Why do oilfields take damage when production is paused?

[D Coyne + 305]

46 minutes ago, Wombat said:

Dan, in complex systems, it is better to take a "top-down" historical approach than a "bottom up" holistic approach. After the oil crash of 2014, the inventory overhang peaked at 300mb. It took until January this year to work off. Admittedly, the US was ramping up production rapidly, but global demand was rising rapidly, and it eventually took 3 years of OPEC cuts to do the job. Now there is about 600mb overhang, and even if all countries were to lift lockdown tomorrow, the global recession will knock 10% of prior covid demand for several years. In other words, if history is any guide, the inventories won't go back to "normal" for at least 6-7 years. Sure, there will be violent swings either way as countries compete for market share one moment, try to maximise price the next, but it all averages out over time and it much easier to make predictions based on historical fact than try to build an impossibly complex model that will always be wrong due to too many inputs with large "error bars". Same applies to climate modelling. They do the same silly thing coz they have never done a physics experiment and don't understand the concept of "cascading errors". Hope that helps:)

Wombat,

Most climate modellers are geophysicists, so they are quite familiar with physics, often geochemists are also involved and generally they also have a pretty good understanding of basic physics.  The World storage levels are not very transparent, we only have good visibility for OECD inventory of crude and petroleum products.  So 300 Mb of excess inventory can be drawn pretty quickly, say World output is cut back from 100 Mb/d to 80 Mb/d, for that scenario, if World consumption has fallen by 10% to 90 Mb/d, it would take 30 days with a 10 Mb draw each day to reach a 300 Mb draw on inventory.  If oil prices remain at $20/bo or so, this seems a pretty reasonable scenario.  As storage levels approach "normal" levels (these can change over time), I will arbitrarily call 300 Mb of crude plus petroleum products a normal level, prices will rise and output will increase so that supply and demand roughly match.

[D Coyne + 305]

4 hours ago, KH 2020 said:

I believe the biggest risk to shutting in wells will come from mature fields, since older wells fight depletion (low oil production) or high water cuts from waterflooding. Wells typically function better when they are continuously pumping, as it keeps fines/solids suspended in the liquid which makes them easier to transport to surface and you get more consistent coverage from your corrosion/scale inhibiting chemicals. 

I've worked a lot of water floods and can say that high water volume wells will more likely corrode and have scale issues. Water is cancer in the oilfield, as it's expensive to produce and dispose. If you leave a well shut in, you aren't spending money treating for corrosion and a warm, moist, static downhole environment will manifest itself to severe bacteria colonies, which will turn your equipment into swiss cheese. When and if you can retrieve the equipment, you'll have to spend extra money to replace the equipment or if your tubulars are stuck or parted due to corrosion, you'll need to consider fishing costs. 

Since 80-90% of the wells in the U.S. make 10 BOPD or less (see image below), this is why a lot of production could be at risk, especially if it's shut in for longer than a year. 

On the other hand, if you don't need to worry about corrosion/scale/solids, the well shouldn't have issues returning to production. In fact, as someone else mentioned, you should see better production temporarily as the well has had time to pressure back up. 

Note that the total output of wells producing 15 bo/d or less is only about 800 kbo/d (in 2018), there are a lot of these wells (about 350,000 of them are oil wells, that chart shows both oil and gas wells), but a large proportion produce 4 bo/d or less, and many of the operators are very savvy about how to chemically treat a well so it can be brought back online after being shut in.

[Dan Clemmensen + 1,011]

7 minutes ago, I. Thunkit said:

Interesting topic. I have been wondering why producers don't all get together and simply agree to create an artificial supply shortage by completely shutting down for a month or two. By that time demand will have recovered and the price could easily go sky high, $100 a barrel or more, and they will recoup any losses.
The way things stand right now, with production exceeding demand and storage  100% full, there can be only one consequence, forced shut downs.
If that causes many wells to be abandoned, as the current discussion would suggest, there will be one helluva shortage anyway when C19 disappears. Prices could easily be $150 a barrel in six months time.

