Posted on 05/04/2007 8:46:08 PM PDT by redwill
The point is that ‘production tax credits’, beyond some sort of depletion allowance, are simply not necessary. Shell et al. will angle for tax credits of one or another kind, but that, of itself, is not any sort of reason to grant them.
Uh, but why is it that marginal conventional producers should be of any concern to the taxpayer at large, or worse yet, subsidised by the taxpayer? They knew the economics of their business model when they got into the game in the first place, and producing (say) $50/bbl crude is a risky proposition to start. It's really the same deal as blacksmiths and hand forges; perfectly useful and viable business until someone comes up with a better idea.
It almost sounds as if you're making the same argument as buggywhip makers used to offer a century ago. But that's hard to believe, since you're far too sharp to reprise that sort of self-serving nonsense.
What's the cost structure of production from the Bakke formations, anyway? $28? $32? $35? Or is it dependent on linking that area to a major pipe or pipes?
BTW, I believe your comment about Venezuela is a straw man. In five years' time, Chavez will have turned V. into a marginal player at best, and, additionally, somebody is going to have to pony up a lot of capital to build refineries to handle that sour sludge V produces. In a declining mkt (as we both postulate will occur should large-scale shale production come online), who the devil will be loony enough to plank down the capital for this type of project, eh?
FReegards, m'friend!
Companies have been hesitant to invest heavily in technology before. Heck, at the start of the present price runup, there were major drilling companies who were slow to invest in more rigs, and oil companies who appeared to be very cautious because of the price.
As you said, that is part of the game, and should not be borne by the taxpayer. I don't think government (taxpayer) subsidy should happen either way.
If shale oil comes online in an economical enough way it will survive the same price quirks as the rest of the industry. If it comes online in a sizeable enough way to replace the depleting domestic reserves and the imported oil, without so reducing the price of oil that shale oil becomes uneconomical, then in a strategic sense, this would be not only do-able but preferable.
If the appearance that enough shale oil coming on line causes a price drop like that of 1998/9, then the net effect is that we will end up more dependant on imported oil, at least in the short term.
That last price crunch caused the plugging and abandonment of a raft of marginal (stripper) wells which were way behind the money curve when the lower price ($6.50/bbl for sweet crude, $4.50 for sour up here) was compared to lift costs and maintenance.
(Granted, the IEA report which caused that crash did not take into account the Asian expansion which has occurred, but the incorrect predictions of a worldwide glut actually caused a net reduction in domestic production.)
Individually, stripper wells don't put out much, but in aggregate, the production was substantial. Even at today's prices, roughly a factor of 10 higher, those wells would not be recompleted.
So here is my point:
If the goal is to achieve energy independance, it will have to be done without upsetting the proverbial applecart and driving prices below the level where both conventional and oil shale production are economical, or the development of both types of reserves may falter.
Artificially and preferentially inflating the price of shale oil in such circumstances will only hurt the domestic conventional oil industry.
If shale oil is not capable of replacing that depleting production, then everything but shale oil, (the part of the industry which is NOT taxpayer subsidized,) will have been struck another 1986 type blow, and the recovery will take longer, because the price will have been artificially depressed.
Investors will be 'once burned, twice shy' all over again.
I remember new drilling rigs being sold at auction and cut up for scrap.
The net effect could be increased dependance on foreign sources.
If the goal of the subsidy is to make the economic climate "safe" for the development of shale oil, why not place price supports in the form of a tariff on imported oil instead, which would bolster the value of domestic crude, regardless of source (oil shale or more conventional reservoirs).This could kick in at some floor price per barrel, would support the whole industry, and raise funds as well instead of pull money out of the budget and throw the bill to the taxpayers.
It is so seldom that government does a damned thing which is beneficial to the oil industry in general, that I am suspicious of subsidizing a relatively unproven technology against one which has done the job.
If the panic occurs in the pits, and the price crashes, the buggywhip makers might see a boom yet.
These (Bakken) wells generally hit payout in under 1 1/2 years, depending on where they are drilled, and on the ND side of the basin, as opposed to the Richland County, Montana field, there is not yet enough production data for me to give you an idea of profitability.
