Saudi, UAE Overstate Their Oil Capacities?

[ceo_energemsier + 1,818]

3 minutes ago, D Coyne said:

ceo_energe

Will believe it when I see it.  Claims are just claims, until backed up by 3-6 months of output, they might be able to pull off 3 months, we will see, I think they would be wise to wait for $80/b and then gradually raise output if they can.

Yes will see. As a member of OPEC , some of their major crude buyers under term contracts have "emergency clauses" included in their contracts that UAE will abide by . This is to make up for shortfalls for supplies from elsewhere, specifically from within the OPEC members due to force majeure including such sanctions. They will increase their supplies to these buyers for a specified amount of time and for a specified amount of increased crude oil volume to  help "balance and stabilize" prices and supplies within reasonable limits.

 

I dont know if you have ever seen or actually have been a party to such a crude oil lifting/sales-purchase term contract with an OPEC member's NOC?

To the additional UAE barrels!!! Cheers! LOL 🍾

 

[D Coyne + 305]

On ‎4‎/‎28‎/‎2019 at 11:34 AM, William Edwards said:

The Saudis want $85/B. Similarly, I want $100,000/D for my services. The Saudis will refuse to produce if they do not get the $85/B. Similarly, I will refuse to provide my services if I do not get the $100,000/D. Are we both not in danger of being unrealistic in what the market and our competitors will allow? 

It might be worthwhile to remember that, ultimately, the consumer, not the producer, determines the price, since it is the acceptance price, not the offering price that activates the transaction. This adds another reason to your only reason list of why the Saudis will sell before Brent reaches $85/B. Too little oil will be sold with an $85 floor for them to achieve their revenue requirements, so they will have to sell for less. Sure, if they will accept a market production share of 2-4 million barrels a day they might boost the price to the eighties, but I suspect that that choice will not be palatable.

Interestingly enough, there is a simple method for the Saudis to achieve the $85 number -- just set their price at $85/B and accept nothing less. That might be a worthwhile experiment!

One needs both the offer and acceptance price to be the same and an agreement to be reached for a transaction to occur.

Let's say I am trying to sell a car privately, a transaction occurs when buyer and seller reach a price that they agree on.

Both buyer and seller have a say.  There would be more demand for oil at $10/b than there would be producers that could profit at such a price.  

The Saudis can continue at current output levels and see what price they can sell their oil for, lately it has been around $70-$75/b.

They may think their current output level maximizes their profits.

[D Coyne + 305]

4 minutes ago, ceo_energemsier said:

Yes will see. As a member of OPEC , some of their major crude buyers under term contracts have "emergency clauses" included in their contracts that UAE will abide by . This is to make up for shortfalls for supplies from elsewhere, specifically from within the OPEC members due to force majeure including such sanctions. They will increase their supplies to these buyers for a specified amount of time and for a specified amount of increased crude oil volume to  help "balance and stabilize" prices and supplies within reasonable limits.

 

I dont know if you have ever seen or actually have been a party to such a crude oil lifting/sales-purchase term contract with an OPEC member's NOC?

To the additional UAE barrels!!! Cheers! LOL 🍾

 

No I have never been party to such a contract. We would need to know the details of such contracts, my guess would be the specified time is 30 to 90 days, as to the reasonable limits, for UAE that may not be more than 300 kb/d above their March output level, or they might have storage facilities they could drain, but at the end of the day, the output would not be sustainable.   That is the point and the reason for the "specified time" and "reasonable limits".

[D Coyne + 305]

On ‎4‎/‎26‎/‎2019 at 9:24 AM, Rodent said:

We're already compensating for this.  The world's oil producers have already absorbed Venezuela's shortfall.  Russia has proven excess capacity (since they are cutting), as does KSA as @damirUSBiHpointed out.  Iraq has a bit in its back pocket too.  

Russia has not cut output by much and neither has Iraq, these two together might have 200 kb/d of excess capacity.  It is not clear how much Libya's output might fall with recent fighting there.  The World probably will not be short, especially as higher oil prices might accelerate US tight oil output increases.

