what the chart for oil is telling us: It will take some time until oil can go up again. It also depends how shale reduces capacity voluntarily or is forced to do so through a collapsing bond market or simply can sit out until worldwide demand finally catches up despite a strong dollar. So, the time span for an oil surge ranges from one to three years, yet it is certainly not within the next three months.
Hi Heinrich,
China devaluing will help get the Chinese economy moving, a continued fall in LTO output will change market sentiment and could cause prices to move back to $60/b within 3 months (end of November), a cut in OPEC output would surely affect oil prices.
I doubt oil will remain below $50/b until next September, I think we will be above $75/b within 12 months. Time will tell.
Dennis,
My pessimism during spring about oil prices has been confirmed this fall. Not very much has changed since then. I think it can get very nasty over the next three months. Something has to break before we get an uptrend. Oil just down 1.74 USD to 44.20 USD per barrel today. Oil at 30 USD per barrel is more likely than 60 USD per barrel for December.
Hi Heinrich,
I expected LTO output would fall more quickly than it has and did not realize how long a lag there would be between a drop in price and a slow down in well completion rates. If LTO output does not fall or falls very slowly and OPEC does not cut, you will be correct. Based on the CAPEX spending so far and the projected capital spending it looks like the drilling may stop soon. At some point the companies that thought oil prices would rise will stop drilling and completing wells because they lose access to credit.
You certainly have called this better than me so far.
Mike had mentioned a few months ago that he thought we would see LTO output crash in the 4th quarter, if he is correct and we need another 3 months for inventory to be drawn down, then 2nd Quarter of 2016 we should see oil prices move higher, if the global economy does not slow down.
Note that if all LTO drilling stops (say to 10% of current completion rates) LTO output will fall steeply (at roughly a 25% annual rate). If we ever get to that point, we will see a very quick rise in oil prices to $80/b or more. I do not know if or when that might occur, but if prices remain under $50/b we might be there before Jan 2016.
HR, I am offended by your comment:” I’ve killed a bunch of rattlesnakes which usually makes me feel better but not this time.” More people like you who do senseless killing of an important species is driving the planet step by step towards catastrophe. Shame on you!
Shale’s dirty little capital market secret
Izabella Kaminska, FT Alphaville, Sep 08 16:14
Shale’s dirty little capital market secret
Izabella Kaminska, FT Alphaville, Sep 08 16:14
I took that article that was posted above a little further to try to determine exactly what price thoses shale players would need to “break even.”EOG is touted as a low cost shale producer, and I believe they are easily the lowest cost producer among the shale majors, but based on my analysis they still burn cash at $70 oil and $3 gas.
EOG:
555,333 daily production 49% oil/51% gas
oil: 272,000/day
gas: 283,333/day
All in cash costs per bbl: $44 (includes LOE, G&A, transport, taxes, maintenance capex & interest expense)
At $60 oil and $3 gas
1.93 billion revenue quarter. Average realized price per barrel: 38.61 Cash burn per boe: 5.39
At $70 oil and $3 gas
2.16 billion revenue quarter. Average realized price per barrel: 43.21 Cash burn per boe: .79
I didn’t account for differentials which would have made things even worse. However, it does appear EOG needs at least $70 oil and >$3 gas to have a chance at making things work long term.
KellyB. That’s in the ballpark of what I get.
Break even is a Humpty Dumpty word that means whatever the person using it intends for it to mean at the time he is using it.
An independent taxi operator might say he ”broke even ” and honestly mean it on a day when he took in fares equal to the cost of gasoline he used that day.
But on the last day of the month, he has to have enough money set aside to cover his insurance, car payment and routine maintenance for the following month if he expects to stay in business.
People who are TRULY “breaking even” if the term means anything at all don’t lay off their employees right and left unless they expect times to get worse. They hang onto them hoping for times to get better.
Now a few questions for anybody who can answer . If a one horse oil man has the rights to a few stripper wells and maybe ownership of the land they are on, rather than just the mineral rights, how much does it typically cost him to close a well permanently ?
I know a lot of wells are located on land that is worth something on the real estate market but others may be on land that is basically worthless due remote location, lack of water etc.
Will the state regulatory authorities vigorously pursue him to collect this cost if he just walks away? If so, how long will it take for the wheels of justice to start grinding?
The one man I know personally who actually owns some oil wells has about a dozen strippers that have been in his family for many years. It seems to me he has been accumulating all sorts of personal property assets for the last decade here in my part of the world over a thousand miles from where his wells are located . These are things that hold value but things he actually has little or no use for, except maybe for the fact that such assets that might be sort of hard for a bankruptcy court to locate.
It can be extremely difficult to prove that a man who went into farming and bought half a million dollars worth of equipment and says he sold it all at a loss actually sold it a piece at a time for a check covering half the purchase price that went in the bank and the other half cash that went into his wallet to pay for a cushy life style.
Something tells me that there will soon be plenty of small fry road kill for the sort of lawyers who specialize in nickel and dime bankruptcy cases all thru the stripper oil business if the states go after stripper well owners to collect the cost of closing up old stripper wells.
Houses are places where fossil fuels are used night and day during the winter. They have electricity, so coal is used for a house to be wired to the gills to have Google maps tuned into the olive orchards in Lebanon.
Natural gas to heat the home, refrigeration for your food, there will be a need for beds, blankets, clothing, furniture, fossil fuels are used for those things to exist here in the real world. You’ll need a washing machine, grease in the bearings, that means oil.
If you have a house, you’ll have a job, you’ll need to get there, some means of transportation, public or private, a bus or your own car. That means oil will be required to begin to have a house.
The conclusion is logical, houses cause over-use of resources, waste and a lot of it. They need wood, that means trees, cutting machines, copper for wires, that means mining and machines to mine the copper. Oil enters the picture everywhere you turn. The dirty filthy nasty stuff that it is, always making life miserable.
Houses make a mess of the world, if humans would just not build them and live outside along the river banks and the ocean shores, oil wouldn’t be necessary at all.
Build a fire and everyone can sing kumbaya in unison. Perfect harmony in a world without that dirty filthy nasty stuff.
Now, houses can be blamed for all the world’s ills, and oil consumption is the reason why.
We need to rid ourselves of both oil and houses.
Live in your van down by the river. It doesn’t ever have to move.
Forget houses and oil, it’ll be a better world without either one.
Just be sure to park your van above any visible signs of former high water marks since moving it without any oil will be quite a chore. LOL
Fission Reactors as well…
http://www.frankcurzio.com/ep-343-oil-expert-cactus-schroeder-unplugged/
Cactus Schroeder, Founder of Chisholm Exploration and oil veteran who has been drilling wells in Texas for more than 40-years, gives us an inside look at what’s really taking place inside the Texas oil patch.
He explains how massive cap-ex cuts, an cutback in Saudi oil production, and the huge decline in drilling costs will eventually lead to higher oil prices. He also highlights why prices are much more vulnerable to an oil shock than ever before.
Cactus then tells us how an old form a drilling is making a major comeback. In fact, this type of drilling is profitable at much lower prices since drillers can increase the amount of oil recovered by 25% compared to fracking. He believes this could be a game-changer in the industry.
Cactus is one of the smartest men you’ll find in the oil business. He has had personal interests in over 1,000 drilling projects. He was also credited with finding one of the largest oil producing wells in the Eagle Ford in 2011 – which he later sold to Norway’s Statoil for more than $1 billion.
If you are thinking of jumping back into oil stocks,be sure to listen to this interview first.
Cactus then tells us how an old form a drilling is making a major comeback. In fact, this type of drilling is profitable at much lower prices since drillers can increase the amount of oil recovered by 25% compared to fracking. He believes this could be a game-changer in the industry.
There’s no way you’re going to get any oil out of tight oil formations without fracking. No fracking = no cracks for the oil to reach the well.
MudGod,
The drillers know very well how to get oil off the ground. However in many cases they are not so firm in knowing markets and what affects prices. Take Harold Hamm who sold all CLR hedges way too early and made an huge loss. His prediction of an oil price recovery has been dead wrong. As it can be a good thing to produce as much as possible, sometimes (that is now) it can be wrong to steam ahead. Who is the biggest enemy of the oil industry? It is the oil industry itself. By steaming ahead, they are driving the dollar higher and the oil price lower at breakneck speed and it looks like the industry is driving itself against the wall – just by doing the right thing at the wrong time. Now it is time to slow down for two years and let the dollar weaken so that the oil price can go up again. Saudi Arabia cannot cut production. If Saudi Arabia would cut production by 2 mill bbl/d (or 30% of exports) the price would go probably up to 70 USD per barrel, yet shale would immediately increase production by another 2 mill bbl/d and we would face the same situation as today. And Saudi Arabia would have a lower market share at lower prices. It is also absurd that low cost production comes out of the market and high cost production (shale) would gain market share. That is a little bit too much to ask from Saudi Arabia. So, it looks like that the egos of the oil industry are driving themselves against the wall at lightning speed.
Here’s a couple of questions for the hands on guys.
How much does it typically cost to legally abandon an old stripper well? My understanding is that some equipment must be removed and the well bore plugged with quite a bit of concrete or straight cement which is not cheap anymore and that an inspection by a qualified engineer or a state employee is probably needed on top of the actual physical work.
How long could a nickel and dime operator get by without reporting any production?
Would it be hard for a small operator with say a couple of dozen wells just quit producing one and hide the fact by fudging the books a bit on his other wells?
Will the state or local government be spending much in terms of personnel time keeping up with stripper wells on a timely basis?
Will the state be aggressive in forcing well owners or mineral rights owners to pay for closing old stripper wells? If so how long will it take for the slow moving wheels of justice to get a well owner into court?
I know specific answers are not possible but I am looking for background information to help me understand the situation of small operators who have few resources and may already be on the brink of bankruptcy as far as their wells are concerned.
My guess is that most such owners also have OTHER substantial assets that would be at risk if they are in front of a judge.
Hi OFM,
Mike has suggested that it would be about $200,000 or so if I am remembering correctly, but no doubt this is variable. I think he was giving me his best guess for an LTO well, but others can correct me as I do not know. A quick search on the web reveals very little.
OFM
Cessation of production, non-reporting of production, and abandonment of wells are somewhat complicated, related but separate and distinct subjects.
OGLs rarely have just one well on the lease. Generally speaking and operator does not have to P&A a non-producing until the last well on the lease has stopped producing. Other issues may accelerate the P&A decision but often a non-producing well has other utility to an operator or surface landowner.
Some operators are known for slow paying royalty owners which is a shameful practice but sometimes there are title issues which may prevent timely payment.
Good and Marketable title is required to make royalty payments. Title is tracked back to the sovereignty of the soil which in Texas and some other states goes back to the Spanish Land Grants.
Non reporting of production may happen but it is not, in my opinion, a big issue because States calculate property taxes and severance taxes based on production. More importantly, Royalty owners are an impatient and in my case a disagreeable person when money is owed.
Then every oil and gas well and OGL and oil and gas field has an identifying number which is required to be posted at every location along with the name of the operator.
Finally, since most operators are not refiners or mid stream processor, an operator must find a purchaser for its oil or gas. Many times these purchasers make royalty payments or remit tax payments to the state. They will not do that without being able to rely on the title or ownership of the respective partners.
I am sure that non reporting of production does happen but it is a self policing problem for the most part.
This might answer many of your questions:
http://www.rrc.state.tx.us/media/6358/plugprimer1.pdf
Typically, an operator will hire a service company which specializes in well plugging when it comes time to P&A a well, like this one:
http://www.superiorenergy.com/brands/well_services/
They should escrow funds during the life of the well….
Farmer,
Four months ago we were given estimates of $60-$80K to P&A an 8000+/-ft well.
As to hiding non producing wells, most of our leases have clauses stating non production or production less than a certain amount for a ninety day period voids the lease.
I know a year or so ago RRC was worried about number of abandoned or orphaned wells. I can only imagine it’s getting worse. They have a section on their site devoted to orphaned wells.
Thanks everybody.
If I had a couple of million in assets and a ten losing wells that were going to cost me that two million to plug and abandon them, I would most definitely be thinking about converting my assets to cash and durable personal goods and looking for a place well out of the traveled way to enjoy my money.
A whole lot of people probably do not have the money to plug old stripper wells they are responsible for even at fifty thousand bucks a well.
Well abandonment costs depend on the well, the cost environment, and regulations. My guess is they can range from $50k to $500k. However, the well equipment can offset some of this cost. Assuming there’s a buyer.
“Based on historical well plugging charges, the average well plugging cost in the State is approximately $4,500 per well. However,
expensive individual well plugged through the OFCU Fund cost over $400,000. The operator had insufficient funds to perform the plugging.
From the RRC ( Texas regulatory agency ) link GS provided.
But this is fifteen year old data and inflation alone in the hourly cost of men and machinery plus materials such as concrete have probably at least tripled since then.
AND going by the few recent cost figures given by hands on guys there has evidently been a really really major tightening of the standards of materials and workmanship from then until now.
A very casual quick look turns up very little specific information on the net, but then I am not skillful in using the right keywords in the right combinations.
It is probably safe to say that it costs fifty thousand bucks and UP to plug and abandon a well today.
In Texas at least a certain amount of money is collected and escrowed in order to cover the cost of closing wells if the responsible parties successfully skip town or go busted.
Some information:
347 A.D. Oil wells are drilled in China up to 800 feet deep using bits attached to bamboo poles.
1849 Distillation of kerosene from oil by Canadian geologist Dr. Abraham Gesner. Kerosene eventually replaces whale oil as the illuminant of choice and creates a new market for crude oil.
1886 Gasoline-powered automobiles introduced in Europe by Karl Benz and Wilhelm Daimler create additional markets for California oil. Prior to the automobile, gasoline was a cheap solvent produced as a byproduct of kerosene distillation.
More at:
http://www.sjvgeology.org/history/index.html
Subtraction time, 2015 – 347 = 1668.
China has been drilling for oil for 1668 years and stopping will happen when it’s gone, not one minute sooner.
Pretty important stuff and why study of lots of things pre oil is not relevant at all.
OFM,
Bankruptcy is a very specialized legal subject. (And I am not a lawyer). I have purchased OGL under the supervision of a bankruptcy court. The court must approve the terms of the OGL and can direct the proceeds of the lease, as the court sees fit, to a secured or unsecured creditor or to the party in bankruptcy.
In dissolution of the assets, the court has wide ranging authority and can even invalidate contracts or agreements that have existed for years. You might want to refresh your memory of the GMC and Chrysler bankruptcies to see what a banana republic we have become.
Of course again, every state is a little different in its treatment of debtors and creditors.
However there is NO STATUTE OF LIMITATIONS against the state.
Thanks I am well acquainted with the GM bankruptcy scandal.
But it appears at first glance that oil and gas laws will be enforced in state courts. IF they are enforced.
Sometimes some laws are just quietly ignored.
I read for instance that tens of thousands of illegal apartments in partitioned houses and garages are somehow overlooked by the authorities in San Francisco alone. Some people even say the city management manages to see less than the referee in a professional wrestling match. The referee’s blindness requires substantial skill, the referee must be quick enough to ALWAYS be looking the other way when the ”rules” are broken.
The real question is whether state regulatory agencies are going to be willing to take nickel and dime operators into bankruptcy court. Bankruptcy judges have no sense of humor and as you mention, substantial power.
But a smart owner of a bunch of petered out stripper wells can probably figure out a way to hide some or maybe even all of his resources from the judge- IF he gets started soon enough.
OFM wrote:
“But a smart owner of a bunch of petered out stripper wells can probably figure out a way to hide some or maybe even all of his resources from the judge- IF he gets started soon enough.”
As long as the Oil well/land is in a corporation and not his personal name, he can protect his assets. Thats why most people that start business incorporate. There personal assets are protected from a lawsuit. The company can file for bankruptcy and the state/creditors can seize any assets owned by the company, but not assets of the workers. Recall the failure of many mines that the gov’t ended up cleaning up. Really smart business owners put their assets into one or more LLCs further protecting their assets. Even if they personally get sued (ie for fraud), they can’t go after his LLCs, He can simply transfer ownership of the LLCs to a family member or friend.
Might get interesting for LTO creditors. When an LTO driller goes bust, the assets fall into the creditors. The creditors then become responsible for the drillers assets. I suspect that the state/Fed gov’t will seek clean up costs on the creditors unless they can somehow ditch the drillers worthless assets first. That would be the ultimate con job. First the Creditors lose there money on loans to the drillers, than have to pay the clean up costs. Double dip losses!
Thanks Tech Guy,
I am familiar with the ABC’s of bankruptcy law and generally speaking you have it right, incorporation of a business protects personal assets.
BUT sometimes a judge will find otherwise for various reasons above my pay grade- but not that of my old personal buddy who IS an attorney specializing in real estate and bankruptcy. He tells me you CANNOT count incorporating protecting you personally in all cases.
Sometimes people guarantee loans personally in order to enable a corporation to borrow money. Then they are on the meat hook personally for that loan.
And sometimes people just don’t incorporate, which can be a messy and time consuming business dealing with the paperwork year after year.
There might be quite a few people out there with stripper wells and abandoned wells on their property which they may have been producing or just simply IGNORING.
Slumlords know how to rent out houses and buildings just about ready to fall down and make money and walk away at the last minute by selling to the next so called “greater fool” in line.
Ma and Pa stripper operators might lack the street smarts to know how to get out, since if they are still in , they have probably BEEN IN the stripper business for decades.
The ONE guy I know PERSONALLY in the oil business has a dozen or so strippers due to his wife inheriting them, been in her family since the majors pulled out. They have gotten to be moderately rich ( well off at least ) in the last ten years from those wells which he told me were making around a hundred barrels per day total. Before that he said they were barely worth keeping them up. (The only reason I know him is he has a vacation house across the road from our place.)
It might not even OCCUR to him that he may be REQUIRED to spend half a million or a million closing these wells on family property if he quits producing them.
The world IS getting crazy. We are gradually slipping away from the rule of law to the rule of men here in the USA. Hopefully it won’t go so far as lenders being held responsible for cleanups but STRANGER THINGS HAVE HAPPENED in American courts in recent times.
I read there is a memo out the last few days from the AG of the USA instructing prosecutors nation wide that the Justice Department is looking like a third world outfit because no top corporate officers or execs have been sent to jail for YEARS now.Seems as if she wants a few people who aren’t kissing ass properly and donating money enough thrown off the bus and under the wheels to make things look a little better.
WELL, I have no problem personally about whose fault that is. The Prez could have appointed a serious AG the first day he was in office, and so could the last prez before that.
You and I would have been locked up, the keys thrown away , and a press conference held to announce our conviction if we had done one ten thousandth of one tenth of one percent of what the big banks got away with scot free recently except for some slap on the wrist fig leaf fines.
