Showing posts with label OPEC. Show all posts
Showing posts with label OPEC. Show all posts

Wednesday, December 29, 2010

Oil at Ninety





An important item is covered here that lets us catch up on the present oil market.  Oil has recovered slowly back through to the $90 dollar mark as the global economy continues to recover back to pre 2008 levels of activity.  During this recovery, OPEC has been able to ship a million barrels per day over their so called quotas.  This all means that they are restraining supply to allow this price level to be reached while covering any shortfalls.

I suspect they have the capacity to keep the price in this particular range.  This is important.  Any higher and contraction begins to impose itself in the developed markets which is not desirable to anyone.

More important the investment to replace declining reserves is now in full swing because the industry must replace cheap declining reserves with new expensive reserves in the face of an expanding global economy.  Unsurprisingly the oil industry is spending everywhere they can.

Locking the price at $90 assures us that the development of North American shale oil reserves and restoration of depleted conventional reserves using the new petro fracking method is profitable and will turn into a massive land rush that will actually make North America completely independent of global oil.

Major alternatives are also emerging and I have no doubt that we will see the complete and rather abrupt end of the oil age quite soon.  Up until that is actually happening we have to keep the economy turning over and oil does just that.  You will be amazed over how fast the final transition will actually be.

All things indicate that peak conventional oil has passed and the present scramble should plausibly replace contracting reserves.

But keep in mind, this contraction is fast and happening across the spectrum of all our present production where any and all new production is expensive.  That is why oil is at $90 and why the alternative options are now holding up economically.


OPEC Caught Lying...

By Nick Hodge | Tuesday, December 28th, 2010



Now that the Peak has passed, all sorts of interesting tidbits are emerging.
Take the December 13th BusinessWeek article that declared OPEC is cheating the most since 2004...
Apparently, the oil cartel pumped 26.78 million barrels per day (mmbd) this year. Yet they have a production limit of only 24.845 mmbd, set at the end of 2008 in response to the recession.
So your friendly neighborhood fuel gang has been breaking its output limit by 1.934 million barrels — everyday, all year long.
With crude at its highest price in two years, overproduction allows OPEC members to boost profits without formally changing output targets.
An extra 1.934 mmbd at $80 works out to a nice “informal” $56.47 billion boost.
OPEC's been lying... That's nothing new.
What's important here is to note the willingness to extract as much as they can as prices rise.
Analysts, start your engines
If the price of oil creeps high enough, OPEC will officially raise its target to cash in.
$100 seems to be the obvious trigger to make that happen, and the consensus is that it will happen this year.
Oil's at $91.43 as I write this — up 30% from the year's low.
Goldman says it'll “average $100 in 2010 and $110 in 2012.” JPMorgan says we'll see $120 by the end of 2012.
Adding to the pricing fire, U.S. stockpiles declined by 19 million barrels this month thanks to intense cold and holiday travel. That's the biggest monthly decrease since December 2006.
I'm sure you've noticed gas station marquee numbers are back on the march.
Prices at the pump have officially broken $3.00 for the first time since October 2008. And they aren't expected to ease anytime soon.
John Hofmeister (former President of Shell, current Head of Citizens for Affordable Energy) is touring TV land this week with a new prediction:
We'll be paying $5.00 per gallon in less than two years, and sometime between 2018 and 2020 there will be another 1970s-style energy shortage requiring rationing.
And this guy didn't just jump on the bandwagon; he's been saying for years that “the last days of affordable gas are behind us.”
He's been attacking our national energy policy since the turn of the century,saying business as usual would lead us to an “energy abyss”.
And like an ever-increasing cadre of oil execs, he admits conventional oil production is in decline, and is convinced we must turn to unconventional sources to fill the gap — and avoid gas station rationing.
There's still time to put this trend to work for your portfolio. Oil at $200 per barrel implies a 122% increase from today's prices.
Buying an oil or gasoline fund like United States Gasoline (NYSE: UGA) or ProShares Ultra Crude Oil (NYSE: UCO) or top unconventional oil plays will ensure rising oil prices translate into personal profits...
Those stocks and funds are already marching in step:
It explains the future of drilling for hard-to-get oil, and the one company that will make shareholders rich as it unlocks billions of barrels worth of unconventional reserves.
Call it like you see it,

Monday, December 29, 2008

Oil Reality Check by Nelder

Chris Nelder once again serves up a reality check on the global oil supply situation. It continues to be awful. That is because we have not added a major new resource for decades and the last and best is passing through peak onto the way to decline.

The only offset is the Alberta Tarsand arriving with pending THAI production and it is certainly never going to be cheap oil. At least that supply can realistically displace a third of global demand in a declining environment.

As I have already posted, I expect the global oil industry to downsize from the current 85,000,000 barrels per day to 50,000,000 barrels per day over the next few decades with a third coming from Alberta, a third from the Middle East and a third from everyone else. It will simply become too valuable to simply burn as fuel in all but the most critical applications. At that rate of consumption, costly oil will be readily available for many millennia.

This blog has investigated many alternative options that can successfully displace this missing oil, so there is no need to rehash them here.

It is worth explaining why the oil industry is shrinking. We currently produce around 85.000.000 barrels per day. All the sources are in decline or about to enter decline. Been incredibly generous, let us pretend that we will only need 2,000,000 barrels per day of new production turned on each year. That way we can replace our current production in forty years. Makes sense?

That means that we need to find a resource able to support this level of production for at least twenty years every year. That translates into a resource of 20X365X2.0Mil. = 14.6 billion barrels of oil in the ground. We have to find one each and every year just to stand still. We have not found such resources for decades. Yet we need to find one in 2009 and every year thereafter.

The bottom line is absolutely clear today. Conventional oil is not able to come up to speed and this was clear to the industry for decades because they have been looking wherever they have been allowed to look. A seven billion barrel field in deep water off the coast of Brazil is a very poor reward.

In light of this developing scenario, one thing becomes clear. Economic expansion based on oil energy is now impossible and must henceforth rely on alternative energy and that really means solar.

In the short term, the global financial system will swing back into operation after the current time out has ended and most everyone has figured out that they are still alive. The first price to respond will be that of oil because of its still central role in the global economy. And another year of peak oil has gone by. It is now like waiting for a heart patient to have a heart attack. As time progresses, it takes a smaller and smaller clog to hurt us.


Oil Prices are Wrong--Very Wrong

By Chris Nelder Wednesday, December 24th, 2008

Everybody seems to have the same question for me lately: What's the deal with gasoline prices?