[William Edwards + 708]

11 minutes ago, ceo_energemsier said:

Yes will see. As a member of OPEC , some of their major crude buyers under term contracts have "emergency clauses" included in their contracts that UAE will abide by . This is to make up for shortfalls for supplies from elsewhere, specifically from within the OPEC members due to force majeure including such sanctions. They will increase their supplies to these buyers for a specified amount of time and for a specified amount of increased crude oil volume to  help "balance and stabilize" prices and supplies within reasonable limits.

 

I dont know if you have ever seen or actually have been a party to such a crude oil lifting/sales-purchase term contract with an OPEC member's NOC?

To the additional UAE barrels!!! Cheers! LOL 🍾

 

Mr CEO, I suspect that your experience has instructed you, as it has me, that simple minds with no underlying experience find simple solutions by not having to be bothered by reality. Thus explanatory discussions are usually fruitless. 

 

[D Coyne + 305]

4 minutes ago, William Edwards said:

Mr CEO, I suspect that your experience has instructed you, as it has me, that simple minds with no underlying experience find simple solutions by not having to be bothered by reality. Thus explanatory discussions are usually fruitless. 

 

The key point is if the output increase can be sustained, I noticed that there is a time limit and caveats such as "reasonable increases".  This special knowledge would need to be revealed.  It seems pretty clear that OPEC producers ramp up their output to maximum just before a meeting to decide upon quotas because these maximum production levels are the basis for the new quotas.  By definition those levels are unlikely to be sustainable, any lifting contracts are likely to use those levels as the "reasonable limit" for production levels and likely set the period of enforcement to 60 days.

Perhaps some people consider 2 months of some production level as the "sustainable" level.  I would put it at the 12 month average level

For Saudi Arabia the sustainable level of C+C output is about 10.5 Mb/d and for UAE perhaps 3.2 Mb/d.  If there were no future decreases in output from Libya or Venezuela, Saudi Arabia alone could produce 750 kb/d of extra output and more than fill the 600 kb/d gap from reduced Iranian exports.  The UAE might also be able to increase output by 150 kb/d and other OPEC producers such as Iraq and Kuwait might be able to produce 100 kb/d above March output levels, so potentially there is 1000 kb/d of spare OPEC capacity and perhaps 100 kb/d for Russia.  If we deduct the 600 kb/d of Iranian exports from the 1100 kb/d of spare capacity for OPEC and Russia, that leaves only 500 kb/d of spare capacity, not a lot of room for surprise supply disruptions on top of anticipated disruptions from Venezuela and Libya.

I see $80/bo for Brent by August.

[ceo_energemsier + 1,818]

15 minutes ago, D Coyne said:

The key point is if the output increase can be sustained, I noticed that there is a time limit and caveats such as "reasonable increases".  This special knowledge would need to be revealed.  It seems pretty clear that OPEC producers ramp up their output to maximum just before a meeting to decide upon quotas because these maximum production levels are the basis for the new quotas.  By definition those levels are unlikely to be sustainable, any lifting contracts are likely to use those levels as the "reasonable limit" for production levels and likely set the period of enforcement to 60 days.

Perhaps some people consider 2 months of some production level as the "sustainable" level.  I would put it at the 12 month average level

For Saudi Arabia the sustainable level of C+C output is about 10.5 Mb/d and for UAE perhaps 3.2 Mb/d.  If there were no future decreases in output from Libya or Venezuela, Saudi Arabia alone could produce 750 kb/d of extra output and more than fill the 600 kb/d gap from reduced Iranian exports.  The UAE might also be able to increase output by 150 kb/d and other OPEC producers such as Iraq and Kuwait might be able to produce 100 kb/d above March output levels, so potentially there is 1000 kb/d of spare OPEC capacity and perhaps 100 kb/d for Russia.  If we deduct the 600 kb/d of Iranian exports from the 1100 kb/d of spare capacity for OPEC and Russia, that leaves only 500 kb/d of spare capacity, not a lot of room for surprise supply disruptions on top of anticipated disruptions from Venezuela and Libya.

I see $80/bo for Brent by August.

Opec producers have to keep their major term contract buyers happy , and if they have the capacity and hence , it is called spare capacity, they will fill the gaps for their "preferred" large volume term buyers for covering the short falls in supply from elsewhere.

