Peak Expensive Oil

[don]

Re: Peak Expensive Oil

Both the US and Russia are on the offensive, just in different ways.

Right. The US is surrounding Russia, pushing for regime change inside of Russia, and Russia is resisting. You're correct.

[don]

Re: Peak Expensive Oil

Big Oil’s Broken Business Model
The Real Story Behind the Oil Price Collapse

By Michael T. Klare

Many reasons have been provided for the dramatic plunge in the price of oil to about $60 per barrel (nearly half of what it was a year ago): slowing demand due to global economic stagnation; overproduction at shale fields in the United States; the decision of the Saudis and other Middle Eastern OPEC producers to maintain output at current levels (presumably to punish higher-cost producers in the U.S. and elsewhere); and the increased value of the dollar relative to other currencies. There is, however, one reason that’s not being discussed, and yet it could be the most important of all: the complete collapse of Big Oil’s production-maximizing business model.

Until last fall, when the price decline gathered momentum, the oil giants were operating at full throttle, pumping out more petroleum every day. They did so, of course, in part to profit from the high prices. For most of the previous six years, Brent crude, the international benchmark for crude oil, had been selling at $100 or higher. But Big Oil was also operating according to a business model that assumed an ever-increasing demand for its products, however costly they might be to produce and refine. This meant that no fossil fuel reserves, no potential source of supply -- no matter how remote or hard to reach, how far offshore or deeply buried, how encased in rock -- was deemed untouchable in the mad scramble to increase output and profits.

In recent years, this output-maximizing strategy had, in turn, generated historic wealth for the giant oil companies. Exxon, the largest U.S.-based oil firm, earned an eye-popping $32.6 billion in 2013 alone, more than any other American company except for Apple. Chevron, the second biggest oil firm, posted earnings of $21.4 billion that same year. State-owned companies like Saudi Aramco and Russia’s Rosneft also reaped mammoth profits.

How things have changed in a matter of mere months. With demand stagnant and excess production the story of the moment, the very strategy that had generated record-breaking profits has suddenly become hopelessly dysfunctional.

To fully appreciate the nature of the energy industry’s predicament, it’s necessary to go back a decade to 2005, when the production-maximizing strategy was first adopted. At that time, Big Oil faced a critical juncture. On the one hand, many existing oil fields were being depleted at a torrid pace, leading experts to predict an imminent “peak” in global oil production, followed by an irreversible decline; on the other, rapid economic growth in China, India, and other developing nations was pushing demand for fossil fuels into the stratosphere. In those same years, concern over climate change was also beginning to gather momentum, threatening the future of Big Oil and generating pressures to invest in alternative forms of energy.

A “Brave New World” of Tough Oil

No one better captured that moment than David O’Reilly, the chairman and CEO of Chevron. “Our industry is at a strategic inflection point, a unique place in our history,” he told a gathering of oil executives that February. “The most visible element of this new equation,” he explained in what some observers dubbed his “Brave New World” address, “is that relative to demand, oil is no longer in plentiful supply.” Even though China was sucking up oil, coal, and natural gas supplies at a staggering rate, he had a message for that country and the world: “The era of easy access to energy is over.”

To prosper in such an environment, O’Reilly explained, the oil industry would have to adopt a new strategy. It would have to look beyond the easy-to-reach sources that had powered it in the past and make massive investments in the extraction of what the industry calls “unconventional oil” and what I labeled at the time “tough oil”: resources located far offshore, in the threatening environments of the far north, in politically dangerous places like Iraq, or in unyielding rock formations like shale. “Increasingly,” O’Reilly insisted, “future supplies will have to be found in ultradeep water and other remote areas, development projects that will ultimately require new technology and trillions of dollars of investment in new infrastructure.”

For top industry officials like O’Reilly, it seemed evident that Big Oil had no choice in the matter. It would have to invest those needed trillions in tough-oil projects or lose ground to other sources of energy, drying up its stream of profits. True, the cost of extracting unconventional oil would be much greater than from easier-to-reach conventional reserves (not to mention more environmentally hazardous), but that would be the world’s problem, not theirs. “Collectively, we are stepping up to this challenge,” O’Reilly declared. “The industry is making significant investments to build additional capacity for future production.”