How could it go from $2 a gallon to over $4 and then back to $1.66 in a single year? Was it speculators?
The evil machinations of OPEC? Badly-timed fills and draws of the Strategic Petroleum Reserve (SPR)?
A financial calamity engineered by the masterminds of a shadowy wealth conspiracy?

It's never an easy question to answer, but I can easily say "none of the above."

The price of oil and gasoline is set daily and globally by a complex interaction of many factors, including the relative valuations of currency, speculation in oil futures, the fact that oil is "priced at the margins," delayed supply and demand feedback to the market, economic growth rates, money flows of hedge funds and big institutional investors, geological factors, geopolitics, and many more.

Oil shot to $147 this year because of a particular highly-leveraged alchemy of those factors, and it fell as the leverage unwound. It's down now because the world is heading into a major recession and traders are, as usual, overdoing their bearish reaction.

OPEC's responses this year have been mostly late to the game, so they were regularly ignored by the market. Last week's production cuts by the cartel, and the subsequent sell-off in oil, was a fine example of this.

Filling the SPR is too negligible to move the markets either. In May, the debate over filling the SPR raged on with hardly anyone seeming to realize that its 68,000 barrels per day of demand is a mere blip against the US consumption of 21 million barrels per day. Traders ignored it.

Much more to the point is an analysis of over 100 studies on gasoline price elasticity by the trade magazine Energy Journal, which found when gas prices increase 10%, they cut demand by 2.6%. When prices fall, consumption picks back up.

Anatomy of a Frenzy

Oil and other commodities shot up in the first part of the year as investors sought a safe haven against the financial calamity stemming from the subprime meltdown and levered up their bets with wild abandon.

That trend reversed course in June as the world's central banks began cutting interest rates and the US flooded the markets with dollars. The global deleveraging that ensued caused a rout in the commodity markets, and absolutely everything was sold indiscriminately as money managers scrambled to meet redemption calls and raise cash.

The progressively worsening news about the health of the global economy has only fed the selling frenzy, pushing down oil prices further still. It's now more profitable to store oil than to sell it immediately, and OPEC has made yet another belated and ineffectual move to curb a supply glut.

The Asian tigers that were widely expected to support demand, even as OECD demand fell, have reported extremely bearish numbers in the last week as their economic growth stalls.

Oil consumption is off 3.2% from a year ago in China, the world's second-largest consumer of oil, and its crude imports are now at their lowest levels this year.

Japan's oil exports fell to record lows in the sharpest monthly decline since such records have been kept;
meanwhile, imports to the world's third-largest oil consumer are down 17% year over year. South Korea's oil imports are also down 6.5% year over year.

Oil consumption by the world's top oil consumer, the US, has led the global decline with an expected 1.2 million barrels per day decline from past levels through 2009, according to the latest EIA report.

And voila: after thirteen straight weeks of price declines, gasoline is back to $1.66 a gallon.

Some have even suggested that oil in the $40s, and the current glut of oil supply, is proof that fears about peak oil supply were wrong.

Nothing could be further from the truth.

A False Sense of Complacency

A sub-$40 fill-up only lulls us into a false sense of complacency. As I have written repeatedly in recent weeks, we are setting ourselves up for a serious supply problem in the future with oil prices now below their replacement costs.

The facts are sobering:

· Current petroleum stocks in the US are still within the average range for this time of year, according to EIA. They're now about 8% higher than this time last year, but that's really nothing to write home about, and it's not much of a "glut."

· In a recent interview with Jim Puplava, energy analyst Robert Hirsch commented that a 1 million barrels per day decline in world demand would only move back the global peak of oil production by one month. By that metric, the allegedly huge cutback in oil consumption has bought the world about one month more before we peak—whoop-de-do.

· Oil production in Canada, the US's top source of crude imports, is faltering as prices are now too low to justify new projects that tap its large-but-costly and difficult reserves in tar sands and heavy oil.

· Our number-three source of imports, Mexico, is in serious trouble. Crude output from our southern neighbor has fallen 7% over last year, and exports are falling much faster, at a 20% decline, according to Pemex. (As I wrote back in June, exports fall faster than overall production. See "
The Impending Oil Export Crisis.") Production from its largest field, Cantarell, one of the four "supergiant" oil fields in the world, is crashing at the rate of 33% per year. At the current rate, Mexico's oil exports will cease altogether in just seven years.

· Experts at the ASPO and elsewhere believe that, within the next two years, world oil production will go into permanent decline, with depletion removing 2.5 million barrels per day from the world market— that's roughly equivalent to the total oil imports of Germany. There are no oil projects that can overcome a decline rate like that. And yet, no major economy is even preparing for this inevitability.

· Saudi oil minister Ali al-Naimi has warned that the world needs $75 oil to ensure future supply, and that current prices "are wreaking havoc on the industry and threatening current and planned investments."

· With gasoline now well below $2 a gallon, hybrids and other higher-efficiency cars are staying on the dealer lots. According to an analyst at Edmunds.com, a new hybrid would pay for itself in gasoline savings in two or three years with gasoline at $4 a gallon; but, below $2 a gallon, it's more like seven to eight years. Less than a year ago, you had to get on a waiting list and pay a premium over sticker to buy a new Prius. Now dealers have lots full of them, and Toyota has experienced such a sharp decline in sales that it posted its first operating loss in 70 years. Hopes that we will quickly replace a large percentage of our rolling stock with higher efficiency vehicles are now on hold, along with the hopes for a massive campaign of drilling shale formations and deepwater reservoirs.

· A steep contango condition in oil futures is still in place, reflecting the market's near-term oversupply and long-term uncertainty.

Given the evidence, the price of oil is wrong. Very wrong. Crude for under $65 a barrel is a bargain, and crude in the low $40s is a steal. I would not be at all surprised to see a sudden and violent move back up for oil prices within the next year, once the current extreme market conditions revert to the mean.

I am still long oil (United States Oil Fund LP ETF, NYSE:
USO) and will add to my position if it goes lower. My expectation is to hold it for a year, in case it further overshoots to the downside before recovering.
I'm also on the hunt for top-notch oil companies with low production costs, sizable reserves, and balance sheets healthy enough to let them acquire smaller competitors at basement prices.
I know it's been a tough year for most investors; but, we're nearly done with this turkey, and I'm setting my sights on profits for 2009. The buying opportunity of a lifetime is upon us. All we have to do now is wait for the right moment to pull the trigger.

Tuesday, December 23, 2008

Global Coal Reserves

This piece surprised me because it challenges the integrity of reported reserves by government agencies. He is saying that historically governments have seriously overstated coal reserves and that this process continues.

