“Let me put it this way. It takes a $40,000 pickup to haul small oil tools in, at today’s prices. Go for larger tools that don’t need to be hauled on a semi, and you’re talking a $100,000 rig.”
You obviously know your stuff, and I won’t dispute your analysis of present conditions.
It may be true that “Two dollar gas, $40-50 dollar oil isn’t going to pay for” drilling expenses. However, it seems that once a pipeline is in and drilling costs have been recovered, that the price could come down steeply—in the absence of government meddling.
“drilling operations in the Bakken, for instance, cost $80,000 and more—a day.”
Accepting your figure, I’m left wondering why it costs that much. When I was a boy, I used to see unattended wells chugging out oil 365 days a year, and I know that wasn’t costing much.
“Counting production costs, bringing a well on line will run on the order of eight to ten million dollars, if things go smoothly, and more if they don’t.”
How much of that is unnecessary? How much of that could you eliminate if you were running everything?
“I’ll admit great things can be done, but the low hanging fruit has been picked. Today’s extractive technologies are more cost and tech intensive than the old vertical wells, and drilling and production cost more.”
Why do they cost 14 times as much as they did in 1968? I presume they do, because that’s approximately the increase in gasoline prices at the pump. I understand that some technologies are more expensive, but we have lots of oil we could pump up with 1930s technology.
“One other thing, those of us who work on drilling sites, often risking life and limb just to get there, aren’t going to put in 14 hour days and live on drilling locations for 1960s wages.”
Nor should you, but even after inflation those wages should be five to six times as high as they were in the 60s. Why is gasoline 14 times as high?
BTW, you have no connection with anyone who speculates in oil futures, do you?
The costs don't just evaporate once the well is drilled. Of that barrel of oil in revenue there are royalties to be paid to the mineral rights owners, (generally up to 20%), pipeline rights of way leases, access roads to be maintained, well maintenance including workovers, re-fracs, daily inspection of the well, at least to start, making sure nothing is leaking, etc.
Part of what you pay for at the pump is the work of the production crews.
Equipment replacement is a factor as well, because, as you noted, the wells are pumping 24/7/365 when not shut down for work on the well or surface equipment. On some wells, produced natural gas runs the pump jack, on others, electricity, both require maintenance, one an electric bill--and not a small one. Some wells have problems with parafin accumulations or salt buildup and corrosion, and those issues need to be addressed periodically as well. So there are a lot of costs beyond what is spent just drilling and setting the well up to produce, which are ongoing. Wells decline in production over time, and the IP (initial production) figures are seldom maintained. Despite the occasional badgering on this site about abiotic oil, few wells produce much beyond their theoretical maxima, determined by roughly calculating the thickness of the pay zone, the porosity of the rock (which gives a maximum fluid volume in the pay zone, subtracting the water saturation percent (there is always some, even if it just coats the inside of the pore spaces), to get the maximum volume of oil present in the formation in that lease spacing.
Recoverable oil is a different matter, dependant on reservoir pressures, how much water is present, and the amount of water which will come out of the rock with the oil, and how much it will cost to dispose of it, versus the price of the oil which comes out.
Eventually, a well which produces both oil and water will produce so much water (or so little oil in comparison), that it is no longer economical to continue production, at least at a given price, and although there is still recoverable oil present,it may not be economically recoverable, it may cost more to get it out than it is worth on the market.
I’m left wondering why it costs that much. When I was a boy, I used to see unattended wells chugging out oil 365 days a year, and I know that wasn’t costing much.
Wells that are chugging out oil 365 days a year are already drilled.
