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137 comments on Oilwatch Monthly - August 2008
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137 comments on Oilwatch Monthly - August 2008
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This graph shows that, irrespective of downward revisions, the 'plateau-like' pattern from 2005 to mid-2007 was broken with the high prices of 2007-8. Whether this represents a sustained uptrend or blood from a stone remains to be seen.
How much of this is 'new' production (i.e. new reserves found and brought online in last several years)? With deMargeries admission that new reserves cost $80 per barrel (and GOM FUD near $80 already in 2006), at what point in demand destruction (or behavioural change) does a drop in oil prices induce shut in production?
In sum, more oil, but at what cost? The models and forecasters predicting over 90mbpd a few years ago might be right but still wrong....i.e. if marginal barrel costs $150 plus lots of water and environmental damage by 2015 will increased production improve or detract from our energy situation?
@Nate
Given that most of the incremental new conventional production comes from Saudi Arabia, and almost all from the middle-east, I wouldn't be too sure about this being a sustained uptrend. Especially given the production decreases in Saudi-Arabia/Middle-east that preceded this uptrend.
It also makes it unlikely that a large share is from 'new' production.
Given that most of the incremental new conventional production comes from Saudi Arabia, and almost all from the middle-east...
Hm. And we exclude the possibility some (or all) of this is being diverted from Iraq?
If one takes the numbers from the EIA, it looks as if these production increases are only a short reaction to higher prices. They show a peak in october 2007 and during 2008, the production increases loose their speed. I think that with ever higher prices, we will see several of those temporary production increases, which will level of over time and at a certain moment will no longer compensate the underlying trend.
The economic model of higher prices does still equal higher production...in the sense that more people are willing to spend more to produce. However, the resource base which all the oil comes from is eroding, thus modest increases take much more money.
The two big changes in 2008 are:
1. Saudi delivering extra crude, between 500,000 and 700,000 bpd through August, and
2. The drop in consumption in the US of approx 700,000 bpd.
Each one of these moves is close to 1% of production and combined is close to 2% of production.
Looking forward the key questions are:
- Can Saudi continue to deliver at their August rate?
- Will consumption recover as prices drop?
I think very lilttle of the consumption drop will be back in the US but it should be seasonal if I'm right about the housing market. Most of the home building is itself through the summer in a lot of US. So I think its pretty save we have seen a pretty much permanent drop of 700,000 bpd at least from housing. Also as we head into the winter again if I'm right and housing is the major cause we should see winter demand remain robust and close to last years levels.
I doubt it drops much more and we may see some slow growth just from population growth alone.
China and India's economies are slowing but they are still growing plus these new lower prices may cause a rebound in some of the poorer parts of the world. If world oil demand is growing at 1% a year and this winters demand is robust and we simply include export land and continued growth in China/India albeit slower then we probably won't see demand drop at least in the US. However the housing industry throughout the world is finally pretty much slowing everywhere so we should see demand declines say in Europe and Australia for example or at least flattening. So overall worldwide demand should be fairly flat once all factors are taken into account at best growing slowly.
As far as the Saudi's continuing I don't thinks so. But overall from here on out its really supply thats going to be setting the price not so much demand. If supply remains adequate then the world economy probably will basically stagnate however if it drops then we should see much higher prices and the world economy move closer and closer to overall shrinkage.
However the world economy is so large today I'd have to think that it may take several years just to slow down out of shear inertia alone. We are coming off of whats probably the biggest bubble the world has ever seen or will ever see for that matter. Its simply going to take time to deflate it.
Think about it 700,000 bpd ?
Well we saw one of the largest industries in the US tank (housing) and its heavily dependent on transportation. We saw the price go high enough that commuters that could would have switched to a more fuel efficient car. Combined now matter how you weight it these are one time gains. Where would we drop another 700,000 bdd ? Going from 15 mpg to 30 mpg is great but the next step is 30 mbp -> 40mph.