OFM:
Its not the Ma & Pa operators that are the concern. Its the publically traded LTO drillers that are the Megalodons in the room that operate thousand of wells. When these drillers go bust. Its going to be awfully expensive to plug and clean up after them.
In my opinion this is going end up as a case of “privatize the profits, but socialize the losses”. It wouldn’t surprise me that the gov’t sets up a special tax or fund, funded by consumers (gas/energy tax) and remaining Oil companies to pay for the clean up costs.
“Its not the Ma & Pa operators that are the concern.”
I agree.
MY concern is FOR THEM.
Anybody with Irish blood is genetically predisposed to be for the underdog and the little people. LOL
In its Short-Term Energy Outlook for September, issued today, the EIA has lowered U.S. C+C production forecast on average by 140 kb/d for each month between September 2015 and December 2016.
The numbers for January-June were revised downward 10 days ago.
Preliminary estimate for July 2015 is 9.24mb/d (vs. 9.44 previously), for August 9.10mb/d (vs. 9.22mb/d in August STEO).
The EIA now expects C+C production to drop to 8.93mb/d in December (down 682kb/d from April peak) and to bottom at 8.63mb/d in August 2016 before increasing to 9.09 mb/d in December 2016.
In the August 2015 STEO, the EIA was expecting production to bottom at 8.86 mb/d in June 2016 (a decline of 830kb/d from peak)
Production in the Lower 48 states ex-GoM is expected to decline from 7.64mb/d in March to 6.83mb/d in December (-817 kb/d) and 6.67 mb/d in June 2016 (down 973 kb/d from peak)
WTI oil price forecast was also marginally reduced
Great work Alex. Just a quick one: haven’t we seen downward revisions for a few months now? Would be awesome to see the monthly adjustments over a longer period
Yes, there were downward revision since the beginning of 2015
Thanks a lot Alex. Really interesting what happened in June/July, where they just went insane – otherwise they seem to have been pretty good in their predictions.
Upward revisions in June and July reflects the increase in WTI price to almost $60 in May and June
WTI oil price forecast revisions
Thanks for all the charts Alex. The size of the revisions, as well as the projected decline till mid next year is pretty staggering.
Any idea what they expect to happen in September next year? Each of the projections sees a big uptrend starting then, without a significant rise in prices. Are there major GOM projects coming online?
Enno,
Part of the projected increase is indeed due to new projects in the GoM.
But Lower 48 onshore output is also expected to increase from 6.67 mb/d in June’16 to 6.93 mb/d in December. They do not explain why, but I think they expect $55/bbl WTI to incentivize an increase in drilling/completion activity.
Average WTI spot price by quarter
From the September STEO:
EIA expects U.S. crude oil production declines to continue through August 2016, when total production is forecast to average 8.6 million b/d. Forecast production begins rising in late 2016, returning to an average of 9.0 million b/d in the fourth quarter. A total of 12 projects are scheduled to come online in the Gulf of Mexico in 2015 and 2016, pushing up production from an average of 1.4 million b/d in the fourth quarter of 2014 to more than 1.6 million b/d in the same period of 2016.
Expected crude oil production declines from May 2015 through mid-2016 are largely attributable to unattractive economic returns in some areas of both emerging and mature onshore oil production regions, as well as seasonal factors such as anticipated hurricane-related production disruptions in the Gulf of Mexico. Reductions in 2015 cash flows and capital expenditures have prompted companies to defer or redirect investment away from marginal exploration and research drilling to focus on core areas of major tight oil plays. Reduced investment has resulted in the lowest count of oil-directed rigs in nearly five years and in well completions that are significantly behind 2014 levels.
Oil prices, particularly in the second quarter of 2015, remained high enough to support continued development drilling in the core areas of the Bakken, Eagle Ford, Niobrara, and Permian basins, with July showing the first month-to-month increase in the oil-directed rig count since October 2014. However, WTI prices below $60/b through the forecast period are anticipated to slow the rate of recovery in onshore drilling and well completion totals, despite continued increases in rig and well productivity and falling drilling and completion costs. The forecast remains sensitive to actual wellhead prices and rapidly changing drilling economics that vary across regions and operators.
While projected oil production in the Gulf of Mexico rises during the forecast period, Alaska oil production falls. Production in these areas is less sensitive to short-term price movements than onshore production in the Lower 48 states and reflects anticipated growth from new projects and declines from legacy fields.
Thanks Alex.
Although their originally forecasted prices of around $70 WTI may lead to some extra drilling again, I doubt the same will happen with $55 WTI. It must happen from additional funding again then, because with these prices, cash flows would not sustain such a boom.
I agree with you. I think most shale companies will have to take a more conservative approach to investments. Some of them have already said they will try to spend within cashflows or at least to decrease the overspent in 2016. Hence, even with lower costs, $55/bbl will not justify a significant increase in drilling/completions.
The price forecast from Feb 2015 over the period from March 2016 to Nov 2016 looks much more realistic than the current oil price forecast.
AlexS, thanks for posting the chart on WTI oil price STEO forecasts.
If I read it right it covers a period of 7 months of 2015. Look at the spread on the price forecast.
The oil industry relies on predictability and future price trajectories are one of the parameters that weigh heavily.
Now, imagine being a CEO for an oil company looking at a price chart like you shared what would you think?
I would think that it is difficult to forecast oil prices with any level of accuracy 🙂 My guess is that it has been like this since 1975, definitely a risky business.
If you are implying that a smart oil CEO, might want to cut back on capital spending (or perhaps retire), I would agree.
Maybe OPEC should change its name to OPPC (Organization of Petroleum Producing Countries) and Russia, Norway, US, and China should join so that oil output can be controlled and oil prices can be stabilized 🙂
”If you are implying that a smart oil CEO, might want to cut back on capital spending (or perhaps retire), I would agree.”
Dennis, not even close.
”Maybe OPEC should change its name to OPPC (Organization of Petroleum Producing Countries) and Russia, Norway, US, and China should join so that oil output can be controlled and oil prices can be stabilized”
A bigger cartel?
Rune,
The chart includes forecasts from STEO issues from February to September 2015. I skipped monthly reports in which there were no significant revisions in oil price forecasts.
Price volatility and changes in price forecasts are not new for the oil market. A normal risk management implies that companies should be prepared for different oil price scenarios. However some people in the industry (particularly, shale guys) got used to a benign and relatively stable oil price environment in 2011-14.
AlexS,
Oil companies normally define a hurdle rate for developments up for sanctioning. They also normally have their own assumptions on price trajectories.
The point is with such price volatility they will tend to use a (very) low rate, thus few developments becomes sanctioned.
Rune,
Oil companies, at least the big ones, normally invest “through the cycle”. That means that their price assumptions are normally the average for the next several years (usually 5 years). And they tend to be rather conservative. For example, in 2011-14, when Brent averaged around $100, the majors’ hurdle rates for upstream projects were based on much lower price assumptions (probably, around $80). And, with strong balance sheets, they can survive 2 or 3 years of $50-60 Brent. Hence, short-term price fluctuations should not affect their investment decisions.
Small and mid-sized U.S. E&Ps are different animals. They have shorter investment horizons and weaker balance sheets. Therefore, for them, monthly fluctuations in prices and changes in short-term forecasts are indeed very negative.
The question is, is this time different?
Big oil companies have long lead times for their investments and are aware of the cyclical nature of the oil price.
One of the big oil companies moved their hurdle rate to $45/b as the price collapsed.
The “only” difference are oil price assumptions for this cycle. $45 is an extreme case, but most of the majors currently project $50-55 and no higher than $60.
But the principle is the same: conservative hurdle rates and long-term price assumptions.
Hi Rune,
This discussion of “hurdle rates” makes sense in general terms but this current discussion appears to be about independent or corporate oil companies.
It might not apply to a NATIONAL oil company – which even though organized as a corporation is still the sole property of a government.
What do you and any others think about NATIONAL oil companies and their capex when it comes to their investment plans ?
Governments imo will not prove to be as flexible and nimble when it comes to changing their ways as for profit corporations.
Hi OFM,
As you point out we need to distinguish between the major public, big national and small independents.
Companies I know often have rolling plans spanning several years (5) as their business model is built around large complex developments. These have annual rolling price forecasts spanning several years, to make estimates on the profitability of the development. A development that takes 4-5 years from investment start until it starts flowing (having cash flow) is like a fully loaded tanker, hard to turn when it is under way. They want their investment to be resilient and test it for various price (and cost) trajectories.
In Norway the State has its own company taking care of the state’s interest or the so called State Direct Financial Interest (SDFI). This company is not an operator, but active partner looking after the states’ interests. How other national oil companies, like Petrobras, Saudi Aramco, are organized I am not sure of.
Small independent operators has less financial muscle and focus on smaller developments, operate on a different time scale, has less resources and are often more nimble. These are likely the ones that to a larger extent will base their decisions on price forecasts from big public institutions.
The unique thing about LTO extraction is that it can “turn on a dime”. Limitied CAPEX for a well and (relative) short time from plans on drilling a well (less than a year if we include the planning, funding, contracts entered into, the actual drilling etc) until it flows.
It is interesting how much things have changed since 2014. In May 2014 the 2014 Annual Energy Outlook was released by the EIA. I have put their reference oil price scenario (in Constant 2012$) for WTI in the chart below.
CNBC- “Out of wack – we have seen this movie before – LNG is a Looming Disaster – 2X the capacity in next 4 years.”
http://www.zerohedge.com/news/2015-09-09/chanos-vs-icahn-famous-short-seller-goes-after-icahns-lng-exporting-activist-play
MUDGod: thanks for the great post with Cactus Schoeder: fabulous interview: well worth listening to.
Found this jewel on ZH,
http://charleshughsmith.blogspot.com/2015/09/the-decline-of-oil-head-fake-or-new.html
That “head fake” chart says it all imo.
If anybody can make a serious argument against it I want to read it.
Charles Hugh Smith’s analysis makes a number of empirical claims which are at best distortions, and at worst outright lies.
Take this claim, for instance:
3. The decline in petro-dollars could push the value of the U.S. dollar (USD) higher, further pressuring oil exporters and emerging markets. When oil prices are high, oil exporters have huge surpluses of cash they need to recycle into assets. Since oil is typically traded in USD, the easy trade is to buy USD-denominated assets such as Treasury bonds.
However, if we look at the holdings of U.S. Treasury bonds by the oil-exporting countries, they have remained relatively flat over the last five years, during a period of consistently high oil prices.
And in the grand scheme of things, the quantity of U.S. Treasuries held by the oil-exporting countries pales in compariosn to those held by the non-oil-exporting countries.
And any number of commenters on this thread could take a wrecking ball to this claim Charles Hugh Smith makes:
Many observers reckon a whole slew of U.S. producers will go bankrupt if oil hovers around $40/barrel for long.
Perhaps, but what a lot of people miss is the costs of production are not static. A significant percentage of U.S. oil production is operated by independents–small, nimble firms that can deploy new technologies quickly and squeeze subcontractors.
What cost $100,000 in the bubble, when demand enabled contractors to charge a premium–well, nowadays, that job might only cost $50,000.
The point is that U.S. production could stay stubbornly high for a lot longer than is generally anticipated.
Glenn – I agree. I do not know why so many people want to focus on cost savings, or the number of bankruptcies, etc. As Jeffrey Brown has pointed out, and also Ron, many times, about the only thing to watch in order to determine the future, short term oil supply is “monthly well completions.” Either there are enough new completions to offset legacy declines, or there are not. And, following the rig count will give you a forward guess as to the number of completions in the short term future. At the peak last year, the rig count was high enough to MORE than offset legacy decline. But, at the current level, there will not be enough new well completions to offset decline. In addition, a number of companies have confirmed that they are drilling wells that they will not complete when drilling is through [for reasons such as they had a rig under contract, so rather than pay the fees to let it go early, it will be cheaper in the long term to drill the well now and complete it later]. If prices recover, the number of wells completed should rise somewhat faster than the rig count [and it will not be due to drilling efficiency].
clueless. I agree with you. I think the recent indications from the major US shale players are that CAPEX is being cut fairly severely for the remainder of 2015 and for 2016. Many appear to be continuing to drill wells but not completing them. AlexS posted some good information in this thread concerning CAPEX cuts for CLR, CHK and WLL. It appears almost all are following this trend except maybe PXD. However, I think maybe PXD CEO just likes to talk, will see what they really do in next few quarters. I have not been sold on Permian “LTO” being so much more economic than EFS or Bakken.
Charles Hugh Smith then follows with this claim:
A sharp decline in the amount of USD that needs to be recycled means the global supply of surplus USD is much lower than in eras of high oil prices.
However, there has been no “sharp decline in the amount of USD that needs to be recycled.”
The US quickly found other imported goods to spend US dollars on, and these fully compensated for the money it saved from the import of oil.
Glenn,
I think it would help to see that chart go back for 10 years – if memory serves me, deficits were 50% higher.
Normally you’d expect deficits to rise in a recovery, and instead it’s been flat.
Then there is Charles Hugh Smith’s distortion of the phrase “resource curse.”
“Resource curse” refers to a phenomena which frequently happens to nations which are rich in natural resources. It consists of a series of political, economic and financial disorders which render the nation over-dependent on the production and exportation of primary materials.
The solution to the resource curse, however, is not further investment into the production and exportatin of primary materials. To the contrary, the solution to the resource curse is diverting some of the nation’s natural resource wealth into investments into a more diversified, industrialized economy.
Why this economic diversification frequently does not happen is what the study of resource curses is all about.
The Progressive Economics Forum out of Canada recently did a series of more than 20 posts on the resource curse, from a variety of economists from all over the world.
http://www.progressive-economics.ca/category/staples-theory/
Despite herculean efforts to diversify the Canadian economy over the past several decades, all these efforts were undone by the current government and Canada has once again become little more than the US’s “open-pit mine,” as one commentator put it.
Lots and lots of entities around the world who have bylaws/rules/regulations that require holding US Ts. Odd, but true. Hugely true of various funds inside the US. Also outside, tho.
I don’t have a particular link to a good history of the resource curse theory but the history of Spain during her glory days as an empire is well known history and illustrates it perfectly.
Spain basically depended on plundered gold and silver which worked great for a WHILE. In the end Spain wasted the opportunity to move to a more modern and efficient economy ahead of her competitors.
Thanks for the progressive-economics link I have bookmarked it and intend to study it at my leisure.
I guess the Canadians are like most kids. Offer a little kid a small candy bar today or one twice as big TOMORROW and he usually takes the small one.
It seems perfectly obvious to me that young Canadians living a “backwoods”lifestyle are going to take the little candy bar today, meaning new roads, cars, washing machines, internet connections etc etc over a life consisting mostly of hard work.The folks who want to build railroads and pipelines and cities are going to win.
I have lived the hard work life style. It’s not all it’s cracked up to be compared to taking it easy in my old recliner and pecking away at my keyboard to pass the time. My Dad at my age would have been hard at work outside on this date thirty or forty years ago.
Material success enables me to sit here with the AC blasting and tropical fruits on the sideboard keeping him comfortable for however much longer he has.He has a great shot at making the century mark in large part due to the easy life brought to us by way of oil and coal.
Spanish gold plunder is also the classic example of problems with the gold standard.
old farmer mac,
I think that’s right. Spain never broke free from the resource curse to develop industries beyond the production of primary materials (princially gold and silver). And like you say, to make matters even worse this production came from its colonies.
Industries dedicated to producing high value-added goods developed in other parts of Europe — outside of Spain — and Spain used its gold and silver production to buy those goods.
Then when silver and gold production imploded in the colonies due to the demographic catastrophe of the Indian population in the second half of the 16th century (more than 80% of its workforce died off in the epidemics), Spain was left with no plan B.
Here’s how Martín González de Cellorigo put it:
The contempt for commerce and manual labour, the lure of easy money from investment in censos and juros, the universal hunger for titles of nobility and social prestige — all these, when combined with the innumerable practical obstacles in the way of profitable economic enterprise, had persuaded the middle class to abandon its unequal struggle, and throw in its lot with the unproductive upper class of society.
The other three great hegemonic global empires that followed Spain — the Netherlands, England and the United States — followed a quite different trajectory. All three became productive powerhouses — each taking its turn at being “the workshop of the world” — only later to de-industrialize.
There was a watercolor from the colonial era which came available at auction in Portugal a few months back which wonderfully illustrates the Iberian zeitgeist which González de Cellorigo describes.
Spain never broke free from the resource curse to develop industries beyond the production of primary materials (princially gold and silver).
What’s worse, these weren’t industrial materials. Really, this wasn’t production, this was theft: they were minting money, and inflating the European money supply.
Nick,
That’s right.
As John Kenneth Galbraith put it:
There were many in Europe after 1493 who knew only distantly of the discovery and conquest of lands beyond the ocean seas, or to whom this knowledge was not imparted at all. There were few, it can safely be said, who did not feel one of its principal consequences. Discovery and conquest set in motion a vast flow of precious metal from America to Europe, and the result was a huge rise in prices — an inflation occasioned by an increase in the supply of the hardest of hard money.
Excellent point Nick.
We ought to take this one over to the non oil side , but it would do the hard core oil guys good to follow it there.
Before the widespread adoption of fiat money, an insufficient supply of precious metals for coinage is generally accounted by economic historians as a severe impediment to economic activity.
MUDGOD: thanks for that great reference to Cactus Schroeder. Well worth listening too.
xxxx
With strategic support and public-private cooperation, thousands of unemployed oil workers and coal miners could potentially land wind and solar jobs.
http://www.truth-out.org/opinion/item/32680-greening-the-us-energy-workforce
Culture clash?
perhaps, but I would think unemployment would trump that.
For what it is worth the weekly EIA data shows another big tumble in US production, down 119,000bpd from last week, down to 9,218,000, and down 400,000bpd from the peak a few months ago. Looks like their models are frantically catching up with reality…..
Is a drop of 119,000 bpd a “big tumble” (from over 9 million)? Alaska alone commonly drops a 100,000 bpd during summer maintenance on their pipeline.
It is definitely not a big enough drop to move the price, but if the drop is not coming from Alaska, than we have a first glimpse that cure for low price is low price.
Two things (to keep it short)
1) How does crude oil supplies develop outside US?
2) How does global DEMAND develop?
I like short.
1) This one is hard to stay short because there are so many moving parts. In short, I would say depends if and how the 2 big exporters (Russia, OPEC) divide the global importing market. The rest of them will just have to fight for their piece of pie depending on their cost of extraction.
2) Short term – no idea. Long term – demand depends on what happens with global debt. Deleveraging of debt? or “Extend & Pretend” a la Greece? Who knows?
It’s a weekly drop, largely coming from Alaska (-100kb/d).
And weekly estimates are not reliable and accurate.
But monthly numbers, including those for Lower 48 onshore, are also starting to show a declining trend.