Some of the Montana wells, (which have different reservoir lithology from the N. Dakota wells) hit payout in under 6 months, with oil cheaper than it is now ($20/bbl--but drilling costs were less, too).
I am not too worried, really. The technology we use to produce these could easily cross over into shale production, and I worked that area of Colorado doing Cozette/Corcoran gas wells years ago. I have been a registred professional geologist in Wyoming for 15 years, so I'll find work. I just might have to drive a little farther to get to the location.
later
If (and I've no direct knowledge of whether or not this is/will be the case) unsubsidised large-scale oil-from-shale production comes online at $25 (just to have a number), then strippers and others whose cost is above $25/bbl will take a hit in the mktplace. I don't consider this either 'good' or 'bad', just the mktplace in operation.
Your point about capital being reluctant, having previously been burnt by collapses in the price of crude, is perfectly well taken. No quarrel at all.
This notion of 'energy independence' is a chimera. The political class have, and have had, exactly no intention of allowing this nation to become either entirely or mostly energy self-sufficient. However, just for the sake of argument, let's say that I'm 100% wrong here, and that the political class sincerely want to reach (or move toward) self-sufficiency.
OK, clearly, because energy usage will grow over time unless a society collapses (per Freeman Dyson and others), then necessarily, to reach self-sufficiency, supply must be increased. While there are lots of ways to do this, the one that will be most readily adopted (voluntarily) is the one with the lowest net cost of production and distribution. That may be oil from shale or it may not -- don't know because I can't get a good handle on the price of crude equivalent from shale, tar sands, etc.
The point here -- and you alluded to it -- is that, if oil from shale (or some other alternative) is or becomes or seems to be becoming, ceteris paribus, an economically viable supply, there will be a price counterattack from the Saudis. When (again, this postulates that the gov't really are interested in self-sufficiency) the counterattack occurs, a la 1986 and 1998, a reasonable gov't policy would be the introduction of a tariff on Saudi (et al.) crude, to a point very mildly above the cost of production/distribution of the alternative supply, whatever it turns out to be.
We've let the Saudis mess up your industry on several occasions, as you well know. Why the devil should we continue to suffer from what the idiots in the lame-stream media usually call 'predatory pricing', for that's exactly what Saudi policy has been for 20-odd years?
Now, such a tariff most certainly is a subsidy to oil from shale (or whatever alternative), but this subsidy doesn't particularly benefit that portion of the energy industry in broad. What it does do is allow the alternative to stay in production (and earn a return on capital) and prevent the Saudis from controlling supply, especially the famous 'marginal barrel' of supply. This is absolutely essential to approaching self-sufficiency.
Which is why you and I are not likely to see large-scale alternative production in our lifetimes. The gov't haven't the slightest intention of allowing us to approach self-sufficiency. They've a vested interest in maintaining 'crises' when and where possible. The sheeple are much more easily controlled when frightened -- and this gov't will stick at nothing to maintain and increase its control.
Don't like it? Neither do I. However, given the gov'ts feckless performance in assuring an energy supply at required levels and given its endless interference in the energy industry, typically with very counterproductive results (viz. Jimmuh Peanut, for one), I claim there is no other rational explanation that covers all the facts and describes all gov't actions to date.
Net bottom line: I loathe subsidies, but, to approach self-sufficiency, a subsidy via tariff is necessary; without one, the Saudis will dump the price ad libidem in order to try to wreck any large-scale alternative production, and we'll be back on the same old treadmill. As a guess, I think a transition period of about 5-6 years is required to establish whatever alternative production firmly and present the Saudis and their buddies w/a fait accompli.
FReegards!
No argument here. People distracted by the daily rigors of personal economics are easily manipulated away from considering the bigger picture, and from paying attention to the loss of freedom and national soverignty which seems to be occurring daily, no matter who is running the show in D.C. (Which is why I support a more heavyweight Conservative for POTUS and no RINOS).
The suggestion of a tariff is one I made before, in response to Congressional threats of increasing fuel taxes. The net effect at the pump might not be much different, but at least the tariff would encourage domestic exploration and production; the fuel tax just sucks money out of the consumer. My other point was that the new, 'cheap' source might do what the Saudis might not be able to do.