I think your timeframes are all wrong. The system has massive inertia, and nothing can happen in a month. A simple example: many VLCC voyages take 40 days to complete. C19 won't magically "disappear". Even if all world leaders were to declare that it's a hoax and dictate that all societies must return to the pre-pandemic state, it would still take more than a month, even ignoring the minor problems of hospital and funeral home overload and finding and training replacement worker for the dead ones. A total production shutdown is not physically possible, but assuming a magical shutdown, you remove 3 billion barrels of production. But consumption is now only about 65 million bbl/day, not 100 the pre-pandemic 100 million bbl/day. so storage goes down by 2 billion, not 3 billion.  There is no mechanism for "all producers to get together". In the same magical world where all world leaders declare the hoax, they could all decree a total production shutdown. In the real world, each of these is as likely as the other.

[D Coyne + 305]

3 minutes ago, Dan Clemmensen said:

I think your timeframes are all wrong. The system has massive inertia, and nothing can happen in a month. A simple example: many VLCC voyages take 40 days to complete. C19 won't magically "disappear". Even if all world leaders were to declare that it's a hoax and dictate that all societies must return to the pre-pandemic state, it would still take more than a month, even ignoring the minor problems of hospital and funeral home overload and finding and training replacement worker for the dead ones. A total production shutdown is not physically possible, but assuming a magical shutdown, you remove 3 billion barrels of production. But consumption is now only about 65 million bbl/day, not 100 the pre-pandemic 100 million bbl/day. so storage goes down by 2 billion, not 3 billion.  There is no mechanism for "all producers to get together". In the same magical world where all world leaders declare the hoax, they could all decree a total production shutdown. In the real world, each of these is as likely as the other.

Dan,

No magic needed.  At current prices, it is not profitable to continue producing oil and many companies will stop drilling new wells and may choke back production on wells that cannot be closed down completely. You are correct that production will not go to zero, but it does not need to, it needs to be cut back by 30% or so.  It won't happen overnight, but when storage space is all filled, it will happen more quickly than many believe is possible. If storage space becomes full, oil price goes to zero.  Production will cease pretty quickly at that point.

[Dan Clemmensen + 1,011]

3 minutes ago, D Coyne said:

Dan,

No magic needed.  At current prices, it is not profitable to continue producing oil and many companies will stop drilling new wells and may choke back production on wells that cannot be closed down completely. You are correct that production will not go to zero, but it does not need to, it needs to be cut back by 30% or so.  It won't happen overnight, but when storage space is all filled, it will happen more quickly than many believe is possible. If storage space becomes full, oil price goes to zero.  Production will cease pretty quickly at that point.

Agreed. This is what I've been saying all along. I was reacting to a newbie post that was calling for unrealistic actions. In the real world, leaving aside profitability, shut ins and chokes are inevitable because physical storage is/will be full, and production must be cut back to equal consumption. It's a shame that there is no mechanism in place to allocate some storage to wells that need to pump to avoid damage. If someone controlled some storage, they could offer to buy such wells, I suppose.

[Eric Gagen + 713]

3 hours ago, Dan Clemmensen said:

Agreed. This is what I've been saying all along. I was reacting to a newbie post that was calling for unrealistic actions. In the real world, leaving aside profitability, shut ins and chokes are inevitable because physical storage is/will be full, and production must be cut back to equal consumption. It's a shame that there is no mechanism in place to allocate some storage to wells that need to pump to avoid damage. If someone controlled some storage, they could offer to buy such wells, I suppose.

Even if there were, the locations of the wells, and the locations of the storage are to far from one another from the oil to be transported from one to the other at a useful volume and speed.  Storage and wells are often spread out days if not weeks worth of transport from each other.  Plus all that transport and storage costs money.  A bunch of storage halfway around the world from where an operator has critical wells they don't want to shut in is wose than useless - it will cost to much to get the oil to the storage, and by the time transport gets arranged and takes place, the wells will be forced to shut in anyway.  Large volumes of oil DO regularly move long distances, but these movements are regular, and predictable based on long term contracts and long standing agreements.  They don't get changed every few years just to try and get a small temporary advantage, because it would cost more than it's worth to try and achieve the limited gains from the short term. 