Goldman Sachs in a recent note indicated they are now using 105.00, as the price to bring on the new bbl (marginal bbl, incremental bbl--whatever phrase one prefers). In the comments this weekend from the OPEC Governor from Iran, he flagged 100.00 as a level that could trigger a slowdown, of future projects. I have been using 90.00, which is based on public statements from state oil companies like Petrobras and Statoil, that do lots of expensive offshore work. Also, CERA's cost inflation numbers for oil services gives one a sense of how the oil price is much more volatile than the steady progression of inflation. Russian Export Tax and Extraction taxes are also good too look at. Currently, there is virtually nothing left for the Russian producer were oil to go below 90.00. (The export tax was raised significantly 01 AUG 2008 based on the average price of the previous two months). Overall, so much new supply has come from unconventional, it's also good to see what you would have to spend now in Alberta, to actually get a flowing bbl from the oil sands.
at what point in demand destruction (or behavioural change) does a drop in oil prices induce shut in production?
My answer is that the 100 dollar level for a period of time causes producers to re-think future projects, possibly putting off their start dates. At 90.00, some expensive EOR and some Russian exports go a bit soft. At 80.00, new and proposed deepwater may require a second look. Also at 80.00 coal and NG probably get a bit cheaper as well.
Oil falling to 80.00 would be a boomerang to some new high level, imo. While I cannot know what is in the mind of the OPEC Governor, I would say this: his efforts to keep oil above 100.00 would probably ensure a better stream of supply than were oil to fall to 80.00. Public frustration with OPEC will blur and hide this idea, sadly. Moreover, any OPEC cut will also feed into public perceptions that "there's plenty of oil."
Best,
Gregor
thanks - that makes sense.
Though I understand that onshore wells are much easier to just turn on and off due to market weakness than the more complex (and costly) offshore projects. But, just like with nat gas, there is a rising floor on oil (barring short term hedge fund liquidations or rule changes on who can own futures contracts).
A more interesting question (pertaining to Goldmans comment) is what % of all production is in the neighborhood of the 'incremental barrel'? If KSA has 7 mbpd that costs $5 and 2.5mbpd that costs $105, at $115 they still make a great deal of money. Smart observers will note it is possible for them to LOSE money on their marginal barrel to appease a call for more production, while still making money on the dregs of the supergiants. An important question this - one I doubt many (any?) people have data on....
Hmm I'd be surprised if Saudi had much left thats producing at a 5 dollar a barrel cost. They have put in a lot of very advanced horizontal wells. I'd say that they probably are over 20 dollars a barrel on their cheapest wells. Not that we know for sure but just reading what they are doing seems to indicate that 5 is almost certainly to low and a reasonable guess is say 20-50 ?
I am a bit confused about how far wells cann be turned on and off. Some people say that technically (considering the oil flow?) wells cannot be (simply?) turned on and off.
On the other hand I've heard that some wells are mothballed for a possible later production. And what do swing producers do if not slowing or stopping the pumps?
Great comment, Gregor.
Do you have any time series data from any source for the minimal cost of incremental production (any specific area or worldwide)?
It would be interesting to see how this has developed in the past 10 years.
I've only seem some CERA data from the recent time.
At the moment, when I post and talk about the incremental bbl, I do try to show that my 90.00 level is something that I have cobbled together, and that it's not a hard target. I don't know how Goldman gets their 105.00 level for oil, or their 9.00 level for NG. The incremental bbl is therefore an ongoing work in progress for me.
My thesis is as follows: it doesn't matter that many OPEC producers are still pumping bbls from legacy fields where the cost has fallen towards zero. Or, even, that some of these can bring on new supply at levels that are still pretty cheap. Let's say KSA is bringing on new supply at a marginal cost of 40.00, or even 25.00, or even 15.00. None of that applies to my view of the incremental bbl.
My view is: what is the highest price level needed to bring on the actual bbl that allows the world to obtain a net increase in supply? As we are not currently obtaining a net increase in crude oil supply,(or let's say we are but only in slight upticks that are in the margin of error), then we are currently very much in the zone of the incremental bbl right now. This 100-120 level.
