happycajun

Saudi Khurais Field: Looks Like Easy Oil May Be Gone from Arabia, Too

Khurais was discovered way back in the '50s, when Aramco was trying to get a handle on just what they had potential-wise in the consession area. They were obligated to cede back to the government acreage over time, and so they were actively trying to determine where there wasn't oil so to speak. Khurais, and later Shaybah, were examples of fields that were high potential, but just too far from the core areas to justify putting in the infrastructure to fully develop when there was so much productive capacity to be produced at a lower marginal cost. Khurais was initially developed on a very limited basis solely to supply crude oil to the government's Riyadh refinery - Khurais being the closest field to that facility. In 1983, I remember when we tapped the 48" crude line that delivered oil to Yanbu on the Red Sea coast for feed to the refineries there, and for export via the Red Sea and Su-med pipeline in Egypt. The economics of using the Pipeline and tankers from Yanbu for export were inferior to using tankers from Ras Tanura, so there was much extra capacity (the Yanbu line was always justified on feeding local development on the west coast of Saudi and on security).

The Yanbu line then was used to feed crude to Riyadh by way of the goverment's pipelines that previously carried Khurais production, and Khurais was "mothballed" for future development. It is only relatively recently that Khurais was properly delineated, and full field development undertaken. As I understand it, the formation oil pay is not as thick nor uniform as originally thought based on extrapolation from Ghawar. Ghawar has been on seawater injection for at least the last 25 years - my memory is a little hazy that far back - it is just the nature of those giant fields, you want to use water injection for pressure maintenance to maximize ultimate recovery - producing without such a mechanism with the the light oil in place would damage the reservoirs early on.

Long story short - I don't think Saudi would be developing Khurais unless it needed incremental capacity to maintain max output in the 10 to 12 million barrel range. Ghawar has been extended by horizontal drilling and improved control. Khurais is by all means a giant oil field, but not as rich as earlier thought to be.

Regards, HC

Your Oil Stocks Aren't Coming Back

Mr. Brown, you show a profound ignorance of the business. You cannot compare a pure play upstream company to an integrated to a drilling company in the first place - at least not on fundamentals. And fundamentals is where you must start. Tech companies of the 90's all set out to own 90% of the same unknown pie - there was no market for what they all sold to investors. Oil & Gas - has been around & will be for some time to come. Some of us who remember the crash of '85 understand. Mah' as sallamah y'all.

Why Are Natural Gas Producers Expanding Production So Aggressively?

First, a technical correction - you don't "pump" natural gas (or any vapor phase material), you compress it. Gas wells flow or they don't flow - you don't pump them. If the pipeline pressure that you have to overcome to get the gas into the pipeline is higher than the wellhead pressure, then you add compression at the wellhead, downstream from the separators.

Second - the "why" wells are being drilled with prices down is more complex than you characterize. One must look at oil & gas law and how mineral rights are acquired to understand why an oil or gas lease is a "use it or lose it" proposition. When a landowner leases his/her minerals, it is by way of an agreement in written form that stipulates that the lessee has a limited amount of time to drill a well, or the leasehold rights revert back to the land owner. In the Haynesville, for example, it common for leases to provide that the lessee must drill a well in two years, or the lease goes away. There is usually an option to "renew" the lease for an amount of money generally equal to the original lease payment or "bonus" that was the consideration for the lease initially. The lease bonus in the Haynesville has been in the $5,000 to $10,000 per acre range generally. If gas and condensate are produced, then the lessor gets a percentage of the gross production at the wellhead, typically 25% of the volume - which the producer generally markets for the owner, who then gets the $$ that his 1/4 of the gas is sold for.

Now, to put this in an economic context. The basic "unit" being formed in the shales is the section - or a 640 acre nominally square area. This unit is developed by a single horizontal well that is spudded (the surface penetration of the drill bit) near the center of one side of the square, and which goes down vertically to the shale formation, then "kicks" horizontal and runs about a mile - this is the section of the well that is "completed" - where the gas flows from the rock into the tubing, then to the surface.