[Eric Gagen + 713]

4 hours ago, I. Thunkit said:

Interesting topic. I have been wondering why producers don't all get together and simply agree to create an artificial supply shortage by completely shutting down for a month or two. By that time demand will have recovered and the price could easily go sky high, $100 a barrel or more, and they will recoup any losses.
The way things stand right now, with production exceeding demand and storage  100% full, there can be only one consequence, forced shut downs.
If that causes many wells to be abandoned, as the current discussion would suggest, there will be one helluva shortage anyway when C19 disappears. Prices could easily be $150 a barrel in six months time.

Aside from the fact that it's literally illegal for most of the producers to collude like this, there is the fact that you can't reasonably turn the wells on and off this quickly (the whole topic of this thread)  At best its a 3-6 months process to shut in a producing area, and in some cases it takes even longer.  Most critically however, is the fact that the very first company or country to cheat on their agreed upon production volume immediately reaps a massive financial reward.  This desire to cheat is literally impossible to avoid - repeated attempts by OPEC to prevent it show time and time again that it can't be avoided.  

[Dwight Schneider + 11]

As a few have mentioned this is not a simple question to answer.  I am not a down hole guy at all but have worked gathering gas at the wellhead most of my career.   Varies from field to field even if they are in the same formations.  Amounts of water produced with the gas and/or oil, what kind of frac jobs they had, how much asphaltines and paraffins are in the oil, what types of propents were used and a long list of other things that can affect a well.  Horizontal wells have much different issues then vertical.  When our company shut in some horizontal wells in CO for a lengthy time the well bore started collapsing they said and they came back at very poor rates.  They never felt it was worth going back in them and clean them up at gas prices at the time but they are still producing and that was 7 or 8 years ago.  The Jonah Gas Field in WY was originally drilled, fractured with a gel commonly used in the area to the south of there and ended up being considered to tight to be commercial several years before it became one of the largest gas fields in the world in it's day.  The original 2 or 3 wells were not plugged but were simply shut in due to the fact the owners did not want to spend the money to pour cement in them.  A geologist, can't remember his name now out of Casper WY thought he saw something in the logs of wells to the north of there and got the logs on the wells in Jonah.  They bought the acreage and wells for a song.  Went out and opened them up and they produced good, commercially economical quantities of gas, so they decided to drill some more wells to test their theories and the rest is history.  It is speculated the gel frac broke down during the years they were shut in allowing the formation to open up and produce.  So some wells can come back very well and others are going to be permanently damaged.  Countries, oil, versus gas and even the same formation have very little to do with what is going on down hole.  Even within the same field there can be a vast difference from one side of the field to the other in some cases.  I worked in a field years ago that one end of the field had black crude, in the middle it was yellow and the other end the crude was almost fire engine red!  All from the same formation, needless to say things that worked on one end of the field for the producer, didn't necessarily work on the other end of the field.  Fields and wells can be as unique as people!

[Wombat + 1,028]

14 hours ago, D Coyne said:

Wombat,

Most climate modellers are geophysicists, so they are quite familiar with physics, often geochemists are also involved and generally they also have a pretty good understanding of basic physics.  The World storage levels are not very transparent, we only have good visibility for OECD inventory of crude and petroleum products.  So 300 Mb of excess inventory can be drawn pretty quickly, say World output is cut back from 100 Mb/d to 80 Mb/d, for that scenario, if World consumption has fallen by 10% to 90 Mb/d, it would take 30 days with a 10 Mb draw each day to reach a 300 Mb draw on inventory.  If oil prices remain at $20/bo or so, this seems a pretty reasonable scenario.  As storage levels approach "normal" levels (these can change over time), I will arbitrarily call 300 Mb of crude plus petroleum products a normal level, prices will rise and output will increase so that supply and demand roughly match.

Dan, I have an IQ of 150+ and have 3 uni degrees, so pls just trust me on this. There is NO WAY there will be a drawdown of 10mb/d!!!!!! That is 70mb/week!!!!!!!!! Don't u think inventories would have RISEN by 70mb/week if that were possible? You have just been told how difficult, time-consuming, and expensive it is to re-open a well, so what makes u think production can be restored as quickly as it can be shut-in? Not a chance. However, the price could fluctuate wildly as a result of this. Please don't take offence, coz I very impressed at the speed at which you grapple with new concepts that are put to you on this forum, think you will be a veteran in no time

[Ding Ray Chung + 8]

2 hours ago, Wombat said:

However, the price could fluctuate wildly as a result of this.

