Peak Expensive Oil

[jk]

Re: Peak Expensive Oil

the depletion rates on shale plays are very rapid iirc. art berman to the contrary, i guess my question above [when do we reach peak cheap SHALE oil?] is unanswerable.

[GRG55]

Re: Peak Expensive Oil

Thank you very much. Mr. GRG55.

Just one follow up. If shale oil can be found in the USA and the technology will be exported around the world, could it not be found elsewhere too.

An example from wikipedia.
http://en.wikipedia.org/wiki/Oil_sha...cal_allocation

Could that change the game in our lifetime. Enough oil to last us until conservation takes out some of the demand side forever combined with declining population in areas of the world that can demand (europe, japan, not as much growth in north america).

Cheers,
AKT

The global hydrocarbons contained in shale are enormous. This huge potential resource has been known for generations. However, until recent years there has not been the convergence of a sufficiently high commodity price and technical capability to attract the capital needed to unlock these resources.

Going forward there are still enormous hurdles to exploiting shale outside of the USA and Canada. Price volatility (where is crude oil price going next?), getting enough of the right equipment + the right people in place (I spent some time looking at potential shale assets in Australia a couple of years ago, but the cost of being the first to stage state-of-the-art equipment and the people that know how to use it all the way from the USA/Canada is a huge hurdle), the cost of capital (cheap and abundant recently, but will it stay that way?), distance to market (in North America the existing infrastructure, including rail, is being used and the world's biggest, richest oil consumption market is right here), environmental concerns and public opposition (including fracing, water resources, carbon policy considerations) and a host of other factors will impede the pace with which innovative North American activities are adopted by others.

the depletion rates on shale plays are very rapid iirc. art berman to the contrary, i guess my question above [when do we reach peak cheap SHALE oil?] is unanswerable.

Barely more than one decade ago the talk was of global economic collapse if crude oil prices rose to the astronomical value of $40 per bbl. Spot Brent went above $40 in August 2004 and, after bouncing around for 5 months, went permanently above $40 in January 2005.

According to data from Wood MacKenzie shale developers in North America need to spend US $25 of capital for each barrel of oil equivalent of production (that is the blended cost of shale gas plays like the Marcellus and shale oil plays like the Bakken). That figure is down from US $38 in 2013. Below a chart of the data from the Eagle Ford play in south Texas, and two multi-shale play charts which amply illustrate, yet again, how technology, human ingenuity and the unique supportive-of-risk culture in the USA drives innovation (chart courtesy of the US Energy Information Administration):





We are in a time when demand has been dampened by years of persistent high (nominal $100/bbl) crude oil prices, and further dampened by years of sub-par economic growth rates in many parts of the world. Yet even with the customary overshoot to the downside, once the price finally broke a few months back spot Brent never closed below $40 (EIA data).

I believe we are already firmly in the PCO era. Anything is possible, but the probability that oil will once again become permanently "cheap" appears quite remote to me (but it isn't going to become permanently "expensive" either ).

That does not mean that oil prices cannot fall further, perhaps much further. 90% of current Non-OPEC production has a cash operating cost below US $23 per barrel (data from Wood Mackenzie); the stuff above that threshold is enhanced (enchanted?) recovery reservoirs and the lower grade oil sands operations that represent only a small fraction of total production volume. So it may take some excursions lower to force more capital to the sidelines, but that will only hasten the supply rebalancing required before the market starts an earnest exploration for a new equilibrium price range. My guess (and once again, just a guess) remains around US $60 as the mid-point of that range (but all bets are off if the world falls into a deflationary global recession).

[akt]

Re: Peak Expensive Oil

Thanks a lot Mr. Grg55. We really appreciate your considered reply. This should probably be part of EJ's next analysis with appropriate citing of reference.

Thank you again for your valuable time.

