Golden Rule: Easy Oil Production Means Cheap Oil, Difficult Production Means Expensive Oil 28 comments
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When James Dean’s character Jett Rink strikes oil as a wildcatter in George Steven’s 1956 epic, Giant, he goes up to the big house where Liz Taylor lives in order to laugh and drip oil all over the front porch. Covered in West Texas Intermediate crude (later to become the benchmark grade, traded in New York) he gets, shall we say, a little forward with Liz. That’s when Rock Hudson steps in, and decks him.
Giant was set in the 1930’s, a time when the price of oil was controlled by the Texas Railroad Commission because of overwhelming supply. The timeline on the price of oil during this period is actually a story worth tracking. Using the BP Statistical Review’s larger database on the price of oil going back to 1861, (see BP Historical Data – Workbook) it appears that by 1920, the production of the Model T may have triggered enough oil demand to finally get prices over 3.00 a barrel (about 34.00 in today’s dollars). But then the Black Giant of East Texas was discovered. And that sent prices back down to uneconomic levels.
Now, it’s interesting that a new discovery just last week by BP in the Gulf of Mexico, Tiber, is not widely understood as representing an entirely new era of oil. Oil that will be extremely expensive to extract, in both capital terms and energy terms. The discovery was greeted much in the way the Jack Field last year was portrayed, or that Brazil’s ultra-deepwater has been portrayed. It’s odd because stubborn facts appear in boldface in all the coverage of these oil fields. They are 5-7 miles down, first through water, then through rock. They will take billions of dollars to develop. The amount of daily flows expected from these fields is not exactly high. And finally, it will take years before any oil from these discoveries actually makes it to market.
Contrast this experience with the giant fields found in rapid succession, in the middle part of the last century. The oil was close to the surface, not miles down below. The oil flowed quickly, and did not require seismic imaging, radio spectroscopy, multi-million-dollar drillships, or armies of PhDs and large ongoing billings from Schlumberger (SLB) and Transocean (RIG). Flows from the Black Giant of East Texas quickly zoomed to 1 Mb/day the year following its discovery. Contrast this experience with expected flows from BP’s Tiber in the 200-300 thousand barrel range, starting in 2015(?).
Easy oil means cheap oil. And difficult oil means expensive oil. So let’s stop the nonsense that there’s a high intellectual hurdle to either grasp or measure this concept. Folksy references to pack horses and unwashed men in the hot, Texas sun 100 years ago as being evidence that “oil was never easy” is either too glib or too dunderheaded to take seriously. The inflation in both capital costs and energy costs to get the new barrel of oil here in the 21st century is, to use a different folksy phrase, completely out of the pan and into the fire. One can obtain energy and capital cost data from outfits like CERA in Cambridge, MA or from the companies themselves. Even Saudi Arabia, when bringing on a new field now, has to build a complex that looks more like a chemical plant or an oil sands mining operation.
The Jett Rinks of today fly on high speed helicopters out to multimillion dollar drillships. They watch huge platforms get crunched by ice or toppled by storms, and then have to wait years for repairs. Even before a drop of oil flows, they can be presented with billings of hundreds of millions of dollars, (or more) just for exploration. Indeed, when the Brazilian government was presented last Summer with an invoice for 1 billion dollars I thought the head of Petrobras (PZE) was going to faint. He was soon thereafter quoted as saying, “Actually, oil between 100 and 125 dollars a barrel is a fair price.” By the way, that billion dollar billing was to drill 20 exploratory wells in Brazil’s new ultra-deepwater fields. Test production just re-started, after problems, Tuesday. When will production actually start to scale up? Given Brazil’s new oil policy and the current price of oil, that remains decidedly unclear.
Further Reading
Chronological Listing of Key Events in the History of the Railroad Commission of Texas (1866-1939).
Photo:
Typical offshore oil industry high-speed work/livery boat.
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This article has 28 comments:
But the message is a sobering one. It's getting much more difficult and expensive to extract just as the developing nations of the world are whetting their appetite to join the developed nations in taking advantage of these oh so useful resources.
Much higher prices are terrible news, of course, for a world economy trying to recover from a severe recession...
As your article shows, there is plenty of oil to be found in ultra deep water rigs and also in oil sands. As the price goes higher, more capital will flow and more oil will be found.
"Peak Oil" is a silly term. The ultra deep water, tar sands and oil shale discoveries have shown us we have not peaked in the discovery of oil or oil equivalents. What has reached its peak (long ago) is the discovery of cheap oil. Take the silly term "Peak Oil" and replace it with "Peak Cheap Oil" and it now makes sense.
Most of the world's oil isn't distributed by truly private enterprise. Most of the world's oil is in public hands. Even the oil in private hands isn't truly and fully privately owned. As Brazil's recent oil legislation shows, oil in many countries is really considered the property of the state, rather than private enterprise. shareholder considerations are secondary.
Tiber is significant in that it is a US discovery. The most recent US major discovery. The fruits of this discovery belong to a private firm (BP), and shareholders can reap the profits.