... and the price action will give some information about storage draw-downs. No oil will be released from storage in the current super-contango conditions. Storage players are financial sophisticates, they sell futures a few months out, then when they depreciate with time, as has been the case recently, they just buy them back ("cover" them) close to delivery date, pocket the money, and sell futures further out. No oil leaves storage. It's a nice racket, and is working very well with futures of ~$25 and spot/physical at <$15... Only when the physical prices start jumping higher will they switch to selling physical oil, so you have to monitor for that action.

Some producers play this game, too, but not all. We all know about PEMEX/Mexico being hedged at $49/bbl for the duration of 2020. Some shale producers are hedged, too. Right now Nov delivery (6 mo. out) is $28. If you are producer who is always hedged out 6 months out, you are in much better shape then selling on the physical market.

Basically, for all the talk about bailouts and subsidies, the Federal Reserve IS subsidising the oil industry, but I wonder how many take advantage of it. The printed helicopter money is flowing to financial assets, and oil futures are being bid up. You see what is going on with the USO ETF, for example. Investors are bidding up paper oil in the future and some producers can take advantage. 

[D Coyne + 305]

6 hours ago, Wombat said:

Dan, I have an IQ of 150+ and have 3 uni degrees, so pls just trust me on this. There is NO WAY there will be a drawdown of 10mb/d!!!!!! That is 70mb/week!!!!!!!!! Don't u think inventories would have RISEN by 70mb/week if that were possible? You have just been told how difficult, time-consuming, and expensive it is to re-open a well, so what makes u think production can be restored as quickly as it can be shut-in? Not a chance. However, the price could fluctuate wildly as a result of this. Please don't take offence, coz I very impressed at the speed at which you grapple with new concepts that are put to you on this forum, think you will be a veteran in no time

Wombat,

There have been estimates that demand has fallen by 30 Mb/d, output was 100 Mb/d, assume for a moment (just a thought experiment) that the 30 Mb/d drop in demand is correct and that output continues unchanged at 100 Mb/d and this continues for one week.  As you are brilliant could you suggest what might happen to inventory levels under that scenario? (OECD Stocks were around 2929 Mb end of Jan 2020 for crude plus petroleum products according to IEA March report.)

See

https://www.iea.org/reports/oil-market-report-april-2020

IEA estimates that demand dropped by 29 Mb/d in April and that output in April was high, let's assume 100 Mb/d.

So what would you expect for change in inventory levels for crude plus petroleum products in April?

Note that I did not say output would rise quickly, you are reading something not written,

I said ...prices will rise and output will increase so that supply and demand roughly match.

Thought readers would be smart enough to realize that "roughly" means supply ramps up as inventory of 300 Mb continues to be drawn down, doesn't happen instantaneously, but Canadian oil sands, tight oil, stripper wells, Russian, Persian Gulf, Brazilian output etc will all be ramped up quickly as oil prices rise quickly due to storage levels falling below normal levels.

Prices may indeed be very volatile until supply and demand approach balance.

This is all so obvious, I left it unstated.

Edited April 30, 2020 by D Coyne

[Dan Clemmensen + 1,011]

7 hours ago, Wombat said:

Dan, I have an IQ of 150+ and have 3 uni degrees, so pls just trust me on this. There is NO WAY there will be a drawdown of 10mb/d!!!!!! That is 70mb/week!!!!!!!!! Don't u think inventories would have RISEN by 70mb/week if that were possible? You have just been told how difficult, time-consuming, and expensive it is to re-open a well, so what makes u think production can be restored as quickly as it can be shut-in? Not a chance. However, the price could fluctuate wildly as a result of this. Please don't take offence, coz I very impressed at the speed at which you grapple with new concepts that are put to you on this forum, think you will be a veteran in no time

My post was a theoretical response to a hopelessly unrealistic suggestion by a newbie. without having real expert projections, I provided an order-of-magnitude bounding range: 1 to 10 Million bbl/day, in order to show that the idea was silly for any number within that range. My gut feeling was that the 10 million bbl/day was way too high. It was there only to give the benefit of the doubt for the ludicrous suggestion.

