Mike Shellman's musings on "Cartoon of the Week"

The latest musings from the unique voice of Mike Shellman.

If you are in the oil & gas biz, and you haven't heard of Mike, might I suggest reading a few of his postings.  Whether you agree with his views or not, he's been in the O&G biz for many decades, and has seen amazing stuff.  Give a listen to a grizzled veteran of O&G.

Cartoon Of the Week

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Mike mirrors the view of most observers who understand the reality of the oil business, beginning with the size of reserves. But then the most important variable in the business of oil, the price, is now "managed" by futures speculators, and the operating industry follows their lead like a bunch of sheep. If ever reality dawned on the group, some actual thinking would have to replace the cheer-leading activity of the leader of the sheep herd.

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33 minutes ago, William Edwards said:

Mike mirrors the view of most observers who understand the reality of the oil business, beginning with the size of reserves. But then the most important variable in the business of oil, the price, is now "managed" by futures speculators, and the operating industry follows their lead like a bunch of sheep. If ever reality dawned on the group, some actual thinking would have to replace the cheer-leading activity of the leader of the sheep herd.

Well said, William.  👍👍

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20 hours ago, William Edwards said:

Mike mirrors the view of most observers who understand the reality of the oil business, beginning with the size of reserves. But then the most important variable in the business of oil, the price, is now "managed" by futures speculators, and the operating industry follows their lead like a bunch of sheep. If ever reality dawned on the group, some actual thinking would have to replace the cheer-leading activity of the leader of the sheep herd.

some folks suspect Saudi money are behind engineered backwardation (long dated futures being much cheaper than those expiring sooner) which makes hedging production more problematic and already costing shale operators who hedged at ~$50 dearly

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1 minute ago, DanilKa said:

some folks suspect Saudi money are behind engineered backwardation (long dated futures being much cheaper than those expiring sooner) which makes hedging production more problematic and already costing shale operators who hedged at ~$50 dearly

Possibly I am naive, but I think that that idea gives the Saudis much too much credit for thinking and implementing such an elaborate scheme. I just blame it on the normal casino-type trading games. Real gamblers will bet on ANYTHING

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15 minutes ago, William Edwards said:

Possibly I am naive, but I think that that idea gives the Saudis much too much credit for thinking and implementing such an elaborate scheme. I just blame it on the normal casino-type trading games. Real gamblers will bet on ANYTHING

I wouldn't hesitate giving them credit - very well-educated smart people with motive and means. Still cannot understand why on Earth future oil price would be lower when storage stock is depleting, reserves not getting replaced and demand is growing by 1.5MMbopd/year.

https://twitter.com/aeberman12/status/1029107863120171008

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2 hours ago, DanilKa said:

I wouldn't hesitate giving them credit - very well-educated smart people with motive and means. Still cannot understand why on Earth future oil price would be lower when storage stock is depleting, reserves not getting replaced and demand is growing by 1.5MMbopd/year.

https://twitter.com/aeberman12/status/1029107863120171008

Thanks, Danil. You say "very well-educated smart people with motive and means" True. But with questionable and changing motives and limited means, but also lacking any real understanding of the business of oil (like most industry participants), particularly when it comes to price management. Harsh? Yes, but supported by, among other factors, the fact that in the Saudi dictionary price stability is not defined as a relatively constant price. Instead it is defined as a high price. Supporting documentation is available. 

I might also point out that most mineral resources on the globe are being depleted, including sand. But we do not worry about running out of most of them because there is more than an abundance of potential supply. Actually, the same applies to oil. We may not know what the extent of oil reserves is, but the identified quantity far exceeds any realistic projection of its depletion. Check the numbers. You might find a comparison of "proven reserves" fifty years ago with those projected now to be surprising and enlightening.

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2 hours ago, William Edwards said:

Thanks, Danil. You say "very well-educated smart people with motive and means" True. But with questionable and changing motives and limited means, but also lacking any real understanding of the business of oil (like most industry participants), particularly when it comes to price management. Harsh? Yes, but supported by, among other factors, the fact that in the Saudi dictionary price stability is not defined as a relatively constant price. Instead it is defined as a high price. Supporting documentation is available. 

I might also point out that most mineral resources on the globe are being depleted, including sand. But we do not worry about running out of most of them because there is more than an abundance of potential supply. Actually, the same applies to oil. We may not know what the extent of oil reserves is, but the identified quantity far exceeds any realistic projection of its depletion. Check the numbers. You might find a comparison of "proven reserves" fifty years ago with those projected now to be surprising and enlightening.