On this basis, Chevron, Exxon, Royal Dutch Shell, and other major firms indeed invested enormous amounts of money and resources in a growing unconventional oil and gas race, an extraordinary saga I described in my book The Race for What’s Left. Some, including Chevron and Shell, started drilling in the deep waters of the Gulf of Mexico; others, including Exxon, commenced operations in the Arctic and eastern Siberia. Virtually every one of them began exploiting U.S. shale reserves via hydro-fracking.

Only one top executive questioned this drill-baby-drill approach: John Browne, then the chief executive of BP. Claiming that the science of climate change had become too convincing to deny, Browne argued that Big Energy would have to look “beyond petroleum” and put major resources into alternative sources of supply. “Climate change is an issue which raises fundamental questions about the relationship between companies and society as a whole, and between one generation and the next,” he had declared as early as 2002. For BP, he indicated, that meant developing wind power, solar power, and biofuels.

Browne, however, was eased out of BP in 2007 just as Big Oil’s output-maximizing business model was taking off, and his successor, Tony Hayward, quickly abandoned the “beyond petroleum” approach. “Some may question whether so much of the [world’s energy] growth needs to come from fossil fuels,” he said in 2009. “But here it is vital that we face up to the harsh reality [of energy availability].” Despite the growing emphasis on renewables, “we still foresee 80% of energy coming from fossil fuels in 2030.”

Under Hayward’s leadership, BP largely discontinued its research into alternative forms of energy and reaffirmed its commitment to the production of oil and gas, the tougher the better. Following in the footsteps of other giant firms, BP hustled into the Arctic, the deep water of the Gulf of Mexico, and Canadian tar sands, a particularly carbon-dirty and messy-to-produce form of energy. In its drive to become the leading producer in the Gulf, BP rushed the exploration of a deep offshore field it called Macondo, triggering the Deepwater Horizon blow-out of April 2010 and the devastating oil spill of monumental proportions that followed.

Over the Cliff

By the end of the first decade of this century, Big Oil was united in its embrace of its new production-maximizing, drill-baby-drill approach. It made the necessary investments, perfected new technology for extracting tough oil, and did indeed triumph over the decline of existing, “easy oil” deposits. In those years, it managed to ramp up production in remarkable ways, bringing ever more hard-to-reach oil reservoirs online.

According to the Energy Information Administration (EIA) of the U.S. Department of Energy, world oil production rose from 85.1 million barrels per day in 2005 to 92.9 million in 2014, despite the continuing decline of many legacy fields in North America and the Middle East. Claiming that industry investments in new drilling technologies had vanquished the specter of oil scarcity, BP’s latest CEO, Bob Dudley, assured the world only a year ago that Big Oil was going places and the only thing that had “peaked” was “the theory of peak oil.”

That, of course, was just before oil prices took their leap off the cliff, bringing instantly into question the wisdom of continuing to pump out record levels of petroleum. The production-maximizing strategy crafted by O’Reilly and his fellow CEOs rested on three fundamental assumptions: that, year after year, demand would keep climbing; that such rising demand would ensure prices high enough to justify costly investments in unconventional oil; and that concern over climate change would in no significant way alter the equation. Today, none of these assumptions holds true.

Demand will continue to rise -- that’s undeniable, given expected growth in world income and population -- but not at the pace to which Big Oil has become accustomed. Consider this: in 2005, when many of the major investments in unconventional oil were getting under way, the EIA projected that global oil demand would reach 103.2 million barrels per day in 2015; now, it’s lowered that figure for this year to only 93.1 million barrels. Those 10 million “lost” barrels per day in expected consumption may not seem like a lot, given the total figure, but keep in mind that Big Oil’s multibillion-dollar investments in tough energy were predicated on all that added demand materializing, thereby generating the kind of high prices needed to offset the increasing costs of extraction. With so much anticipated demand vanishing, however, prices were bound to collapse.

Current indications suggest that consumption will continue to fall short of expectations in the years to come. In an assessment of future trends released last month, the EIA reported that, thanks to deteriorating global economic conditions, many countries will experience either a slower rate of growth or an actual reduction in consumption. While still inching up, Chinese consumption, for instance, is expected to grow by only 0.3 million barrels per day this year and next -- a far cry from the 0.5 million barrel increase it posted in 2011 and 2012 and its one million barrel increase in 2010. In Europe and Japan, meanwhile, consumption is actually expected to fall over the next two years.