Thanks Alex. Keep us posted with graphs.
To put it in some context
weekly vs. monthly production statistics
Andy,
Those are last weeks numbers, released on the 2 Sept. The next release is on the 10 sept, due to your long weekend. The gas numbers will be on Friday. Not sure when the Baker Hughes rig count will be out, Maybe Monday. We will have to wait and see.
http://www.bnsf.com/about-bnsf/financial-information/weekly-carload-reports/
The Burlington Northern Santa Fe hauled 1276 fewer petrol cars in week 35 of 2015 than in week 35 of 2014.
1276 x 650 = 829,400 barrels of oil.
118,485 barrels per day decrease in oil hauled by rail from one year to the next.
Either the oil is going someplace else, more capacity in pipelines or there is less production.
When oil is 25.50 per barrel, you might be less inclined to sell.
Do like the dairy farmers dumping milk during the Great Depression and dump oil at gas stations.
My take is that there is no global oil supply glut.
Reasoning:
(1) Most oil production comes from “developing nations” which, in general, publish approximate data months or years late.
(2) Over 50% of global oil is used by developing nations and their oil use in increasing. Global demand is increasing at about 1 million bpd per year (EIA)..
(3) A recent storage surge in the US coincided with an import surge and a closed refinery. The data showed US demand exceeded production but was marketed as the opposite.
(4) A 2014 IEA study of 1,600 fields that produce 70 % of global oil showed a decline rate of 6.2%
(90 million)(0.70)(.062) = 3.9 million bpd. With the demand increase that means the world needs about 5 million bbls per day of new production. Enough said?
Amvet,
Facts (particularly, revisions of historical numbers) show that most “developing nations” have more reliable oil production statistics than the U.S.
AlexS, Could be accurate, I can´t dispute that, but it appears to be late
The 2015 EIA global report has no production and consumption data newer than 2013.
You can find it here:
http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm#
Well , technically speaking using the language properly there IS NO SUCH THING as a shortage or a glut. Glut is a weasel word implying a FAILURE of the theory of supply and demand. The theory has not failed. Even in the very first classes taught in econ you learn that markets overshoot and undershoot and that it takes a little time for production and consumption to find the happy point at which the market “CLEARS”.If economic conditions are changing fast , the market may run behind “out of adjustment” chasing the changing conditions.
THERE IS SUPPLY . THERE IS CONSUMPTION. Price is determined by these two factors plus or minus the effects of some oil going into storage and taxes or subsidies to some extent.Taxes add to price and subsidies reduce price, so they are included in the basic analysis automatically.
DEMAND is a mathematical function that tells us approximately how much end users will BUY at any given price at any given instant. Right now demand is such that the world is buying ninety or so million barrels a day at around forty five bucks if the price hasn’t changed since I last checked.
SOMEBODY IS BUYING every drop of oil pumped that is not accidentally spilled. Using the language properly supply is ALWAYS equal to consumption( allowing for a time lag of course ) and demand at any instant is equal to consumption as well.
Producers are bringing enough oil to market that end users just don’t want it all except at today’s relatively cheap price given todays economic conditions.
This is dirt simple and even a ten year old farm kid understands such things by the time he is sixteen if his Daddy encourages him have a little patch of tomatoes or watermelons of his own to sell out by the road.
Incidentally , this is the explanation offered by such backwoods institutions as Oxford, sarc light on.
Supply and demand no longer control prices. Massive futures trades by funds and banks (even central banks) control prices. They sell what they do not have and buy what they do not want.
With lots of money plus a leverage of, say, 45 (Deutsche Bank) , a lot of trading is going on.
Pardon my french but market manipulation is part and parcel of supply and demand.
IF a central bank makes money free and easy or tight, this applies to spending right across the board, not just for oil. Trading can influence prices a little maybe for a short while but this sort of manipulation is self correcting.
Somebody who thinks traders of ANY sort can control price is going to have to tell me HOW THEY CONTROL PRODUCTION and how they CONTROL SALES at the consumer end of the market.
The trucking company or the airline or the farmer running his business or the man on the street filling up his car buys more or less depending on the STATE OF THE ECONOMY and the particular needs of the business or his personal needs. If oil is cheap businesses and individuals are less careful about using more than really necessary. If it is high they are more careful about reducing their use. THERE is no way in hell a trader can change this basic behavior.
And at the other end, producers have to GUESS at what oil is going to sell for. I have not yet seen ANYBODY with any professional expertise worth mentioning make a comment in this forum to the effect that oil producers base their production plans on the TRADERS determining the price of oil.
They base their plans on what they think the COST of production will be and on THEIR ESTIMATES of the DEMAND for oil, which in turn is estimated based on the estimated future state of the economy.
Not too many people dispute that traders and bankers can and do get manage to earn or steal a little along the way. But nobody I know of with expertise believes the traders matter very much in the grand scheme of things.
Suppose you manage to manipulate the price of oil up by a dollar or two, which basically means you have managed to get between some of the biggest and baddest great white shark corporations in the world, some of them owned by some of the biggest and baddest governments, and their CUSTOMERS- likewise big and bad outfits such as major trucking companies, state and national governments, major corporations such as airlines, retailers such as WALMART, etc etc etc.
There are always a few thieves getting away with a little here and there in any business or industry. They don’t amount to much in the grand scheme of things.
A trader might manage to push the price of oil up or down minutely for a few hours or days. If so, more than likely some other trader lost what he made. In the end, the end users, the final customers, determine how much oil is produced, refined and distributed and sold. NOT TRADERS.
If producers can make money at the wholesale end, they produce. If not, they eventually give up and production falls until the price goes up enough to make production profitable again.
Some producers have production costs low enough and pockets deep enough to ride out a long spell of low prices. Some don’t. The ones that don’t will sooner or later give up and quit.
Traders cannot hold oil OFF the market to any significant extent and cannot bring oil TO the market to any significant extent.
If anybody has proof to the contrary, PLEASE set me straight NOW because I would rather be known for a fool today in this small forum rather than a bigger one later in case my eventual book ever becomes a best seller, lol.
NOW an outfit such as OPEC CAN keep oil off the market and force the price up, or flood the market and push the price down.At the moment however OPEC is not a functional working outfit.This might change, OPEC might regain some vitality and DO SOMETHING sooner or later.
Some history:
“In its first year, Spindletop produced more than 3.5 million barrels of oil; in its second, production rose to 17.4 million. In addition to driving the price of oil down and destroying the previous monopoly held by John D. Rockefeller and Standard Oil, Spindletop ushered in a new era in Texas-based industry, and was enormously influential in the state’s future development. New oil companies were formed, along with the refining and marketing organizations needed to support them, offering a host of new jobs and increased income for the state’s inhabitants. Meanwhile, thousands of new prospectors arrived in Texas, searching for their own fields of black gold.”
http://www.history.com/topics/spindletop
17,400,000/365=47,671 barrels per day from one whale of a well, Spindletop.
Just so you know.
I don’t think that was from one well. But maybe I’m wrong.
Fernando, you are correct. For example, the Hogg-Swayne Syndicate tract, which comprised of 15 acres and was purchased in April, 1901 for $180,000.00. Four years prior the same tract changed hands for consideration of $450.00.
The Hogg-Swayne Syndicate sold off small parts of the 15 acre tract to others, eventually there were tracts as small as 1/64 an acre. Despite being this small, owners still managed to drill a well on these 1/64 acre tracts, the derricks touched each other. If my math is correct, those lots would be approximately 23′ x 23′. The tract was nicknamed the Onion Patch. Many photos depicting Spindletop show a photo of this tract, which was also hit by devastating fires in 1902 and 1903.
Another place where spacing was extremely tight was Signal Hill in California. I believe the area had previously been subdivided into small lots for houses. Oil was discovered and soon wells were being drilled on the housing lots. Signal Hill is a part of the Long Beach Oilfield, which I believe has produced nearly one billion barrels of oil, including 1/5 of the worlds supply in 1923. Also, many historic photos depicting the tight spacing, many which show houses right next door, built prior to the oil discovery in 1921.
(Found this stuff on Wikipedia).
I stand corrected. Cerro Azul No. 4 was 250,000 bpd.
“The flow was first gauged on February 15 at 152,000 barrels of oil a day, and continued to increase. On February 19, the day the well was capped and brought under control, it blew 260,858 barrels in 24 hours. Total production by December 31, 1921 was 57,082,755 barrels of oil and the well was still producing.”
http://www.sjvgeology.org/history/gushers_world.html
There was a well (the 30-A I think) in the Yates field in Pecos County, Texas that IP’d at 8,500 bbls per HOUR (200,000 bopd). Had a bit drop of 21 ft through the pay interval. That is what I would call a whale.
200,000 bopd is really impressive!
Interestingly, what are IP rates in the best deep offshore wells?
I’d say 30-50 mmbopd for the really big ones.
thanks
I was out at Core Labs one time when they brought in a core from the Yates Field.
One of the Core Labs engineers joked: “The average man on the streets thinks that oil exists below the surface of the ground in lakes and rivers.” Then he quipped, “The engineers and geologists at Marathon Oil believe that too.”
I’ve seen the opposite end of the spectrum too. A San Andres core from somewhere on the CBP (it’s been a while and I’ve forgotten the field) that had a few 3-9 ft karst sections that were 100% filled with anhydrite. Super depressing stuff.
Hmmm was CO2 involved by any chance?
Nope, was a well from the late 20’s (’27 I think). Its one of the few fields in the world that actually had caverns charged with 100% oil. Had a really strong water drive from the start.
Interesting.
Canadian Natural cuts salaries in Calgary, Aberdeen
Canadian Natural Resources Ltd. said Wednesday that it is cutting salaries for all of its staff in Calgary and Aberdeen, Scotland, as it grapples with low commodity prices.
IMF warns Saudi Arabia on public spending as oil revenues dwindle
The International Monetary Fund has urged Saudi Arabia to reduce domestic energy subsidies and its public sector wage bill as the world’s top oil exporter wrestles with plunging crude prices.
Rune, AlexS, thank you for the information regarding the CAPEX cuts by CLR, CHK and WLL.
One thing that will be interesting in the next few quarters is to see the OPEX per BOE numbers for the shale companies. My contention is that these figures have been low due in part to the large number of recently completed wells. The low price environment will help some, but I suspicion that OPEX is more difficult to cut than CAPEX, due to same being non-discretionary.
For example, assume Shale R Us at the end of Q2 2015 was producing 100,000 net BOEPD from 1,000 wells. They decide to defer most completions for the next four quarters. OPEX per BOE is $8.00 at the end of Q2. So, for Q2, OPEX was $73,600,000.00 to produce 9,200,000 BOE.
At the end of Q2 2016, Shale R Us is now producing 60,000 BOE from the same 1,000 wells. If OPEX is $73,600,000.00, OPEX per BOE would be $13.33. Question is, will OPEX for the wells go up or go down. Maybe will go down due to less water disposal costs. However, maybe will go up as there will be less wells flowing, and likely more down hole repairs required as the wells will be one year older.
Will be interesting to see how this shakes out. Falling production with rising OPEX per BOE not good with debt of $Billions.
Shallow, thanks.
This is one of the things I find interesting. It is the financial dynamics that comes into play as extraction declines. Just think debt service ($/boe) for highly leveraged companies.
Unit OPEX ($/boe) increases fast as volumes decline fast.
Meet the Financial Red Queen and she is nothing like her physical twin.
Hi Shallow sands,
I would think that there would be lower costs to pump the oil (that would be electricity, I think) as there is 40% less oil, also there would be less water say 30% less and at $5/b for water disposal that’s a lot of money, if we are talking 900,000 barrels of water in a month that is $4.5 million less spent on water disposal, that could cover a lot of down hole maintenance. I think the overall OPEX might be a wash. Lets say we use Fernando’s fixed plus variable cost approach.
For each well we assume a fixed cost of $12,000 per month and a variable cost of $4/boe. So after 1 year we have $12 million in fixed costs and $7.2 million in variable costs for a total of $19.2 million for the month, the monthly output is 1.8 million boe so OPEX is $10.66/boe, a smaller increase than the $13.33/boe based on fixed overall OPEX (your initial assumption). I will let those who know much more than me comment if Fernando’s, fixed plus variable approach has merit. The model could easily be changed to one with a higher fixed cost and lower variable cost, if these numbers don’t make sense to those who know (Mike, Richard, Shallow sands, Rune, and Fernando).
Dennis. I may be wrong, because I am not in the LTO industry. I just read about it. However, it is my understanding that LTO wells usually flow for a few months after completion, requiring no artificial lift. Therefore, there would be no electrical expense due to artificial lift.
Also, related to this on the CAPEX side is the issue of whether completion costs include the artificial lift equipment. It is my understanding that artificial lift equipment for LTO wells runs in the hundreds of thousands of dollars, be it rod pumped, jet pumped or electric submersible. It is not clear to me that companies include this when they disclose well drilling and completion costs. I think some do and some do not. Maybe someone with more knowledge on this subject could chime in.
Dennis. There are a couple of proposed projects for sale on Energynet that are operated by American Energy Partners. They are for Mississippian unconventional wells in OK. Although not Bakken, the AFE’s show just how many expenses are incurred in drilling and completing an oil well.
I do note that artificial lift equipment was included in the AFE’s. Looks like about $300K, but the wells’ vertical depth are under 5,000′.
I think a lot can be learned by following the auctions. For example, several properties list the last 12 months gross and net income. For shale wells in particular, many examples of how production declines plus price crash equals rapid economic deterioration.
Also, for working interests, lease operating statements are a valuable tool.
Hi Shallow sand,
In your example of 1000 wells at the start I assumed they were of different ages as there are very few companies that would complete 1000 wells in a month, so some of those wells might require artificial lift, but I do not know at what point this usually begins. This would probably be a much smaller effect than a difference in water disposal costs.
Note that when the average output of the average well (for the 1000 wells in your example) falls to 15 b/d, then the OPEX rises to $30/boe using the OPEX/well=$12,000+4 times monthly well output formula.
This seems like it might be in the ball park, what do you think?
Dennis, I agree, too many moving parts sometimes to get an accurate indication of where OPEX will go for shale wells. I do think the numbers you use are in the ballpark, but as you know, there is quite a range.
Michael Filloon, who writes Seeking Alpha articles about the Bakken, mentioned that he requests information from shale companies and sometimes they provide it to him. I don’t know if any would provide you with lease operating statements upon request? Probably not, but it might be worth a try?
I do see reports of Bakken producers putting in wastewater handling pipeline networks directly to injection wells. That ought to lower OpEx a lot for older wells. I’m not sure what fraction of wells have it already, but it looks to me like more producers than not had it on the agenda until recently.
Marketwatch.com had posted this article:
The end of deep-sea oil drilling as we know it
http://www.marketwatch.com/story/the-end-of-deep-sea-oil-drilling-as-we-know-it-2015-09-09?link=MW_popular
Highlights:
“Once the current oil-supply-and-demand imbalance is narrowed, and it will be faster than many are now predicting because consolidation will put supply into the hands of fewer corporations like Dow components ExxonXOM, +0.36% and ChevronCVX, -0.17% we will see the price of oil rise back to around $80 per barrel as soon as next summer I believe.”
“What we aren’t likely to see is a rise in the price of oil above $100 for at least several years unless there is a war or significant event that disrupts supply.”
“Combine the lower demand for oil in the future with the prolific results of fracking, and soon re-fracking, and it is not hard to see that the need to drill for oil in the oceans is decreasing. ”
“We are also probably seeing the end of most new deep-sea oil drilling. Many people are completely missing this, including those who protested Royal Dutch Shell’sRDS.A, +0.62% permit to drill off of Alaska, which may never result in an active oil field because new deep-sea oil drilling may never be economic again. Shell indicated that if the field was developed, it woudn’t likely happen until around 2030.”
[Oddly he dismisses Off shore drilling because of High Debt load, but praises LTO, ignoring that the Debt load is even worse with the shale drillers]
Author also states that fracking combined with solar development will lead to US energy independence. We shall see.
Shale Companies Get Real on Asset Sales as Early Swagger Wanes
http://www.bloomberg.com/news/articles/2015-09-10/shale-companies-get-real-on-asset-sales-as-early-swagger-wanes
A renewed plunge in oil prices and the winding down of other financial lifelines is forcing shale drillers to auction off once-prized assets and settle for less in potential deals.
This week, companies such as Chesapeake Energy Corp. said they are embracing the strategy as they confront the reality of a prolonged, painful crash. While executives have assured investors that it won’t be a fire sale, recent deals suggest that prices have fallen significantly from even a few months ago, according to data compiled by Bloomberg.
With one-sixth of major independent oil and gas producers facing debt payments that are more than 20 percent of their revenue, austerity has replaced the swagger that characterized the earliest days of the oil bust. Contracts that locked in higher prices are expiring, leading banks to reduce credit lines in coming months. Drillers caught in the squeeze may be forced to auction off some of their best holdings to raise cash or accept more expensive financing to avoid bankruptcy, according to more than a dozen bankers, lawyers and company officials who specialize in energy deals.
“These companies are starting to be a little more realistic about their situation and to face up to the fact that they will probably have to do something they don’t want to do,” said Omar Samji, a partner in law firm Jones Day in Houston. “There’s not going to be an easy lifeline.”
The first wave of deals is already looming: sales of land holdings in prolific oil regions. Oil market gyrations since July have made valuations hard to pin down, dimming the outlook for sales of whole companies. Instead, executives are looking to shore up their balance sheets by selling land or wooing deep-pocketed private equity groups or hedge funds to invest in their operations in exchange for a share of revenue, Samji said.
Sales Announced
Cobalt International Energy Inc. sold off discoveries in Angola last month and EOG Resources Inc. has begun an auction for acreage in Colorado and Wyoming. Anadarko Petroleum Corp. said it will continue to weigh offers, and Chesapeake said Tuesday it’s still pursuing asset sales. The Oklahoma City-based producer is said to be seeking buyers for dry gas acreage in the Utica shale formation, according to people with knowledge of the matter.
“Chesapeake is not desperate,” Chief Executive Officer Doug Lawler told investors Tuesday. “We are not going to have a fire sale on any asset.”
Illustrating the tough choices companies are facing, W&T Offshore Inc. announced Sept. 1 the sale of acreage in West Texas’s Permian basin, the highest oil-producing area in the U.S., for $376 million. The price amounted to about $8,000 an acre, less than a fourth what was paid for similar land in another deal just months ago, according to an analysis by Raymond James.
The Houston-based producer spent $120 million more than it made during the first six months of the year, and has drawn about half of a $500 million bank loan. A sale of prime Permian acreage might allow W&T to double its liquidity, or the amount of money it has on hand in cash and credit to pay for drilling and other expenses, according to Bloomberg Intelligence.