The spare volume available for these buyers is split up some may get more, some less and there is also a possibility that the "base" price for these "emergency extra" barrels will be higher than the pricing of the term contract volume barrels

[D Coyne + 305]

4 minutes ago, ceo_energemsier said:

Opec producers have to keep their major term contract buyers happy , and if they have the capacity and hence , it is called spare capacity, they will fill the gaps for their "preferred" large volume term buyers for covering the short falls in supply from elsewhere.

The spare volume available for these buyers is split up some may get more, some less and there is also a possibility that the "base" price for these "emergency extra" barrels will be higher than the pricing of the term contract volume barrels

It is my opinion that the OPEC "spare capacity" is overstated, this can be seen by looking at output levels just before meetings to determine quotas when prices are low or looking at output levels when oil prices are very high.  Look at Saudi production from 2011 to 2014, the maximum average C+C output levels were about 9.9 Mb/d, but Saudi Arabia had claimed for years they were capable of producing 12 Mb/d of C+C, when in reality during that period there maximum sustainable production capacity was 9.9 Mb/d and there was 2 Mb/d of "phantom spare capacity".  Today the maximum sustainable Saudi C+C output capacity is about 10.5 Mb/d. 

Interesting that the emergency barrels come at a higher price, how much higher is typical (maybe 10%), it might be high enough that they are not wanted or that the market price would tend to be at that level due to shortages.

[ceo_energemsier + 1,818]

18 minutes ago, D Coyne said:

It is my opinion that the OPEC "spare capacity" is overstated, this can be seen by looking at output levels just before meetings to determine quotas when prices are low or looking at output levels when oil prices are very high.  Look at Saudi production from 2011 to 2014, the maximum average C+C output levels were about 9.9 Mb/d, but Saudi Arabia had claimed for years they were capable of producing 12 Mb/d of C+C, when in reality during that period there maximum sustainable production capacity was 9.9 Mb/d and there was 2 Mb/d of "phantom spare capacity".  Today the maximum sustainable Saudi C+C output capacity is about 10.5 Mb/d. 

Interesting that the emergency barrels come at a higher price, how much higher is typical (maybe 10%), it might be high enough that they are not wanted or that the market price would tend to be at that level due to shortages.

It may not necessarily be at a higher price, it is all dependent on the negotiations by and between that particular OPEC NOC and the particular buyer. The buyer may even say , we dont elect to buy additional barrels during such times and no one gets any penalties for breach of contract.

[ceo_energemsier + 1,818]

1 minute ago, ceo_energemsier said:

It may not necessarily be at a higher price, it is all dependent on the negotiations by and between that particular OPEC NOC and the particular buyer. The buyer may even say , we dont elect to buy additional barrels during such times and no one gets any penalties for breach of contract.

What would be the gain/+ive takeaway for OPEC members to over state capacity?

It only tamps down the "fear" premium for a very very very short time, and then what? the world will see thru their fudging the numbers and then what?

[D Coyne + 305]

18 minutes ago, ceo_energemsier said:

What would be the gain/+ive takeaway for OPEC members to over state capacity?

It only tamps down the "fear" premium for a very very very short time, and then what? the world will see thru their fudging the numbers and then what?

ceo_energemsier,

 

Perhaps they don't want the World to realize that peak oil is likely to arrive by 2025 and that oil prices will be going up.  If it does many nations may aggressively push for alternatives to oil for transportation and their black treasure may become worthless as demand for oil might fall faster than supply.  I doubt this will occur in the near term, but high oil prices may make this a reality by 2050 and then the $20/b scenario may become reality as OPEC nations end up in a price war trying to sell as many barrels as they can befor demand dries up for good.

[ceo_energemsier + 1,818]

2 minutes ago, D Coyne said:

ceo_energemsier,

 

Perhaps they don't want the World to realize that peak oil is likely to arrive by 2025 and that oil prices will be going up.  If it does many nations may aggressively push for alternatives to oil for transportation and their black treasure may become worthless as demand for oil might fall faster than supply.  I doubt this will occur in the near term, but high oil prices may make this a reality by 2050 and then the $20/b scenario may become reality as OPEC nations end up in a price war trying to sell as many barrels as they can befor demand dries up for good.