I don't think shut-in wells can be reopened as fast as they were shut in. However, we know that some wells are being choked, and (from an article in the Houston Chronicle) others are being run intermittently at levels that maintain their ability to operate. These well will all resume operation very quickly, basically immediately tracking the consumption curve as it recovers. recovery will not be instantaneous, and as you (and the rest of us) know, it'll take a lot of time (2 years?) to draw down excess storage. 2 years is not enough to bring in a major offshore development, but it is enough time to finance and activate new shale  wells. The exact shape of the shale recovery curve will depend on where the capital investment comes from and how visionary/brave/foolhardy the investors are.

[Dan Clemmensen + 1,011]

In reply to my longing for a way to provide storage for a maintenance amount of production from wells:

18 hours ago, Eric Gagen said:

Even if there were, the locations of the wells, and the locations of the storage are to far from one another from the oil to be transported from one to the other at a useful volume and speed.  Storage and wells are often spread out days if not weeks worth of transport from each other.  Plus all that transport and storage costs money.  A bunch of storage halfway around the world from where an operator has critical wells they don't want to shut in is wose than useless - it will cost to much to get the oil to the storage, and by the time transport gets arranged and takes place, the wells will be forced to shut in anyway.  Large volumes of oil DO regularly move long distances, but these movements are regular, and predictable based on long term contracts and long standing agreements.  They don't get changed every few years just to try and get a small temporary advantage, because it would cost more than it's worth to try and achieve the limited gains from the short term. 

I was thinking only about Texas wells and Cushing storage. Cushing is presumably well-connected to the Texas oil fields since it is the delivery point for WTI. Cushing is not full, but all empty storage there was booked long ago, probably by folks with long-term contracts. If some of those folks made arrangements to choke their own wells, they could offer to "purchase" oil (at say -$1.00) from low productivity wells operating at maintenance levels.  Choke a 100 bbl/day back to 50 bbl/day and you can permit 35 low-productivity wells to each pump 10 bbl/week, which is apparently all some of them need to keep the well healthy, according to a story in the Houston Chronicle. This is all probably a logistical and administrative nightmare, but there are lot of idle folks in the business in Texas right now to do it, and at a higher level it preserves valuable capital. There are 173,000 active wells in Texas. I don't know how many of them could benefit from this, but that is a large amount of capital equipment that will take damage if shut completely off.

[I. Thunkit + 2]

18 hours ago, Eric Gagen said:

Aside from the fact that it's literally illegal for most of the producers to collude like this, there is the fact that you can't reasonably turn the wells on and off this quickly (the whole topic of this thread)  At best its a 3-6 months process to shut in a producing area, and in some cases it takes even longer.  Most critically however, is the fact that the very first company or country to cheat on their agreed upon production volume immediately reaps a massive financial reward.  This desire to cheat is literally impossible to avoid - repeated attempts by OPEC to prevent it show time and time again that it can't be avoided.  

You're all missing the point. Storage is now 100% full so production can only match current consumption, which is say 40% previous. Consider the consequences if it doesn't. You can't just plow oil back into the ground like a farmer will with his worthless potatoes. So ALL producers have to agree to cut back to 40%, or else! 

it seems that most recent problems have been over quotas. They need not be changed in any cutback. As for cheating, it is not possible because there would be nowhere to store the excess and their exports could be closely monitored. So the only way out is for everyone to cut their production back to 40%. If that causes permanent shutdowns then when demand returns to normal, there will likely be a considerable production shortage...and with only about 3 months supply readily available in excess storage we could see $100 a bbl.

Note, the C19 will probably weaken and disappear as quickly as it arrived because as it infects, it is multiplying at an enormous rate and mutating all the time, most likely to a less virulent form. Rumour has it that the virus was ingeniously devised as a way to overcome the world's ageing population problem and was planted in China to hide the identity of the true culprit. It might also rid parts of the world of street beggars and other tax burdening undesirables as well.