I beg to differ. Governments will report a resource rather than a reserve. The resource is the total amount of material that might or could be mined regardless of cost. Canada has a 1.7 trillion barrel resource in the tar sands. It has a reserve of 175 billion barrels economically available for now.

Once cost becomes an issue we are talking about reserves. These measure what can be reasonably mined in view of current costs and selling prices. A lot of perfectly good coal will get reclassified as rock.

The one thing that I learned about the mining industry is perfectly good ore reserves turn into rock amazingly often. In fact we are living through one such transition right now.

Double the selling price of coal and I am sure that vast new resources will spring up. Let me put this another way. I have inspected my share of oil drilling logs. Every so often another coal seam will be typically encountered since we normally drill in sedimentary basins. They are all too deep to ever consider mining for the present. None of these are ever even counted as resources.

It is obvious that the USA can double their resource estimate by the simple expedient of measuring deeper. At least it would be more ethical than the resources added by OPEC.
And a note on that. Few understand that the first two discovery wells in a new field plus seismic has proven sufficient to define proven oil reserves. It is very unlikely that later work will significantly increase that figure. In fact the reverse is likely. Those vast new OPEC reserves announced in the eighties did not coincide with new field discoveries. Therefore they are fairy tales.

World Coal Reserves Could Be a Fraction of Previous Estimates

By Alexis Madrigal December 17, 2008 6:29:35 PMCategories: AGU 2008, Clean Tech, Energy, Geology

SAN FRANCISCO — A new calculation of the world's coal reserves is much lower than previous estimates. If validated, the new info could have a massive impact on the fate of the planet's climate.

That's because
coal is responsible for most of the CO2 emissions that drive climate change. If there were actually less coal available for burning, climate modelers would have to rethink their estimates of the level of emissions that humans will produce.

The new model, created by Dave Rutledge, chair of Caltech's engineering and applied sciences division, suggests that humans will only pull up a total — including all past mining — of 662 billion tons of coal out of the Earth. The best previous estimate, from the World Energy Council, says that the world has almost 850 billion tons of coal still left to be mined.

"Every estimate of the ultimate coal resource has been larger," said ecologist Ken Caldeira of Stanford University, who was not involved with the new study. "But if there's much less coal than we think, that's good news for climate."

The carbon dioxide emitted when humans burn coal to create usable energy is primarily responsible for global warming. Leading scientists think that the stability of Earth's climate will be dictated by how the world uses — or doesn't use — its coal resources. And the thinking has been that the world has more than enough coal to wreak catastrophic damage to the climate system, absent major societal or governmental changes.

So the new estimate, which opens the slim possibility that humankind could do nothing to mitigate carbon dioxide emissions and still escape some of the impacts of climate change, comes as quite a shock.

Rutledge argues that governments are terrible at estimating their own fossil fuel reserves. He developed his new model by looking back at historical examples of fossil fuel exhaustion. For example, British coal production fell precipitously form its 1913 peak. American oil production famously peaked in 1970, as controversially predicted by King Hubbert. Both countries had heartily overestimated their reserves.

It was from manipulating the data from the previous peaks that Rutledge developed his new model, based on fitting curves to the cumulative production of a region. He says that they provide much more stable estimates than other techniques and are much more accurate than those made by individual countries.

"The record of geological estimates made by governments for their fossil fuel estimates is really horrible," Rutledge said during a press conference at the American Geological Union annual meeting. "And the estimates tend to be quite high. They over-predict future coal production."

More specifically, Rutledge says that big surveys of natural resources underestimate the difficulty and expense of getting to the coal reserves of the world. And that's assuming that the countries have at least tried to offer a real estimate to the international community. China, for example, has only submitted two estimates of its coal reserves to the World Energy Council — and they were wildly different.

"The Chinese are interested in producing coal, not figuring out how much they have," Rutledge said. "That much is obvious."

The National Research Council's Committee on Coal Research, Technology, and Resource Assessments to Inform Energy Policy actually agrees with many of Rutledge's criticisms, while continuing to maintain far sunnier estimates of the recoverable stocks of American coal.

"Present estimates of coal reserves are based upon methods that have not been reviewed or revised since their inception in 1974, and much of the input data were compiled in the early 1970’s,"
the committee wrote in a 2007 report. "Recent programs to assess reserves in limited areas using updated methods indicate that only a small fraction of previously estimated reserves are actually mineable reserves.”

And don't look to technology to bail out coal miners. Mechanization has actually decreased the world's recoverable reserves, because huge mining machines aren't quite as good at digging out coal as human beings are.

With Rutledge's new numbers, the world could burn all the coal (and other fossil fuels) it can get to, and the atmospheric concentration of CO2 would only end up around 460 parts per million, which is predicted to cause a 2-degree-Celsius rise in global temperatures.

For many scientists, that's too much warming. A growing coalition is calling for limiting the CO2 in the atmosphere to 350 parts per million, down from the 380 ppm of today, but it's a far cry from some of the more devastating scenarios devised by the Intergovernmental Panel on Climate Change.

"Coal emissions really need to be phased out proactively — we can't just wait for them to run out — by the year 2030," said Pushker Kharecha, a scientist at NASA's Goddard Institute for Space Studies. "There is more than enough coal to keep CO2 well above 350 ppm well beyond this century."

The Intergovernmental Panel on Climate Change uses economic models that assume that the world will not run out of coal. Some IPCC scenarios show 3.4 billion tons of coal being burned just through 2100.
That's more than five times what Rutledge thinks will be possible — and a good deal higher than the WEC's estimate for recoverable coal reserves, too.

On the other hand, if the world were really to encounter a swift and steep decline in accessible coal resources, it's unclear how humans could retain our current levels of transportation, industry and general energy-usage.

So, even if coal were to run out and the most dangerous climate change averted, the imperative to develop non–fossil-fuel energy sources would remain.

"Peak Oil and peak gas and peak coal could really go either way for the climate," Kharecha said. "It all depends
on choices for subsequent energy sources."

Tuesday, November 25, 2008

Oil Reserve Calculations

It struck me, after posting my recent note on the problem with the unchallenged reserves quoted by the Saudi’s and the members of OPEC in general, that few people outside of the oil industry have a clear understanding of how these reserves are calculated.

Unlike the mining industry, who quite rightly minimize reserve calculation because it is very expensive and needs to be sufficient only to remain several years ahead of production, oil operates against a very different model because the reserves can be calculated early and accurately.

