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27 comments on From One of Our Insiders: Some Thoughts and Data about Prices and Exploration

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Dave Cohen on November 1, 2005 - 7:21pm Permalink | Subthread | Comments top
I'm trying to judge the seriousness of this revelation.

Does our insider tell us the size (reserves, production flow rate) of the typical projects being postponed? And what about the type of project? The example indicates deepwater. For example, are we talking about a delayed GOM field with an estimated URR of 0.5 billion barrels and an expected daily production of 25/kbd? How much oil are we talking about here? If we're going to talk about inflationary pressures on oil price, what's the near term (3 to 5 years out) expected world production shortfall due to these delays?
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Bubba on November 1, 2005 - 10:24pm Permalink | Subthread | Parent | Comments top
Lets put things in perspective.  The biggest fields in the GOM (Mars, Thunderhorse, etc.) are 0.5 to 1 billion barrels with production rates that run from 100 to 200 thousand barrels per day.  Projects of this size are on their own schedule, were likely approved on oil selling for $18 to $25/bbl, and are only impacted by the current environment in that the market for everything from rigs to roughnecks to reservoir engineers is much tighter now than it was 2 years ago.  They might be delayed, but if anything, they are 2 to 3 times more profitable than they were when the go forward decision was made.

With commodity prices as high as they are now, everyone wants a piece of the extra profit.  Costs rise dramatically.  Consequently, some marginal developments that one presumed would now be profitable still don't make the cut.  I have seen analyses of various tar sand developments that make money at $35/bbl and make more at $70/bbl, but no where near as much as you might imagine.  The increased gross revenue is eaten up by greatly increased costs, as everyone demands to sup from the trough.

That said, marginal projects never really make a big difference in the overall scheme of things.  They only make a difference when a significant hurdle can be overcome and the volume from the marginal project is large.  Tar sands are also a good example of this.  If the price of oil stays low (e.g. below $25/bbl) none of these project make enough revenue per barrel to cover their operating costs.  None ever get approved and none of this oil ever comes on the market.  However, once companies are convinced that the price will stay above their threshold number, they start committing billions of dollars on these "marginal" projects.  Pretty soon you are making 1 million barrels per day.

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Dave Cohen on November 1, 2005 - 11:55pm Permalink | Subthread | Parent | Comments top
Thanks for the reply, Bubba. But I'm still left with the question of what "marginal" projects are delayed due to price and what the supply impact of these delays are.

As far as "companies [being] convinced that the price will stay above their threshold number", I would think that it is obvious that the price will stay above their threshold numbers at this point. There is simply no evidence in the supply & demand equation that market prices will ever go down again much below current levels -- unless there is a serious worldwide recession. There's no Prudhoe Bay, no North Sea to bring online anymore. Pretty soon you're getting 1/mbd from marginal projects? When will they decide to go forward with these projects? Apparently, higher initial development costs are putting them off given the historical volatility of the market but I would submit that past experience does not apply here. Not to mention, as you have, that these oil business cultures are very conservative and risk-averse.
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Bubba on November 2, 2005 - 9:40am Permalink | Subthread | Parent | Comments top
My own experience is that marginal projects are marginal in every sense.  Except in the unique types of cases I mentioned above, of which there are few, marginal projects don't make an impact on even a single company's bottom line or overall production level, much less the gross production of an entire country (or the world for that matter).
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wkwillis on November 3, 2005 - 1:48pm Permalink | Subthread | Parent | Comments top
Marginal projects don't much effect company profits but they do affect product prices. 1% of the oil supply determines 10% of the prices because it's the marginal 1% that sets the prices.
A good example is the oil shock of 1973 that reduced supply by 5% and increased prices by 100%. 1980 increased prices by 400% and was the result of an even smaller decrease in production.
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ABAPer on November 2, 2005 - 11:08am Permalink | Subthread | Parent | Comments top
Marginal projects may not have made a difference when overall there was a surplus of supply. However when the surplus is gone every drop counts...
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27 comments on From One of Our Insiders: Some Thoughts and Data about Prices and Exploration

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