While stripper well production is predicated on lowball estimates of price, the crash of '98 was so severe that even those lowball estimates were exceeded ($4.50/bbl for sour crude, $6.50 for sweet?), and the wells could not meet their own lift costs. The IEA report predicted a global glut for some time to come and the producers decided to not continue producing at a net loss per barrel.
The idea that there is a new cheap source of oil which could provide enough to replace Saudi production, for example, might cause a price crash as investors go looking for greener pastures in the speculative markets and the price of futures drops. Refinery bid for crude oil would follow suit.
I guess one root question beneath it all is one of whether the Saudis have the excess production capacity to crash the price of oil.
They have reached or are near their current production peak given the infrastructure they have, and the depletion curve will make its mark felt.
The ones to watch are the Chinese, who have been ardently scouring their vicinity for reserves and developing them, and who, with an edict, could limit domestic usage to become a net exporter should they develop the capacity. It might just be in their interest in the long run to make us more dependant on imports, as they prepare to step into the 'superpower' arena.
I can see where the occasional multi-year runup in price benefits the strategic picture by developing better technology and letting it be refined (and paid for, with profit) without necessarily developing (and consuming) domestic resources, and while consuming foreign sources which will be unavailable in the instance of global conflict.
In the event of war, on an all-out war footing, we could do amazing things in terms of development once the technology is in place.
But. There is still the human element to consider. Even if we had the smokestack industries to support that runup (it takes one hell of a lot of steel tubular goods to drill and case a well, much more to provide sufficient oil to run things at even 50%), it also takes time to train the people, and the geosciences and engineering personnel are just not in the pipeline.
I agree about subsidies, I'd just as soon not have them and let the market decide, but there is the concept that political manipulation of oil supplies on a global basis exists and will be conducted to our detriment by many of the players out there.
It is not hard to imagine the (former??) Communist bloc encouraging both the jihadis and South/Central American sources to play ball on their team in order to facilitate such mayhem in the energy sector.
For all the crap about "democracy", these are de facto dictatorships which can game their domestic consumption by decree to shift usage to military or even export purposes, the former reason is obvious, the latter to crash the global market.
Most of us in the industry are ardent patriots: we love our country, we love the work we do, and we are aware of its crucial relevance to national security.
There was a time when developing the technology left only a short span to going into production in the industrial sector, but now we would have to develop the steel mills, etc., as well, not just for military consumption in an all-out war, but for the supporting industries as well.
This is an area where the environmental movement has struck a serious blow to national security with their "never low enough" stance on emissions, as anyone from the 'rust belt' can testify.
But aside from all that, it is not just the Saudis, but the 'panic in the pits', so to speak. In '98, it was the wholesale abandonment of positions in petroleum which crashed the price. The glut did not exist, except on paper from the IEA--which was grossly in error. Had I had the means and ability to invest heavily in oil futures for a 1 year hold, I would have expected to double my money at a minimum, and in actuality would have tripled it in one year.
Instead, we scratched by on less than half the income of the previous year, with three additional dependants. Had I been younger, just entering the industry, I would have found a different line of work. As it was, I knew the downturn would be temporary (and I did not trust any agency under the Clintons, especially not in an election year --the Dems wanted Congress back--when the highly conservative oil industry seems to take a hit if the Dems can orchestrate it and has less money to toss in the political coffers) and toughed it out. Hordes of seasoned hands who had also been through the boom bust of '78/'86, had had enough of watching their pay rise and fall with the fluctuations in price, and left the industry for good.
Union 76 research facility in Brea, California spent a huge amount of time and money working on extraction methods in the late 60’s and early 70’s. My stepmother worked for the head of that research facility at the time and she said the company was very optimistic about developing economicly viable extraction methods and that was when oil prices were hovering around $10 a barrel. Very interesting info!!
Good to hear. The sooner we can utilize this resource on a large scale the sooner we can eliminate a major source of terrorist ideology funding. What does that $10 a barrel equate to as adjusted for inflation roughly, if you know off hand?
Generally speaking, it is cheaper to pump oil from the ground by using either the oil or the gas as fuel for the various pumping methods than it is to mine oil shale and use some type of fossil-fueled retort to extract the oil from the shale because of the extra steps and the temperatures required.
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