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 (NYSE:SLB) and Transocean (NYSE: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 (NYSE: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.