Default Risk
The pressure is building for more such sales. As prices plunged last month to below $40 a barrel, one out of every eight junk-rated oil companies was in danger of defaulting — the most since January 2010, according to Moody’s Corp.
“The oil and gas sector had the highest number of negative speculative-grade rating actions for the month, with seven downgrades including three defaults,” according to Standard & Poor’s. Ten companies out of the 60 in Bloomberg Intelligence’s index of North American producers spent 20 percent or more of their revenue on interest payments in the first half of the year, according to data compiled by Bloomberg — a key sign of distress.
For companies including Magnum Hunter Resources Corp., Comstock Resources Inc. and two others, it was more than 30 percent, the analysis shows.
“The oil industry is going to have to reshape itself somewhat to fit this market,” said Shahid Ghauri, a partner in law firm Jones Walker’s energy practice. “The valuation of some of these companies may be too high. That’s why we could start to see some more deal activity in distressed situations.”
attached chart:
Wow…
Just read EIA has weekly US production at 9.14 million bopd, down 89,000 barrels from prior week. As discussed here, do not know how accurate, but it appears oil market is reacting, despite another build in inventories. Wonder if 8.9 million bopd by year end 2015 is too generous. If US lost 89K barrels per week for the remainder of the year, from 9/4/15 to 12/31/15 production would drop by over 1.5 million bopd, or down to about 7.6 million bopd. Is that possible?
Total U.S. C+C production: -83kb/d
Alaska: +125 kb/d
Other: -208 kb/d !!!
Weekly numbers show a decline of 475kb/d from the early June peak.
For U.S. ex Alaska the decline is 504 kb/d
EIA weekly vs monthly production estimates – total U.S. (kb/d)
The latest STEO implies a 587 kb/d decline in the U.S. ex-Alaska C+C production from April to September
EIA weekly vs monthly production estimates – U.S. ex-Alaska (kb/d)
Any ideas on why Alaska jumped +125 this week? Been on a sky diving session for a while.
It was down 100 kb/d in the previous week, likely due to temporary shutdowns
Alaska is always down in July and August owing to annual maintenance work; production resumes to “normal” for balance of year. July avg. 468,000 and August, 418,000 bpd (rounded). Normal now below 500,000 bpd (with decline avg. 5-6% per year).
I am mathematically challenged but looks to me like in recent weeks US ex. Alaska has been declining close to 20% on an annualized basis? Again, big if is whether EIA data is accurate.
shallow sand,
I think oil prices will stabilize and probably rise somewhat by the end of the year. With this, the decline in production may slow down. But it will continue
Annual WTI spot crude oil prices fell from $21 in 1997 to $14 in 1998, and US C+C production (virtually all classified as conventional at that time) fell by 7.4% from 12/1997 to 12/1998:
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS1&f=M
So, it’s a reasonable assumption that conventional US C+C production could easily fall by high single digit percentages from late 2014 to late 2015, with shale production falling by double digit rates (net declines, after new wells, in both cases), with the overall decline being in the double digit range.
And a reminder that the observed net rate of decline in Louisiana’s marketed gas production, a mix of conventional + shale gas, was 20%/year from 2012 to 2014.
That would look a bit overdone.
But ND rig count is dropping fast again, back to 69 now, from 75 just a week ago.
“Chesapeake is not desperate,” Chief Executive Officer Doug Lawler told investors Tuesday. “We are not going to have a fire sale on any asset.”
When reading any press release, always ask yourself if the exact opposite of what is stated makes more sense, and if so believe that instead, particularly if the statement is a denial.
Magnum Hunter seems to be caught in the same Utica spot price disaster as Chesapeake. 2Q2015 realized gas price $1.67. Ouch. 2Q2015 Operational Profit before special items, imparements, depreciation and interest negative $0.10 per McfE. Ouch. Gas production down 29% Q/Q. Possibly a seasonal effect, but still ouch.
It’s bank credit line window dressing season. Everyone’s trying to fix up their books before the banks re-evaluate their creditworthiness in October using ugly trailing 12-month price averages.
Well for 1 year we have been reading BS from financial press. It looks like there is no more benefit for the bankers to print science fiction on behalf of “resilient” shale drillers. More likely the reason is that they run out of granma & granpa investors or even hedge funds or private equity groups. Now we will see who was swimming skinny dippy 🙂
Back in 1978 when congress created section 401(k) to the tax code and the big push got underway to do away with defined-benefit pensions — and workers’ savings got funneled into the markets — I figured that the rules of finance would have to be changed to allow for the slaughter of the lambs.
And sure ’nuff, as a couple of PBS Frontline documentaries revealed, that’s exactly what happened:
http://www.pbs.org/wgbh/pages/frontline/video/flv/generic.html?s=frol02p79&continuous=1
http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/
“Back in 1978 when congress created section 401(k) to the tax code and the big push got underway to do away with defined-benefit pensions — and workers’ savings got funneled into the markets ”
Pension funds were typically invested in the markets. The issue is that some Pension funds where not investing well, and people were less likely to work for a single employee during their working career. Also not every companies (ie small businesses) offer their employees pension plans. 401K plans filled in the gaps. 401K is a better option than pensions, because if the company fails or they invest pension funds poorly, the workers could be left with nothing. A prudent worker with a 401K would likely fair better than with a pension plan since there are few US companies that last. As far as Gov’t Pension’s well they are usually way underfunded and mis-managed. The only advantage is gov’ts can raise taxes to prop up thier pensions (for a while)
I use to contribute to 401K/SEP/IRA’s but they no longer make any sense, because the odds favor that the gov’t will take away retirement funds either through taxation (ie raise taxes) or forcing retirement funds to be heavily invested in gov’t bonds that lose money. In my opinion its better to pay the taxes up front, and just save money for retirement outside of US retirement plans. The US debt is close to $19 Trillion, increasing about $1T per year. At some point it going to turn into a crisis. I am sure Retirement funds will get sacrificed at some point as well as raising the minimum retirement age. I doubt anyone born after 1959 will ever see a dime of Social Security.
For most people retirement funds have been a tax increase since they typically need to tap their retirement funds before 59 (either for an emergency, long term unemployment, etc) which results in 10% penalty tax.
I think most of the horsepower to switch from defined benefit plans to defined contribution plans came from desired cost savings on the part of employers:
If the old virtues of defined-benefit plans seemed less compelling to employers, the one singular virtue of 401(k) plans became the more irresistible: 401(k)s are dirt cheap. In the late 1970s, employers devoted more than 4 percent of workers payrolls to pensions. By the 1980s, they were contributing around 2.5 percent.
— Jacob S. Hacker, The Great Risk Shift
Let’s redline some stuff:
Oil market gyrations since July have made valuations hard to pin down, dimming the outlook for sales of whole companies.
wooing deep-pocketed private equity groups or hedge funds to invest in their operations in exchange for a share of revenue, Samji said.
Of Revenue?????? That’s lethal stuff. Zero ability to throw in every imaginable cost to get the profit down. This is what happened to Hollywood in the 80s and led them to NEVER do deals that were a % of revenue.
The price amounted to about $8,000 an acre, less than a fourth what was paid for similar land in another deal just months ago, according to an analysis by Raymond James.
Ten companies out of the 60 in Bloomberg Intelligence’s index of North American producers spent 20 percent or more of their revenue on interest payments in the first half of the year, according to data compiled by Bloomberg — a key sign of distress.
And HY paper is alleged to be floated now at 13%, which will be now a % of much lower revenue than in 1H. trala trala
Hi Sweethearts.
Well, the dog days of summer are over in the northern hemisphere… What did we miss?
In doing a find on this page of ‘head fake’, I catch a mention of it from the same article I caught it from– and yes, I was familiar with Charles Hugh-Smith’s (CH-S) other articles on the same thing… I have a hard time with the term head fake, which doesn’t seem to describe something clearly. But then, I have a hard time with exergy and emergy, but dog knows I am trying.
Maybe its because my head is still groggy from what the dog days of summer can inspire… (which can be written about in the relative comfort of not being a refugee.)
But, or so, my question to you is this: How do you reconcile, (or could you please attempt to reconcile for us, or at least me, hereon) CH-S’ ‘head fake’ article with, say, BW Hill’s and/or Gail Tverberg’s takes on similar and with regard to stuff like emergy/exergy/unconventional ff’s/bottom-of-the-barrel ff’s/economy-as-engine? For example, what of Glenn Stehle’s response to CH-S’s ZH article’s mention (the thread of which I am about to read…)
…So it indeed looks like another facet of Peak Oil 101– human migration beyond the norm– is well underway… My heart goes out to the refugees, who doubtless are going to come, and are coming, under yet more fire, only this time, sociopolitically as they attempt their cultural re-integrations from their tents.
test
With all the revisions to US Oil production, won’t inventory numbers have to be revised as well? I read somewhere(possibly this site) that part of the methodology for the EIA to calculate inventory levels was based on production. Something like production + imports minus exports and refining.
If that is the case, since production has been so overstated, wouldn’t inventory levels by off by 10’s of millions of barrels?
Good piece from the EIA:
U.S. onshore producers face challenging times
This Week in Petroleum, September 10, 2015
http://www.eia.gov/petroleum/weekly/
Results from second-quarter 2015 financial statements from U.S. companies with onshore oil operations suggest continued financial strain for some companies. Low oil prices have significantly reduced cash flow for U.S. oil producers. To adjust to lower cash flows, companies have turned to capital markets financing and also have reduced capital expenditures. With energy company bond yields widening in relation to U.S. Treasury bonds, some companies may have to reduce capital expenditures further to service their debt.
The 44 companies analyzed contributed much of the growth in global oil production over the past several years. Most of their operations are focused in onshore shale plays in the United States. According to the financial statements, their combined production averaged 2.7 million barrels per day over the first half of 2015, representing approximately 35% of U.S. Lower 48 production.
With U.S. crude oil prices 47% lower in first-half 2015 compared to first-half 2014, U.S. onshore companies experienced a significant reduction in cash flow from operations. Most companies responded by reducing capital expenditures. Even before the decline in prices, these companies had typically used a combination of debt, new equity, and cash flows to finance their rapid expansion, which is a common strategy for growing companies that need to finance investment before operating cash flow can increase. The difference between operating cash flow and capital expenditure—known as free cash flow—remained at a deficit in first-half 2015, although it was $2.8 billion higher than the same period in 2014 (Figure 1) and the second quarter was the lowest deficit for any quarter since 2012.
In addition to reducing capital expenditures, this group of companies responded to the reduction in cash flow in the first half of 2015 through share and debt issuance. Some companies have been able to refinance their debt—that is, paying off old debt and taking on new debt, perhaps with a different interest rate or longer maturity. This option has increasingly become more expensive, though, as interest rates for energy company debt issuance increased as crude oil prices declined, and are higher than for any other business sector.
Some actions from the companies’ operating activities also helped mitigate the price decline. Net hedging assets stood at $8.8 billion in total for these companies as of June 30, 2015, the third-highest for any period since 2011. An oil-producing company can hedge by selling a portion of its future expected production in futures, options, or swaps markets, which locks in a price. These derivative instruments increase in value as prices fall and could provide a cushion to lower revenue from falling prices. These companies have also benefited from lower operating expenses, such as lower rates for drilling and support activities.
Because of the large stock of debt accumulated from past years, a higher percentage of operating cash flow is being devoted to debt-service payments (Figure 2). Debt-service payments consist of principal repayment to creditors and typically are fixed in both amount and frequency, agreed upon before a company receives a bank loan or issues a bond. With fixed debt repayments and the large reduction in cash from operations for these companies, the ratio of debt repayments to operating cash flow has increased in recent quarters, with 83 cents of every dollar of operating cash being devoted to debt repayments for the four quarters ending June 30, 2015, the highest since at least 2011. As the debt repayment to operating cash flow share increases, a company is left with less cash to use for investment opportunities, dividends, or savings for future use.
Companies that use bank credit facilities to meet their short-term cash requirements face redeterminations twice a year. With next month’s round of redeterminations—which considers the valuation of companies’ reserves as collateral—some companies may face challenges in raising enough cash to maintain capital expenditures and meet liabilities.
…
Hmmm Re: “Free Cash Flow” Burn Rate was higher in 2014 than 2015 with income much greater in 2014?? Free fall in capX? One has to wonder who is on the wrong side of the Hedges? Who’s pocked does that Lifeboat money come from? Does it just get sucked out of the Futures Casino?
Some economists, like No mi Pri ns recently wrote on her blog, believe the credit problems in the domestic oil and gas sector could cause problems everywhere because of the “level of global inter-connected financial risk.” Higher borrowing costs for the domesitc US oil and gas sector mean higher borrowing costs everywhere.
From Reuters:
U.S. shale giants turn to 2016 with somber outlook
http://www.reuters.com/article/2015/09/10/us-oil-usa-spending-idUSKCN0RA1CZ20150910
Some of the largest U.S. shale oil producers have already begun slashing 2016 budgets, with some planning double-digit reductions starting next January, the latest sign low crude prices are forcing a radical adjustment in the industry.
A rash of bleak commentaries from CEOs this week marks one of the earliest times in a calendar year that oil producers have laid out rough sketches for the following year’s spending.
Here to stay, it seems, is constant belt-tightening, though executives still think they will be able to pump more oil.
In all, North American oil companies should cut their budgets by as much as 15 percent next year, analysts at Barclays estimate.
Marathon, which operates in North Dakota and Texas, said it would trim at least 18 percent of its capital budget next year – more than $600 million – by cutting the number of wells it fracks, among other steps.
Executives at Anadarko Petroleum Corp and Apache Corp hinted strongly they could take cuts of their own.
“If we do stay in this lower-for-longer scenario, we’re going to see (2016) become a very different period than we would have anticipated,” Al Walker, Anadarko’s CEO, said at the conference.
Analysts expect the most acute pain at very small firms, not the big independents.
Still, cuts are happening. Apache has cut 20 percent of its staff this year and has begun looking for a joint venture partner to help develop its Montney shale acreage in Canada, a sign that the company is looking to spread financial risk.
WPX Energy Inc, which is spending $825 million to $925 million this year, could cut that to $700 million to $800 million next year, Chief Executive Rich Muncrief said Wednesday.
Chesapeake Energy Corp CEO Doug Lawler told investors at the conference on Tuesday that maximizing liquidity and preserving the company’s ability to generate cash were near-term priorities.
“How we deploy our cash in the next few years will be very important,” said Lawler, adding that he was prepared to cut capital spending next year.
It is an expectation slowly becoming reality across much of the U.S. oil industry, with many suppliers now realizing their own bottom lines are in jeopardy.
“We believe our customers will take a conservative approach to their 2016 budgets,” Paal Kibsgaard, chief executive of Schlumberger NV, the world’s largest oilfield service provider, told the conference on Wednesday.
To be sure, budget cuts don’t necessarily mean that oil output will drop, with productivity of drilling rigs and frack crews jumping in the past two years.
Cimarex Energy Co said new processes to complete wells have helped it extract 64 percent more oil in New Mexico than had previously been available, a staggering jump that points to how nonchalantly the industry had spent money and overlooked efficiencies when oil prices eclipsed $100 per barrel, roughly $55 above current levels.
Continental Resources Inc slashed its 2015 budget on Tuesday and said 2016 should not be markedly different, but still forecast that oil output will rise at least 19 percent this year.
Only those U.S. shale producer who have heavily hedged production for next year, and less than half of the 30 largest did so according to a Reuters analysis, are voicing optimism and even increasing spending.
“We’ll probably be one of the only companies increasing our capex going into 2016,” said Pioneer Natural Resources CEO Scott Sheffield.
This is in response to Island Boy’s question about electrifying the oil fields way unthread where no response is possible. I asked about this and got a lot of replies sometime back from some hands on pros.
It is out of the question to run the grid out to places where oil is found for the purpose of running the drill rigs. The distances are unmanageable and the size of the power lines too big and the actual NEED for ninety nine percent of the power at any given site is TEMPORARY. When the drill rig moves only the last one percent is still needed to run the pumping and storage equipment, instrumentation etc.
To put this in perspective in farm country , where I live today with houses every few hundred yards along the road, I cannot run a fifty horse power electric motor. The local grid is not up to supplying that much juice for me without browning out my neighbors or upgrading our local branch line.
There is no hope of running transmission lines even five or ten miles capable of running electric motors with thousands of horsepower that will be used at any given location for a few months only.Diesel fuel will always be cheaper, and some rigs will be running on locally produced gas from nearby wells.
Diesel fuel can even be locally refined, the first new refinery in the US for years was built in ND recently to supply the local oil industry.
Electric tram trucks at present work well only on short routes where they are used regularly for years on end. So far they are not economic in very many locations but as diesel fuel becomes more expensive they may be eventually become practical in many places.
A portable natural gas generator should work very well, often on stranded gas. Mostly they just don’t want to bother with the additional complexity, because you’d still temporarily need a diesel generator also at least for the first well on a pad, if you were going that route.
Without doing any research (i.e., I could be very wrong), but I am sure that there was an article in the Daily Oklahoman a couple of years ago that talked about Chesapeake transitioning to using natural gas to drill [going into an electrical generator] instead of diesel. If I had to guess, I would not be surprised if there are over 100 drilling rigs that can operate that way.
At NDIC:
Date: Number of rigs:
9/11/2011 199 rigs
9/11/2012 193
9/11/2013 180
9/11/2014 198
9/11/2015 69 rigs drilling holes and, more than likely, striking some oil.
From 198 in 2014 to 69 in 2015, 129 fewer drilling rigs, 129 rigs all doing nothing, just standing there taking up space saving money that will go down the drain.
Just too many rigs working for nothing, no sense in drilling if there isn’t enough oil. If it costs too much for what is there then you stop, it won’t pay a dime. You can’t drill for nothing, it doesn’t pay.
http://www.geohelp.net/world.html
1857 Preston Barmore drilled two gaswells on Canadaway Creek near Fredonia, NY – used an 8 pound charge of gunpowder at a depth of 122′ to ‘frack’ the well – the first record of artificial fracturing
http://www.geohelp.net/world.html
A little history doesnt hurt at all, you gain some insight.
This link is more politics than oil, but given that Venezula is an important exporter and potentially a HUGE future potential exporter I think the people focused mostly on oil will benefit by reading it.
I need add nothing it speaks for itself.
https://www.washingtonpost.com/world/the_americas/clashes-break-out-as-venezuelans-await-end-of-opposition-leaders-trial/2015/09/10/468fceda-50f3-11e5-b225-90edbd49f362_story.html
Yea! You go Washington Post!
Maduro needs to take a page out of Mexico’s playbook. The Mexican government knows how to take care of trouble makers like Lopez:
Espinosa, 31, was found dead in a Mexico City apartment on Friday, alongside four women. All had been beaten, tortured, then shot in the head. The killings came just two months after Espinosa had fled the gulf coast state of Veracruz following death threats over his work….