And this slowdown in demand is likely to persist well beyond 2016, suggests the International Energy Agency (IEA), an arm of the Organization for Economic Cooperation and Development (the club of rich industrialized nations). While lower gasoline prices may spur increased consumption in the United States and a few other nations, it predicted, most countries will experience no such lift and so “the recent price decline is expected to have only a marginal impact on global demand growth for the remainder of the decade.”

This being the case, the IEA believes that oil prices will only average about $55 per barrel in 2015 and not reach $73 again until 2020. Such figures fall far below what would be needed to justify continued investment in and exploitation of tough-oil options like Canadian tar sands, Arctic oil, and many shale projects. Indeed, the financial press is now full of reports on stalled or cancelled mega-energy projects. Shell, for example, announced in January that it had abandoned plans for a $6.5 billion petrochemical plant in Qatar, citing “the current economic climate prevailing in the energy industry.” At the same time, Chevron shelved its plan to drill in the Arctic waters of the Beaufort Sea, while Norway’s Statoil turned its back on drilling in Greenland.

There is, as well, another factor that threatens the wellbeing of Big Oil: climate change can no longer be discounted in any future energy business model. The pressures to deal with a phenomenon that could quite literally destroy human civilization are growing. Although Big Oil has spent massive amounts of money over the years in a campaign to raise doubts about the science of climate change, more and more people globally are starting to worry about its effects -- extreme weather patterns, extreme storms, extreme drought, rising sea levels, and the like -- and demanding that governments take action to reduce the magnitude of the threat.

Europe has already adopted plans to lower carbon emissions by 20% from 1990 levels by 2020 and to achieve even greater reductions in the following decades. China, while still increasing its reliance on fossil fuels, has at least finally pledged to cap the growth of its carbon emissions by 2030 and to increase renewable energy sources to 20% of total energy use by then. In the United States, increasingly stringent automobile fuel-efficiency standards will require that cars sold in 2025 achieve an average of 54.5 miles per gallon, reducing U.S. oil demand by 2.2 million barrels per day. (Of course Congress -- heavily subsidized by Big Oil -- will do everything it can to eradicate curbs on fossil fuel consumption.)

Still, however inadequate the response to the dangers of climate change thus far, the issue is on the energy map and its influence on policy globally can only increase. Whether Big Oil is ready to admit it or not, alternative energy is now on the planetary agenda and there’s no turning back from that. “It is a different world than it was the last time we saw an oil-price plunge,” said IEA executive director Maria van der Hoeven in February, referring to the 2008 economic meltdown. “Emerging economies, notably China, have entered less oil-intensive stages of development… On top of this, concerns about climate change are influencing energy policies [and so] renewables are increasingly pervasive.”

The oil industry is, of course, hoping that the current price plunge will soon reverse itself and that its now-crumbling maximizing-output model will make a comeback along with $100-per-barrel price levels. But these hopes for the return of “normality” are likely energy pipe dreams. As van der Hoeven suggests, the world has changed in significant ways, in the process obliterating the very foundations on which Big Oil’s production-maximizing strategy rested. The oil giants will either have to adapt to new circumstances, while scaling back their operations, or face takeover challenges from more nimble and aggressive firms.

[GRG55]

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.

- No idea how the gold/oil ratio works. Gold seems the asset of last resort when confidence in government, Central Bankers and the monetary system is under question. Oil is an essential commodity without which maintaining the current level of global population might be impossible.

- Price volatility varies over time depending on a great number of factors, fundamental and political. No predicting that for any given time outlook with any degree of accuracy. There is greater risk of a mean less than $60 than one higher than that.

- Oil tends to creep up over time, with very occasional politically driven upward spikes (Iran revolution, Saddam invading Kuwait) and rapid downward adjustments (an elevator with no brakes) that invariably overshoot.

This oil patch downturn is going to be very different from the 2008 version. This is shaping up to be one of the all time epic bloodbaths in the patch (too much leverage, too much mis-allocated capital, too much service industry capacity, not enough management talent to go around, and not enough political clout to get bailed out like the banks). It is going to be particularly harsh in Canada; the cash posting for Western Canadian Select crude fell below US $30/bbl yesterday. Wellhead netbacks for heavy crude are now below lifting costs for many producers. Production curtailment is going to accelerate. As will the layoffs and bankruptcies.