The lease bonuses for 640 acres is a sunk cost of about $3 - 6 million. A well costs a little more than that. If you don't drill, you lose the lease, or have to pony up another $3-6MM to hold the lease - which you will still lose if you don't drill - all you are buying is time. Having shelled out the $$$ for a lease, and or for a well - it is simple matter of cash flow that you have to generate revenue to produce some return on the investment. The lease also has shut in provisions, which require that a lease be produced once a well is drilled, or it reverts to the land owner - if a lease is shut in more than thirty days - you can lose the lease.

The above is much simplified - but it shows that the economics and risks are more complex than you characterize. This is why the upstream E&P business is best analogized as a game of stud poker - you have to ante up at each stage of the game, and you don't know if you have won or lost until the last card is dealt.

Rising Oil Prices: What We Have to Do ASAP

The real issue regarding energy cost is stability. For the longer term, yes - we will need to come up with a replacement for oil and gas - but it won't be overnight, and the "how" is still being worked out by the markets. Oil shot up - some blame "speculators" which I don't really understand because ANY investment is speculative. The base premise of portfolio management is that the future is uncertain - making investment risky - the trick is to determine the degree of risk and to place your bets so that your exposure is understood and fits your risk tolerance.

If Oil at $147/bbl was "too high," then it seems that Oil at $30/bbl was perhaps "too low." As with most things, when a stable trajectory is disturbed, there is an overshoot/hunting response to the disturbance, with a new stable "steady state" being the result. The new stable basis gets priced into the economy. Oversimplified, but basically how dynamic systems respond to impulses. Now, for your recommendations:

Beg OPEC - What? This is a real winner! Beg for what? Stability? Low Prices? High Prices? Alternative Energy Technologies? The only common ground here that makes any sense is "Stability" - OPEC wants it (or at least Ali Naimi/Saudi wants it), but at what level? $70-$80 is the stated happy equilibrium.

Use the SPR - This option makes a little sense when the price is at extreme levels (produce from when price swings too high, add too when price is too low), but not when the price is seeking some intermediate ground. the SPR is NOT a permanent, limitless supply.

Expand Transit system service IMMEDIATELY? How? the problem in most cases is that people don't use it! With gasoline/petrol at relatively low prices, this won't get people on the tube.

Expand Bus service? see above. Have you been to a bus station lately? Unless you are a police officer I doubt it! There is no quick way to make this ANY more attractive (less unattractive?) than it is.

Increase Gas Tax? I thought you said the price was TOO HIGH! Good move, let's MAKE IT HIGHER!

Encourage some sort of "commute efficient" practice by employers - this was done to VERY limited effect back in the '70's energy crunch, and it can have some impact, but not permanent, and I don't understand what "salary subsidy" for the workers results in any incentive for the EMPLOYER to change work days?

"Should have been preparing for this" - well, can't fault you there. I said this THIRTY years ago. All that's changed is the clowns in charge, the circus is the same.

Obama 'Shines' Natural Gas

You call that CHANGE, that's just business as usual, drilling nasty holes in the ground and burning hydrocarbons into CO2! Unsightly rigs in beautiful beachfront viewscapes uglifying things - not like the renewables such as windmills off the coast of Hyenas's port (oops, bad example). Besides, drilling for anything is a horrific BUSH policy, and the obamanation must break cleanly from any and all such heretical act. Finally, WHO in the nat gas industry loudly supported our lord high master and savior? Don't hold your breath, nat gas makes too much sense as part of a cohesive energy policy and is not "new" or "change" enough - it just ain't "YES WE CAN" enough.

Why Are Natural Gas Producers Expanding Production So Aggressively?

Mr Galt, I'll tell you were they get these people.

The majors recruit the finest engineering, geology and mba programs in the world, looking for the best potential. I have known many with undergrad degrees from US Naval Academy, US Military Academy, Texas, Texas A&M, Rice, Oklahoma, MIT, Harvard, Michigan, Penn, Duke, Purdue - just to name a few who I know who made it to the top ranks of E&P businesses. They then put them in the trenches - ALWAYS analyzing the economics of any investment decision. ALWAYS. The independants tend to hire from the majors - because the majors are better able to afford to train and develop the raw recruit. The young professional is taught about legal and regulatory aspects of the business - and HEAVILY INDOCTRINATED to NOT do anything wrong or unethical. I know some armchair quarterbacks will jear this assertion, but the majors all have a culture of being ethical, honest businesses - WAY more so than what I have seen from the wallstreet financial crowd.