Espinosa was the 13th journalist working in Veracruz to be killed since Governor Javier Duarte from the ruling Institutional Revolutionary party (PRI) came to power in 2011. According to the press freedom organisation Article 19, the state is now the most dangerous place to be a journalist in Latin America….
Espinosa – who specialised in covering protests and social movements – had reported threats dating back to 2012 but two recent stories particularly angered authorities, according to friends and colleagues….
After a string of threats, Espinosa left Veracruz in early June – joining more than 30 other journalists who have fled the state after receiving threats, according to Article 19.
But in the end, Mexico City offered no safe haven: the five bodies were found late on Friday in the apartment in the middle-class neighbourhood Narvarte – considered one of the safest in the capital.
One of the women was Espinosa’s friend Nadia Vera, a social anthropologist and activist, with whom the photographer had been staying while looking for somewhere to live.
Vera, 32, was an active member of the student movement #YoSoy132 whose protests against political corruption Espinosa had regularly covered. She had also left Veracruz for security reasons.
http://www.theguardian.com/world/2015/aug/04/journalists-mexico-press-freedom-photographer-ruben-espinosa-murder
Such is life, and death, in a client state of the United States.
I forget which are the other two but the Pentagon recently evaluated Mexico as one of the three most likely ”failing states” in the world.
Mexico is also major oil exporter and potentially a long term exporter.
But we ought to take this over to the other thread.
The International Energy Agency in its September Oil Market Report said that lower oil prices are having serious impact on both global supply and demand. This should help to partially rebalance the oil market in 2016.
Non-OPEC supply in 2016 is expected to fall by nearly 0.5 mb/d (to 57.7 mb/d) – the biggest decline in more than two decades. US LTO is forecast to shrink by 0.4 mb/d next year. From the report: “US oil production is likely to bear the brunt of an oil price decline … . After expanding by a record 1.7 mb/d in 2014 [C+C+NGLs], the latest price rout could stop US growth in its tracks. A sharp decline is already underway, with annual gains shrinking from more than 1 mb/d at the start of 2015 to roughly half that level by July. Rigorous analysis of our data suggests that US light tight oil supply, the engine of US production growth, could sink by nearly 400 kb/d next year as oil’s rout extends a slump in drilling and completion rates.” For comparison, the EIA expects total US C+C production to decline by 0.4 mb/d, including a 0.49 mb/d drop in Lower 48 states onshore output.
The IEA also expects lower output in Russia and the North Sea. From the report: “Producers outside of the US also continue to adjust to the lower price outlook. Marginal fields are being shut or are at risk as companies seek to stem losses from high operating costs. Spending curbs are also accelerating decline rates.”
Global oil demand growth is expected to climb to a five-year high of 1.71 mb/d in 2015, before moderating to a still above-trend 1.36 mb/d in 2016 thanks to lower oil prices and a strengthening macroeconomic backdrop. Compared to the previous month report, global demand forecast was increased by 200 kb/d to 94.43 mb/d in 2015, and by 190 kb/d to 95.79 mb/d in 2016. Interestingly, the IEA revised historical demand numbers for 2014. Initially, the agency estimated global demand growth in 2014 at 650 kb/d. Thereafter it was increased to 700 kb/d and now to 820 kb/d.
As a result, the world would need much more crude from OPEC. According to the IEA, in order to balance the market, the group would need to pump around 31.3 million bpd in 2016 – up 1.6 mb/d y-o-y and 0.5 mb/d more than the forecast in the previous IEA report. “In the second half of 2016, OPEC would need to pump some 32 million bpd – the first time the world would require more oil than the group currently produces.”
Meanwhile, according to the IEA, OPEC crude supply fell by 220 kb/d in August to 31.57 mb/d, led by losses in Saudi Arabia, Iraq and Angola. The group’s output still stood 1.2 mb/d higher than a year ago.
Additional comments from Reuters:
The report is one of the most bullish for OPEC since the group shocked markets last year by deciding against cutting production, choosing to fight for market share and depress the output of higher-cost producers such as the United States.
“The big story this month is one of tightening supply, with the spotlight firmly fixed on non-OPEC,” the IEA said in its monthly report.
The developments predicted by the IEA should help rebalance oil markets next year and potentially lift prices, which in August sank to six-year lows due to a growing glut and as concern deepened over the Chinese economy.
The IEA said China’s economic health represented one of the biggest bearish risks to its forecast but added that Chinese demand for oil products remained remarkably resilient, with growth in the first half of 2015 at more than 5 percent.
“We expect China, the world’s second-largest oil consumer, to keep up its crude purchases despite the recent stock market collapse, currency devaluation and steady stream of negative macroeconomic news. Beijing could also buy extra crude to fill up its strategic reserves,” the IEA said.
It predicted Chinese oil product demand growth at over 3 percent in 2016.
Before the market rebalances in the second half of 2016, global inventories – already at record levels – will continue to grow and put further pressure on oil prices.
And by the time markets begin to rebalance, Iranian oil could return in big volumes if sanctions are lifted. Iran’s crude exports have fallen from roughly 2.2 million bpd at the start of 2012 to around 1.0 million bpd in August.
“While there is unlikely to be a substantial boost in Iranian production before next year, oil held in floating storage could start to hit world markets before then,” the IEA said estimating Iran’s floating storage at 44 million barrels of which it said condensate amounted to some 60 percent.
http://www.reuters.com/article/2015/09/11/us-oil-iea-idUSKCN0RB0NN20150911
How Low Can Oil Go? Goldman Says $20 a Barrel Is a Possibility
http://www.bloomberg.com/news/articles/2015-09-11/-20-oil-possible-for-goldman-as-forecasts-cut-on-growing-glut
“The oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016,” Goldman analysts including Damien Courvalin wrote in the report. “We continue to view U.S. shale as the likely near-term source of supply adjustment.”
And from Reuters:
Goldman cuts oil price forecasts on oversupply, China slowdown
http://www.reuters.com/article/2015/09/11/us-oil-price-goldman-outlook-idUSKCN0RB14920150911
The bank cited rising OPEC production and economic concerns associated with China as the main reasons that triggered the downward revision in price forecasts.
The bank said the oil market was more oversupplied than it had expected and that it forecasts the surplus to persist in 2016.
The U.S. investment bank cut its 2016 WTI forecast to $45 a barrel from $57 and expects a 2015 WTI average price of $48.1 per barrel. Its prior forecast was $52.
Goldman also trimmed its average 2015 Brent price forecast to $53.7 per barrel from $58.2 and its 2016 forecast to $49.5 a barrel from $62.
More than 10 major international financial institutions have cut their oil price forecasts over the last month citing weak market fundamentals and the recent slowdown in the Chinese economy
Finally some good news! If Goldman Sachs the price will drop then surely the opposite ahs to happen. Interesting article below
http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405?page=6
Hi AlexS,
Do these low price scenarios seem reasonable to you? I can’t imagine oil staying at $35 or lower for more than a month, barring a severe financial crisis. The Goldman scenario sound plausible, I don’t know how long it would take to draw down inventories, do we know how far above normal levels stocks are world wide? Three months at 1 Mb/d of excess demand would give us a 90 Mb draw, but I don’t know what the excess is. IEA seems to indicate 270 Mb or maybe 160 Mb, so it looks like 6 to 9 months to draw down inventories, so it might not be until next June that we see oil prices climb significantly.
Edit:
I just re-read the IEA Oil Market report posted by AlexS, it seems there will be excess demand of roughly 2 Mb/d in 2016, if correct this would suggest about 4 to 5 months to draw down 270 Mb of excess inventory, which would put us at May or June. Oil prices would probably start to gradually rise as the draw down begins in Jan and by June I would think $75/b is possible.
Dennis,
In fact Goldman Sachs did not say that oil price could stay at $35 for a long period.
And $20 is not their base scenario. And even in this extreme scenario I guess they mean prices could touch $20 just for a few days.
Their forecast for 2016 is $45 per barrel of WTI. This doesn’t look completely unreal, but I still think the average price will be higher.
WTI oil price forecasts (revised in September and Reuters survey of 30 analysts as of end-August)
Dennis,
The IEA did not say there will be excess demand in 2016.
They said that the “call on OPEC crude” will increase by 1.6 mb/d y-o-y in 2016.
The “call on OPEC crude” = global demand – non-OPEC supply – OPEC NGLs supply
The IEA estimates the average “call on OPEC crude” in 2015 at 29.7 mb/d. But OPEC was producing much more: 31.0 mb/d in 1H15, 31.79 mb/d in July and 31.57 mb/d in August, which resulted in significant overproduction and increasing inventories.
Even if the “call on OPEC crude” increases by 1.6 mb/d y-o-y in 2016, it will reach 31.3 mb/d, which is still below the current level of OPEC crude production. To balance supply and demand, OPEC would need to cut output, but this looks unlikely given the expected increase in Iran’s production.
That means supply will still exceed demand, but the amount of excess supply will gradually decline from the peak levels of 2.6 mb/d in 2Q15. Global inventories will continue to increase, albeit at slower pace, and oil prices will remain under pressure.
The chart below from the IEA’s OMR assumes that OPEC crude output stays at current levels of 31.7 mb/d for the rest of 2015 and in 2016 (which implies that OPEC will accommodate additional volumes from Iran).
In that case excess supply will be eliminated by 4Q16. But it will take a lot of time after that to draw down excess inventories.
Goldman’s forecast of the global supply/demand balance is actually very similar. They also expect oil market to remain in surplus until 4Q16.
This chart from Goldman Sachs shows how the build-up in inventories was exceeding seasonal patterns since early 2014 and that will normalize only by 4Q16
It think Goldman is wrong about $20 oil. At this price, even the Saudis would be losing money.
Yes, but just imagine… at $20 per barrel the Saudis would have the worldwide oil market to themselves (obligatory – and what they might lose on each barrel they’d make up in volume).
If you think of the oil market like a freeway , a multilane highway , where a really bad accident can stop traffic for many hours, including thousands of vehicles not actually involved except in the traffic jam, it is not hard to visualize oil prices dropping to twenty dollars for a LITTLE WHILE.
I am not predicting this will happen, and don’t expect it to.
But if you are stuck with inventory that just will not move from the retail level back thru the distribution system to the processing system to the actual raw material production stage- then this sort of thing can happen, and crude oil IS a raw material. Crude is USELESS until somebody manufactures it into gasoline, lube oil, asphalt,diesel etc.
Farmers occasionally see the price of their goods drop to ZERO – meaning nobody will take them at the farm gate even if FREE. My family has dumped lots of good produce ”over the bank”, a farm country euphemism for into the nearest large gully or ravine, to get rid of it. Ditto almost any farmer sooner or later in the USA.
Oil could theoretically go to a low that allows only for the shipper and tax man to be paid at the quoted price.This is (partly) because some producers will simply refuse to shut in production at ANY price for reasons that are not exactly clear to me but have to do with maintaing the well for future production. Shut her down, she may never start again, or only after spending a lot of money to bring her back from the dead.
Almost any business man will run at a dead loss for a little while hoping to keep his organization whole and maintain market share waiting for better prices.
If the price is the Henry Hub price, and it costs twenty bucks to get it there including taxes, then the price could conceivably go that low for an extremely short period, with a producer getting nothing at all above taxes and shipping. I don’t know where to find them now but in this very blog numbers have been posted in recent months indicating some producers were getting less than ten bucks at the well for some low quality oils.
My opinion as a layman is that the odds of this happening for more than an extremely short time are extremely low. Price wars happen but don’t last very long when even the lowest cost seller is losing his shirt.
It appears that the variable costs of production per barrel exceed twenty bucks for a very large number of large producers. If they have to spend thirty to pump oil that sells for twenty they can shut in cheaper than they can produce.The losers eventually HAVE to give it up but depending on the depth of their pockets, maybe not for months. Some of the big boys look to have deep enough pockets to hold out two years at least.
Using the term ”lifting costs” to mean variable production costs seems to be the usual thing in the oil industry. If lifting costs are twenty and shipping and taxes add on ten more, for the lowest cost producer, the price at some ”hub” will NOT go below thirty for more than a few days.
OF course the Saudis may have “lifting costs” of only ten bucks( this figure pulled out of thin air) but otoh they produce only ten million barrels per day. The price will always be high enough on average to bring enough oil to market to keep the world wide economy running in the long term. Freeway pileups in the oil industry might push prices industry wide below production costs for a little while, not very long.
A year is not very long at all in terms of an industry as slow moving as oil.
Didn’t it only cost 1.50 usd per barrel back in circa 2003 to obtain oil from the ground in Iraq?
We’re in a world economy that has become a Frankenstein monster, a couple of bolts of lightning provides a hefty jolt to give the monster new life.
QE is the lightning, a bolt of it strikes, after a few twitches, voila, Frankenstein monster world economy.
Gotta have oil too though, lots of it.
It might have cost that little to get oil out of the ground back then in Iraq.The infrastructure used would have been built in previous decades when the costs of materials and labor were lower by a factor of five to ten than at present.
Inflation marches on.
The twenty dollar figure I mentioned is from memory and I read it somewhere recently as a low end figure for most oil fields, probably in this blog but maybe elsewhere.
Rune,
Having lured in droves of small investors – even my own accountant took early retirement for shale investing – into the narrative of high tech oil and gas profits, Goldman is bailing out. The question now is how will small investors react to the imploding vision of tenfold and more gains in oil and gas investing. Are these small investors also bailing out in panic or will they ride out their investments in the hope of fast rising oil prices? My scenario is that disappointed small investors will sell their investments at some point in panic. This will be also the point for a turnaround as then funding for shale will dry up and shale production will fall substantially, which in turn will drive up oil prices again.
Hi Heinrich,
As I find time I will illustrate (with a chart or two) how the recent price decline affects the cash flow and profitability for an “average” Bakken LTO well starting to flow early 2013.
I briefly looked at this earlier and I think many will find it interesting (at least) how the price decline affects the financial and profitability for wells of 2013 and 2014 vintage.
The lower price reduces the number of wells with an outlook to become profitable.
Oil Boom A Loser For North Dakota
http://www.mcclatchydc.com/news/nation-world/national/economy/article34552824.html
Reading all the comments on that article, I’m glad I’m not the only one who immediately noticed how much that piece of journalism reeks of liberalism and the liberal agenda. No doubt the author has never even been to eastern Montana or western North Dakota. Because if he had, he would’ve seen that out here we don’t care if the governments are losing money, being parasitic leeches that take our money and waste it is pretty much the only thing government anywhere is good at. No surprise an ultra liberal university would try and spin big gov’t into a good light.What they should have “studied” is how the Bakken Boom has given high paying jobs to many thousands of good people who have found themselves more prosperous than they could’ve ever dreamed, plus all the mineral rights owners enjoying the freedom to collect royalties on their property and small business owners proving the American dream still exists. Private wealth creation is what’s worth reading about here, not some manufactured “problems” a few bureaucrats are trying to con us into throwing more of our money at.
P.S. Now in just the last few minutes I’m not seeing any comments on that article. Looks like several hundred of them were just wiped away, censored, no doubt because almost none of them were conforming to the left’s ideals and agendas with their smear campaign against capitalism and fossil fuels. Sad but true that the libs are always the ones to scream “free speech” the loudest but when you try pointing out any one of the numerous holes in liberal ideology they shut you down and vilify you, whereas conservative media always allows people to look to both sides of an issue and draw your own conclusion as to which side is superior.
”P.S. Now in just the last few minutes I’m not seeing any comments on that article. Looks like several hundred of them were just wiped away, censored, no doubt because almost none of them were conforming to the left’s ideals and agendas with their smear campaign against capitalism and fossil fuels”
WIPED AWAY FROM WHERE ? WHICH SITES do you think are being so effectively censored?
You will find a home that suits you at the WASHINGTON TIMES.
Methinks you are in need of a long rest and some tranquilizers.
Agenda-troll alert.
”The June plan is based on Brent crude oil averaging $60 a barrel in 2015 and $70 a barrel from 2016 to 2019. So far this year Brent has averaged $57 and Brent futures are trading below $60 a barrel through November 2017, a sign few investors and traders expect an increase soon. The highest current futures price is $65.10 for December 2022 settlement.
Petrobras’ plan also assumed Brazil’s real currency would average 3.10 to the dollar in 2015 and 3.26 in 2016. But it has already weakened 19 percent since then to 3.85, driving up the local currency cost of paying the company’s debts, most of which are in dollars.”
http://uk.reuters.com/article/2015/09/11/uk-brazil-petrobras-plan-idUKKCN0RA2QE20150911
Baker Hughes US rig count:
Oil: -10 (to 652)
Gas: -6 (to 196)
Land rigs: -14
Offshore rigs: -2
Horizontal: -11
Directional: -4
Vertical: -1
Oil rigs by basin:
Permian, Bakken, Eagle Ford, Niobrara, Cana Woodford, Mississippian, Haynesville – each down 1 unit
“Others” (conventional) – down 3 units
Texas down -9 does that tell anyone anything in particular? Couldn’t find how they done in that last weeks.
Permian: down 1 oil rig and 2 gas rigs
Eagle Ford: down 1 oil rig and 2 gas rigs
Other 3 rigs are conventional
For the folks keeping an eye on the Appalachian Basin …
EQT just released the results of their first Utica dry gas well, the Scott’s Run.
For its first 38 days production, it has produced over 1.1 Bcf.
The restricted flow (9,560 psi casing flowing pressure at the outset) is 30MMcfd.
Expressed in energy equivalence in oil terms (boe), this one well has produced over 180,000 boe in a little over one month.
Many more Utica wells are in the planning stages.
My recollection is that this well cost about $30m. They had to swap out the first rig for one that could better handle the pressure:
http://seekingalpha.com/article/3500026-eqt-corporation-deep-utica-update?isDirectRoadblock=true&uprof=46
Quoting article:
Well Cost And Well Economics
EQT encountered significant challenges when drilling the well. Due to the extreme reservoir pressures encountered, the company had to replace its drilling rig with a higher-specification unit, which resulted in a delay. As a result, the well’s cost came out at ~$30 million. However, the fact that the very first well could be completed, with the planned proppant volume loaded successfully, gives hope that technical challenges are not unsurmountable. Going forward, EQT believes it can reduce its well cost in the Deep Utica to as little as $12.5 million for 5,400-foot laterals.
The high cost sets the bar for well performance quite high. Assuming a $12.5 completed well cost, the Deep Utica play would need to yield EURs in the 25-30 Bcf per well range to be economically competitive versus the existing “core of the core” sweet spots in the Marcellus, where operators currently drill wells with EURs in the ~15+ Bcf range for ~$6-$7 million per well.
coffeeguyzz,
Even if the production numbers are sustainable, why are these companies not making money? EQT shares down from 110 USD to 72, RRC down from 90 USD to 30, LNG in freefall, CHK massively down… It is plain insane to produce as much gas as possible and get no rewards for the work. It is just a money losing scheme on an epic proportion. Even Goldman is bailing out. Please wake up.