I've been wanting to ask this for some time, but I'm afraid the answer will be beyond my comprehension: How do you measure "proven reserves"?  How do you measure any reserves?  I mean, you drill some holes, oil is found, there is oil down there.  How much?

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39 minutes ago, Dan Warnick said:

I've been wanting to ask this for some time, but I'm afraid the answer will be beyond my comprehension: How do you measure "proven reserves"?  How do you measure any reserves?  I mean, you drill some holes, oil is found, there is oil down there.  How much?

Good question.

If you have a Scribd account, download this pdf from Oil Price and read pages 7 - 10.  File size is too big for me to attach.

https://www.scribd.com/document/360890054/Tricky-Terminology

 

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Here's the text of page 7:

 

THE THREE P’s: PROVED, PROBABLE, POSSIBLE

The three Ps are probably some of the most misunderstood terms in the industry. They have changed and evolved, and they can often be the downfall of a new investor. Oil and gas reserves and resources are volumes of oil and gas that can be commercially recovered in the FUTURE. For potential investors attempting to determine the present and future value of an oil and gas company’s reserves, the 3Ps are the pieces to the puzzle; and quite simply, they categorize the level of certainty of commercial extraction.

Reserves are merely estimates based on the evaluation of data showing evidence of the amount of oil and gas present in underground reservoirs.

According to the Society of Petroleum Engineers (SPE), there are five classifications of commerciality for oil and gas resources:

Production: Oil and gas that has already been recovered, so recovery is demonstrable;

Reserves: proven, probable and possible (the 3Ps);

Contingent Reserves: These are potentially recoverable reserves that may not yet be mature enough to commercially extract, or that may intuit some technological complications;

Prospective Resources: These are resources that have not yet been discovered, and whose presence and volume is estimated based on indirect evidence and no drilling;

Unrecoverable Petroleum: These are resources that are not recoverable currently due to geological/technological reasons.

Under this classification system, the least risk for investors is associated with “Reserves”, which carry some degree of certainty regarding future commercial extraction; while “Contingent Reserves” are “discovered” but considered “sub-commercial”, and “Prospective Reserves” are a pure gamble and as yet undiscovered. 

Under the category of “Reserves”, 3Ps are defined as follows:

Proved Reserves: Reserves with 90% certainty of commercial extraction

Probable Reserves: Reserves with 50% certainty of commercial extraction

Possible Reserves: Reserves with 10% certainty of commercial extraction.

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Hi Tom.  Thanks for page 7.  Very interesting already.  I don't have Scribd and, since this friend of mine seems to have been hacked recently, I'm not too keen on downloading free subscriptions.  Never have been as a rule, actually.  Anyway, isn't it possible to attach a pdf here, or some other method?  Appreciate the effort, if indeed it is possible.  Thanks!

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7 minutes ago, Dan Warnick said:

Hi Tom.  Thanks for page 7.  Very interesting already.  I don't have Scribd and, since this friend of mine seems to have been hacked recently, I'm not too keen on downloading free subscriptions.  Never have been as a rule, actually.  Anyway, isn't it possible to attach a pdf here, or some other method?  Appreciate the effort, if indeed it is possible.  Thanks!

I emailed it to you, using the email address you used to register on the forum.  If you didn't receive my email, message me here.  The pdf is around 7 MB, and the limit on this forum is 2 MB.

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1 minute ago, Tom Kirkman said:

I emailed it to you, using the email address you used to register on the forum.  If you didn't receive my email, message me here.  The pdf is around 7 MB, and the limit on this forum is 2 MB.

Got it, thanks!

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7 hours ago, Dan Warnick said:

I've been wanting to ask this for some time, but I'm afraid the answer will be beyond my comprehension: How do you measure "proven reserves"?  How do you measure any reserves?  I mean, you drill some holes, oil is found, there is oil down there.  How much?

In reality what it boils down to is "an educated guess", but good enough for government work. We don't need to know the figure for reserves of sand either, just that there is plenty.

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William, I think you and Tom are missing what I'm trying to understand. 

1.  How does one determine, or get evidence, that oil is under a certain location?

2.  Is oil under virtually every location to greater or lessor degrees, and greater or lessor qualities (sweet to sour?)?

3.  Once you have that information, one would assume a test hole is drilled to confirm whether or not oil is in fact under a given location?

4.  Once oil is confirmed under a given location, how do you know if it's one ship full or 1,000?  Or do you just pump until it's not coming up anymore?