To book a reserve creditably in the oil business, it is necessary to make a discovery well first. That puts you in a field. At that point it is possible to map the confines of the field’s closure with relatively inexpensive seismic. A judicious placement of the next well usually toward the farthest closure boundary confirms continuity. At that point, provided the well is successful, you can do a preliminary reserve calculation that will probably stand up.

In fact it will stand up. That is why a deep discovery with only the discovery well in the pocket can be proclaimed so confidently as a multi billion barrel reserve. A second production well quickly refines the numbers to a level of confidence that permits production planning.

Thus, once such a reserve calculation is made, it is very unlikely that it will ever be upgraded significantly by additional in field drilling. Technology changes will upgrade resources, such as happened with the Alberta Tarsands. Expect additional upgrades driven by the development of THAI. Just remember though that no new oil is been found or even needs to be found in Alberta and Saskatchewan. The resource itself already exceeds a trillion barrels and apparently hugely exceeds that.

Therefore the addition of 150 billion barrels of Saudi reserves, not previously quoted by the pre Aramco discoverers is very suspect. Folks who find fields do brag about them at appropriate industry seminars. And the nature of reserve calculation as I have just described makes it very unlikely those reserves are coming from prior discoveries.

And it is not just the Saudis who are playing bullshit poker, so is the entirety of OPEC. As a result, the world has been gulled into sitting back and behaving like very good customers. The World has not invested aggressively in other resources with the exceptions of Canada in the Tarsands and Europe in the wind business and in nuclear. The US political system chose to sleep as this unfolded and is only now waking up to the dire necessity of action, although business has not been sleeping and has been pushing everywhere for position in the coming race to provide fresh energy.

By the by, if those reserves had a drop of credence, Saudi production would not be sitting at 5,000,000 barrels per day and teetering on the edge of sharp decline. You would have brought those reserves on line and lowered the take on existing fields. Instead they applied water injection to their best field as a method to maintain production volume. In the event, the shoe is overdue to drop. The way they squirmed last summer before they promised to release more oil, surely tells us that their above ground reserve is drawn down and is leaving them with no flexibility to massage the market.

The truth is that the dominos are falling slowly as field after field is in clear decline already, and the last to hit the wall will be the Saudis if it has not happened already.

Monday, November 24, 2008

Saudi Decline

This is an excerpt from the financial newsletter Outstanding Investments by Byron King. It just underlines in a dramatic way what we already know. As I have already posted, we are waiting for the other shoe to drop and make this problem into a major crisis.

What this article establishes is that the shoe could well be the Saudis. Others are expected while this will make it obvious that the OPEC reserve picture is a complete lie.

Can we plan for 2,000,000 bbls less production over the next year? It may still not be next year, but there is as yet no cushion anywhere. It is now going to happen sooner or later.

The Saudis may have 50 billion barrels left. That is how big the actual lie has been. Also the rumors on the water cut out of the kingdom are very disquieting. It smells like reductions are eminent just like occurred in Mexico.

It could be that the only available fresh oil production is really sitting in Iraq.

As this letter makes clear, we are set up for oil price shocks over the next decade, with resulting recessions. The source does not matter, but the failure of the Saudis will hit the hardest.

The cupboard is bare and nobody knows it

Americans used to run Aramco, the huge oil company that manages the Saudi fields. But in 1979, the Saudis booted us out and took over.

And then a funny thing happened...

The Saudis started keeping everything a secret.

No one knows for sure how much oil they've got in the ground, or how much they produce each year or how much they could produce if they wanted to push it to the max.

It's all secret. Experts try to figure out how much oil the Saudis sell by monitoring tanker traffic in and out of the world's ports. That's how little we know for sure.

But wait, it gets worse!

After the Saudis took over, an even funnier thing happened...

Their figures for proven reserves kept going up and up and up — even though they didn't find any major new oil fields!

In 1979, the Saudis adjusted proven reserves upward by 50 billion barrels. Then eight years after that, their proven reserves magically grew by another 100 billion barrels.

Their estimated reserves increased by 150% in nine years — to a total of 260 billion barrels. And they didn't find a single major new oil field!

And here's the funniest thing of all...

For the last 17 years, they've claimed they own 260 billion barrels of proven oil in the ground. The figure never goes down, even though they pumped out 46 billion barrels during that period.

Let me see...260 minus 46 equals 260. Saudi math!

Based on these bogus figures, the Saudis claim they can produce as much oil as the world wants for the next 50 years. As recently as 2004, they claimed their reserve estimates are actually conservative.

That's why most of the world's governments and intelligence services believe the Saudis could pump 20 million barrels of oil a day if they wanted to. Trouble is, we've got no proof except their say-so.

If it were true, we wouldn't have a thing to worry about. But it's not.

It's horse hockey

Before Aramco's American owners were shown the door in 1979, they told Congress that Saudi Arabia had proven reserves of 110 billion barrels. There have been no major new discoveries, so 110 billion barrels was probably about right. And since then, about half of that has been used up.

So why do the Saudis insist everything is just fine and they have 260 billion barrels of reserves?

One reason is they wanted to discourage non-OPEC nations from looking for more oil or switching to alternatives.

It was a devious plan, and it worked perfectly.

But that wasn't the only reason the Saudis lied about their reserves. They did it because everyone does it! Everyone in OPEC, that is.

The Biggest Lie of All: OPEC's Imaginary Oil

In the 1980s, OPEC's claim of total reserves magically leaped from 353 to 643 billion barrels without a single major discovery. Industry experts call it the quota war.

You see, OPEC had to limit how much oil each member could sell, because prices were too low. The quotas were based on... each member's oil reserves!

That's right: The amount of oil OPEC would let a member pump depended on how much that member had in the ground. So it paid for OPEC members to claim the biggest reserves they could. And that's what they did.

The Saudis alone jacked up their estimate by about 100 billion. Kuwait added 50% to its reserves in one year, 1985. Venezuela doubled its reserves in 1987. Iraq and Iran doubled their estimates, too.

What's more, OPEC members did like the Saudis and kept their reserve estimates the same year after year, as if no oil were being pumped out and sold.

Everyone claimed to have a bottomless well.

Now, if you're like me, you prefer to base your financial decisions on the real world, not on a fantasy.

Let's look at how much oil there really is...

In the 1970s, when Western managers were still in charge, they believed for a time that Saudi output could reach 20 million barrels a day. But by the time the Americans lost control in 1979, they figured the peak would be 12 million.

They also predicted that peak production would last only 15-20 years. 1979 plus 20 is 1999. We're past the peak, if these men were right. But we already know they were too optimistic.