There some bad apples, as in any business, but after the last great oil boom/bust, and all of the scrutiny focused on the industry over the nearly forty years I've been around it - the culture is shareholder focused, while operating legally and ethically. Anyone have some specific factual charges - take them to the SEC.

Laying the Foundations for a Post-Oil Age Economy

Huhhhh? Ever been to London? Yep, well laid out..... What IS the post oil economy? I thought that technology will make energy cheap, clean and abundant - which means attempts to further concentrate populations into potential death traps for natural or manmade plagues won't be driven by energy. And further, if you further concentrate population, who will produce all of the food (and renewable energy) that these slums will need? Waste disposal? Crime? An what about all of the existing "sprawl?" Do you advocate what the dicatator Napoleon did in Paris - bulldoze the whole thing and start from scratch? Sounds like you are a "mass transit" agenda guy, and you don't address what all those sheep in the superherds will be doing for a living. I thought that all this technology was to enable telecommuting and such. Indeed, I work all over the globe frome whereever I am. I thought that one of the environmentally sustainable trends was to consume locally produced "stuff" rather than to ship crap from Hong Kong to NYC for consumption of "fresh" produce. Sounds to me like you need to do a little more work on problem definition before you launch your "foundation" for the Oil Free (ha!) future.

Peak Oil as a Function of Earth's Volume

This is hilarious! Are you a "strategic planner" for the DOE perchance? LOL!

Oil Futures: Money for the Taking?

What? BB - I don't get the connection between your post and the article. I THINK that Andy's point is that, from a purely microeconomic perspective, there is a pure arbitrage play sitting here, and yet no one is taking advantage of it. Easy money - no way to lose.... Borrow $$ at low rates, buy oil at today's price, sell future contracts at the mucho higher price, and hold the oil until the contract comes due. The macro picture you describe has nothing to do with this equation.

My thoughts as to the WHY behind Andy's very astute observation is that the storage cost is higher than he thinks - We see numerous mentions of crude inventories being at very high levels, which I think is an indication that arbitragiers are indeed at work. So much so, that storage capacity is getting max'ed out. Building new capacity will take too long and be risky in the longer term. The oil producers can keep oil in the ground rather than pruduce it, pay royalties and taxes and then store it. The largest oil storage facilities are in salt domes, mostly owned and operated by the U.S. Govt in the SPR. Other than this capacity, the amount of oil storage capacity as a percentage of production capacity is relatively small. In Saudi Arabia, home to some of the largest crude oil storage tanks in the world - total tankage is only about two or three days worth of production capacity.

Andy, I think the answer is that unused storage to do what you describe just ain't there and the lead time to build more is greater than the market's perception of when the price will snap back.

Regards, HC

Natural Gas: Short Term Bear, Long Term Bull

Fitzman - Like I've told you before - Nat Gas just ain't novel enough for the Obamans to get charged up about, and it still releases CO2 & is a "finite" resource - all negatives to the administration, so they are going for the homerun, to leap ahead of fossil fuels entirely. I keep hearing "Moore's law" (after Intel co-founder Gordon Moore) recited for the proposition that "technology" results in a doubling of performance every 18 months, at one half the cost. Right. If this were true, we'd all be flying to the moon on tiny rockets purchased at walmart for $1.98.

I have seen a lot of trucks hauling large diameter epoxy coated line pipe (20+ inch stuff) and a lot of large diameter Cameron Ball Valves (in sets of identical units on trailer rigs) in north Louisiana and North East Texas - so some pipeline construction is underway. My thoughts are that the basic economics and "free market" (such as it is - the ol' invisible hand) will make nat gas rise to the occassion. The trip will be bumpy though, and will be in spite of, rather than because of, anything the current administration does.

Longoil - in principle, there is no reason that nat gas is needed to create hydrogen - in refineries, they crack the long chains to the point that only carbon is left from the hydrogen-carbon molecules - hence petrocoke byproduct. Way back in the old days, in a former era of oil glut - conoco had a major liquid gasification project to produce pipeline quality gas from abundant, cheap crude oil. (this was in the late 60's, early '70's). HOWEVER, it is probably more economical to use natural gas for the hydrogen source than to crack it from the raw bitumen, and produces greatey yields of syncrude.