Moving a drilling rig capable of drilling 20,000+ ft. costs on the order of $200,000, and that does not count the cost of preparing the site and access roads. The day rate for such a rig is over $20,000.00 Mud chemicals can run $10,000 a day, directional personnel and equipment another $10,000, fuel, trucking, rentals on subsurface equipment and surface equipment (mostly solids control equipmnet to remove find cuttings from the drilling mud), supervisory personnel (Company hand and geologist), gas detection, safety equipment (H2S), drill bits, mud motors, 'soap rope and pipe dope' (AKA miscellaneous costs) make up much of the balance. Everything has to be trucked in or out, from the site housing to wastewater to trash, so drilling a well in the Bakken isn't cheap. There are generally two casing strings run: a 9 5/8 surface casing which is set at somewhere between 1700 and 2500 ft. as a rule (sometimes deeper to protect aquifers), and cemented in place, and then an intermediate casing string of 7-inch pipe run to the pay zone (usually about 11,000 ft.) also cemented in. The actual pay horizon is the drilled out of the end of the 7-inch, for another roughly 9500 ft. on a two-section (1280 acre) lease. Keep in mind, that setting the casing in the pay zone involves starting a curve some 410 feet above the pay zone, and turning the drill string to very nearly horizontal--in the right place. Generally, you do not have much to guide you except logs from a well a few miles away, and even in a mile or less, the formation thickness can vary by enough to throw that off. Then, after setting that 7-inch casing, you have to navigate in the formation, generally staying in a 4 to 8 foot thick layer for the next 9500 ft.
That's where my job comes in, I'm a wellsite geologist who does geosteering.
How much of that is unnecessary?
None of it, really. The oil industry has been through some rather severe contractions in the past three decades, along with the booms. If you checked the drilling rig counts going back to the late 70's you'd see that over half of the drilling rigs which were running last year might not be making hole next year. When that happens, the dead weight hits the bricks. One of two philosophies are used by companies: they either lay off the top personnel because it is cheaper to field less expensive less experienced personnel (a gamble if the job goes badly which maay cost far more in the long run), or they keep the core personnel who are more expensive but are most exerienced, to train the next generation of hands.
The latter is often more successful long term, the former lets the company sockaway some cash, usually before selling out to a competitor.
Either way, benefits packages dry up, and lean times are lean. Drilling tool and service companies sell their product (even in good times) on a basis of how much money they can save their clients, and there is no fat left to trim.
To an extent, when there is high demand during a boom cycle prices come up, as does pay, but in the meantime, folks elsewhere are steadily making a paycheck, getting their incremental raises, and stuffing a 401K. In the oil patch, you are always saving for the next bust, or paying off the last one.
Why do they cost 14 times as much as they did in 1968? I presume they do, because that’s approximately the increase in gasoline prices at the pump.
By the time gasoline comes out the pump, you have to add in a few things (look at the price of a '68 Camaro versus a new one).
First, inflation. Second taxes. (fifty cent gas won't happen in some places because the state and federal taxes combined are more than fifty cents). Third, regulations. I didn;t get into the industry until 1979, but the number of regulations, not just on the drilling end, but on the refineries, emmissions refits, etc. have added a substantial burden. Retailers have undergone similar regulatory shifts, some of which put former retailers out of business because of the compliance costs. Distribution costs are up as well, whether by truck or rail, and adding in ethanol which has to be blended in near the point of sale means that the cost of transporting and blending the ethanol separately is factored in as well. Those additional burdens are the product of the government, for good or ill, but they increase the cost as well, and that is without getting into the regional fuel blends mandated by the EPA and others.
Just as prior to 1968, you could fill out the order form, toss a check in an envelope and mail order a rifle or pistol, things are more complicated now for the oil industry, too, whether it be in the drilling and production end (the upstream part of the industry) or in refining and distribution (the downstream end of the industry).
I understand that some technologies are more expensive, but we have lots of oil we could pump up with 1930s technology.
If it isn't already being produced, point me to it! I know a guy with a cable tool rig, and we could make a killling!
Seriously, I don't think many outside the industry realize how much things have changed. The first wells drilled in this area took over 40 bits to drill, went to roughly 9800 ft. (vertically), and only took six to eight months to get there. We drill down two miles (roughly speaking) and over two miles, now, run two casing strings and a liner for production in the lateral and are usually done in 30 days, with a far better safety record overall.
No, I do not play the futures market in any way, I only use it as an indicator of future demand for a resource I have an integral role in bringing to the surface because it indicates when the next 'bust' is coming.
I know I tend to digress, but the reason for the disproportional cost you are seeing is more government then anything else, ultimately.
Since 1968, substantial regulatory burdens have been added to every aspect of the oil industry, from site preparation to drilling to production to transport to refining to distribution of the refined products. I'm not saying all of those are bad, but the way they have been implemented often has caused costs beyond what might have been incurred if they were implemented differently.