The truth is that Saudi production never got to 12 million. "In all probability, output peaked in 1981 at an unsustainable level of about 10.5 million barrels per day," according to Matthew R. Simmons, a leading oil industry authority.

And yet the lies go on...

In 2004, Saudi officials claimed they boosted production to 9.5 million barrels per day and maintained that level for five months.

It's almost sure they were lying. The International Energy Agency is the group that keeps an eye on these things for the developed, oil-importing countries. The IEA could find no sign the Saudis were selling more oil.

As far as anyone can tell, they pump only around 5 million barrels a day, and that's all they've pumped for years.

It's déjà vu all over again

In spite of being lied to at least once, the IEA, the U.S. Department of Energy and other forecasters believe the Saudi claims. ALL their projections of our energy future ALWAYS assume the Saudis could produce 15-20 million barrels a day.

The lies have worked. Not only do Western politicians believe them, but so do many oil industry experts and investors with huge amounts of money at stake. They've been had.

We went through three recessions from 1973-1983.

Care for a repeat?

Our whole economy is at risk. Your investments are at risk. Your retirement plans are at risk.

America has been so prosperous the last couple of decades, a lot of people forget what the energy crisis of the '70s was like. Let me remind you: The price of a barrel of oil shot up 400%. Long lines formed at gas stations practically overnight.

Folks had to pay four times as much for a gallon of gas, and there came a week when one out of every five gas stations in the United States had no gas to sell at any price.

The U.S. had three major recessions within 10 years after the first oil crisis in 1973. And those recessions were deep, with double-digit unemployment, double-digit interest rates and double-digit inflation.

Think 10-12% unemployment.

Think 15-18% mortgage rates.

Tuesday, July 22, 2008

Oil Price History

This rather long report on the history of the oil market is excellent and should be read. It is also a good indicator of where current supply flexibility exists with the advent of extremely high prices. Good luck with the success of the auto formating.

As I have posted, the current price regime cannot be sustained and we are seeing the cracks everywhere. Financial credit is likely still holding prices, but this is in the face of visibly declining demand. There has been no major supply reduction anywhere. In fact marginalized production is coming on stream. Sooner or later we will have a price break that carries the price back toward the $100 mark. Everyone will feel relieved although they should not.

Although we are now moving to get out of the oil business which well we should, how much oil do we really have that is recoverable? Because of this price shock and the flap over global warming which is a direct challenge to take all fossil fuels of line, it is safe to assume that the current daily production of around 87,000,000 barrels is as high as we will ever go.

This works out to around 30 billion barrels per year. That means that we are burning oil at the rate of one trillion barrels every thirty years.

Now mankind has already burned one trillion barrels in the form of cheap conventional oil.

That tells me that all those old reservoirs hold an additional trillion barrels recoverable using THAI (toe and heel air injection).

Canada has a trillion barrels in heavy oil, again mostly best recovered using THAI.

So does Venezuela.

Therefore, before we even get going, we have one hundred years of inventory available.

I fully expect that Canada will have an additional trillion barrels in the Mackenzie River valley and the related Arctic.

Brazil should also be good for another trillion barrels. It is just technically painful since it is, so far, deep ocean or hidden under impervious basalts.

And we do not want to forget the Caribbean and even the worked over regions in the USA.

In other words, before we have left the Americas, I am seeing two hundred years of supply at current production levels and the $100 price structure. The technology is here now to exploit all the resource.

Surely the rest of the world has much more.

It is just that we did not know until recently how to turn the tap on. THAI has solved that.

Energy Economist Newsletter

Oil Price History and Analysis (Updating)

A discussion of crude oil prices, the relationship between prices and rig count and the outlook for the future of the petroleum industry.

Introduction

Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply.

The U.S. petroleum industry's price has been heavily regulated through production or price controls throughout much of the twentieth century. In the post World War II era U.S. oil prices at the wellhead averaged $24.98 per barrel adjusted for inflation to 2007 dollars. In the absence of price controls the U.S. price would have tracked the world price averaging $27.00. Over the same post war period the median for the domestic and the adjusted world price of crude oil was $19.04 in 2007 prices. That means that only fifty percent of the time from 1947 to 2007 have oil prices exceeded $19.04 per barrel. (See note in box on right.)

Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude, oil prices only exceeded $24.00 per barrel in response to war or conflict in the Middle East. With limited spare production capacity OPEC abandoned its price band in 2005 and was powerless to stem a surge in oil prices which was reminiscent of the late 1970s.

Crude Oil Prices 1947 - May, 2008
Crude Oil Prices 1947-2007
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*World Price - The only very long term price series that exists is the U.S. average wellhead or first purchase price of crude. When discussing long-term price behavior this presents a problem since the U.S. imposed price controls on domestic production from late 1973 to January 1981. In order to present a consistent series and also reflect the difference between international prices and U.S. prices we created a world oil price series that was consistent with the U.S. wellhead price adjusting the wellhead price by adding the difference between the refiners acquisition price of imported crude and the refiners average acquisition price of domestic crude.

The Very Long Term View

The very long term view is much the same. Since 1869 US crude oil prices adjusted for inflation have averaged $21.05 per barrel in 2006 dollars compared to $21.66 for world oil prices.

Fifty percent of the time prices U.S. and world prices were below the median oil price of $16.71 per barrel.

If long term history is a guide, those in the upstream segment of the crude oil industry should structure their business to be able to operate with a profit, below $16.71 per barrel half of the time. The very long term data and the post World War II data suggest a "normal" price far below the current price.

Crude Oil Prices 1869-2007
Crude Oil Prices 1867-2007
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The results are dramatically different if only post-1970 data are used. In that case U.S. crude oil prices average $29.06 per barrel and the more relevant world oil price averages $32.23 per barrel. The median oil price for that time period is $26.50 per barrel.

If oil prices revert to the mean this period is likely the most appropriate for today's analyst. It follows the peak in U.S. oil production eliminating the effects of the Texas Railroad Commission and is a period when the Seven Sisters were no longer able to dominate oil production and prices. It is an era of far more influence by OPEC oil producers than they had in the past. As we will see in the details below influence over oil prices is not equivalent to control.

Crude Oil Prices 1970-2007

Crude Oil Prices 1970-2007

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Post World War II

Pre Embargo Period

Crude Oil prices ranged between $2.50 and $3.00 from 1948 through the end of the 1960s. The price oil rose from $2.50 in 1948 to about $3.00 in 1957. When viewed in 2006 dollars an entirely different story emerges with crude oil prices fluctuating between $17 - $18 during the same period. The apparent 20% price increase just kept up with inflation.