The huge dip in oil and nat gas prices over the last nine or so months will only make the return to tight supply all the more abrupt and painful...

HC

Nobel Laureate Penzias: U.S. Needs a $1 a Gallon Gas Tax

Old well proven formula:

NOBEL PRIZE == BRILLIANT MIND + NO COMMON SENSE

Why Are Natural Gas Producers Expanding Production So Aggressively?

"John Galt" - sorry, I missed your irony initially! Where there is misconduct, by golly letstake the miscreants to task, conspiracy theorists - please stick to the authenticity of the moon landings, JFK, ect.

Madrejesica - oil & gas property rights are governed by state law, hence each state has its own set - but there is a significant similarilty in how the operating companies and landowners have approached the legal issues. Regarding the shut-in provisions, the typical lease provides for a "shut-in royalt" that holds the lease when a lease is shut-in awaiting facilities. Following is an example:

"should Lessee be unable to operate said well because of lack of market or marketing facilities or governmental restrictions, then Lessee's rights may be maintained beyond or after the primary term without production of minerals or further drilling operations by paying Lessor as royalty a sum equal to one dollar (1.00) per acre of land covered hereby per year, the first payment being due . . ."

There are a variety of general lease forms that have been used over time, and you must read each one to make sure what it says! If you have a significant sized tract (forty acres or more) you would be well advised to have an oil & gas lawyer take a look at things for you before you sign. My VERY generalized explanation above is just that - generalized. Whole legal treatises on the subject of Oil & Gas law such as "Williams and Meyers" (which my old friend Pat Martin edits) are written on the subject, so this is an over-simplification at best!

Oil Is Still the Key to U.S. Economic Future

Nice article Fitzman. The shale plays & the horizontal drilling/completion technology ushered in with the shale plays will keep natgas price decoupled from oil (or at least very loosly tied) at historical ratios. Another factor is LNG - a significant amount of import capacity has been sited, predating the shale plays, and will contribute to supply side.

U.S. Policies, Especially Energy, Should Be Much More Strategic

Son, you are clueless if you consider slapping a tax on any commodity a "strategic" step. At best, such a move would be considered tactical, albeit foolish. At bottom, energy is a component of all production. To the extent that a tax is placed on a form of energy, that tax becomes a part of the cost of production. Because other players in a global economy (the Chinese?) do not add this element of cost into their cost of production, they have an advantage. At the moment, the supply of oil and natural gas is more than adequate, but the US economy is in a major recession. NOW, you advocate the brilliant STRATEGIC step of slapping a major tax on a fundamental commodity? Nice "strategic" plan ace.

Exxon Misses as Production Drops

This is a harbinger telling what the future holds for our current oil "surplus." Oil, more so than gas, is very sensitive and responsive to price. Oil has a higher lifting cost which increases with maturity of a field. Gas on the other hand is much easier and less costly to produce once the well is completed. This means that an oil well will be plugged and abandoned when price drops below a certain threshold because the cost of operating it exceeds the revenue it produces - no positive cash flow. A gas well is cheaper to run. Once it is on stream, it does not have a high direct operating expense, so with the sunk cost of discovery and developement behind - it will continue to operate at bargain basement gas prices because it continues to create positive net revenue - it produces cash flow. Over the slightly longer term, capital expenditure drops because there is less cash flow to reinvest in finding and developing new resources, which are always ranked by marginal develpment cost - the cheaper barrel equivalent of reserves gets developed first..... but over time, the barrel has gotten more expensive to put on the proven producible reservse books. Deeper water, more remote areas, smaller deposits, less desirable chemical composition, etc.... are all factors that push a barrel of reserves out in time, until the price goes up.

So, it is inevitable that the current low prices will result in less exploration, less development, less reserve replacement, continued depletion, and ultimately - less oil available..... and higher prices. If Exxon's stats show it after less than one year of seriously down prices - it is true of the industry at large - simple Oil & Gas Econ 101.