Quicksilver Resources Files Bankruptcy as Gas Price Drops

3:54 PM MDT
March 17, 2015

(Bloomberg) -- Natural gas producer Quicksilver Resources Inc. sought bankruptcy protection in Delaware, the latest casualty of falling energy prices.

Quicksilver’s holdings are focused in the natural gas-rich Barnett Shale play of North Texas. The company also has reserves in the Horn River Basin in northeast British Columbia and the coalbeds of the Horseshoe Canyon in Alberta. It’s been battling a worsening cash outlook and hired advisers last year to try to address near-term debt maturities and boost liquidity.

The Chapter 11 petition filed Tuesday listed $1.21 billion in assets and $2.35 billion in debts...

and, complete liquidation:

https://www.rbauction.com/cms_assets...sper-wy-an.pdf

The smart money (that's anybody who started getting ready for this during last year) is still on the back nine, holding dry powder in the bank...but they've stepped up the pace of play and probably won't stop for drinks at the clubhouse.

[vt]

Re: Peak Expensive Oil

FACT OF THE WEEK:
A New U.S. Solar System Gets Installed Every 2.5 Minutes





According to new data from GTM Research, the U.S. solar industry completed a project every 2.5 minutes last year. In fact, the solar power industry is growing so fast that figure could shrink to one project per minute by 2016. Of course, that requires a lot of manpower. Today, the U.S. solar industry has more employees than Google, Apple, Facebook and Twitter combined.

[GRG55]

Re: Peak Expensive Oil

FACT OF THE WEEK:
A New U.S. Solar System Gets Installed Every 2.5 Minutes




According to new data from GTM Research, the U.S. solar industry completed a project every 2.5 minutes last year. In fact, the solar power industry is growing so fast that figure could shrink to one project per minute by 2016. Of course, that requires a lot of manpower. Today, the U.S. solar industry has more employees than Google, Apple, Facebook and Twitter combined.

Okay folks...hands up everyone here that thinks that solar actually competes with crude oil (Tesla owners will be allowed to remain delusional ).

On the face of it the numbers look impressive, and the headlines even more impressive. The one above suggests that if you don't have a neighbour or family member installing a solar kit on their roof in the next five minutes you must be missing something.

Despite the best efforts of entrenched interests and our politicians, ingenuity and innovation are driving many different forms of energy supply, arguably at a faster pace than ever before in human history. This is ultimately a positive for all of us on the planet.

US Solar Energy Capacity Grew An Astounding 418% From 2010-2014

Solar energy’s rapid growth in America is evident – even casual observers will note the proliferation of solar photovoltaics (PV) across the country. But sheer size is usually illustrated best by statistics, and in this case, the stat is 418%That’s the percentage installed solar energy capacity grew in the U.S. from 2010-2014, according to the U.S. Energy Information Administration’s April 2014 Electricity Monthly Update.It’s true solar is still a small part of America’s energy mix – even with this growth, solar energystill only makes up just over 1% of total national generation capacity. But quadrupling capacity in just four years is an indisputable testament to the potential for solar to decarbonize our economy and decentralize our power system...


In 2010, America’s total solar capacity was just 2,326 megawatts (MW), good for .22% of the country’s total electricity generation capacity. But the plummeting price of solar modulesand increasing efficiency of installation has sent solar skyrocketing.By February 2014, 12,057MW of solar electricity generation had been installed across the country, a growth rate of 418% and 9,731MW in sheer gain. Solar’s share of total U.S. generation capacity now stands at 1.13% – and EIA estimates continued growth across the industry.Keep in mind capacity doesn’t always equal actual generation output – even the biggest fossil fuel power plants go offline due to maintenance or malfunction, and while intermittency concerns are being addressed through innovation, myriad factors mean solar panels won’t always be generating electricity.