Somehow I do not believe that they are worried about keeping a lid on peak oil. We have had a few peak oil events, but the world is awash in oil. From an investment perspective, oil demand may drop for transport fuels but it wont be a drastic drop for one, secondly the more alternatives are pushed the more the demand for hydrocarbons will grow , for alternative uses.

[Ward Smith + 6,615]

General question. The United States has the Strategic Petroleum Reserve, holding around 700 million barrels, plus about half that amount in private hands in places like Cushing. Do any of the OPEC countries have something equivalent for export purposes? When farmers don't like the price their crop is getting, they store their grain in silos. 

[ceo_energemsier + 1,818]

2 minutes ago, Ward Smith said:

General question. The United States has the Strategic Petroleum Reserve, holding around 700 million barrels, plus about half that amount in private hands in places like Cushing. Do any of the OPEC countries have something equivalent for export purposes? When farmers don't like the price their crop is getting, they store their grain in silos. 

OPEC member countries NOC's and their trading divisions maintain some form of stored barrels in different locations.

They lease tank farms storage capacities in various strategic locations such as in NWE (The Nederlands), Euro-Med, Japan, Singapore, and in the Caribbean as well floating storage (oil tankers) from time to time. Now they also maintain stored barrels volumes in China and KSA, has an arrangement with India whereby they funded in part storage facilities in India to store their crude oils.

 

________________________________________________________________________________________

https://economictimes.indiatimes.com/industry/energy/oil-gas/india-seeks-saudi-investment-in-strategic-oil-storage-rescue-plan-for-refinery-project/articleshow/68342522.cms

 

India Targets Saudi Investment In Strategic Oil Storage

India has already built 5.33 million tons of underground reserves in three locations, which can meet 9.5 days of the country's oil needs.

ndia is seeking investment from Saudi Arabia to build emergency crude reserves that will act as a buffer against volatility in oil prices and supply disruptions for the third-largest oil consumer.

Saudi's participation in the Indian Strategic Petroleum Reserve program was discussed at a meeting between the kingdom's Energy Minister Khalid Al-Falih and his Indian counterpart Dharmendra Pradhan in New Delhi on Saturday, according to a government statement on Sunday. They also discussed expediting a proposed $44-billion oil refinery project on India's west coast with investment from Saudi Arabian National Oil Co., it said.

India, which imports four out of every five barrels of oil it consumes, is expanding its strategic reserves to shield from perennial political risk in the Middle East and Africa that account for the bulk of its purchases. Prime Minister Narendra Modi has opened some of the underground caverns for commercial storage to lessen the strain on state finances. It has already leased out tanks to Abu Dhabi National Oil Co.

 

India has already built 5.33 million tons of underground reserves in three locations, which can meet 9.5 days of the country's oil needs. It now plans two new reserves with a combined capacity of 6.5 million tons, sufficient to cover an additional 12 days.

Saudi Arabia is a key oil supplier to India and exported 36.8 million tons of crude to Indian refiners in the year ended March 2018, accounting for 16.7 percent of their total purchases, according to the statement.

 

Adnoc signs deal to store crude oil in India

India also in talks with Saudi for crude oil storage, Indian oil minister says

---

Published:  November 12, 2018 18:44

 

bu Dhabi: Abu Dhabi National Oil Company (Adnoc) on Monday signed a Memorandum of Understanding with the Indian Strategic Petroleum Reserves Ltd (ISPRL) to explore the possibility of storing its crude oil at ISPRL’s underground oil storage facility at Padur in Karnataka.

 

 

 

The facility has a storage capacity of 2.5 million-tonnes (17 million barrels) capacity, according to a statement from Adnoc.

The agreement follows the arrival, on November 4, of the final shipment of the initial delivery of Adnoc crude to be stored in another ISPRL underground facility in Mangalore which will store 5.86 million barrels of crude oil.