From 1958 to 1970 prices were stable at about $3.00 per barrel, but in real terms the price of crude oil declined from above $17 to below $14 per barrel. The decline in the price of crude when adjusted for inflation was amplified for the international producer in 1971 and 1972 by the weakness of the US dollar.

OPEC was formed in 1960 with five founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Two of the representatives at the initial meetings had studied the the Texas Railroad Commission's methods of influencing price through limitations on production. By the end of 1971 six other nations had joined the group: Qatar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria. From the foundation of the Organization of Petroleum Exporting Countries through 1972 member countries experienced steady decline in the purchasing power of a barrel of oil.

Throughout the post war period exporting countries found increasing demand for their crude oil but a 40% decline in the purchasing power of a barrel of oil. In March 1971, the balance of power shifted. That month the Texas Railroad Commission set proration at 100 percent for the first time. This meant that Texas producers were no longer limited in the amount of oil that they could produce. More importantly, it meant that the power to control crude oil prices shifted from the United States (Texas, Oklahoma and Louisiana) to OPEC. Another way to say it is that there was no more spare capacity and therefore no tool to put an upper limit on prices. A little over two years later OPEC would, through the unintended consequence of war, get a glimpse at the extent of its power to influence prices.

World Events and Crude Oil Prices 1947-1973
World Events and Crude Oil Prices 1947-1973
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Middle East, OPEC and Oil Prices 1947-1973
Middle East, OPEC and Oil Prices 1947-1973
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Middle East Supply Interruptions

Yom Kippur War - Arab Oil Embargo

In 1972 the price of crude oil was about $3.00 per barrel and by the end of 1974 the price of oil had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel by Syria and Egypt on October 5, 1973. The United States and many countries in the western world showed support for Israel. As a result of this support several Arab exporting nations imposed an embargo on the countries supporting Israel. While Arab nations curtailed production by 5 million barrels per day (MMBPD) about 1 MMBPD was made up by increased production in other countries. The net loss of 4 MMBPD extended through March of 1974 and represented 7 percent of the free world production.

If there was any doubt that the ability to control crude oil prices had passed from the United States to OPEC it was removed during the Arab Oil Embargo. The extreme sensitivity of prices to supply shortages became all too apparent when prices increased 400 percent in six short months.

From 1974 to 1978 world crude oil prices were relatively flat ranging from $12.21 per barrel to $13.55 per barrel. When adjusted for inflation the price over that period of time world oil prices were in a period of moderate decline.

U.S. and World Events and Oil Prices 1973-1981


Middle East, OPEC and Crude Oil Prices 1947-1973
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OPEC Oil Production 1973-2007


OPEC Production and Crude Oil Prices 1973-Present
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Crises in Iran and Iraq

Events in Iran and Iraq led to another round of crude oil price increases in 1979 and 1980. The Iranian revolution resulted in the loss of 2 to 2.5 million barrels per day of oil production between November, 1978 and June, 1979. At one point production almost halted.

While the Iranian revolution was the proximate cause of what would be the highest prices in post-WWII history, its impact on prices would have been limited and of relatively short duration had it not been for subsequent events. Shortly after the revolution production was up to 4 million barrels per day.

Iran weakened by the revolution was invaded by Iraq in September, 1980. By November the combined production of both countries was only a million barrels per day and 6.5 million barrels per day less than a year before. As a consequence worldwide crude oil production was 10 percent lower than in 1979.

The combination of the Iranian revolution and the Iraq-Iran War cause crude oil prices to more than double increasing from $14 in 1978 to $35 per barrel in 1981.

Twenty-six years later Iran's production is only two-thirds of the level reached under the government of Reza Pahlavi, the former Shah of Iran.

Iraq's production remains about 1.5 million barrels below its peak before the Iraq-Iran War.

Iran Oil production 1973-2007


Middle East, OPEC and Crude Oil Prices 1947-1973

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Iraq Oil production 1973-2007


Middle East, OPEC and Crude Oil Prices 1947-1973

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US Oil Price Controls - Bad Policy?

The rapid increase in crude prices from 1973 to 1981 would have been much less were it not for United States energy policy during the post Embargo period. The US imposed price controls on domestically produced oil in an attempt to lessen the impact of the 1973-74 price increase. The obvious result of the price controls was that U.S. consumers of crude oil paid about 50 percent more for imports than domestic production and U.S producers received less than world market price. In effect, the domestic petroleum industry was subsidizing the U.s. consumer.

Did the policy achieve its goal? In the short term, the recession induced by the 1973-1974 crude oil price rise was less because U.S. consumers faced lower prices than the rest of the world. However, it had other effects as well.

In the absence of price controls U.S. exploration and production would certainly have been significantly greater. Higher petroleum prices faced by consumers would have resulted in lower rates of consumption: automobiles would have had higher miles per gallon sooner, homes and commercial buildings would have been better insulated and improvements in industrial energy efficiency would have been greater than they were during this period. As a consequence, the United States would have been less dependent on imports in 1979-1980 and the price increase in response to Iranian and Iraqi supply interruptions would have been significantly less.


US Oil Price Controls 1973-1981
US Price Controls 1973-1981 Refiners Aquisition Cost of Crude Oil
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OPEC's Failure to Control Crude Oil Prices


OPEC has seldom been effective at controlling prices. While often referred to as a cartel, OPEC does not satisfy the definition. One of the primary requirements is a mechanism to enforce member quotas. The old joke went something like this. What is the difference between OPEC and the Texas Railroad Commission? OPEC doesn't have any Texas Rangers! The only enforcement mechanism that has ever existed in OPEC was Saudi spare capacity.


With enough spare capacity at times to be able to increase production sufficiently to offset the impact of lower prices on its own revenue, Saudi Arabia could enforce discipline by threatening to increase production enough to crash prices. In reality even this was not an OPEC enforcement mechanism unless OPEC's goals coincided with those of Saudi Arabia.


During the 1979-1980 period of rapidly increasing prices, Saudi Arabia's oil minister Ahmed Yamani repeatedly warned other members of OPEC that high prices would lead to a reduction in demand. His warnings fell on deaf ears.

Surging prices caused several reactions among consumers: better insulation in new homes, increased insulation in many older homes, more energy efficiency in industrial processes, and automobiles with higher efficiency. These factors along with a global recession caused a reduction in demand which led to falling crude prices. Unfortunately for OPEC only the global recession was temporary. Nobody rushed to remove insulation from their homes or to replace energy efficient plants and equipment -- much of the reaction to the oil price increase of the end of the decade was permanent and would never respond to lower prices with increased consumption of oil.