 

[Ding Ray Chung + 8]

1 hour ago, I. Thunkit said:

So the only way out is for everyone to cut their production back to 40%. If that causes permanent shutdowns then when demand returns to normal, there will likely be a considerable production shortage...and with only about 3 months supply readily available in excess storage we could see $100 a bbl.

None of these numbers are correct.

1. Global imbalance likely peaked at 25-30% of production for a couple of weeks, which was absorbed in storage throughout the chain (producers, storage tanks, floating, refiners, product tanks, etc.). Not 40%, and not for a long time.

2. Voluntary cuts, forced shut-ins, natural decline plus gradual opening of some countries is bringing the market to equilibrium or close to it.

3. In a slow and complex process of recovery, whenever demand starts to exceed current production, some production will be coming back online and some of the storage will be slowly drawn down, depending on a multitude of factors like shape of the futures curve, political factors in Russia, Middle East, and myriad of others. Oil shortages are highly unlikely in the next 2-5 years.

[Eric Gagen + 713]

2 hours ago, Dan Clemmensen said:

In reply to my longing for a way to provide storage for a maintenance amount of production from wells:

I was thinking only about Texas wells and Cushing storage. Cushing is presumably well-connected to the Texas oil fields since it is the delivery point for WTI. Cushing is not full, but all empty storage there was booked long ago, probably by folks with long-term contracts. If some of those folks made arrangements to choke their own wells, they could offer to "purchase" oil (at say -$1.00) from low productivity wells operating at maintenance levels.  Choke a 100 bbl/day back to 50 bbl/day and you can permit 35 low-productivity wells to each pump 10 bbl/week, which is apparently all some of them need to keep the well healthy, according to a story in the Houston Chronicle. This is all probably a logistical and administrative nightmare, but there are lot of idle folks in the business in Texas right now to do it, and at a higher level it preserves valuable capital. There are 173,000 active wells in Texas. I don't know how many of them could benefit from this, but that is a large amount of capital equipment that will take damage if shut completely off.

From that very narrow POV the problem is much simpler, but not the way you think.  Cushing is full.  The tanks available for use are full, and the ones that aren't, are contracted out to people who won't make the space available to the market in general.  If the producers of WTI are constrained to selling to Cushing, and only Cushing, then they need to close in their wells, all their wells, full stop until there is space available.  Fortunately our real life situation isn't that simple - there are sales outlets at Corpus Christi, in Houston, and interconnecting pipelines to other locations, and that is where any WTI for sale is going to go until there is space available in Cushing for trade there to resume on normal terms.  

[Dan Clemmensen + 1,011]

5 minutes ago, Eric Gagen said:

From that very narrow POV the problem is much simpler, but not the way you think.  Cushing is full.  The tanks available for use are full, and the ones that aren't, are contracted out to people who won't make the space available to the market in general.  If the producers of WTI are constrained to selling to Cushing, and only Cushing, then they need to close in their wells, all their wells, full stop until there is space available.  Fortunately our real life situation isn't that simple - there are sales outlets at Corpus Christi, in Houston, and interconnecting pipelines to other locations, and that is where any WTI for sale is going to go until there is space available in Cushing for trade there to resume on normal terms.  

OK, try this: if those wells cannot be maintained to allow a quick recovery, then the state of Texas will lose revenue that would otherwise become available when production resumes. The state therefore has an interest in enforcing a reallocation of the already-reserved storage available at Cushing. Cushing is not in Texas, but the pipelines are, so the allocation would be at the inputs to the pipeline system. While I prefer a market approach because it's more efficient, government intervention is justified in an unprecedented situation such as this. This is similar to flooding one neighborhood to save five others during an unprecedented flood, except in the oil situation there is no lost capital in the producers, just lost revenue.

