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262 comments on US Peak Oil Adaptation: Prognosis in a Credit Crunch

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Stuart Staniford on August 20, 2007 - 3:06pm Permalink | Subthread | Parent | Comments top

"HL is just part A of the calculation".

My point is that Jeffrey isn't getting that 5% in production decline from Hubbert Linearization. I don't know where he's getting it - as far as I know, there's no evidence for it. And even if one completely bought the rest of the model (which I don't), that 5% near-term production decline arbitrarily doubles the size of the problem.

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westexas on August 20, 2007 - 3:52pm Permalink | Subthread | Parent | Comments top

As noted down below, I am talking about the decline rate by the top net exporters, not the world.

Based on crude oil production data through 5/07, and if we assume flat production for the rest of 2007, the year over year decline in Saudi crude oil production would be 5.9%, for Norway, 4.8%, versus 5% plus recent increases in consumption (EIA data).

When Russia starts declining, which may be happening now, I suspect that the production decline rate may be in the vicinity of 10% per year.

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jim burke on September 2, 2007 - 3:07pm Permalink | Subthread | Parent | Comments top

Stewart, download Rembrandt's latest Oilwatch monthly here and look at chart #11. That has the dramatic decline of net exports Jeffrey's talking about

jim

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suyog on September 2, 2007 - 7:02pm Permalink | Subthread | Parent | Comments top

Jim, your link does not work.

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jim burke on September 2, 2007 - 9:31pm Permalink | Subthread | Parent | Comments top

How about this?

(the html style manual has changed recently, and I'm sort of a technopeasant...)

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memmel on August 20, 2007 - 3:55pm Permalink | Subthread | Parent | Comments top

My understanding is the 5% decline is in next exports not production. And this is from his export land model.
I assume a post of it applied to world is forthcoming from WT so we can discuss it in depth later.

Next:
I find it interesting you did not discuss how this monetary environment would effect investment in oil production and exploration and in general the oil and energy industries. I'd say we can expect investments in major projects to decrease significantly. My main concern has become a sort of extension of the export land model where it becomes increasingly profitable to produce less and less oil for two reasons.

1.) Expensive oil makes it expensive to extract.
2.) Monetary problems makes it difficult to invest large amounts of money in projects with a long term payout and a requirement for high prices to be profitable. The reason the price, has to be high goto 1.

3.) Export Land effect where high prices increases internal consumption and money spent on expanding capacity is "lost" to the subsidized internal market thus discouraging extensive investment by the national oil companies.

So the coupling of high oil prices and a weakening economy seems to set off a sort of downward spiral that cannot be easily solved. In my opinion declines in production will steepen significantly as the economy worsens and national oil companies will respond by continued cuts in exports both intentional and as a result of production declines, lower investment levels, and increased internal consumption forcing the oil price to remain high and setting us on this downward path even as the economy weakens.

Overall you seem to get into a paradoxical situation that as oil becomes more expensive less is produced.

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oilmanbob on August 20, 2007 - 8:10pm Permalink | Subthread | Parent | Comments top

Memmel
big oil companies don't borrow for exploration, they are mostly awash in cash. They will sometimes borrow for a fixed asset with a fixed life, like a production platform or to finance a takeover

And, not all oil will be expensive to extract. But the oil coming onstream will be a magnitude more expensive, and also rusting infrastructure on stripper fields.
Bob Ebersole

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memmel on August 20, 2007 - 9:16pm Permalink | Subthread | Parent | Comments top

First your talking trillions to say develop the arctic so I don't think they are awash in cash considering the costs they would need to incur to keep production up. Not even close. Next I think they will have to continue to do serious stock by backs as they report lower and lower reserves. The market has not been kind to oil companies with large hord's of cash and shrinking reserves. The simplest way to solve this problem is to buy other oil companies. Next one would expect profit margins on the refining side to fall soon and even go negative as oil gets expensive. Politically their is a limit to how much refining profit a company can make.

Probably the best example of how I think this will play out is Iran.

Next most of the oil reserves left are in the ME or other regions under the control of National oil companies these are actually the ones I'm more concerned about since these are the onces that will be cash constrained.

And all this expenditure billions and even trillions of dollars if it happened and happened in time would be to keep oil prices low. I think that just like any other technical solutions offered ethanol etc the chances of the oil industry investing trillions to keep oil prices low are slim now. Especially for the National companies.

As far as I can tell to keep production close to what it is now over the next few years if all the giants are in decline is going to take a mind numbing amount of cash with a lot of it borrowed I just don't see this happening. And a lot of these projects need 60+ a barrel to be profitable.
And consider a few hurricanes through the Gulf...

In any case I don't consider the current cash reserves of the majors to be that important.

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memmel on August 20, 2007 - 9:29pm Permalink | Subthread | Parent | Comments top

Oh and about borrowing.

