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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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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