Parsing the data a bit further also reveals interesting growth trends within distinct solar industry market segments, and could mean a balancing out of the fight over net metering.EIA notes net-metered applications have increased every year since 2010 at an annual rate of around 1,100MW and now total 5,251MW total installed capacity. California remains the clear leader with 38% of total net-metered capacity, but irradiance isn’t the only driver – New Jersey and Massachusetts combine for an additional 21% of total capacity.But while net metering gets the most attention in statehouses, utility-scale solar PV has overtaken net metered solar, perhaps for good. These systems, with an installed capacity of 1MW or greater, have grown fast and now total 5,564MW total installed capacity.As with small-scale solar, California leads the way with 49% of installed capacity, followed byArizona with 17% and North Carolina with 6% The Tarheel State’s utility-scale solar strength stands out in comparison to its minuscule .2% net-metered capacity share – indicative of diverse state solar policies.“The biggest takeaways I see are that utility scale PV capacity is rapidly increasing and overtook the net metered segment according to our data,” said Glenn McGrath, EIA Team Lead for Electric Power Systems and Reliability, via email. “Different state policies are key drivers in the growth of the two segments.”EIA also notes the rise of solar thermal projects, namely concentrated solar power. This sector traditionally represented just 400MW total capacity, but expanded significantly when three large facilities representing 650MW of new capacity went online in 2013. Ivanpah is the most famous example, but Solano is a “particularly distinctive application” due to its storage capabilities.

[vt]

Re: Peak Expensive Oil

I agree solar is not going to replace fossil fuels anytime for decades.

Large solar farms will be used by more utilities to replace coal over time. This is where most of the growth will come from.

[lektrode]

Re: Peak Expensive Oil

I agree solar is not going to replace fossil fuels anytime for decades.

Large solar farms will be used by more utilities to replace coal over time. This is where most of the growth will come from.

and how solarPV will be used to screw The Rest of US once again.
(using all the tax credits + subsidies to build-out massive systems that RUN FOR FREE, while their meters spin on, CHARGING FOR THE KWH'S with 'costs based upon capital invested')

all under the guise of 'reducing carbon dioxide emissions'

if they PTB were really interested in choking co2 ?
the N word would be in play, EVERYWHERE by now.

but its curiously and quite CONSPICUOUSLY ABSENT.

so... the lamerstream and 'green' media can spew-on with all the delusional/fictional propaganda they can dream up, meanwhile the only REAL alterNative is going to make chinese manufacturing boom

while 'job creation' here in The US goes to bartenders and waitress jobs - would you like fries with your $15/hour mickieD burger?
but not to worry - the NEXT TRILLION DOLLAR DEBT BOMB will have em all sporting BS degrees...

[GRG55]

Re: Peak Expensive Oil

- No idea how the gold/oil ratio works. Gold seems the asset of last resort when confidence in government, Central Bankers and the monetary system is under question. Oil is an essential commodity without which maintaining the current level of global population might be impossible.

- Price volatility varies over time depending on a great number of factors, fundamental and political. No predicting that for any given time outlook with any degree of accuracy. There is greater risk of a mean less than $60 than one higher than that.

- Oil tends to creep up over time, with very occasional politically driven upward spikes (Iran revolution, Saddam invading Kuwait) and rapid downward adjustments (an elevator with no brakes) that invariably overshoot.

This oil patch downturn is going to be very different from the 2008 version. This is shaping up to be one of the all time epic bloodbaths in the patch (too much leverage, too much mis-allocated capital, too much service industry capacity, not enough management talent to go around, and not enough political clout to get bailed out like the banks). It is going to be particularly harsh in Canada; the cash posting for Western Canadian Select crude fell below US $30/bbl yesterday. Wellhead netbacks for heavy crude are now below lifting costs for many producers. Production curtailment is going to accelerate. As will the layoffs and bankruptcies.

Quicksilver Resources Files Bankruptcy as Gas Price Drops

3:54 PM MDT
March 17, 2015

(Bloomberg) -- Natural gas producer Quicksilver Resources Inc. sought bankruptcy protection in Delaware, the latest casualty of falling energy prices.

Quicksilver’s holdings are focused in the natural gas-rich Barnett Shale play of North Texas. The company also has reserves in the Horn River Basin in northeast British Columbia and the coalbeds of the Horseshoe Canyon in Alberta. It’s been battling a worsening cash outlook and hired advisers last year to try to address near-term debt maturities and boost liquidity.

The Chapter 11 petition filed Tuesday listed $1.21 billion in assets and $2.35 billion in debts...

and, complete liquidation:

https://www.rbauction.com/cms_assets...sper-wy-an.pdf

The smart money (that's anybody who started getting ready for this during last year) is still on the back nine, holding dry powder in the bank...but they've stepped up the pace of play and probably won't stop for drinks at the clubhouse.