Heinrich,
I am intrigued by your comment. You are the one that is claiming there will be a massive spike in the price of Nat Gas, in the short term, so why would you criticize companies from exploring and appraising resources in readiness for this perceived shortage that you expect?
The point with the Marcellus/Utica play, once they their prices normalize with Henry Hub, they are still most likely to be the lowest cost producer in the US. So even though they are exploring in a sub dollar per MCF environment, they will be aiming to produce in a much more lucrative environment.
On re-reading your post, I see you perceive these high pressure wells to be for production, where as I would say these are more like exploration wells, though these wells will be put online, assuming pipeline availability. Of course the HBP rules on small leases will then come into play, and most likely create its havoc once again,
Toolpush,
Companies have a certain responsibility against shareholders and should not destroy other peoples money. Despite I expect prices much higher during this winter, there is no need to overproduce now. Rather companies should wait until prices are high. Telling stories about wonder wells, it looks like companies want to keep prices as low as possible at the expense of their shareholders. Many investors have already lost huge amounts of money and the companies still want to get money from naive investors so that they can burn it through in untimely production. You could also argue that I should be happy that companies are driving themselves against a wall, so that I can buy them on the cheap when prices are rising. Yet, is this a good business practice? This is just madness betraying small investors on a big scale. I simply cannot be quiet in this situation. In addition, companies want to show that they can prosper even at low prices due to their monster wells and this is clearly not the case.
Push, Mr. Wharton, Mr. Leopold
Including the Utica well that Rice Energy described this past weekend at Barclay’s Energy Conference, there are three recent wells of significance re the Utica.
Consol’s well, Gaut 4IH, cost $27million and is located about 60/70 miles northeast of Rice’s well. This is a significant eastward expansion.
EQT’s well, Scotts Run, did cost $30 million and encountered severe operational issues during drilling.
Rice’s well, John Biggs, is already online (producing product for sales), encountered pressures of 10,254 psi, and was completed a full three months faster than originally planned.
All three wells are considered test wells in that the expectations for successful production are there, but a whole array of factors are to be learned (where to land the lateral, lateral length, fracturing particulars, etc.),
For some cost perspective, the early (2010) Eagle Ford wells cost $14 million. The early Duvernay wells (2011/2013) cost $20 mil a pop.
All three of these wells were drilled off pads with already producing Marcellus wells on them.
The financial status of many of these companies is well recognized. Consol, whose history dates back to the 1860’s, has released just about its entire E&P workforce and has relinquished rights to hundreds of thousands of acres to its JV partner Noble.
All the while, hundreds of miles to the northeast, Shell, operating as SWEPI, is quietly drilling/producing numerous Utica wells in Tioga county.
The anticipated $6 billion ethane cracker from Shell, along with a similar sized cracker from a Thai company, is looking more probable going forward.
Sasoil has started building a $10 billion complex on Lake Charles, LA, to, supposedly, process Appalachian Basin sourced product.
I was a bit surprised to learn that of the 19 rigs that Baker Hughes reports working in the Utica, 5 of them are oil and 14 gas. This implies that the formation is much wetter than the Marcellus. It seems that all of the new reports are talking just about nat gas. Since they are drilling much deeper than the more shallow wells in Ohio this makes sense. However, it seems to me that based on the rig count there must be a lot of oil in the formation and I am wondering if anyone has a good handle on how the oil and nat gas are distributed.
Mr. Wharton
In the westernmost portions of the Utica, there exists the ‘oil window’, but, with some similarities to the Eagle Ford’s oil window, the shallowness, lack of ‘drive pressure’ has made recovery difficult.
Recently, Chesapeake did a frac using now-banrupt Gasfrac’s process hoping the energized liquid (butane/propane?) would be effective in assisting the lift of the oil to the surface. Terrace Energy tried the same thing a few years back in the EF.
Both attempts had similar results in not accomplishing much after the first few months’ production, IIRC.
There are some great maps around depicting this compositional distribution. I think Range has some good ones on their investor presentations.
The Penn State University folks have a site ( Marcellus Center Outreach?) that also has current, informative displays.
The formation contains a lot of liquids, including oil, in its western areas, but the dry gas portion is WAY larger.
Edit: Just pulled up Antero Resource’s presentation at last week’s Barclay’s energy conference. Pages #11 and 13 depict the formation’s composition as well as the currently drilling rig locations.
Profitability is exactly the right question, Heinrich. If you assume a 15 Bcf EUR, at a well average cost of $5-6 million, simple division gives a capital cost of $0.33-0.44 per mcf. If that’s really what these wells are putting out, even at current depressed regional prices, they should be not only book profitable, they should have cash profitablility pouring out their collective asses.
In my experience, “representative” type curves are uniformly like the children of Lake Woebegone.
There are whole groups of Marcellus wells which in my opinion really have EURs around 15 Bcf. And yes, these are opinions, because the EUR is by necessity a prediction of future output, which, as a forward-looking statement, is by definition an opinion. For example, COG Susquehanna County wells of first production vintage around 2011. These, in my opinion, really come in around 15 Bcf EUR. The whole COG NE Marcellus operation is solidly profitable even at current depressed price levels, although I definitely wouldn’t say the same about their Eagle Ford operation.
Average new Susquehanna County wells vintage 2013 are still coming in at EURs I estimate at around 8 Bcf. At ~$0.75 capital expenditure per mcf, this is still solidly profitable at any reasonable price level, although not by much at current local spot price levels, which I don’t consider reasonable over the long term.
Anyhow, requiring profitability greater than a 15 Bcf Marcellus NE dry well before drilling is a lot requiring profitability greater than a Ghawar well before drilling an oil well. Yes, these wells exist, but they’re very, very far from being the marginal producers, so using them as a reference for a profitablity limit is an absurd standard.
So, what about an average “Marcellus Region” well (yes, EIA really DOES differentiate by state and NOT by formation. Try reading their product descriptive text for once instead of just guessing what their numbers mean)? Can we guess the EUR of an average well, and not a 15 Bcf monster? Disregarding type curves and the children of Lake Woebegon, mathematics tells us that there must be a quite a lot of wells which are below average, and after counting the effects of 15 Bcf monster wells, a lot of them will be quite a lot below average.
The EIA Marcellus “New-Well Gas Production Per Rig” for September is 8,415 mcf/day. Let’s divide this by 2.0 (accurate Jan-Mar 2015) wells per rig per month to get 4,207 mcf/well/day IP. “Legacy Production Decline” divided by “total production” is ~4%. 4,207 mcf day/(0.04/month)*30.5 days/month = 3.2 Bcf. Yes, really, assuming exponential decline, the average Marcellus well really is coming in at 3.2 Bcf EUR. For the mathematically challenged, this is almost 5x less than 15 Bcf.
There are several reasons why 3.2 Bcf will be an underestimate of the actual average Marceulls EUR. The number of wells per rig per month will have slightly increased from the 2.0 accurate in Jan-Mar 2015. Because most of the current wells are young, the current field decline of 4% for the EIA “Marcellus Region” may be expected to be an overestimate relative to the appropriately weighted lifetime average of “Marcellus Region” wells. Nevertheless, I assert that a 3.2 Bcf EUR will be a hell of a lot closer to the actual realized average EUR for current “Marcellus Region” wells than a 15 Bcf value derived from cherry-picking the best core NE Marcellus dry wells.
An alternative, highly relevant ratio is capex per mcf produced. This measure may reasonably be quite high during periods of rapid growth, but nevertheless it serves as an important sanity check to show that reported output growth has not been achieved as a resut of phyric capital expense levels.
EQT Q2 2015/Q1 2015 gas volume growth = ~1%. EQT “Capital expenditures from continuing operations” 1H 2015: $1.321B. 1H 2014: $0.994B. Capital expenditures/production 1H 2015: $4.52/mcfe. 1H 2014: $4.59/mcfe.
$4.52/mcfe in capital expenditures for 1% q/q growth ain’t going to fucking cut it even with 36% y/y (1H 2015/1H 2014) growth.
This EQT test Utica well is in what I expect to be the real Utica core, in the narrow TOC >3% band. Given linear pressure depletion EUR for this well is definitely > 6 Bcf, my best guesstimate 8-15 Bcf. Given competent and experienced personnel, this well really ought to cost $10-14M, and not $30M. Current conditions in the western Woodford or in much of the Haynesville really aren’t all that different, and if it costs $30M, it’s because EQT don’t know that the fuck they’re doing. Given competent management, it’s definitely a winner, compared to competing wells.
My main concern would be downsizing. Check out figure 4 here. The Utica shale is actually shale stacked with limestone. The Marcellus and Bakken aren’t terribly different. Due to the limestone intervals, the large-scale permeability is quite high. Wells don’t have to be very close to start stepping on each other’s toes.
Baker Hughes rig cut is out.
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTk0ODM0fENoaWxkSUQ9MzA0NDE1fFR5cGU9MQ==&t=1
US land down 14
US total down 16
North America down 18
oil down 10
gas down 4
horizontal down 11
Canada oil down 8
Canada gas up 6
Texas down 9
North Dakota down 1 to 70. The first time I have seen BH higher than ND govt site which is currently at 69.
Eagle Ford down 3 to 90.
Permian down 3
All the pure gas plays unchanged.
Williston basin oil rig count
Ahem, I presume that is a spelling mistake and not an editorial remark?
Oops!
Thanks Greenbub, definitely a typo. Too late for me to change now.
Dennis, can you please edit for me.
My goodness! What’s the big deal?!
https://www.beaconreader.com/mason-inman/bakken-production-holds-steady-in-july?utm_source=publish&utm_medium=email&utm_campaign=bakken-production-holds-steady-in-july&utm_content=bottomlink
To whomever the mods are: please ban this Nick G character if it will keep Mike here. He and the few other on-the-ground perspectives are the only reason I come here. I’m sure I’m not alone. Thanks.
I can’t and do not pretend to speak for Ron but I follow this blog closer than ANYBODY and can say with confidence he bans only idiots and trolls as a rule. Otherwise he is extremely lenient and has banned only two regulars to the best of my memory. One was a guy who constantly insinuated I am a nazi racist and the other one was me – for calling RON a nasty name in an attempt to get him to ban either the other guy or the both of us. I succeeded.
He eventually let me back in as well as the second guy – who soon made the mistake of insinuating Ron is a racist too. THAT got him banned permanently.
There is a zero chance he will ban Nick imo.
I think there is a misconception here. The discussion about whether or not oil can be replaced is here because Ron wants it to be here: He asked the questions that got the whole discussion rolling on the last couple of posts where fighting started.
IMO Nick is an incurable optimist who habitually wears pink glasses and who does a professional pr level job of staying on message.
But he does NOT attack people personally.
And he is dead right about Ron’s intentions concerning the comments section as well as lead articles.
xxxxx
HOME
ENERGY AND HUMAN EVOLUTION
NON-OPEC CHARTS
OF FOSSIL FUELS AND HUMAN DESTINY
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THE COMPETITIVE EXCLUSION PRINCIPLE
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WHAT IS PEAK OIL?
WORLD CRUDE OIL EXPORTS
WORLD OIL YEARLY PRODUCTION CHARTS
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Right up top.
If technological change involving electric vehicles etc doesn’t fall into these categories I am SEVERELY mistaken.
The electricity used in electric vehicles is a direct substitute for most oil production, because it fulfills the same purpose as oil, transportation energy. Therefor, it is very relevant to peak oil and oil production demand and descent. All major topics on this site.
Also any electric production systems are relevant since they are the source of the energy to displace the use of oil in transport. Efficiency gains are also very relevant to peak oil discussions, since they modify the demand for oil. I could go on but won’t.
I think that the reasons PV, wind power and electric vehicle discussions are not welcomed here is that they do short circuit the oil industry. No drilling, pipelines, oil trains, refineries, ships trucking, retail fuel outlets are needed to run electric cars. Instead the residences, private renewable companies and power companies become the major players. No radiators, exhaust pipes, pistons, manifolds, valves, spark coils, catalytic converters needed. All replaced by a solar PV array, an inverter box, some wires, an electric motor and some control circuitry. No middlemen once installed. No need for continuous drilling for oil for transport.
I think that they fear the demise of a plethora of industries. oil, and all the related oil and related transport industries.
I also believe their fears and anger are unfounded. Oil and gas will be produced for quite a while, just not quite as much of it. The birth of the renewable industries will require external energy for a while and there will be a long transistion period. Chemicals and plastics from oil will still be needed.
Since anyone on a peak oil site was expecting a downturn in oil production already, they should understand that substitute technologies and changes in society will render oil obsolete eventually. So unless oil production falls off like a cliff (which would put the oil people out of business rapidly) we will see an expected transition, as much as possible, away from oil production to other forms of energy production and the means of using them.
Change is coming, birth is always painful, but this was easily seen coming and delaying the inevitable will only make it tougher.
Right now the interplay of energy sources is making a mixed bag and entering any new endeavor whether it be a drilling site or a PV farm is risky. Anything could happen to prices, sooner or later. Boom or Bust is now Boom and Bust.
When the dust settles it will be a new world.
Mac,
“Staying on message” is a politician’s euphemism for ignoring an interviewer’s question and repeating the campaign platform. I try never to ignore questions or arguments: most of the fun of these debates comes from really listening to and learning from people’s arguments and giving them a well researched and well written counter-argument.
Hi Nick, I see that the term “staying on message “means something different to you. To me it does not mean dodging questions in the context I used it but rather simply never actually saying anything inconsistent with the MESSAGE.
I do appreciate everything you say, but I can’t remember you ever getting even a little bit off your message when you are the messenger delivering your own message rather than responding. To me that is staying on message in context.
You most certainly do acknowledge that things might go wrong with your hoped for changes becoming realities if challenged or questioned.
Politicians don’t. You have my respect and I would NEVER call you a politician.
I try myself to acknowledge that things might not go as I project or predict by often using such qualifiers as ” assuming bau lasts” or something along that line. That’s getting off message in a sense but MY message is less of a salesman’s pitch.
Yours comes across as a pitch since you are so incurably optimistic in making your comments. I am however not accusing you of selling any thing in particular except your vision of the future.
Unless you are getting paid by the comment by some shadowy renewables industry association, your message is intellectually and morally honest. Personally I do not believe any such organization exists. I really hope your vision comes to pass.
It is infinitely more desirable than my own which anticipates a hard end for most of us.
Incidentally there are ads on CL offering to pay people to make comments on piece rates but they pay for people to help sell particular products or to deny climate change or comment against renewables from all I can discover.
I guess I am making a pitch: I’m arguing that we should do something, as a society and as individuals, to solve our problems with oil & fossil fuels.
So, I suppose after I “yes, EVs can work and we should start building them as fast as we can” I should then say “but, of course, we might not adopt them fast enough to prevent a lot of pain, because the opposition is pretty desperate.”. That might help people see the uncertainties involved.
Please make this pitch in the other thread.
I’m not really making the pitch here: I’m answering Mac’s questions & comments about comment/argument style, which in turn were started by someone else commenting on the recent fighting.
And, of course, this illustrate the problem with separate posts: how do you draw the line on related things, and when do you move back and forth?
It doesn’t really work very well for individual commenters to try to act as moderators…
Heh, I think I’ve crossed over that line myself at least one time already. Reasonable replies to a post which is legitimately oil/gas related may themselves reasonably be not oil/gas related. Nevertheless, this argument still belongs in the other thread.
I don’t deny that there is a significant implicit transaction cost related to switching threads. I do, nevertheless, find the oil/non oil distinction significantly useful and generally support that distinction in this forum.
Yeah, this is a good place to stop.
PHX Energy layoffs the latest to hit Alberta’s oil industry
More than 500 jobs, nearly half of company’s workforce, cut as a result of low oil prices
These layoffs must have some effect on the Canadian economy, and right in the middle of an election campaign. It’s mostly high paying jobs that are lost.
Hi gang, I have been out of pocket for well over a week now. I have been extremely busy with multiple problems. Moving was only one of them. My wife’s health has been causing me many problems. She has dementia, short term memory loss and is prone to fits of anger for every tiny thing that goes wrong.
But my son who works in Saudi has bought a beautiful home in Gulf Breeze, Florida and wanted to get his mother and I out of the very bad neighborhood we lived in. I love him for that but it has exacerbated some problems with my wife. But all that will pass and everything will be to normal in a few days… I hope.
I will have a new post late Monday. Lots of data coming out Monday so I won’t know where to start.
I thought the Baker Hughes rig count this week was very interesting. Looks like the rig count, after pausing for awhile when it looked like the price of oil might be rising again, has started to fall again.
Best wishes for you and your family, Mr. Patterson.
Good luck Ron
All the best to you and your family, Ron
Ron
I wish you the best on your Move! Please take all time you need don’t worry about us! We’ll manage in your absence! Family is important and comes first! We all very much appreciate all the time you spent creating this blog!
DC,
It might be prudent to create a second open thread group since the current ones are getting rather large.
Hi Techguy,
I will let Ron decide what is best. I was just filling in at his request.
http://www.forbes.com/2008/06/05/mileage-military-vehicles-tech-logistics08-cz_ph_0605fuel.html
You don’t have to know very much, actually hardly ANYTHING AT ALL, judging by the evidence , to write for FORBES.
Gasoline powered submarines my stinky ass. Gasoline powered ships, this would be insanity even for dope smugglers. – outboard motors on very small craft , maybe , but so far as I know the Pentagon doesn’t buy gasoline at all for deployed military equipment. Maybe a very small amount for tools such as chainsaws that might be needed by military engineers. Cars and some small equipment that are used around town and on base yes. In blue water ships?
The editors, if there are any, are as clueless as the author.
Yair . . .
OFM. Strange article alright but in fact there has been a return to petrol (gasoline) engines for quite large patrol/litoral combat and commercial craft right around the world.
It is quite common in Pacific Resort industry to see water-taxi’s and ferry’s with a herd of 250/300 hp outboards on the stern. These are purpose designed engines by the traditional outboard manufacturers and can be more fuel efficient than a diesel.
Since about 2005 this outfit . . . http://www.seven-marine.com/technology/engine/
has been developing outboards using the supercharged version of the small bock Chevy and in its latest incarnation is rated at over 600hp . . . I saw a clip of a US Marine hard body inflatable with three of them and it seemed to be getting along quite nicely.
Cheers.
I find references to modern American navy small engines – outboards – that CAN run on gasoline but they all appear to be designed nowadays to run on the standard diesel ration. These engines must cost an arm and a leg given that they are high performance and multi fuel capable and sold ONLY to the navy.