“It is our firm hope that we will be able to convert this framework agreement into a new mutually beneficial partnership that will create opportunities for Adnoc to increase deliveries of high-quality crude oil to India’s expanding energy market and help India meet its growing energy demand and safeguard its energy security,” said Dr Sultan Ahmad Al Jaber, UAE Minister of State and Group CEO of Adnoc,

https://gulfnews.com/business/energy/adnoc-signs-deal-to-store-crude-oil-in-india-1.60322809

India seeks Saudi investment in strategic oil storage, rescue plan for refinery project

The official statement said: "Saudi Arabia's participation in Indian Strategic Petroleum Reserve (SPR) program was also discussed."

 

Read more at:
//economictimes.indiatimes.com/articleshow/68342522.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

[ceo_energemsier + 1,818]

18 minutes ago, Ward Smith said:

General question. The United States has the Strategic Petroleum Reserve, holding around 700 million barrels, plus about half that amount in private hands in places like Cushing. Do any of the OPEC countries have something equivalent for export purposes? When farmers don't like the price their crop is getting, they store their grain in silos. 

https://tankterminals.com/news/column-china-crude-oil-storage-splurge-is-opecs-best-friend/

 

https://www.reuters.com/article/us-saudi-oil-china/saudi-arabia-to-boost-oil-exports-to-china-with-strategy-shift-idUSKCN1QF1V3

[D Coyne + 305]

2 hours ago, ceo_energemsier said:

Somehow I do not believe that they are worried about keeping a lid on peak oil. We have had a few peak oil events, but the world is awash in oil. From an investment perspective, oil demand may drop for transport fuels but it wont be a drastic drop for one, secondly the more alternatives are pushed the more the demand for hydrocarbons will grow , for alternative uses.

You may be right, I don't know the motivation for claiming more spare capacity than exists.  Let's say one believes Sadi Spare capacity was 12 Mb/d in 2011 to 2014.  Perhaps this figure is C+C+NGL and Saudi Arabia did come close to this figure in 2012 at 11.6 Mb/d when Oil Price was around $120/b in 2017$ (data from BP), C+C output was only 9.83 Mb/d in 2012, so it may be that spare capacity includes NGL, where I focus on C+C output as the need is primarily for transportation fuel and NGL is a very small part of that mix.  In 2016 Saudi C+C output was 10.5 Mb/d where C+C+NGL was 12.4 Mb/d, so where you may be thinking in terms of C+C+NGL for "crude capacity", I think of C+C with sustainable capacity(12 month average output) about 10.5 Mb/d for Saudi Arabia.  I don't expect a drastic drop at first, but demand for fuel for land transport may drop quite a bit while ship and air transport may expand, so OPEC may never have any problem selling their oil as it will always be the cheapest source.  At some point the more expensive resources such as deepwater, extra heavy, and tight oil may be priced out of the market (second half of 21st century.)

[ceo_energemsier + 1,818]

14 minutes ago, D Coyne said:

You may be right, I don't know the motivation for claiming more spare capacity than exists.  Let's say one believes Sadi Spare capacity was 12 Mb/d in 2011 to 2014.  Perhaps this figure is C+C+NGL and Saudi Arabia did come close to this figure in 2012 at 11.6 Mb/d when Oil Price was around $120/b in 2017$ (data from BP), C+C output was only 9.83 Mb/d in 2012, so it may be that spare capacity includes NGL, where I focus on C+C output as the need is primarily for transportation fuel and NGL is a very small part of that mix.  In 2016 Saudi C+C output was 10.5 Mb/d where C+C+NGL was 12.4 Mb/d, so where you may be thinking in terms of C+C+NGL for "crude capacity", I think of C+C with sustainable capacity(12 month average output) about 10.5 Mb/d for Saudi Arabia.  I don't expect a drastic drop at first, but demand for fuel for land transport may drop quite a bit while ship and air transport may expand, so OPEC may never have any problem selling their oil as it will always be the cheapest source.  At some point the more expensive resources such as deepwater, extra heavy, and tight oil may be priced out of the market (second half of 21st century.)