Higher prices also resulted in increased exploration and production outside of OPEC. From 1980 to 1986 non-OPEC production increased 10 million barrels per day. OPEC was faced with lower demand and higher supply from outside the organization.

From 1982 to 1985, OPEC attempted to set production quotas low enough to stabilize prices. These attempts met with repeated failure as various members of OPEC produced beyond their quotas. During most of this period Saudi Arabia acted as the swing producer cutting its production in an attempt to stem the free fall in prices. In August of 1985, the Saudis tired of this role. They linked their oil price to the spot market for crude and by early 1986 increased production from 2 MMBPD to 5 MMBPD. Crude oil prices plummeted below $10 per barrel by mid-1986. Despite the fall in prices Saudi revenue remained about the same with higher volumes compensating for lower prices.

A December 1986 OPEC price accord set to target $18 per barrel bit it was already breaking down by January of 1987and prices remained weak.

The price of crude oil spiked in 1990 with the lower production and uncertainty associated with the Iraqi invasion of Kuwait and the ensuing Gulf War. The world and particularly the Middle East had a much harsher view of Saddam Hussein invading Arab Kuwait than they did Persian Iran. The proximity to the world's largest oil producer helped to shape the reaction.

Following what became known as the Gulf War to liberate Kuwait crude oil prices entered a period of steady decline until in 1994 inflation adjusted prices attained their lowest level since 1973.

The price cycle then turned up. The United States economy was strong and the Asian Pacific region was booming. From 1990 to 1997 world oil consumption increased 6.2 million barrels per day. Asian consumption accounted for all but 300,000 barrels per day of that gain and contributed to a price recovery that extended into 1997. Declining Russian production contributed to the price recovery. Between 1990 and 1996 Russian production declined over 5 million barrels per day.


World Events and Crude Oil Prices 1981-1998
World Events and Crude Oil Prices 1981-1998
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U.S. Petroleum Consumption
U.S. Petroleum Consumption
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Non-OPEC Production & Crude Oil Prices

Non-OPEC Production & Crude Oil Prices
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OPEC Production & Crude Oil Prices
OPEC Production & Crude Oil Prices
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Russian Crude Oil Production

Russian Crude Oil Production
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OPEC continued to have mixed success in controlling prices. There were mistakes in timing of quota changes as well as the usual problems in maintaining production discipline among its member countries.

The price increases came to a rapid end in 1997 and 1998 when the impact of the economic crisis in Asia was either ignored or severely underestimated by OPEC. In December, 1997 OPEC increased its quota by 2.5 million barrels per day (10 percent) to 27.5 MMBPD effective January 1, 1998. The rapid growth in Asian economies had come to a halt. In 1998 Asian Pacific oil consumption declined for the first time since 1982. The combination of lower consumption and higher OPEC production sent prices into a downward spiral. In response, OPEC cut quotas by 1.25 million b/d in April and another 1.335 million in July. Price continued down through December 1998.

Prices began to recover in early 1999 and OPEC reduced production another 1.719 million barrels in April. As usual not all of the quotas were observed but between early 1998 and the middle of 1999 OPEC production dropped by about 3 million barrels per day and was sufficient to move prices above $25 per barrel.

With minimal Y2K problems and growing US and world economies the price continued to rise throughout 2000 to a post 1981 high. Between April and October, 2000 three successive OPEC quota increases totaling 3.2 million barrels per day were not able to stem the price increases. Prices finally started down following another quota increase of 500,000 effective November 1, 2000.


World Events and Crude Oil Prices 1997-2003

World Events and Crude Oil Prices 1997-2003

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OPEC Production 1990-2007

OPEC Production 1990-2005

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Russian production increases dominated non-OPEC production growth from 2000 forward and was responsible for most of the non-OPEC increase since the turn of the century.

Once again it appeared that OPEC overshot the mark. In 2001, a weakened US economy and increases in non-OPEC production put downward pressure on prices. In response OPEC once again entered into a series of reductions in member quotas cutting 3.5 million barrels by September 1, 2001. In the absence of the September 11, 2001 terrorist attack this would have been sufficient to moderate or even reverse the trend.

In the wake of the attack crude oil prices plummeted. Spot prices for the U.S. benchmark West Texas Intermediate were down 35 percent by the middle of November. Under normal circumstances a drop in price of this magnitude would have resulted an another round of quota reductions but given the political climate OPEC delayed additional cuts until January 2002. It then reduced its quota by 1.5 million barrels per day and was joined by several non-OPEC producers including Russia who promised combined production cuts of an additional 462,500 barrels. This had the desired effect with oil prices moving into the $25 range by March, 2002. By mid-year the non-OPEC members were restoring their production cuts but prices continued to rise and U.S. inventories reached a 20-year low later in the year.

By year end oversupply was not a problem. Problems in Venezuela led to a strike at PDVSA causing Venezuelan production to plummet. In the wake of the strike Venezuela was never able to restore capacity to its previous level and is still about 900,000 barrels per day below its peak capacity of 3.5 million barrels per day. OPEC increased quotas by 2.8 million barrels per day in January and February, 2003.

On March 19, 2003, just as some Venezuelan production was beginning to return, military action commenced in Iraq. Meanwhile, inventories remained low in the U.S. and other OECD countries. With an improving economy U.S. demand was increasing and Asian demand for crude oil was growing at a rapid pace.

The loss of production capacity in Iraq and Venezuela combined with increased OPEC production to meet growing international demand led to the erosion of excess oil production capacity. In mid 2002, there was over 6 million barrels per day of excess production capacity and by mid-2003 the excess was below 2 million. During much of 2004 and 2005 the spare capacity to produce oil was under a million barrels per day. A million barrels per day is not enough spare capacity to cover an interruption of supply from most OPEC producers.

In a world that consumes over 80 million barrels per day of petroleum products that added a significant risk premium to crude oil price and is largely responsible for prices in excess of $40-$50 per barrel.

Other major factors contributing to the current level of prices include a weak dollar and the continued rapid growth in Asian economies and their petroleum consumption. The 2005 hurricanes and U.S. refinery problems associated with the conversion from MTBE as an additive to ethanol have contributed to higher prices.