[ProdigyofZen]

Re: Peak Expensive Oil

Going forward there are still enormous hurdles to exploiting shale outside of the USA and Canada. Price volatility (where is crude oil price going next?), getting enough of the right equipment + the right people in place (I spent some time looking at potential shale assets in Australia a couple of years ago, but the cost of being the first to stage state-of-the-art equipment and the people that know how to use it all the way from the USA/Canada is a huge hurdle), the cost of capital (cheap and abundant recently, but will it stay that way?), distance to market (in North America the existing infrastructure, including rail, is being used and the world's biggest, richest oil consumption market is right here), environmental concerns and public opposition (including fracing, water resources, carbon policy considerations) and a host of other factors will impede the pace with which innovative North American activities are adopted by others

These issues are much less prominent in Argentina's Vaca Muerta shale development. They already have the infrastructure and capital to produce oil and natgas from the, what I believe is the second largest shale formation in the world.

I own a few Argentinian stocks for this reason.

[GRG55]

Re: Peak Expensive Oil

...This time it IS different.

A thousand oilsands workers laid off unexpectedly at Husky Energy’s Sunrise project

March 12, 2015 | Last Updated: Mar 12 2:19 PM ET

CALGARY, Alberta — About 1,000 construction workers employed by a contractor at Husky Energy Inc.’s Sunrise oilsands project were laid off unexpectedly on Wednesday, a union official confirmed...

...“Guys were just notified this morning as they woke up in camp,” Huygen said.“They were supposed to be there until June, July and August. It was supposed to be a gradual decline through the summer, so this was unexpected.”...

...The layoff is among the largest yet seen from companies operating in Alberta’s oilsands, as oil prices that have dropped more than half since June squeeze profits and force operators to slash capital spending and new projects.
Suncor Energy Inc said in January that it would cut 1,000 employees and contractors, while Royal Dutch Shell Plc is cutting about 300 from its oilsands operation.

[jk]

Re: Peak Expensive Oil

A thousand oilsands workers laid off unexpectedly at Husky Energy’s Sunrise project

March 12, 2015 | Last Updated: Mar 12 2:19 PM ET

CALGARY, Alberta — About 1,000 construction workers employed by a contractor at Husky Energy Inc.’s Sunrise oilsands project were laid off unexpectedly on Wednesday, a union official confirmed...

...“Guys were just notified this morning as they woke up in camp,” Huygen said.“They were supposed to be there until June, July and August. It was supposed to be a gradual decline through the summer, so this was unexpected.”...

...The layoff is among the largest yet seen from companies operating in Alberta’s oilsands, as oil prices that have dropped more than half since June squeeze profits and force operators to slash capital spending and new projects.
Suncor Energy Inc said in January that it would cut 1,000 employees and contractors, while Royal Dutch Shell Plc is cutting about 300 from its oilsands operation.

so what companies are capitalized well enough, and have conservative enough with debt, to be the acquirers of distressed assets?

[ProdigyofZen]

Re: Peak Expensive Oil

so what companies are capitalized well enough, and have conservative enough with debt, to be the acquirers of distressed assets?

Private Equity and Hedge Funds...

Just watch they will buy it all up because they are flush with cash.

[ProdigyofZen]

Re: Peak Expensive Oil

A thousand oilsands workers laid off unexpectedly at Husky Energy’s Sunrise project

March 12, 2015 | Last Updated: Mar 12 2:19 PM ET

CALGARY, Alberta — About 1,000 construction workers employed by a contractor at Husky Energy Inc.’s Sunrise oilsands project were laid off unexpectedly on Wednesday, a union official confirmed...

...“Guys were just notified this morning as they woke up in camp,” Huygen said.“They were supposed to be there until June, July and August. It was supposed to be a gradual decline through the summer, so this was unexpected.”...

...The layoff is among the largest yet seen from companies operating in Alberta’s oilsands, as oil prices that have dropped more than half since June squeeze profits and force operators to slash capital spending and new projects.
Suncor Energy Inc said in January that it would cut 1,000 employees and contractors, while Royal Dutch Shell Plc is cutting about 300 from its oilsands operation.

Four years of oil drilling collapses in seconds on this infographic video: http://www.bloomberg.com/graphics/2015-oil-rigs/

[jk]

Re: Peak Expensive Oil

Private Equity and Hedge Funds...

Just watch they will buy it all up because they are flush with cash.

you don't think there are any public companies positioned to benefit?