5.  Finally, and your answers to the questions above may already answer this, who then makes the claims of the largest reserves in the world, the 2nd largest, etc.?

Sorry to take you back to basics, but I appreciate your patience.

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12 minutes ago, Dan Warnick said:

William, I think you and Tom are missing what I'm trying to understand. 

1.  How does one determine, or get evidence, that oil is under a certain location? He asks a competent geologist.

2.  Is oil under virtually every location to greater or lessor degrees, and greater or lessor qualities (sweet to sour?)? No

3.  Once you have that information, one would assume a test hole is drilled to confirm whether or not oil is in fact under a given location? Yes

4.  Once oil is confirmed under a given location, how do you know if it's one ship full or 1,000?  Or do you just pump until it's not coming up anymore? More holes and more "asking the geologist".

5.  Finally, and your answers to the questions above may already answer this, who then makes the claims of the largest reserves in the world, the 2nd largest, etc.? Look at BP's Statistical Review of World Energy.

 

 

 

BP 2017 (dragged).pdf

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(edited)

14 minutes ago, William Edwards said:

Thanks, William.  Getting there, but I still don't know how they knew there was oil there in the first place or who has the dipstick.

Edited by Dan Warnick

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1 minute ago, Dan Warnick said:

Thanks, William.  Getting there, but I still don't know how they knew there was oil there in the first place or who has the dipstick.

Initially it  was probably from observations of oil seeping out of the ground. Later seismic interpretations refined the guesses.

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2 minutes ago, William Edwards said:

Initially it  was probably from observations of oil seeping out of the ground. Later seismic interpretations refined the guesses.

So, a man named Jed comes to mind.  And nowadays they, in layman's terms, read the rock formation samples drilled out of the ground?  Something like that?

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Just now, Dan Warnick said:

So, a man named Jed comes to mind.  And nowadays they, in layman's terms, read the rock formation samples drilled out of the ground?  Something like that?

Yes, they read the rock formations obtained from cores drilled into the suspected locations. But first they construct a 3-D picture of the sub-surface from seismic readings. Too deep for me!

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3 minutes ago, William Edwards said:

Yes, they read the rock formations obtained from cores drilled into the suspected locations. But first they construct a 3-D picture of the sub-surface from seismic readings. Too deep for me!

So is a seismic reading essentially an earth penetrating type of radar ping?

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2 minutes ago, Dan Warnick said:

So is a seismic reading essentially an earth penetrating type of radar ping?

Sort of.

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7 hours ago, Dan Warnick said:

So is a seismic reading essentially an earth penetrating type of radar ping?

Dan, check your email, I sent you another pdf from Oil Price.  This one is on "Exploration" and it explains seismic pretty nicely.  

The 5 MB pdf is too large for me to attach on the forum (limit is 2 MB).

@CMOP is there any way that the Oil Price Community forum can make available the "Oil Price Investor Education Series" set of educational pdfs written in 2015?  This education series is a great collection of useful information.

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4 hours ago, Tom Kirkman said:

Dan, check your email, I sent you another pdf from Oil Price.  This one is on "Exploration" and it explains seismic pretty nicely.  

The 5 MB pdf is too large for me to attach on the forum (limit is 2 MB).

@CMOP is there any way that the Oil Price Community forum can make available the "Oil Price Investor Education Series" set of educational pdfs written in 2015?  This education series is a great collection of useful information.

Got it, Tom.  Thank you!

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Having been a practicing petroleum engineer for over 40 years, I had to comment about reserve assessment. There are categories of "proved" reserves-proved producing and proved undeveloped. Accurate assessments of reserves can be made using engineering techniques with producing wells that are not possible on non-producing wells. On producing developed wells there are basically three techniques. 1)Production trends can predict future production-if a well has dropped from 10,000 barrels to 9000 barrels to 8000 barrels it will likely produce 7000 barrels during the next time period. 2) Volumetric techniques are used when cores or well logs are available to calculate oil in place over an estimated drainage area. 3) Material balance techniques which estimate remaining reserves by measuring pressure drops versus accumulated production.      

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19 hours ago, Tom Kirkman said:

Dan, check your email, I sent you another pdf from Oil Price.  This one is on "Exploration" and it explains seismic pretty nicely.  

 The 5 MB pdf is too large for me to attach on the forum (limit is 2 MB).

 @CMOP is there any way that the Oil Price Community forum can make available the "Oil Price Investor Education Series" set of educational pdfs written in 2015?  This education series is a great collection of useful information.

After you posted it the other day - i've been working on it! Good call! 
Will be up by next week. 

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