All the larger craft appear to be powered by GAS TURBINES which burn the same fuel. It is either JP8 which is basically a very high quality diesel fuel or something very close to it. Uncle Sam uses it right across the board now so far as I can find out but I don’t currently know any sailors except a couple of relics who got out decades ago.
Other navies may very well still be using gasoline powered small craft and inshore larger craft. I bet one of the new engines I just read about cost five or ten times as much as a civilian model same horsepower and a big gasoline outboard costs over twenty grand US, which is more than a new car with a more powerful engine.
I have a question for some of you oil industry guys. How are proved reserves determined and how accurate are those figures?
Determining the amount of oil in place is done by finding the size of a reservoir (seisimc/drilling) and combining this with physical properties of rock and fluid. Then a recovery factor is assumed, using assumptions from fields with similar characteristics. Oil in place (OIP) is then multiplied by the recovery factor to arrive at a reserve number. Accuracy is pretty good when geology is well known. The term Proved reflects the amount of (any) resource that can be recovered from a deposit with a reasonable level of certainty.
And this is the stuff of geologic peak and not “economic peak”. The former means something. The latter can’t possibly mean anything when money can be redefined and loans can be offered and bailed out if not repaid.
The technocopia celebration of fracking has proven to be nothing. The technology was not new. Only the price was, and is no longer.
So you got yer volume and yer porosity, and permeability would be in the recovery factor. And that’s how much oil you got.
How did we miss this? It’s 1 yr old so the delusion is in place, but it’s Kemp about the Russian shale:
http://www.reuters.com/article/2014/07/16/us-russia-shale-kemp-idUSKBN0FL28L20140716
In 1980 and again in 1985, the Soviet government detonated small nuclear devices underground in the West Siberia oilfields in an attempt to stimulate production.
The experiments were code-named Project Angara and Project Benzene respectively, and were among 21 nuclear explosions conducted by the ministries of oil and geology to stimulate oil and gas production between 1965 and 1987.
“Special explosives were developed by the Soviet weapons laboratories to meet the unique requirements of stimulating oil and gas reservoirs,” according to one U.S. arms control expert (“The Soviet Program for Peaceful Uses of Nuclear Explosions”, 1998).
One more time, sportsfans. If you HAVE to have it, you will do ANYTHING to get it. No matter what.
BTW, the price of oil in Argentina is $77/barrel. They have achieved 0.7% production gain y/y with that price.
US weekly production was down 83,000 barrels per day last week. Alaska was up 125,000 bpd while US lower 48 was down 208,000 bpd leaving a total decline of 83,000 bpd.
Ron,
The 125 k increase from Alaska, is easily explained by completion of maintenance, and unlikely to be repeated. Whereas the 208k drop the lower 48, most likely due to the industry slow down finally catching up with reality. It will be very interesting to see if this develops into a trend or is just an anomaly! I suspect it will be the former.
The shale players can say what they like, but cutting drilling by 60% will effect production, sooner or later!
Interesting EIA article from three years ago, showing three predicted production profiles for Alaska, low oil price case, reference case and high oil price case:
http://www.eia.gov/todayinenergy/detail.cfm?id=7970
Annual C+C Alaskan data through 2014 (which currently appears to be all from the North Slope):
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MANFPAK2&f=A
In any case, here is the North Slope link:
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=manfpak1&f=a
At the 2004 to 2014 rate of decline in Alaska’s production (6.2%/year), they would be down to 350,000 bpd in 2019.
While I’d be the last to deny there are ongoing production declines (5-6%/year) from the North Slope I think this information is somewhat misleading. Maintaining flow through the TAP is under continuous study. Once flow rates are constrained for the reasons cited, operators will likely resort to transmission via “batching”. And, there are other options under consideration. In any case, as one old time engineer said: ” there’s no way we’re going to shut in one barrel of oil as long as options exist, and there are several we’ve been looking at”.
In any case, the North Slope of Alaska and the North Sea are both very good examples of the challenges facing the global oil industry, in regard to managing heavily depleted oil fields, especially at current oil prices.
In the North Sea, I believe that some fields are losing money at current oil prices, but operators continue to produce the fields, in order to delay the day of reckoning in regard to decommissioning costs:
Shell declares end of pipeline for Brent Oil Field
http://www.independent.co.uk/news/business/news/shell-declares-end-of-pipeline-for-brent-oilfield-10019486.html
Totally agree with every word. As I’ve said before, the North Slope and North Sea are poster children for the fact of depletion of major non-OPEC oil resources.
Incidentally, I understand that once TAPS shuts down, Alyeska has to remove “every trace” of the pipeline (according to the Wikipedia entry). Just like North Sea operators, I suspect that North Slope operators are keenly interested in kicking the can down the road.
LOL True but NA operators seem to take the three monkeys approach re decommissioning. You know, hear no evil, see no evil…. or, we can pass it on to some state agency (or our grandchildren). Yes, I’m being too cynical.
Not possible.
Given the lack of other available options for the crude on the North Slope, there’s really no alternative to keeping the pipeline up and running. On the other hand, it was oversized in the first place, and they don’t need anything like the present capacity. I expect to see them start replacing parts with ones with 80-85% less capacity any day now.
The logical solution to me is to convert the current 48″ pipeline to Nat Gas transport, and build a much smaller/cheaper pipeline in parallel for oil. Many pipelines in the lower 48 have been convert from one fluid to the other with no major issues.
It’s an interesting idea. I did kind of wonder how much of the pipeline they’re going to have to replace due to age, but after looking at it for a bit, it looks like corrosion issues are probably localized rather than general.
The other issue would be having a 48″ pipe going to Valdez. There’s the existing LNG plant and some industrial demand, but mostly you’d end up having to build new LNG plants, and lose a lot of energy liquefying it. I suppose you could also go partway to Valdez and then extend the pipe along the Alaska Highway towards Alberta. Neither of these projects really looks all that good economically right at the moment.
This response tries to shed some light on Heinrich Leopolds’s question (I put it in a new thread).
The estimates is for an average Bakken LTO well of 2013 vintage (with a first 12 months flow of 90 kb) started in January 2013 with a well cost of $9M and with actual WTI prices as published by EIA.
The well is treated as a cost/profit center.
The well is assumed financed 50% with debt @6% and 50% from net cash flows from operations (other wells).
I will argue this is a conservative approach and would have treated the well as 100% debt financed as the net free cash flow alternatively could have been used for investments that yielded 6% (or more).
The effects of natural gas and NGLs have been neglected (the net back contribution from these varies over time between negative to positive).
Effects from hedges not included.
Costs for acreage acquisition not included.
Tax effects from financial costs not included.
So what about financial costs?
I stopped the estimates as per September 2015. The reason is that specific finance costs start to weigh heavily. Further, as the wells age, it will likely become subject to increased maintenance needs, which is to be covered from the net cash flow for the well.
As I have shown earlier, there has been little deleveraging in the Bakken. In other words the debt remains “attached” to the well and as the extraction declines the specific financial cost increases ($/b). This has so far been kept in check by bringing in more wells to spread the financial costs on a higher flow.
The companies have increased their debts since 2013.
As of September 2015 this makes the monthly cash flow barely positive and if oil prices (WTI) remain around $50/b for the foreseeable future, it gets difficult for the well to pay out (that is nominally earn the costs of the well).
Given the assumptions used above, total payout time is sensitive to the oil price and could be anything from 7 to 20 years for the presented well (the well is treated as a cost/profit center with debt attached to it).
Note how the well started in January 2013 had the prospect to earn a decent return with the decline in the oil price faces the risk of taking some loss.
Looking at the well as a cost/profit center makes little difference if oil prices come up in the near future as the profitability is already impaired from a period of low oil prices, this because of the combination of discount effects and declining flow. Then throw in future maintenance needs.
Rune,
Thanks for the interesting chart. I am asking myself how this chart would look like for a conventional well? Is there a difference between a conventional well (e.g. a platform well in the North Sea with high upfront costs) and an LTO well in terms of cash flow over time? I have been assuming for a long time that there is a difference, which could make the assessment of the performance of an investment possible.
Some recent North Sea (small) developments (some 60 Mb recoverable and which I have estimates on) have higher upfront costs (investments typically $1-2 Billion over 2-3 years and started to flow in 2012 and 2013) and recovers the investments over 3 – 4 years.
Generally the profitable developments recovers their cost (reach payout) after 3-4 years.
The decline in the oil price will lower their profitability.
One of the reasons I assumed the LTO well above using 50%, debt is that if it all was considered debt, it would have likely shown negative cash flow as from August -15. This is exclusive of any corporate tax effects on financial costs.
The information below contradicts to what the EIA is saying about US oil output.
Texas Alliance of Energy Producers (TAEP) estimates that oil production in the state increased in August to 111.2 million bbl, or 3,587 kb/d. This compares with the latest estimate from the EIA for June, which is 3,460 kb/d.
“Texas crude oil production in July remained resilient against low wellhead prices, jumping 15% year-over-year to remain on track to break the state’s annual production record set in 1972, according to data from the Texas Alliance of Energy Producers (TAEP). Estimated output during the month totaled 111.2 million bbl. ” [source: http://www.ogj.com/articles/2015/09/taep-texas-petro-index-continued-decline-in-july-as-oil-output-rose.html%5D
Robert Wilson posted this link to an article which says that oil production in North Dakota remained flat in July vs. June levels at 1.2mb/d
https://www.beaconreader.com/mason-inman/bakken-production-holds-steady-in-july?utm_source=publish&utm_medium=email&utm_campaign=bakken-production-holds-steady-in-july&utm_content=bottomlink
The author claims that this is the state’s official data to be released on Monday.
The question is: is oil production in the U.S. really declining, as the EIA said in its recent reports?
Maybe not. We won’t know for months, as has been discussed here before.
Personally, I find the EIA has become more accurate since reporting that production is falling. LOL
Got statements today from crude purchaser for August oil sold. I am still a proponent of requiring crude purchasers to simply send their info by email to EIA. We would know August sales by end of September.
Wonder how the Texas Alliance collects data? Hopefully soon we will be getting gravity data from EIA.
“I am still a proponent of requiring crude purchasers to simply send their info by email to EIA”
Good idea, but why not to require crude producers to report their info directly to the EIA, like in most oil producing countries? Or you think shale guys will be cheating? I see no reason why they would do this.
There are quite a lot fewer crude purchasers/transporters than there are producers, and in a rational world, the governmental requirement would be that they report transactions, and not producers. Nevertheless, I don’t see this argument as carrying a lot of weight in the current situation, which is, after all, not terribly rational.
AlexS. I don’t think there would be much cheating by producers.
The reason I think purchasers would be better in US are that there are far fewer purchasers, so less to aggregate, the purchasers are more automated already, the purchasers are the ones who measure gravity usually, and finally the purchasers measurements are likely more accurate. Many producers measure by the inch, which is .75 barrels in a 115 barrel tank, 1.16 barrels in a 140 barrel tank and 210 barrel tank. However, the purchasers strap the tank before they begin buying from it, and tanks are not perfectly uniform. And purchasers get down to the .01 of a barrel, which would matter when millions of tanks of oil are sold each month, like in US.
Yet another reason, EIA information should be identical to that on the paid services, which also aggregate sales, so each would be a good check on the other.
shallow sand, Blaine,
Thanks for clarification
From Our Finite World:
As long as people are willing to pay for anything, it will likely continue.
If rich people want to burn money, they can do that, even though no productive value comes from burning it.
If someone wants to throw money at an energy source that uses more energy than it creates, they can do that. Currently we don’t stop people from “wasting” money.
Much of the world economy funds activities that waste resources, use energy inefficiently, and degrade the quality of life. If only we did restrict human activities to those that are beneficial to the planet.
And able, more so than willing.
A human body works the same way in a sense as an economic-engine one; change/progressively-degrade the kind and the quantity and quality of the ‘food’ and you change/progressively-degrade the ‘operations’ that run on it.
Caelan, please stop touting this garbage. The amount of energy needed to extract other energy is never going to be a constraint, as other resources like money will always be more limiting constraint. You don’t judge the success of an economic enterprise by the amount of energy that went into it. Only physicists may perhaps do that. To the man with a hammer, everything looks like a nail.
Energy is wasted when it is converted to electricity, do we conclude from that that it is a folly? Could it be that some energy carriers are more valuable than others. If someone spends 2 hours to save someone else 1 hour, does that make sense? Yes, of course it does; ask a CEO about his assistents. EROEI is just an utterly useless metric.
BW Hills has something to sell. I have never seen him make an interesting remark, or respond well to his critics, and it is a shame that peakoil.com and now through you also POB are used as platforms for him to sell this nonsense.
EROEI is NOT a useless metric.
I agree that the BW HILL position is in practical terms basically a joke but in theoretical terms it holds water.
Oil COULD theoretically become obsolete and thus WORTHLESS as a fuel or industrial feedstock IF the cost of extracting it goes high enough and the cost of other sources of energy ( wind, solar, geothermal, nuclear, fusion ETC ) go low enough.
Only a fool or an incurable techno optimist in my estimation could believe this will come to pass in the foreseeable future,say within fifty years.
There is an EXCEEDINGLY remote possibility it might come to pass at some distant future time.
EROEI is an extremely useful tool that tells us what is physically possible at the outer limits using various energy sources to accomplish a given job.
A lot of economists have done substantial work on this question and none I am aware of seem to think that a modern economy can function on energy sources that return less than four or five to one. Some think the necessary return is higher , in the seven or eight to one range.
Fortunately wind and solar power both have within the last decade demonstrated EROEI higher than this.
EROEI will matter MORE and MORE in some situations as SOME sources of energy get to be more expensive.
Right now tar sands oil is affordable in large part because natural gas is super cheap.
As both gas and oil deplete, the price of gas is expected to go up in relation to the price of oil.
The increased value of gas could mean tar sand oil will be too expensive to mine and process at that time.
EROEI would be proven to HALT tar sands oil production at that point.
There is talk of building nukes to get the heat needed to successfully extract and process tar sands so as to save the gas for sale.
Can you show a single practical study where EROEI was one of the main factors for or against a project? Can you show a case where an actual business is using this metric in their decisions?
You mean “extremely useful” in a non-practical sense?
Isn’t a project feasibility study (typically involving cost/benefits analysis) a version of an EROEI assessment by another name? This discussion seems to be running in circles.
That was back when dollars were an analog to joules. Then a profit/loss assessment was an EROEI assessment.
But not when you start printing money absent underpinning.
This is why Argentina can declare the price is $77/barrel and achieve oil production gains, as they just reported. The economists will run in circles screaming “unsustainable” and “imbalanced”, but nobody is starving and . . . they increased production about 0.7%.
Everyone wants to do their traditional analysis based on money, because they somewhat dare not challenge money.
Pinning the ‘map’ as accurately as possible to the underlying ‘terrain’ would seem key.
The map-holders and their cartographer hostages appear increasingly to be messing with the maps, clipping pins here and repinning there, etc..
YuU aR H3rE
(Now go, and discover that price…)
No it’s not the same. All joules are not equal, unlike present dollars. All hours of work are also not equal. That’s why nobody does these kind of analyses in other units.
I mean extremely useful to an engineer or businessman working up the plans for a business or a major industrial operation. Such people must know at least approximately how much energy they have to put INTO making the project work, and this will vary according to the source of the energy. From there they can hopefully work out whether the project is feasible considering the price of the various potential energy sources available to them and how efficiently each one can be utilized and prices estimated some years down the road.
Economists and other people who have studied this matter-I have only READ ABOUT IT- tell us that unless the EROEI is at least as I indicated above probably four or five to one or better, a successful project is not likely.
This would not be true if the project is small and of very high value, for instance manufacturing fuel for a rocket to launch a communications satellite. It would not matter if the fuel contains only a very minor fraction of the energy that went into it, because coal, oil, gas and nuclear power are dirt cheap in comparison to the price of rocket fuel and the utility of rocket fuel.
If the EROEI of a project such as the Canadian tar sands falls too low, the odds are high that the value of the materials going into the project will EXCEED the value of the materials coming out, eventually, because as energy supplies deplete, the price per btu value seems to grow closer. In other words as both gas and oil get to be less plentiful, the value of a gas btu will increase relative to the value of an oil btu.
Natural gas can be used directly as an engine fuel, although doing so is a lot of trouble. If the EROEI of using gas to produce crude falls too low, the gas WILL be used directly as an engine fuel.
Right now tar sand operators can buy gas dirt cheap. If the price of that gas goes up four or five times, which is realistically possible, and the price of the energy that goes into manufacturing the machinery used in the tar sands goes up, and the delivery charges go up, the tar sands may turn from a winning proposition to a losing proposition.
The eroei on the overall process is thus a useful guide.
Cutting firewood with an energy return of ten to one with a chainsaw is not too bad a deal, I do it myself . Let the return get down to two or three to one and I won’t bother anymore.
I do recognize that this same chain of reasoning can be followed thru just using the various prices of different energy sources in the SHORT term.
OFM,
I believe the energy return from the small amount of fuel used for your chain saw, will be massive. The fuel used to transport that wood in your old pick up, will far out way the chain saw use, even for a short distance of transport.
Enno Wrote:
“Can you show a single practical study where EROEI was one of the main factors for or against a project?”
Sure, Green River. Plenty of Oil there! Also US Ethanol. the Thermal depolymerization plants designed to convert organic waste into crude oil.
Ultimately the world needs an economical and abundant source of liquid fuels to to keep the global economy functioning.
I doubt the price of Oil will go to zero. Even in a Mad Max collapse Oil will have high demand since it can be used in the existing manufactured goods that need it (cars, generators, trucks, boats, water pumps). I would imagine Oil will have a considerable higher value a decade or less after we are on the downside slope of Oil production.
This would seem to require a viable, surviving system.
Oil may always have a value; obtaining it, a cost; but necessarily a price? Who (and by what system) would be charging for it?
Caelan wrote:
“This would seem to require a viable, surviving system.
Oil may always have a value; obtaining it, a cost; but necessarily a price?”
Let me simply it. The dollar is likely to go to zero before Oil does. Estimating price of Oil in currencies may be pointless in a Fiat era when currencies do not have anything backing them. For all I know, Oil might be priced in Woolongs.
Choice of system boundaries is a key and challenging aspect of performing a net energy analysis especially when comparing totally different processes: say nuclear vs coal. In the former case, what is the real cost of waste disposal, in the second, what is the cost of AGW. I doubt either can be determined even approximately.
Net energy or EROEI is the only thing that does matter. Oil could be $500 or a million instead of the current $45ish and it wouldn’t matter. Soon as it takes more energy to get energy, cost or price or money doesn’t matter. No surplus of energy then oil will not be drilled at any price. No surplus of energy you can’t make money at any price! You will actually lose money regardless of price! You will actually lose energy will every unit or barrel extracted.