[GRG55]

Re: Peak Expensive Oil

you don't think there are any public companies positioned to benefit?

The ones that do most of the buying could be the supermajors. Exxon bought into shale first with its acquisition of XTO (an early mover and consolidator in the Fort Worth area Barnett Shale) and then bought in to one of the more prolific shale plays in Canada (the Fox Creek Duvernay) by buying Celtic in early 2013. Conoco spun off its downstream (refining and retailing) and also its international assets and brought Billions of US$ home to pursue an almost pure North American E&P strategy. Chevron is a holder of a lot of legacy land positions from its conventional properties, including the Duvernay.

Apache reported a US $4.81 Billion 4Q 2014 loss, and may start to divest. So it's not just the small independents that are in some trouble.

As for Private Equity, yes it has money, but at this point they seem more interested in the battered up service sector than in owning upstream reserves and production. That may change however.

I think the next shoe drops in May/June with another wave of layoffs announced...that would fit the pattern of past similar price declines.

[seobook]

Re: Peak Expensive Oil

So what is different this time? And why might it matter? Shale resources have changed things considerably.

• This is the closest thing to "just in time" inventory (supply) management the oil industry has ever enjoyed.

This time it IS different.

A recent WSJ article echos this view:

Independent shale-oil producers have slashed their planned 2015 spending on drilling by $50 billion, compared with last year’s, but have promised to increase production by focusing on their best oil fields.
...
Now many are adopting a new strategy that will allow them to pump even more crude as soon as oil prices begin to rise. They are drilling wells but holding off on hydraulic fracturing, or forcing in water and chemicals to free oil from shale formations. The delay in the start of fracking lets companies store oil in the ground in a way that enables them to tap it unusually quickly if they wish—and flood the market again.

[seobook]

Re: Peak Expensive Oil

Iran's Nuclear Deal Could Open Oil Flood

While a deal is far from certain, Iran’s Oil Minister Bijan Zanganeh said Monday that the country could double its exports quickly.

“In case the international sanctions against Iran are lifted, one million barrels a day will be added to the country’s crude-oil production and exports in several months,” Mr. Zanganeh was quoted as saying by his ministry’s news agency Shana.

[seobook]

Re: Peak Expensive Oil

Iran's Nuclear Deal Could Open Oil Flood

While a deal is far from certain, Iran’s Oil Minister Bijan Zanganeh said Monday that the country could double its exports quickly.

“In case the international sanctions against Iran are lifted, one million barrels a day will be added to the country’s crude-oil production and exports in several months,” Mr. Zanganeh was quoted as saying by his ministry’s news agency Shana.

[GRG55]

Re: Peak Expensive Oil

Iran's Nuclear Deal Could Open Oil Flood

It does not matter if the sanctions are lifted. There is absolutely no possibility of Iran adding 1 mm bbls/d of export oil to world markets in a "few months", and perhaps not even in a few years. Sanctions or access to money aren't the issues - in an era of abundant, nearly free money, the Chinese would long ago have already flooded Iran with cash in exchange for oil projects.

In addition to gobs of money it also takes a secure, stable, enforcable legal structure for foreign investment. The internal politics of Iran all by itself is a huge impediment; it will take years to negotiate a contract to be allowed to invest in any of their petroleum developments.

Fits alongside the same sort of oil announcement nonsense I wrote about here:

http://www.itulip.com/forums/showthr...9470#post19470

and here:

http://www.itulip.com/forums/showthr...107#post268107

In this game one has to recognize the myths for what they are.

[Down Under]

Re: Peak Expensive Oil

Hi GRG55, Thanks for the in depth analysis; very insightful. A couple of questions if you don't mind. Given that the shale reserves are huge, does that alter the gold/oil ratio such that what has occurred in the past is less relevant?

And, let's assume for the purposes of this discussion, you are correct about $60 being the mid point. If so, what is the range? On the downside it appears to be about $40; does that make the upside about $80?

And, whatever you think the range is, presumably this range could hold for 3-5+ years. I know you don't have a crystal ball and that you've stated predicting the price of oil is virtually impossible, just interested in your thoughts.