What frightens me though is not high oil prices, but their yo-yoing up and down.
High oil prices certainly contributed to the slump of 2008, although financial folly assisted.
As the IEA notes when the economy picks up, oil prices must shoot up, as present oil prices are well under what it will cost to develop these new fields, or oil from tar sands etc.
This rise in oil prices in maybe 2015 should put a huge spoke in the wheels of any recovery, indeed a return to sustained growth hardly seems possible until oil dependence is greatly reduced.
Oil at $70 when the new fields need levels of perhaps $100-120 is unsustainable.
It appears though that oil at the higher price is also unsustainable by the world economy.
For those who imagine that massive new cheap oil fields are around the corner, it should be noted that in every year since the 1960's less new oil has been discovered than has been used.
> "Peak Oil" is a silly term. The ultra deep water, tar sands and oil shale discoveries have shown us we have not peaked in the discovery of oil or oil equivalents. What has reached its peak (long ago) is the discovery of cheap oil. Take the silly term "Peak Oil" and replace it with "Peak Cheap Oil" and it now makes sense. >
I agree with your other comments, but I think "Peak Oil" is still a useful term. It refers to the peak daily production levels, which is really the key. The world was using almost 86 million barrels per day in 2007 and that daily consumption had been growing year over year until the recession hit hard in 2008, despite price rises averaging some 25%/year from 2003 onward. Even if we have hundreds of billions of barrels in the ground, we can still have severe shortages.
I'm reminded of the $10 million dollar lottery which was to pay out a dollar a year for ten million years. The winner might still have trouble coming up with the down payment on a clunker if he couldn't have done so before winning that lottery.
U.S. daily production peaked in the early 1970s. Even Texas and Oklahoma are now net importers. Some of the Middle Eastern countries are in the same boat.
"Proved reserves of oil - Generally taken to be those quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reservoirs under existing economic and operating conditions. "
This softens the concept of a finite amount of oil, because as technology improves (ultra deep water, oil sands, oil shales) - more and more oil becomes technologically feasible to extract, thus "Proved Reserves" can increase, even though no new oil is being made.
The above information comes from the website of BP. TooBad41 there is no mention of horizontal drilling.
Also, as more money is put into altenative energy (not government money, btw) there will be breakthroughs, discoveries, and developments that will make the alternative energy as cheap as oil was for most of the 20th century.
I have no idea what those breakthroughs, discoveries, and developments will be, though.
We don't need any new breakthrough technology.
With sensible policies and regulation such as in France nuclear energy can do the job fine.
For fully referenced information on this, see my series of posts here:
seekingalpha.com/artic...
On Sep 10 02:01 PM Crashnburn wrote:
> Good article, mostly all good posts. What I take away is that as
> the price of oil goes up, it will naturally (without government intervention)
> start making alternative energy sources more economically viable.
>
>
> Also, as more money is put into altenative energy (not government
> money, btw) there will be breakthroughs, discoveries, and developments
> that will make the alternative energy as cheap as oil was for most
> of the 20th century.
>
> I have no idea what those breakthroughs, discoveries, and developments
> will be, though.
Seriously, though, it would seem that political risks would rise along with oil prices.
Oil Tax Would Have Little Price Effect, Treasury Says
www.bloomberg.com/apps...
Sept. 10 (Bloomberg) -- Increasing taxes on oil and natural gas companies would have an “insignificant” effect on prices for consumers, the Treasury Department’s chief economist said.
Removing U.S. “tax preferences” for the oil industry, as proposed by the Obama administration, might result in less than a 1-cent increase for a gallon of gasoline, Alan Krueger said in testimony to the Senate Finance Committee’s panel on energy today. Removing “tax subsidies” for natural gas producers may lead to a 1 percent jump in prices for that fuel, he said. ...
Hey.. budd-habill, if you want to have fuel for your junker, qwicherbellyaching about the Canadian tarsands. Or move over to the threads discussing propellers and solar-panels and blog with the other fantasizers.
Also, when money is present, so will there be politicians, lobbyist and big business.
www.opensecrets.org/
When one realizes the depth of this depression the world is in today, due to the 60% speculation of last summer of 2008 in crude oil alone, one must do something to prevent it from happening again.
For some good reading on this subject check out this site.
Global Research.
www.globalresearch.ca/...
Not because of any recovery, and Congress needs term limits.
Just a little FYI:
The last 20 years have been characterized by rising U.S. oil consumption, but now
"www.eia.doe.gov/oiaf/a..."
the U.S. Energy Information Agency, incorporating the most-recent changes in U.S. consumer behavior, says there will be no appreciable growth in U.S. oil consumption between now and 2030, with biofuels accounting for all of the growth in liquid fuels.
While oil stocks have risen, the coal stocks have been on an absolute tear from the bottom. Natural gas stocks are IMO the best investment going forward and the recent run up in the price of the underlying commodity is just the beginning. Have been buying the American and Canadian Trusts from the bottom, providing a nice profit and a steady stream of income that should rise with the price of natural gas.