[Eric Gagen + 713]

2 hours ago, I. Thunkit said:

You're all missing the point. Storage is now 100% full so production can only match current consumption, which is say 40% previous. Consider the consequences if it doesn't. You can't just plow oil back into the ground like a farmer will with his worthless potatoes. So ALL producers have to agree to cut back to 40%, or else! 

it seems that most recent problems have been over quotas. They need not be changed in any cutback. As for cheating, it is not possible because there would be nowhere to store the excess and their exports could be closely monitored. So the only way out is for everyone to cut their production back to 40%. If that causes permanent shutdowns then when demand returns to normal, there will likely be a considerable production shortage...and with only about 3 months supply readily available in excess storage we could see $100 a bbl.

Note, the C19 will probably weaken and disappear as quickly as it arrived because as it infects, it is multiplying at an enormous rate and mutating all the time, most likely to a less virulent form. Rumour has it that the virus was ingeniously devised as a way to overcome the world's ageing population problem and was planted in China to hide the identity of the true culprit. It might also rid parts of the world of street beggars and other tax burdening undesirables as well.

 

Storage isn't 100% full - it's full in certain places.  Other places aren't.  So some producers face pressure to shut in due to physical limits and some don't.  Some producers like heavy oil in Western Canada face sustained continuous prices at or near zero.  Others don't.  

 

You can't coordinate a shutdown between all producers.  It's illegal - you can take that concept and throw it away because it literally can't happen. 

Cheating among those parties who are on the face of things willing and able to attempt to cooperate happens.  To imagine that it doesn't, or cannot is to imagine that we have a powerful one world government with massive economic and military power to force it, and we haven't got one.  Literally every single other attempt to control production rates in much more mild ways than what you are suggesting has failed due to massive cheating.  Why would this one case be different?  

Apart from all these other factors,  you literally can't stop things as quickly as you surmise.  For example, oil going from the middle east to East Asia or the Americas sails on a tanker that takes 40 some odd days each way.  Oil in a pipeline running from Texas to a refinery in New Jersey takes several weeks to move it's way from one point to another.  Contracts for purchase and delivery of oil are often long term, and not breakable just because prices are negative or otherwise inconvenient for one of the parties.  

[Eric Gagen + 713]

1 hour ago, Dan Clemmensen said:

OK, try this: if those wells cannot be maintained to allow a quick recovery, then the state of Texas will lose revenue that would otherwise become available when production resumes. The state therefore has an interest in enforcing a reallocation of the already-reserved storage available at Cushing. Cushing is not in Texas, but the pipelines are, so the allocation would be at the inputs to the pipeline system. While I prefer a market approach because it's more efficient, government intervention is justified in an unprecedented situation such as this. This is similar to flooding one neighborhood to save five others during an unprecedented flood, except in the oil situation there is no lost capital in the producers, just lost revenue.

Yep - this, among other reasons is why production allocation is on the table - the TRRC will be voting on it May the 5th.  

[I. Thunkit + 2]

1 hour ago, Eric Gagen said:

Storage isn't 100% full - it's full in certain places.  Other places aren't.  So some producers face pressure to shut in due to physical limits and some don't.  Some producers like heavy oil in Western Canada face sustained continuous prices at or near zero.  Others don't. 

 

If it isn't full now, it soon will be.

 

You can't coordinate a shutdown between all producers.  It's illegal - you can take that concept and throw it away because it literally can't happen. 

I'm sure Donald could make it happen if he wanted to. Besides, I cannot believe that all oil producers are completely stupid. If it was clearly explained to them that if they all shut down for about six weeks, they would get $100 a bbl from thereon, I'm pretty sure they would cooperate.

1 hour ago, Eric Gagen said:

Cheating among those parties who are on the face of things willing and able to attempt to cooperate happens.  To imagine that it doesn't, or cannot is to imagine that we have a powerful one world government with massive economic and military power to force it, and we haven't got one.  Literally every single other attempt to control production rates in much more mild ways than what you are suggesting has failed due to massive cheating.  Why would this one case be different?  

I'm sure Donald and Vladimir could jointly find a way to fix that too..... maybe sanctions ...or...er..... bombs....

1 hour ago, Eric Gagen said:

Apart from all these other factors,  you literally can't stop things as quickly as you surmise.  For example, oil going from the middle east to East Asia or the Americas sails on a tanker that takes 40 some odd days each way.  Oil in a pipeline running from Texas to a refinery in New Jersey takes several weeks to move it's way from one point to another.  Contracts for purchase and delivery of oil are often long term, and not breakable just because prices are negative or otherwise inconvenient for one of the parties.  