8 months after the above post lots of PE money moving in to acquire upstream oil assets - they have the advantage they don't have to go through the quarterly results reporting nonsense to the market and can take a longer term view.

And despite the fall in the Loonie and Canada's significant petroleum technology track record, the fundamentally uncompetitive post-GFC Canadian economy is headed south led by a still collapsing oil patch.


OPEC Targets U.S. Shale, But Hits Canada Instead

OPEC took a swing at U.S. shale and knocked down Canada.

Threatened by surging production from North America, the Organization of Petroleum Exporting Countries has been pumping above its quota for 17
months as it seeks to take market share from higher-cost regions. The resulting 60 percent price crash is hitting Alberta harder than Texas.

Canadian producers are struggling to cut the cost of extracting bitumen from the oil sands, and their other wells are failing to match the efficiency gains of U.S. rivals, a Bloomberg Intelligence analysis shows. While output keeps rising in the Permian Basin, the largest U.S. shale play, companies are slowing output from wells in Alberta and have shelved 18 oil-sands projects during the downturn, according to ARC Financial Corp...

[touchring]

Re: Peak Expensive Oil

Is OPEC aiming at US shale oil producers to begin with?

I think OPEC is aiming at Russia and Iran for supporting Assad. But hey Russia has started using strategic long term bombers that can carry tens of thousands of pounds of bombs against ISIS, and the proxy armies backed by the Saudis are being slaughtered like sheep as we speak, nothing is more scary than carpet bombing. but guess what? They are retreating into Iraq.

So what goes around has finally come around. LoL

http://www.express.co.uk/news/world/...ed-SEWAGE-PITS

http://m.ibtimes.co.in/syria-isis-le...ideouts-655418

[GRG55]

Re: Peak Expensive Oil

Is OPEC aiming at US shale oil producers to begin with?

I think OPEC is aiming at Russia and Iran for supporting Assad. But hey Russia has started using strategic long term bombers that can carry tens of thousands of pounds of bombs against ISIS, and the proxy armies backed by the Saudis are being slaughtered like sheep as we speak, nothing is more scary than carpet bombing. but guess what? They are retreating into Iraq.

So what goes around has finally come around. LoL

http://www.express.co.uk/news/world/...ed-SEWAGE-PITS

http://m.ibtimes.co.in/syria-isis-le...ideouts-655418

I don't completely agree with the face value thesis of that headline (the one I posted) other than the USA - Canada comparison implication; and previous posts of mine on this and other threads will confirm that.

OPEC is playing the same market share game that most every commodity producer has to try to play during the down portion of the price cycle. Despite widespread popular opinion, including no small number of iTulipers, OPEC/Saudi were not the primary instigator of this price decline. That rests with the remarkable increases in aggregate production year-over-year from continental US unconventional oil. The Saudis exacerbated the overshoot once the price started to fall by not behaving as "everyone" expected (curtail their production to support prices), but what all those observers fail to accept is that would be irrational behaviour from any producer with lifting costs in the bottom quartile of global supply.

I don't think OPEC/Saudi is aiming at anyone specifically. Merely trying to maximize their market share at the expense of anybody who is a higher cost current or future supply. That is part of the reason Brazil sub-salt is in the toilet, deep water offshore Gulf of Mexico is dying, low value heavy oil sands in Canada is now a red-heaed stepchild, offshore Africa is getting the machete, Kashagan is a permanent money pit, and Russian Arctic development might need life support from China to avoid being put on ice.

[lakedaemonian]

Re: Peak Expensive Oil

I don't completely agree with the face value thesis of that headline (the one I posted) other than the USA - Canada comparison implication; and previous posts of mine on this and other threads will confirm that.

OPEC is playing the same market share game that most every commodity producer has to try to play during the down portion of the price cycle. Despite widespread popular opinion, including no small number of iTulipers, OPEC/Saudi were not the primary instigator of this price decline. That rests with the remarkable increases in aggregate production year-over-year from continental US unconventional oil. The Saudis exacerbated the overshoot once the price started to fall by not behaving as "everyone" expected (curtail their production to support prices), but what all those observers fail to accept is that would be irrational behaviour from any producer with lifting costs in the bottom quartile of global supply.