When I try to explain the concept to people in a more general sense, I ask the following question: what happens to the price of oil if we take off all the unconventional bbls, from the Alberta Oil Sands? Then I go on to explain the cost inflation in the Oil Sands to bring on new supply currently, and in the future. Then I go back to the first question: can the world obtain higher levels of oil production if the Oil Sands producers do not increase production?
So this is how I think about the issue in a conceptual sense.
BTW, when TAQA the Abu Dhabi Oil Company invested in the oil sands in the last 18 months, one of the explanations that was given by the investment managers, was that TAQA wanted exposure to the incremental bbl, which they saw as being set at a new high level by oil sands production. In other words, low cost GCC producers with their legacy fields of easy to extract conventional oil need to re-frame the pricing environment, such that while they can enjoy the spread between their cost and the marginal bbl, that is a profit phenomenon now, only. TAQA was looking forward to the re-pricing of oil.
In a specific sense, however, were labor and metals to drop significantly in price, then I think Goldman and others might have have to start lowering their incremental level from 105.00. On the downside, therefore, my view is that labor, materials, and environment are playing an equal role to geology right now, in the mark-up to the new high level of the marginal bbl(this may be stating the obvious). And then of course there is the matter of EROEI, which as others are pointing out, is probably at a rate of decline that probably outpaces our ability to analyze it in real time.
The bottom line is that this is a very tricky thing to quantify.
In terms of market prices and the near term, my view is that if oil can hold above 100.00 to 110.00 in the next 6 months, then the chances of a new spike are reduced. However, if oil goes below 100.00 to 90.00 soon, then I think we could spike to a new high pretty easily before May of 2009, as the lagged negative effects on new supply would kick in starting in late Winter, early Spring next year.
For now, I am sticking with 90.00 as my marginal level, and have new comfort that Goldman is higher and that OPEC is obviously eyeing 100.00. (I also think Petrobras is thinking about 100.00 too).
Cheers,
Gregor
I'd like to see a graph of nth barrel of oil vs. cost to produce. Has anyone seen such a graph? I would imagine it to be "hockey stick" shaped or an exponential curve.
I would like to use a graph as this to make an economic argument.
Note that if we use the 5/05 rate of 74.3 mbpd as the index rate, the EIA shows the average daily rate through May, 2008 to be basically flat, at about 74.2. Of course, we are within the margin of error on these production estimates, but taking the data at face value, the cumulative difference between what we would have produced at the 5/05 rate and what we have actually produced continues to grow, albeit at a slow rate in 2008. What the cumulative difference metric gives us is our cumulative inability to simply match the 5/05 rate, despite the fact that oil prices are currently twice the average annual 2005 price.
And a Saudi net export reminder. Their annual (EIA) net export data and my 2008 estimate follow:
2005: 9.1 mbpd
2006: 8.5
2007: 7.9
2008: 8.4*
*Assumptions: average annual total liquids rate of 10.9 mbpd (versus 11.1 in 2005) and consumption of 2.5 mbpd.
Our economy is based on growth. Economic Growth approximately equals Energy Growth times Efficiency Growth
Since Energy Growth stopped in 2005 economic momentum has been decaying (indicators of foreclosures, growing unemployment and recession). Even if some source of additional capacity comes on line, it is unlikely to counter the momentum loses. Add in the Export Land Model and it seem pretty clear that, economies can no longer grow based on oil.
The facts seem pretty clear that we must either increase efficiency by 2-12% per year or accept economic and population carrying capacity declines of 2-20% per year.
It seems unlikely any new oil production peak, based on price and size, will reverse current, and growing, negative economic momentum. It seems that policy makers should regard 2005 as Peak Oil or at least Peak Growth and change assumptions to radically increase Efficiency.
It is possible for 17X (4% to 70%) efficiency gains in urban transportation but to do so requires change government's management from Planning to Standards. Here is an example of a shift to 100 mile per gallon standard.
The problem with efforts to count economic decay is they take time. Even planting Victory Gardens will take several years to make an impact. "Plateau" means we are out of time.
If we acts agressively, those actions may extend the plateau and restrain the panic that will accelerate post plateau declines.