Barely a month ago, interest rates on high-quality industrial bonds averaged 8.45%; two weeks ago they were at 9.1% and now they are between 9% and 10%. Because of such market instability, major corporations have postponed at least seven big issues in the past two weeks. The latest: $300 million in Texaco bonds, withdrawn from the market last Wednesday.

Oil companies are not immune.

http://www.time.com/time/magazine/article/0,9171,917303,00.html

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oilmanbob on August 20, 2007 - 10:25pm Permalink | Subthread | Parent | Comments top

Memmel

of course oil companies aren't immune. Chevron bought Texaco about 5 years ago, who is trying to sell their bonds? I think old bonds like that would be as gilt-edged as they get.

But you're getting awfully far ahead of the curve on Artic Ocean exploration. The countries surrounding the ocean own claims out to 200 miles offshore, and are just now trying to figure out who owns the rest. I don't care if there are 10 Ghawars out there, the production problems out there are likely to be as big as sending a rocket to Titan to send back methane, and just as likely to make money. Maybe our greatgrandchildren will have some oil after all.
Bob Ebersole

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oilmanbob on August 20, 2007 - 10:36pm Permalink | Subthread | Parent | Comments top

Mike, you're also right that the only way they can grow their reserves is buy other companies, especially since they had a thirty year period where the big guys didn't explore in the US. They can also dump an almost infinite amount in tar sands and oil shale. But I suspect in another 10 years they will be like tobacco companies, their only worth being what the dividends are on the stock and with about as much social catchet. The big boys are being set up to take all the social blame for the energy problems, just like the Mexicans are being set up to take the blame for our employment problems. Bob Ebersole

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memmel on August 20, 2007 - 10:48pm Permalink | Subthread | Parent | Comments top

Your making it hard for me to argue with you hmmph :)

I'd like to add that how the National Oil companies react is going to be a big factor. It makes sense that in the presence of economic uncertainties in importing countries and with a lot of oil investment eaten up by internal demand and with prices increasing fairly fast as production drops they will not be very aggressive about increasing production over the next few years.

I'm very concerned in general about how global peak will effect the oil companies and so far its not looking good.

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noutram on August 21, 2007 - 6:15am Permalink | Subthread | Parent | Comments top

There's probably quite a few small companies that will do very well mopping up the smaller nuggets of remaining oil -thats been discussed here before. Also, any company offering 'magic bullit' recovery methods with also do very well out of a strong desire to increase output.

Nick.

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Aniya on September 3, 2007 - 1:52am Permalink | Subthread | Parent | Comments top

Hi memmel,

To help me clarify what you and Bob are talking about here:

Is there a big difference between "the majors" and the NOCs in the available capital for new projects normally?

And what are the implications of this? So, are you saying that the NOCs don't have as much - or (well, where does the money go? KSA for eg.) - or that they, for eg. KSA will be pressured to keep the revenue flowing? - (towards whomever they are supporting w. the profits now)?

And how does the degree of cooperation among NOCs - (is there any?)- affect the picture? and/or between NOCs and "majors" for that matter?

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Aniya on September 3, 2007 - 2:02am Permalink | Subthread | Parent | Comments top

Thanks, Stuart (belated as it is),

Memmel, ok so...

re: "2.) Monetary problems makes it difficult to invest large amounts of money in projects with a long term payout and a requirement for high prices to be profitable. The reason the price, has to be high goto 1."

1) Would a consistent price rise as opposed to volatility fix this problem?

2) Remember back when you were talking about the normal oil market ceasing to function much after "peak"? (I believe w. the rules already in place for a (de facto was it?) rationing system - question mark?) Anyway...how does the idea about the market no longer being relevent (once decline has "set in") relate to the dynamic you are talking about here? Do the determinants of price change in some fundamental way under such a scenario?

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pschwart on September 3, 2007 - 9:29am Permalink | Subthread | Parent | Comments top

as a person who worked in SA for several years as an engineer I tend to agree with this post. Saudi production is probably as much investment driven as demand driven. This was a problem they had in the 70's. They have little use for dollars which are depreciating and inflation is rampid. Why drop $100bn into an oilfield that's just going to give you $ 150bn in overpriced treasury bonds.

One thing that hurts our markets is that a nano percent of the population understands them. A telephone company with declining sales, declining eps, a 4% dividend paid with borrowed money, an accounting system that classifies a guy who goes from a wire to digital cable a "new customer" and a PE of 27 is not an investment. It's a Ponzi scheme.

Ponzi schemes are always the result of easy money, where all good investments are too expensive. Today, people avoid bonds because they can't afford to own them. Not a good sign.

Peak oil can be traced almost to the month to Fed rate decreases. Supply and demand have been extremely consistent.

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262 comments on US Peak Oil Adaptation: Prognosis in a Credit Crunch

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