I don't think OPEC/Saudi is aiming at anyone specifically. Merely trying to maximize their market share at the expense of anybody who is a higher cost current or future supply. That is part of the reason Brazil sub-salt is in the toilet, deep water offshore Gulf of Mexico is dying, low value heavy oil sands in Canada is now a red-heaed stepchild, offshore Africa is getting the machete, Kashagan is a permanent money pit, and Russian Arctic development might need life support from China to avoid being put on ice.

Gday GRG,

Do you see any relevant comparisons today with the oil glut and OPEC quota game of pretend from a generation ago?

If so, is there anything to learn from then that could apply to now or the near future?

What I recall reading about was that as prices fell, producers kept pumping harder to generate needed income, which led to further prices drops(as I understand it) finishing around 2000 at $1 US a gallon and at the peak of the Tech Boom.

The bubble popped and energy prices started their ratchet upwards until peaking 7-8 years later.

How vulnerable do you reckon equity markets and exurb property markets are to energy prices eventually coming off their bottom?

How much lower and longer do you suspect energy prices will reach or remain?

I'm feeling grateful for what feels like a too good to be true(for long) environment.

[touchring]

Re: Peak Expensive Oil

I don't completely agree with the face value thesis of that headline (the one I posted) other than the USA - Canada comparison implication; and previous posts of mine on this and other threads will confirm that.

OPEC is playing the same market share game that most every commodity producer has to try to play during the down portion of the price cycle. Despite widespread popular opinion, including no small number of iTulipers, OPEC/Saudi were not the primary instigator of this price decline. That rests with the remarkable increases in aggregate production year-over-year from continental US unconventional oil. The Saudis exacerbated the overshoot once the price started to fall by not behaving as "everyone" expected (curtail their production to support prices), but what all those observers fail to accept is that would be irrational behaviour from any producer with lifting costs in the bottom quartile of global supply.

I don't think OPEC/Saudi is aiming at anyone specifically. Merely trying to maximize their market share at the expense of anybody who is a higher cost current or future supply. That is part of the reason Brazil sub-salt is in the toilet, deep water offshore Gulf of Mexico is dying, low value heavy oil sands in Canada is now a red-heaed stepchild, offshore Africa is getting the machete, Kashagan is a permanent money pit, and Russian Arctic development might need life support from China to avoid being put on ice.

As usual, I'm just ranting away and playing the devil's advocate. Politics is as important as market forces in determining the price of an

Just a thought, if you're referring to oil sands, isn't what SU doing is oil sand mining? Is the situation really that bad?

[jk]

Re: Peak Expensive Oil

What I recall reading about was that as prices fell, producers kept pumping harder to generate needed income, which led to further prices drops(as I understand it) ...

“Demand is still the key for commodities at the moment, and supply discipline and production cuts are uncertain,” said Helen Lau, analyst at Argonaut Securities in Hong Kong. “There’s a chance that local producers will continue to ramp up production and replace the cuts that have been made. Everyone still wants to maintain cash flow at these prices.”

quoted in the "3, 2, 1.... deflation!?" thread

[GRG55]

Re: Peak Expensive Oil

“Demand is still the key for commodities at the moment, and supply discipline and production cuts are uncertain,” said Helen Lau, analyst at Argonaut Securities in Hong Kong. “There’s a chance that local producers will continue to ramp up production and replace the cuts that have been made. Everyone still wants to maintain cash flow at these prices.”

quoted in the "3, 2, 1.... deflation!?" thread

Happens every time.

The lowest cost producers will continue to produce to maintain cashflow in the expectation that the higher cost producers will eventually have to close down their production or go bankrupt. It's happening right now with the copper miners and with the iron ore producers (and probably some other commodities that I don't follow as closely as well). Note the last paragraph in the article posted below, about Saudi supply to China.

OPEC is trying to maintain the delusional fiction that it can set the price...at least the high cost producers within OPEC. And that is the reason there is so much stress within OPEC. They can't all produce at a uniformly low lifting cost. Here is Venezuela, the poster child of the deluded, pleading its case.

Venezuela Sees Crude in Mid-$20s If OPEC Doesn't Act

November 22, 2015

Oil prices may drop to as low as the mid-$20s a barrel unless OPEC takes action to stabilize the market, Venezuelan Oil Minister Eulogio Del Pino said.