Can oil’s EROEI fall to a net energy loss is another question all together. The debt required to drill shale oil with with an EROEI of around 1 to 5 needs $100 oil to be serviced. But if that EROEI drops to 1 to 1 the debt required to drill it can’t be serviced at any price. There has to be a surplus of energy in order to service debt. Unless you can print unlimited amounts of money to service debt.
And you can.
just by giving an extreme example where EROEI may seem to matter, it does not logically follow that under all normal practical conditions it is of any relevance, let alone “the only thing that does matter”.
In support of your point, petroleum refining operations represent a net energy loss, since the energy output is less than the energy input.
Incidentally, this is one of the reasons that I exclude refinery gains from liquids production numbers in net oil exporting countries. Although it’s necessary to refine crude oil, it seems unreasonable to count a net energy loss operation as “production.” The other reason is that it can distort the production numbers for countries with large refining operations, e.g. the US.
http://www.bloomberg.com/news/articles/2015-08-25/oil-at-77-argentina-marches-to-a-different-drummer
Oil at $77? It is in Argentina.
Oil has plummeted below $39 a barrel in the U.S. But despite the price bloodbath in global energy markets, it fetches nearly twice that amount in Argentina — home to some of the most expensive crude in the world.
. . .
Argentina’s crude production was 533,600 barrels a day in June, down 0.5 percent compared with May but up 0.7 percent year on year. The increase was mainly from YPF’s crude output rising by 4.7 percent in the same span.
Take the example of a rechargeable battery. EROEI is inherently around 0.8. Therefore, nobody will ever use this technology.
It is not oil, though, and oil went into the battery’s production.
What would happen if only batteries were used to produce batteries?
Enno,
Your response here seems as ‘unelaborative’ as what you suggest of BW Hill, and in this uneconomy, ‘we all’ have something to ‘sell’.
It would seem that the ability to do work will determine the success/viability/size of any economy (or human for that matter), no? Electricity is very different from oil, and oil which is degrading in its energy content and accessibility. Also, oil is used as a material as well.
We can distort ‘maps’ (money) to obscure the real ‘terrain’, but fundamentally, it is the terrain that matters. And the more we distort them, the more lost we potentially become, and we seem pretty lost already.
Well there you go. Maybe that’s a better idea than leaving it to the so-called economists.
Which means what exactly?
I did a little reading over at Peak Oil, including at the most recent thread and I am tempted to differ. And there seem to be many who agree with Hill and maybe, as you suggest, ‘touting’ his take or at least seriously considering it.
Anyway, I have to step out for a couple of out-of-pocket hours, but will return.
(I like that expression, out of pocket. It’s cute. ^u^)
I have read several times Russia cannot cut production due to the nature of its production, weather issues, etc. Although I think I have a general understanding of this, I welcome any more detailed input on this issue.
I understand not wanting to cut, no one wants to. However, if a 2 million bopd world wide cut would boost the price $30 per bbl, it seems not one exporting country would have to sacrifice much.
As for USA, I think the cut will be when EIA starts releasing gravity information later this year and we find out how much oil is not really oil. That will cut USA actual oil production by a substantial amount.
Further, hard to know if accurate, but EIA is forecasting reduced production from US next year, even this year.
Russia has quite a lot of wells which would experience major problems with gas hydrates were they to shut them down completely. Nevertheless, the vast majority of these wells could be significantly throttled back without causing significant difficulty. Their decision not to decrease production is primarily based on political and economic and not technological factors. In this respect, they are not terribly different from Saudi Arabia.
No one out there today.
Anyway, Russia and OPEC can take satisfaction in hurting the US oil industry.
Fact is 99% of those in the US are happy about that.
Russia and OPEC are losing their you know what. The longer they let this go on, the more money they lose.
I’m not so sure Russia and OPEC are as smart as we give them credit for on this board. I think too many of us who post here have views outside of US mainstream. About 99% of the US population is loving $2 gasoline. The auto plants are roaring. Extra shifts, parts plants hiring anyone they can find.
Trying to provoke a response. I understand being smug when your OPEX is less than $5. But when you were getting $110 most of the last three years, are now getting $40, and have little otherwise going for you economically, it wears pretty thin.
If OPEC and Russia don’t act, they are playing into US hands. US will be happy for them to keep practically giving their oil away.
Shallow,
Surely the shale house of cards must fall, before OPEC and Russia pull back. If not, and they blink first the shale plays may just be able to clutch victory from the jaws of defeat, and I am sure Russia and OPEC, do not want any chance of their survival.
Shallow,
Let’s speculate. If US production falls to 6-7 mbd by the end of 2016 that looks to me that shale part of oil industry folded like cheap lawn chair in just short 2 years. Sustainable competitor? Hardly. I mean even monopoly like Kodak’s 35mm film endured 10 years fighting since introduction of digital camera before folded.
Toolpush. I don’t know. When you are shorting oil to drive the price down, and your country’s primary source of income is oil exports, maybe you have over thought things, or been too smart for your own good.
Last time this happened the price was low for 12+ years, USSR collapsed. I think these countries (Russia and OPEC) have overestimated the importance of US shale. OTOH, if they have not, they are in big trouble.
Keep in mind Russia’s other big export is grain. When oil tanks, so does grain. So that is a double whammy on them.
As for Gulf OPEC, what do they have economically without oil sales?
I’m playing devils advocate here, but I think they are maybe making big mistakes.
Who knows, really. One thing for sure, they drove down costs in the US. I don’t think either Russia or Gulf OPEC will be happy with $50-60 the next several years. KSA in particular looks foolish, upping production less than one million bopd to sell it for a little over one third what they had gotten accustomed too.
We shall see. Just trying to liven up this dead place. Maybe a new Ron post tomorrow will get things going again.
shallow sand,
Don’t expect Russia to cut oil production. It will never happen.
Russia has not sided with OPEC when the cartel cut production quota in the past. Various Russian top officials have for several occasions confirmed that the country will continue to adhere to this policy.
In fact, Russia was not shorting oil, as you say. Its production remained essentially flat this year, unlike Saudi Arabia which has significantly increased output since last November.
I am also 99% sure that OPEC will not cut production at its next meeting. It just doesn’t make sense. The history suggests that OPEC has successfully managed supply when the oil price slump was due to short-term cyclical decline in demand (like in 1998-99 and 2008-09). But when falling oil prices are a result of secular growth in supply, this strategy doesn’t work. Saudi Arabia and its neighbors were cutting production in the first half of the 1980s in an attempt to stabilize the oil market. It resulted in other competitors taking their market share, but did not prevent the slide in oil prices. This time, if the Saudis/OPEC cut output, their market share would be taken by shale producers. Prices would rise only temporarily and then would drop again due to continuing growth in LTO production. OPEC would need to cut output again and the vicious circle will continue.
By not cutting production, the Saudis are accepting to suffer 2 or 3 years of low oil prices. That would not kill the shale industry, but would significantly deter its growth, postpone development of highest-cost conventional projects and at the same time stimulate healthy growth in global demand. Ultimately, the market will find a new equilibrium at price levels acceptable to the majority of oil producers ($70-$80).
The Saudis did mention they were worried about a price spike due to the lack of cap ex from other producers.
AlexS. I don’t think Russia is shorting oil, I should have been clear about that.
Gulf OPEC, I think, is shorting oil, through the likes of Citibank and Goldman Sachs, who they have close ties with.
AlexS said:
But when falling oil prices are a result of secular growth in supply, this strategy doesn’t work. Saudi Arabia and its neighbors were cutting production in the first half of the 1980s in an attempt to stabilize the oil market. It resulted in other competitors taking their market share, but did not prevent the slide in oil prices.
In the 1980s the Saudi’s might have indeed been facing a “secular growth in supply.”
However, they were also facing a huge decline in global consumption.
That is not the case with the current rout in oil prices, despite all the disinformation that has been spread by the likes of Gail Tverberg, Art Berman and the majority of the MSM.
To paraphrase a senior official from Oman, critical of the KSA strategy:
When you sell only oil, why would you do things to lower the price of oil.
Okay, I will try to liven up the place.
First, I really enjoy reading your posts, shallow.
KSA, Kuwait and others have huge reserves, they can sit this out. In any case, longer than the shale producers as has been discussed here many times. Russia is a bit different, their reserves are not as large. But they pay for most domestic cost in Ruble, so are not as affected. For critical spare parts they have to pay USD. With the sanctions in place, that will cost them dearly. They are also having problems, selling to third parties: China and Russia have been negotiating since 2002 and still can’t agree on a price. Turkey just froze talks…
Other OPEC members are hurting but because of that they are trying to sell as much as possible just for the hard currency they need for imports.
This is not over yet.
If I were KSA, I would want to see some really big shale players go under before reducing output.
“They are also having problems, selling to third parties: China and Russia have been negotiating since 2002 and still can’t agree on a price. Turkey just froze talks…”
We are talking here about the oil market, not natural gas.
Russia has no problems selling oil.
”
When you sell only oil, why would you do things to lower the price of oil.”
Shallow,
Wall-Mart does it every day, and they don’t even produce anything that they sell.
KSA DIDN’T CHANGE BEHAVIOR. They were pumping oil and they kept pumping oil. How does anything become their fault? They have no obligation to be the cutter of production, regardless of what may have happened in the past. Someone else can be the cutter of production. This is not an unreasonable position.
Now, if Russia and KSA agreed to sell oil for a lower price than the price offered for it, and kept doing so, then that lowers the price of oil and does deep damage to an enemy. This can happen with no change to the production or demand numbers. Just make a decision to damage an enemy and agree to lower pricing.
There is no reason to walk around thinking this is impossible. Predatory pricing is utterly credible, and essentially typical.
KSA didn’t start it, I agree. However, rather than keeping steady at 9.6 million, they upped it to 10.6 million bopd. And they are selling that extra million bopd for about $40 right now.
I’ll readily admit I’m not smart enough to know if the strategy is right or wrong. However, I do know Russia and OPEC are selling oil on the cheap and surely aren’t too happy about it, despite outward appearances.
I also know that shale and tar sands, despite us making fun of it and it’s financing, are putting the big time hurt on both Russia and OPEC.
Hey, we that own US conventional are getting smacked around. But, keep in mind, 99% of the US populace thinks that is great.
99% of the US populace also will be happy to see shale and tar sands get taken out to the wood shed if it means the likes of Russia and OPEC will be forced to sell oil for $40 or less to keep shale and tar sands down.
The shale guys just stabbed themselves and other producers in the world by going crazy and borrowing to the hilt. For consumers it has been a true blessing. Guys that own trucking companies are loving it. Airlines. Auto manufactures.
In fact, there is so much good for US that comes from $2 gas, we will finds ways to keep shale going just enough to keep KSA and Russia on the cheap oil hot seat.
OTOH, I doubt US could have topped 11 million bopd. So OPEC cuts and Russia cooperates, maybe oil falls to $70-80. Shale would have slowed, maybe not much less than now.
But KSA had to put the pedal to the metal and boost production. Same with their Gulf neighbors. And now Iran, who has been curtailed during times of $100 oil will get to finally sell more for $40 or less. If I weren’t losing big time on my investments in oil, I would think that is funny.
Also, Iran thinks they pulled one over on the ole USA with the nuke deal. Maybe. IMO there is some behind the scenes psychology Iran is missing. The reality IMO is Israel is acting all upset. But, this deal is set up such that when Iran backslides, which they will, Israel will not be beholden to US to hold back, and will blow them out of the water.
And this was the US and Israel plan all along.
Just speculating, I may be way off. But, sometimes things are not as they seem.
Well, your timeline is not as it seems. Well, not your timeline. Just the incompatibility of the calendar with the pedal to the floor narrative.
Up top Ron shows OPEC charts. KSA was decreasing output from July 2014 into maybe the first months of this year, and that was the period of the price fall. It’s been flat since. Which was the time of ramp up. So if you believe in supply and demand as explanation, the scenario doesn’t support it.
And as for “getting hurt” . . . Russians make their own cars, they grow and transport their own food, they pay for those things in rubles. They are getting fewer dollars for oil. But there’s no reason for them to care in a domestic well being perspective.
I believe Saudi Arabia significantly increased its production in the spring of this year.
This graph shows OPEC oil production, but if I am not mistaken most of the increase was due to Saudi Arabia increasing its production.
..
Saudi Arabia oil production (mb/d)
Source: JODI
AlexS, I wonder if KSA offered to cut over 1 million bopd when they asked Russia recently to agree to a joint cut? I could completely understand Russia saying no if KSA did not first agree to go back down to 9.6 million bopd, and then agreed to a joint cut of a few hundred thousand bopd along side other OPEC members and Russia.
I’m sure they haven’t offered nothing.
shallow sand,
The reason Saudia Arabia, Kuweit, Russia,… are not cutting production is their high fixed cost operations based on large economics of scale. The break even point of these operations is fixed to high production volumes. Shale is small scale and has a different break even. You could compare this to Mom and Pop shops asking Wal Mart to cut capacity with the goal to keep prices high. Wal Mart will not do it as Wal Mart needs large volumes to be competitive. This is also why shale will never be competitive at low prices as these operations are small scale operations and their fixed costs per production units are manifolds higher than for large scale operations. Shale operations are the Mom and Pop shops of the oil industry – being profitable at high prices only.
OPEC cuts 2016 world oil demand forecast by 50kbpd
Cuts 2016 global oil demand forecast by 50k to 1.29mbpd
Raises 2016 OPEC demand by 190kbpd to 30.31mbpd
Non-OPEC supply growth -100kbpd to 160kbod
Says recent data shows better than expected oil demand
Signs of slowing US production could reduce market imbalance in coming months
Secondary sources say OPEC output +13kbps in August to 31.54m
Saudi’s say they produced 10.265mbpd in August vs 10.361m in July
http://news.forexlive.com/!/opec-cuts-2016-world-oil-demand-forecast-by-50kbpd-20150914
So maybe the prediction that China’s economic problems will cause global oil demand destruction are not coming true?
7.2 billion humans consuming oil at a fairly rapid pace, they’re drilling holes all over the world to find some more oil because 90 million barrels that were there yesterday are gone today. In ten days, 900 million barrels will be gone.
After 1000 ten day periods, 10,000 days, 900 billion barrels will be gone. If the estimates are correct, in less than 28 years there will be 350 billion left to extract which means that in 37 total years, the oil age will enter its final chapter, over, done.
A billion barrels of oil gone every eleven days to satisfy the gaping maws is getting to be too much. All at huge losses. Got some great flying machines out of the deal though, so it’s not a total loss.
Might want to begin to slow down, take it easy, give it a break.
RonW Wrote:
“After 1000 ten day periods, 10,000 days, 900 billion barrels will be gone. If the estimates are correct, in less than 28 years there will be 350 billion left to extract which means that in 37 total years, the oil age will enter its final chapter, over, done.”
I doubt we are near the halfway point on total extraction. Technology has permitting production rates to extract oil well above normal bell curve production. Horizontal drilling permits high extraction rates, well after a field is “depleted”. The world has turned to bottom of barrel to maintaining production (horizontal drilling, Deep sea, and tar sands and shale). The fact that these sources are being tapped should be a strong indication of how dire the situation has become. We probably extracted between 60% and 80% of the economically recoverable oil.
The oil age will probably end when BAU can no longer be maintained, which will be considerable less than 37 years.
Hi Tech Guy,
So only 1800 Gb of economically recoverable oil? (I am using end of 2014 cumulative C+C output of 1250 Gb). Jean Laherrere’s URR estimate is 2700 Gb of C+C output, this is the minimum I would expect. My estimate is a minimum of 3100 Gb (600 Gb od extra heavy oil from Canada and Venezuela) and 2500 Gb of C+C less extra Heavy based on a Hubbert Linearization of World C+C less extra heavy. The Hubbert Linearization technique has usually led to too low an estimate (US lower 48, for example) so a more realistic estimate is 2800 Gb of C+C less extra heavy plus 600 Gb of oil sands (aka extra heavy oil) for a C+C URR of 3400 Gb. The USGS estimates a C+C URR of 4100 Gb, that estimate is too optimistic (or pessimistic if one believes climate change will be a problem, as I do.)
DC Wrote:
” Jean Laherrere’s URR estimate is 2700 Gb of C+C output, this is the minimum I would expect. My estimate is a minimum of 3100 Gb (600 Gb od extra heavy oil”
Hi DC,
In my opinion, when the remaining Cheap Oil is gone, the global economy will tank, and much of the Heavy Oil will no longer be economically recoverable. Even today, we see trouble in Non-conventional sources. Sooner or later it will be margin call for the LTO drillers and it will leave a very sour after-taste in investors when they get burned on huge losses. Future investment in non-conventional oil will likely be frowned upon by investors.
It also appears that Off shore drilling has lost its edge. Drillers like Petrobras are basically insolvent, and the big Oil majors have lost interest in developing expensive projects. It appears the Oil majors have turned to cannibalism by consolidation and buying up the assets of the lesser oil companies instead of spending CapEx on new projects. Its cheaper to buy assets of competitors to replace reserves than it is to tap new fields.
My guess to reach yours or Jean’s URR, the price of Oil would have to be sustained above $140 bbl (guess), perhaps as high at $225 bbl. I very much doubt the world can sustain $120 for any considerable period. Once demand destruction takes hold, there will be less revenue to support expensive projects, thus the remaining oil will stay in the ground.
FWIW: I would not use the 2008 $147 Bbl as benchmark of how high the global economy could afford. Back then the world was in probably the biggest credit bubble in the past couple of hundred years. Its very likely we will see oil spike above $140 bbl, but I don’t see how it can be sustained, without causing widespread demand destruction.
In any case, at high consumption levels, mathematically we are consuming remaining recoverable reserves at an accelerating rate of depletion, which is especially true for the remaining supply of Global Cumulative Net Exports of oil (CNE).
Found this presentation, the slides is below the video. Very interesting and worth a look.
http://www.oilandgas360.com/togc-webcast/petrie/
There is a person who goes by Raw Energy who posts on Seeking Alpha. Very good E & P economics oriented posts.
A new twist, touched on today by Raw Energy, is that much of shale E & P general and administrative expenses (G&A) are not expensed, but are capitalized. Therefore, G & A as shown on 10K/10Q is not all on the income statement, but is buried in other areas. In Raw’s article, CHK is shown to capitalize almost 50% of G & A.
Something I had not thought of that I think some here might find interesting.
I suppose if G&A costs were more or less level, it wouldn’t make much difference, but assuming that we are seeing some material cuts in G&A currently and going forward, I assume that they would be able to average out higher levels of G&A in prior years over subsequent years.
Capitalizing G&A!
What a change!
When I was in the business back in the 70s and 80s, we tried to expense everything we could to try to bring down our taxable incomes so as to reduce those income tax bills.
I guess the only thing that matters now is getting those reported profit figures up.