Yes agree. I do also believe the costs of deep water, crappy heavy and extra crappy heavy oil and tight oil costs of exploration and production over the next few years will be coming down. We are already seeing drop of tight oil down, we have costs down in the Eagle Ford to 23-28$/bbl and Permian down in the range of $29-38$/bbl and as the majors come in they will bring more resources to lower those for their respective acreages over time. @ the start of the shale game , people said these are viable at 100$/bbl, then it came down to the 90s$/bbl range, then down to the 70s, 60s and 50s. Same with the deep water and ultra deep water. Hundreds and hundreds of companies are out there trying to get into the heavy oil game and have been for sometime. Each one has a different tech and outlook. I know many, dozens and dozens who have gone out of business, others are somewhat successful and some are very successful. I know for a fact that two of our techs have been proven and , how ironic, the bulk of the testing and proving out for these two techs was conducted in now the disaster known as Venezuela in the late 90s and early 2000s. We packed up and left before things started to get bad. Signals were all over the place. Now we have JVs, with several major producers and OPEC members NOC's . The costs of upgrading the crappy heavy oils is extremely lucrative to go on large scale operations.

Granted in the shale game lot of companies went belly up , because they did not plan their game plan for the shale game, but that is a discussion on its own.

There will be inventors and innovators working hard at different technologies and processes to be more efficient, more productive, cleaner and better and safer for the environment at lower costs. The biggest hurdle is time.

Coming back to the spare capacities , if the crude spare capacity is tight, they can also always use the condensates  to create different blends of crude oils adding to actual crude oil barrels in volume.

There will always be a certain type of natural resource that will be left behind due to high costs and the tech not available at a given time to develop those economically.

 

[Tom Kirkman + 8,860]

On 4/28/2019 at 11:34 PM, William Edwards said:

The Saudis want $85/B. Similarly, I want $100,000/D for my services. The Saudis will refuse to produce if they do not get the $85/B. Similarly, I will refuse to provide my services if I do not get the $100,000/D. Are we both not in danger of being unrealistic in what the market and our competitors will allow? 

Excellent analogy, easily understood.  Thank you for making that point, and making it clearly, William.

I've heard that the Saudis actually want around $91/bbl to balance their budget (and grease the palms of the many thousands upon thousands of royal princes who want their cut of oil money for doing ... exactly nothing ... except for being royal princes.  Tough gig.)

 

/ P.S.  Rudolf is someone I make it a point to read over on LinkedIn.  We certainly do not agree on everything (disagree quite a bit, sometimes) but his views are worth reading, in my opinion.

[D Coyne + 305]

14 hours ago, ceo_energemsier said:

Yes agree. I do also believe the costs of deep water, crappy heavy and extra crappy heavy oil and tight oil costs of exploration and production over the next few years will be coming down. We are already seeing drop of tight oil down, we have costs down in the Eagle Ford to 23-28$/bbl and Permian down in the range of $29-38$/bbl and as the majors come in they will bring more resources to lower those for their respective acreages over time. @ the start of the shale game , people said these are viable at 100$/bbl, then it came down to the 90s$/bbl range, then down to the 70s, 60s and 50s. Same with the deep water and ultra deep water. Hundreds and hundreds of companies are out there trying to get into the heavy oil game and have been for sometime. Each one has a different tech and outlook. I know many, dozens and dozens who have gone out of business, others are somewhat successful and some are very successful. I know for a fact that two of our techs have been proven and , how ironic, the bulk of the testing and proving out for these two techs was conducted in now the disaster known as Venezuela in the late 90s and early 2000s. We packed up and left before things started to get bad. Signals were all over the place. Now we have JVs, with several major producers and OPEC members NOC's . The costs of upgrading the crappy heavy oils is extremely lucrative to go on large scale operations.

Granted in the shale game lot of companies went belly up , because they did not plan their game plan for the shale game, but that is a discussion on its own.

There will be inventors and innovators working hard at different technologies and processes to be more efficient, more productive, cleaner and better and safer for the environment at lower costs. The biggest hurdle is time.

Coming back to the spare capacities , if the crude spare capacity is tight, they can also always use the condensates  to create different blends of crude oils adding to actual crude oil barrels in volume.

There will always be a certain type of natural resource that will be left behind due to high costs and the tech not available at a given time to develop those economically.

 

The breakeven price is much higher than you believe in the Permian and Eagle Ford.  More like $60/b for a $9.5 million dollar well for a well with average oil recovery (EUR).  The low ball $30/b estimates exclude a number of line items.  I use a discounted cash flow analysis over the life of the well with a 10% annual discount rate and breakeven price is where net present value of cumulative discounted net revenue over the life of the well is equal to the capital cost of the well.  EUR=390 kbo for the average 2017 Permian Basin well.  See shaleprofile.com for real world Permian basin data.