Venezuela is urging the Organization of Petroleum Exporting Countries to adopt an “equilibrium price” that covers the cost of new investment in production capacity, Del Pino told reporters Sunday in Tehran. Saudi Arabia and Qatar are considering his country’s proposal for an equilibrium price at $88 a barrel, he said. []

...“We cannot allow that the market continue controlling the price,” Del Pino said. “The principles of OPEC were to act on the price of the crude oil, and we need to go back to the principles of OPEC.”...

...Saudi Arabia also reclaimed its position from Russia as the largest crude supplier to China, where it sold 3.99 million metric tons in October, 0.8 percent more than in September, data from the Beijing-based General Administration of Customs showed Monday. Russia supplied 3.41 million tons to China last month, a 16 percent drop from a record in September, according to the data...

[Southernguy]

Re: Peak Expensive Oil

3 oil companies thriving on low oil prices

Matthew DiLallo, The Motley Fool 11:50 a.m. EST November 23, 2015

(Photo: 2009 file photo by AFP/Getty Images)

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With oil prices down roughly 50% over the past year, some oil producers are simply trying to survive. Then there's a second group that's just trying to tread water by focusing on pushing costs down to balance cash flow with outflows for capex and dividends. Finally, a third group has emerged in what's really an elite class of oil companies that are thriving in the current environment because they're generating free cash flow while still managing to grow their production. Topping that list are Suncor Energy (NYSE:SU), Oasis Petroleum (NYSE:OAS), and ExxonMobil (NYSE:XOM). Here are the secrets to their success.
The Canadian powerhouse
Through the first three quarters of this year, Suncor Energy has generated C$5.5 billion in cash flow. While Suncor plowed roughly C$2 billion of that amount back into maintenance and used another C$2.7 billion to fund growth projects, the company has still managed to generate C$875 million in free cash flow. In fact, it's generating so much free cash flow that it actually increased its dividend at a time when most oil producers are at best holding dividends flat. Further, Suncor Energy has even restarted its stock buyback program while also going on the offensive in making two notable acquisition overtures. Suffice it to say, Suncor Energy is thriving under the current conditions.
Its secret is simple. First, its integrated business model has really provided a lift to cash flow, with its refining and marketing segment kicking in 42% of its cash flow last quarter, which is up from 22% in the same quarter of last year. In addition, Suncor Energy has pushed its costs down to its lowest level in years, with its oil sands operating costs declining to levels not seen since 2007. When we add those factors to its growing production profile and strong balance sheet, and it puts Suncor in an elite category.
The Bakken gem
Oasis Petroleum, likewise, is generating free cash flow during the current environment even after investing to grow production, and it expects those trends to continue next year, even a $50 oil price. Its secret sauce is lower costs, thanks in part to its own vertical integration and its strong hedge portfolio.
That hedge portfolio helps insulate some of Oasis' cash flow from weak oil prices, much as Suncor's refining assets do for its cash flow. However, it's when this strong cash flow shield is added to Oasis Petroleum's vertical integration that we see the real key to its success. Oasis has a midstream services segment and a well services segment, which work together to improve operational and financial performance by cutting out key middlemen. This advantage enabled Oasis to reduce its well costs and operating costs by 30% and 35%, respectively, year over year. So despite its smaller size, the compelling combination of production growth and free cash flow generation really puts Oasis in an elite class.
The big oil behemoth
So far this year, ExxonMobil has generated $26 billion in cash flow from operations and another $1.6 billion from asset sales. After investing more than $20 billion to both maintain and grow production, Exxon still generated $7.4 billion in free cash flow, which, like Suncor, it used to boost its dividend and buy back stock.
Exxon's success is also due to its integrated business model, with its downstream and chemicals segments driving strong cash flow. In fact, just last quarter its downstream earnings doubled year over year to $2 billion. Further, because of its scale, Exxon can really put pressure on its suppliers and service providers to reduce their costs, which has resulted in a 10% reduction in upstream costs compared with last year. Clearly, Exxon is built to last through any oil price cycle.
Investor takeaway
Exxon, Oasis, and Suncor are thriving amid lower oil prices because of one really important key factor. While all three are focused on reducing their costs, the real differentiator between this trio and their weaker peers comes down to the integrated business model. Exxon and Suncor are clearly enjoying a natural hedge from their refining assets, while Oasis is benefiting from the lower costs of having its well services performed in house.