World Events and Crude Oil Prices 2001-2007

World Events and Crude Oil Prices 2001-2005

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Russian Crude Oil Production

Russian Crude Oil Production

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Venezuelan Oil Production

Russian Crude Oil Production
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Excess Crude Oil Production Capacity

Excess Crude Oil Production Capacity

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One of the most important factors supporting a high price is the level of petroleum inventories in the U.S. and other consuming countries. Until spare capacity became an issue inventory levels provided an excellent tool for short-term price forecasts. Although not well publicized OPEC has for several years depended on a policy that amounts to world inventory management. Its primary reason for cutting back on production in November, 2006 and again in February, 2007 was concern about growing OECD inventories. Their focus is on total petroleum inventories including crude oil and petroleum products, which are a better indicator of prices that oil inventories alone.
World Events and Crude Oil Prices 2004-2007

Impact of Prices on Industry Segments

Drilling and Exploration

Boom and Bust



The Rotary Rig Count is the average number of drilling rigs actively exploring for oil and gas. Drilling an oil or gas well is a capital investment in the expectation of returns from the production and sale of crude oil or natural gas. Rig count is one of the primary measures of the health of the exploration segment of the oil and gas industry. In a very real sense it is a measure of the oil and gas industry's confidence in its own future.

At the end of the Arab Oil Embargo in 1974 rig count was below 1500. It rose steadily with regulated crude oil prices to over 2000 in 1979. From 1978 to the beginning of 1981 domestic crude oil prices exploded from a combination of the the rapid growth in world energy prices and deregulation of domestic prices. At that time high prices and forecasts of crude oil prices in excess of $100 per barrel fueled a drilling frenzy. By 1982 the number of rotary rigs running had more than doubled.

It is important to note that the peak in drilling occurred over a year after oil prices had entered a steep decline which continued until the 1986 price collapse. The one year lag between crude prices and rig count disappeared in the 1986 price collapse. For the next few years the economy of the towns and cities in the oil patch was characterized by bankruptcy, bank failures and high unemployment.

U.S. Rotary Rig Count 1974-2005


Crude Oil and Natural Gas Drilling


U.S. Rotary Rig Count 1974-1997 Crude Oil and Natural Gas Drilling
Click on graph for larger view

After the Collapse


Several trends were established in the wake of the collapse in crude prices. The lag of over a year for drilling to respond to crude prices is now reduced to a matter of months. (Note that the graph on the right is limited to rigs involved in exploration for crude oil as compared to the previous graph which also included rigs involved in gas exploration.) Like any other industry that goes through hard times the oil business emerged smarter, leaner and more conservative. Industry participants, bankers and investors were far more aware of the risk of price movements. Companies long familiar with accessing geologic, production and management risk added price risk to their decision criteria.

Technological improvements were incorporated:

Increased use of 3-D seismic data reduced drilling risk.

Directional and horizontal drilling led to improved production in many reservoirs.

Financial instruments were used to limit exposure to price movements.

Increased use of CO2 floods and improved recovery methods to improve production in existing wells.

In spite of all of these efforts the percentage of rigs employed in drilling for crude oil decreased from over 60 percent of total rigs at the beginning of 1988 to under 15 percent until a recent resurgence.

U.S. Rotary Rig Count


Exploration for Oil


U.S. Rotary Rig Count Exploration for Oil
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U.S. Rotary Rig Count
Percent Exploring for Crude Oil
U.S. Rotary Rig Count Percent Exploring for Crude Oil
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Well Completions - A measure of success?

Rig count does not tell the whole story of oil and gas exploration and development. It is certainly a good measure of activity, but it is not a measure of success.

After a well is drilled it is either classified as an oil well, natural gas well or dry hole. The percentage of wells completed as oil or gas wells is frequently used as a measure of success. In fact, this percentage is often referred to as the success rate.

Immediately after World War II 65 percent of the wells drilled were completed as oil or gas wells. This percentage declined to about 57 percent by the end of the 1960s. It rose steadily during the 1970s to reach 70 percent at the end of that decade. This was followed by a plateau or modest decline through most of the 1980s.

Beginning in 1990 shortly after the harsh lessons of the price collapse completion rates increased dramatically to 77 percent. What was the reason for the dramatic increase? For that matter, what was the cause of the steady drop in the 1950s and 1960s or the reversal in the 1970s?

Since the percentage completion rates are much lower for the more risky exploratory wells, a shift in emphasis away from development would result in lower overall completion rates. This, however, was not the case. An examination of completion rates for development and exploratory wells shows the same general pattern. The decline was price related as we will explain later.

Some would argue that the periods of decline were a result of the fact that every year there is less oil to find. If the industry does not develop better technology and expertise every year, oil and gas completion rates should decline. However, this does will not explain the periods of increase.

The increases of the seventies were more related to price than technology. When a well is drilled, the fact that oil or gas is found does not mean that the well will be completed as a producing well. The determining factor is economics. If the well can produce enough oil or gas to cover the additional cost of completion and the ongoing production costs it will be put into production. Otherwise, its a dry hole even if crude oil or natural gas is found. The conclusion is that if real prices are increasing we can expect a higher percentage of successful wells. Conversely if prices are declining the opposite is true.

The increases of the 1990s, however, cannot be explained by higher prices. These increases are the result of improved technology and the shift to a higher percentage of natural gas drilling activity. The increased use of and improvements to 3-D seismic data and analysis combined with horizontal and and directional drilling improve prospects for successful completions. The fact that natural gas is easier to see in the seismic data adds to that success rate.

Most dramatic is the improvement in the the percentage exploratory wells completed. In the 1990s completion rates for exploratory wells have soared from 25 to 45 percent.

Oil and Gas Well Completion Rates
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Oil and Gas Well Completion Rates
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Oil and Gas Well Completion Rates
Development

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U.S. Oil and Gas Well Completion Rates
Exploration

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Workover Rigs - Maintenance

Workover rig count is a measure of the industry's investment in the maintenance of oil and gas wells. The Baker-Hughes workover rig count includes rigs involved in pulling production tubing, sucker rods and pumps from a well that is 1,500 feet or more in depth.

Workover rig count is another measure of the health of the oil and gas industry. A disproportionate percentage of workovers are associated with oil wells. Workover rigs are used to pull tubing for repair or replacement of rods, pumps and tubular goods which are subject to wear and corrosion.

A low level of workover activity is particularly worrisome because it is indicative of deferred maintenance. The situation is similar to the aging apartment building that no longer justifies major renovations and is milked as long as it produces a positive cash flow. When operators are in a weak cash position workovers are delayed as long as possible. Workover activity impacts manufacturers of tubing, rods and pumps. Service companies coating pipe and other tubular goods are heavily affected.

U.S. Workover Rigs and Crude Oil Prices
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Copyright 1996-2007 by James L. Williams

James L. Williams
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