Fulfilling those contracts is just what is needed...but from the excess storage not new production.

 

[Wombat + 1,028]

13 hours ago, Dan Clemmensen said:

My post was a theoretical response to a hopelessly unrealistic suggestion by a newbie. without having real expert projections, I provided an order-of-magnitude bounding range: 1 to 10 Million bbl/day, in order to show that the idea was silly for any number within that range. My gut feeling was that the 10 million bbl/day was way too high. It was there only to give the benefit of the doubt for the ludicrous suggestion.

I don't think shut-in wells can be reopened as fast as they were shut in. However, we know that some wells are being choked, and (from an article in the Houston Chronicle) others are being run intermittently at levels that maintain their ability to operate. These well will all resume operation very quickly, basically immediately tracking the consumption curve as it recovers. recovery will not be instantaneous, and as you (and the rest of us) know, it'll take a lot of time (2 years?) to draw down excess storage. 2 years is not enough to bring in a major offshore development, but it is enough time to finance and activate new shale  wells. The exact shape of the shale recovery curve will depend on where the capital investment comes from and how visionary/brave/foolhardy the investors are.

You are correct on all fronts, except one. It will take at least 5 years for inventories to return to normal, which by the way is close to 500mb of "total commercial petroleum products" (excluding SPR) in USA alone. Please check EIA "weekly petroleum status report" before assuming you know anything about typical storage levels in USA. Then consider that typical storage levels similar in Europe, and that SA has similar storage capacity, South Africa about 200m barrels etc. China may have 1 billion barrels of storage space by now. A VLCC carries 2m barrels, and there is about 200 of them. A panamax is not a VLCC. You need to consider that demand and supply will soon match, but the inventories will not disappear in a hurry. As I said, it took 6 years to clear 300mb of inventory overhang between 2014 and 2020, so will take at least as long to clear 700mb glut we have now. Hope that helps?

[Wombat + 1,028]

20 hours ago, Dan Clemmensen said:

In reply to my longing for a way to provide storage for a maintenance amount of production from wells:

I was thinking only about Texas wells and Cushing storage. Cushing is presumably well-connected to the Texas oil fields since it is the delivery point for WTI. Cushing is not full, but all empty storage there was booked long ago, probably by folks with long-term contracts. If some of those folks made arrangements to choke their own wells, they could offer to "purchase" oil (at say -$1.00) from low productivity wells operating at maintenance levels.  Choke a 100 bbl/day back to 50 bbl/day and you can permit 35 low-productivity wells to each pump 10 bbl/week, which is apparently all some of them need to keep the well healthy, according to a story in the Houston Chronicle. This is all probably a logistical and administrative nightmare, but there are lot of idle folks in the business in Texas right now to do it, and at a higher level it preserves valuable capital. There are 173,000 active wells in Texas. I don't know how many of them could benefit from this, but that is a large amount of capital equipment that will take damage if shut completely off.

This is how much storage is left Dan: 

[Jay McKinsey + 1,489]

31 minutes ago, Wombat said:

This is how much storage is left Dan: 

FWIW EIA reports that the US has 255 mn bbl of floating top https://www.eia.gov/petroleum/supply/weekly/wcrudeoilstorage.xlsx

[Wombat + 1,028]

9 minutes ago, Jay McKinsey said:

FWIW EIA reports that the US has 255 mn bbl of floating top https://www.eia.gov/petroleum/supply/weekly/wcrudeoilstorage.xlsx

Doesn't matter, what the graph is saying is that there is about 70mb of that floating top space still available. Sure, it may have already been "rented out" but not actually filled yet. Filling takes time.

[Jay McKinsey + 1,489]

10 minutes ago, Wombat said:

Doesn't matter, what the graph is saying is that there is about 70mb of that floating top space still available. Sure, it may have already been "rented out" but not actually filled yet. Filling takes time.

What the EIA is saying is that there is about 255mb of that floating top space still available.. Has nothing to do with being reserved.

Edited May 1, 2020 by Jay McKinsey