The tech has accomplished a lot, but if there were a lot of projects that were viable in ultra deep water at $50/b (2017$) we would have seen a lot of new project development.  My understanding is that the low price environment from 2015 to 2017 saw quite a lot of projects shelved, so I am a little less optimistic about low costs for ultra deep water, oil sands, and Arctic oil.  Costs may come down a bit.

Also on tight oil the resource is pretty limited (perhaps 80 to 90 Gb for the US id the AEO reference oil price case is correct and USGS mean UTRR estimates are also correct), as sweet spots get drilled up and producers move to less prospective acres the costs will increase, it is unlikely that tech will overcome this reality, physics will always win out.

Edited April 30, 2019 by D Coyne

[Mike Shellman + 548]

2 hours ago, D Coyne said:

The breakeven price is much higher than you believe in the Permian and Eagle Ford. 

I agree; numerous line item costs are conveniently left out of breakeven price calculations. Managing debt is generally always left out on a per incremental BO or BOE basis and paying that debt back is avoided completely. Denial is very useful in well economics. Paying debt back for most LTO companies makes their real breakeven price $25-30 higher.

Improved productivity gives the appearance that costs are going down; they're actually not. Where costs are going down it is because service companies are taking the hit (see Halli and Big Blue). Assuming that will continue, or, for instance, that source water and disposal of produced water in the Permian is going to go down, and not up, is not based on any operational experience.  The TRRC could put its limp foot down tomorrow on flaring and most of the LTO business would be SOL and break evens would go through the roof.

American shale oil is one of the most expensive barrels in the world to produce. Legacy debt puts a great burden on revenue from new production and that burden increases over time. Suggesting the cost of future hydrocarbon extraction is going to go down anywhere in the world is, well, sort of nuts.

Net back price calculations are far more meaningful and useful in napkin shale oil analysis. Take home pay per BO in the Delaware Basin, for instance, is probably about $26-$27 after all, real costs are deducted. Real wells cost are close to $11MM with leasehold and gathering infrastructure costs...now, try and find a lot of Bone Springs wells in the Delaware that will make 410K BO and remember, new wells must now pay for themselves... AND old wells too!

150% ROI's in the shale oil business will never allow it to pay back old debt, replace reserves and grow, not without more low interest, outside capital. It is not the first time that a resource play has failed from a business standpoint; it happens all the time in the oil biz. That's life. OPM has just kept this play going like the little battery bunny, nothing else.  A few companies will be alright in the shale biz; if you are day trader, whoop. But as to long term sustainability and getting America way down the oil road, shale oil is a business and the business is failing. Miserably, actually. I find it incredible how many people simply cannot accept that. Most everyone that can't is making a buck from the whole gig. 

 

 

 

 

 

Edited April 30, 2019 by Mike Shellman

[D Coyne + 305]

36 minutes ago, Mike Shellman said:

I agree; numerous line item costs are conveniently left out of breakeven price calculations. Managing debt is generally always left out on a per incremental BO or BOE basis and paying that debt back is avoided completely. Denial is very useful in well economics. Paying debt back for most LTO companies makes their real breakeven price $25-30 higher. Improved productivity gives the appearance that costs are going down; they're actually not. Where they are it is because service companies are taking the hit. Assuming that will continue, or, for instance, that source water and disposal of produced water in the Permian is going to go down, and not up, is not based on any operational experience.  The TRRC could put its limp foot down tomorrow on flaring and most of the LTO business would be SOL and break evens would go through the roof. American shale oil is one of the most expensive barrels in the world to produce. Legacy debt puts a great burden on revenue from new production and that burden increases over time. 

Net back price calculations are far more meaningful and useful in napkin shale oil analysis. Take home pay per BO in the Delaware Basin, for instance, is probably about $26-$27 after all, real costs are deducted. Real wells cost are close to $11MM with leasehold and gathering infrastructure costs...now, try and find a lot of Bone Springs wells in the Delaware that will make 410K BO and remember, new wells must now pay for themselves... AND old wells too! 150% ROI's in the shale oil business will never allow it to pay back old debt, replace reserves and grow, not without more low interest, outside capital. It is not the first time that a resource play has failed from a business standpoint; it happens all the time in the oil biz. OPM has just kept this play going like the little battery bunny, nothing else. I find it incredible how many people simply cannot accept that. Most everyone that can't is making a buck from the whole gig. 

Thanks Mike,

What is the current wellhead oil price for the average Permian (Delaware sub basin) producer?  I think you might be using about $60/bo for the wellhead price, 33% for Royalties and taxes (leaving $40.2/bo) so for $26.5/bo for take home we would have $13.7/bo for LOE and other overhead and perhaps interest and principle payments (not sure if interest and debt were included in your estimate.  Just trying to wrap my head around some real World estimates, do you have an estimate for the level of Debt for Permian producers, is it about $100-$150 billion for the tight oil focused Permian players?

Also if we assume the Permian tight oil producer debt is about $150 billion (pulled that out of thin air, no idea what the actual number is) and we assume the debt is paid back over 15 years at a real annual interest rate of 3.5% (6% nominal rate) with output flat at the March 2019 output level, then the barrels produced after March 2019 would need an extra $9.50/b over breakeven to pay off the existing debt.  Note that large producers such as Chevron or Exxon Mobil would pay the prime interest rate (currently 5.5% nominal and 3% real rate assuming 2.5% annual rate of inflation.)  So for the majors the interest costs might be somewhat lower.  Not sure where you get the $25/b estimate, perhaps you assume paying back the debt in 5 years.  Also note that assuming flat output as I have done is quite conservative, it is likely output will continue to increase which spreads the debt payments over more barrels of oil so debt payback per barrel is likely to be lower than I have estimated here, perhaps $7.50/b rather than $9,50/bo.

Edited April 30, 2019 by D Coyne

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3 hours ago, D Coyne said:

The breakeven price is much higher than you believe in the Permian and Eagle Ford.  More like $60/b for a $9.5 million dollar well for a well with average oil recovery (EUR).  The low ball $30/b estimates exclude a number of line items.  I use a discounted cash flow analysis over the life of the well with a 10% annual discount rate and breakeven price is where net present value of cumulative discounted net revenue over the life of the well is equal to the capital cost of the well.  EUR=390 kbo for the average 2017 Permian Basin well.  See shaleprofile.com for real world Permian basin data.

The tech has accomplished a lot, but if there were a lot of projects that were viable in ultra deep water at $50/b (2017$) we would have seen a lot of new project development.  My understanding is that the low price environment from 2015 to 2017 saw quite a lot of projects shelved, so I am a little less optimistic about low costs for ultra deep water, oil sands, and Arctic oil.  Costs may come down a bit.

Also on tight oil the resource is pretty limited (perhaps 80 to 90 Gb for the US id the AEO reference oil price case is correct and USGS mean UTRR estimates are also correct), as sweet spots get drilled up and producers move to less prospective acres the costs will increase, it is unlikely that tech will overcome this reality, physics will always win out.

FYI , my numbers are not numbers that I believe in. Those are numbers that we actually have been getting , not just for a 30-90days IP runs but long term sustained production over the years and these numbers are not estimates, they are actual realized numbers. There are no line item exclusions either or use of "Enron-esque" accounting methodologies to shift numbers around. My numbers are very very real world.

Also unlike the CEO or some exec of Apache who had stated a few years ago , their costs were 2$/bbl and were able to go head to head with KSA in their costs, yes they left out and use a lot of numbers of line items in their accounting.

Numerous deep and ultra deep water projects were shelved due to the low oil price and the uncertainty associated with it for long term outlook. Deep water and ultra deep water are a long term and long term payout investments, it may take 5-10 years for actual commercial production and then more time for the returns, while shale is much much faster.

Physics can be manage to an extent by technology, it is part of technology. One of the methods to deal with that sweet spots and lower quality rocks is to mix and match the high grade with mid and low grade ir rather tier geo quality rocks and spread out through a mixed pattern of development that produces hydrocarbons from a co-mingled set up of different tiered quality of assets.