Posted on 02/18/2015 4:31:56 AM PST by thackney
It may be difficult to look beyond the current pricing environment for oil, but the depletion of low-cost reserves and the increasing inability to find major new discoveries ensures a future of expensive oil.
While analyzing the short-term trajectory of oil prices is certainly important, it obscures the fact that over the long-term, oil exploration companies may struggle to bring new sources of supply online. Ed Crooks over at the FT persuasively summarizes the predicament. Crooks says that 2014 is shaping up to be the worst year in the last six decades in terms of new oil discoveries (based on preliminary data).
Worse still, last year marked the fourth year in a row in which new oil discoveries declined, the longest streak of decline since 1950. The industry did not log a single “giant” oil field. In other words, oil companies are finding it more and more difficult to make new oil discoveries as the easy stuff runs out and the harder-to-reach oil becomes tougher to develop.
The inability to make new discoveries is not due to a lack of effort. Total global investment in oil and gas exploration grew rapidly over the last 15 years. Capital expenditures increased by almost threefold to $700 billion between 2000 and 2013, while output only increased 17 percent (see IEA chart).
Despite record levels of spending, the largest oil companies are struggling to replace their depleted reserves. BP reported a reserve replacement ratio – the volume of new reserves added to a company’s portfolio relative to the amount extracted that year – of 62 percent. Chevron reported 89 percent and Shell posted just a 26 percent reserve replacement figure. ExxonMobil and ConocoPhillips fared better, each posting more than 100 percent. Still, unless the oil majors significantly step up spending they will not only be unable to make new discoveries, but their production levels will start to fall (some of them area already seeing this begin to happen). The IEA predicts that the oil industry will need to spend $850 billion annually by the 2030s to increase production. An estimated $680 billion each year – or 80 percent of the total spending – will be necessary just to keep today’s production levels flat.
However, now that oil prices are so low, oil companies have no room to boost spending. All have plans to reduce expenditures in order to stem financial losses. But that only increases the chances of a supply crunch at some point in the future. Put another way, if the oil majors have been unable to make new oil discoveries in years when spending was on the rise, they almost certainly won’t be able to find new oil with exploration budgets slashed.
Long lead times on new oil projects mean that the dearth of discoveries in 2014 don’t have much of an effect on current oil prices, but could lead to a price spike in the 2020’s.
All of this comes despite the onslaught of shale production that U.S. companies have brought online in recent years. U.S. oil production may have increased by 60 to 70 percent since 2009, but the new shale output still only amounts to around 5 percent of global production.
Not only that, but shale production is much more expensive than conventional drilling. As conventional wells decline and are replaced by shale, the average cost per barrel of oil produced will continue to rise, pushing up prices.
Moreover, with rapid decline rates, the shale revolution is expected to fade away in the 2020’s, leaving the world ever more dependent on the Middle East for oil supplies. The problem with that scenario is that the Middle East will not be able to keep up. Middle Eastern countries “need to invest today, if not yesterday” in order to meet global demand a decade from now, the International Energy Agency’s Chief Economist Fatih Birol said on the release of a report in June 2014.
In fact, half of the additional supply needed from the Middle East will have to come from a single country: Iraq. Birol reiterated those comments on February 17 at a conference in Japan, only his warnings have grown more ominous as the security situation in Iraq has deteriorated markedly since last June. “The security problems caused by Daesh (IS) and others are creating a major challenge for the new investments in the Middle East and if those investments are not made today we will not see that badly needed production growth around the 2020s,” Birol said, according to Reuters.
If Iraq fails to deliver, the world could see oil prices surge at some point in the coming decade. Despite the urgency, “the appetite for investments in the Middle East is close to zero, mainly as a result of the unpredictability of the region,” he added.
Well, right now prices are relatively low so we will have to wait and see what the future holds.
I do find the hemp article interesting. Wonder how “big oil” feels about it?
Prior to the recent US production boom OPEC favored a price range of $100-$125 bbl. I think the market will settle (excepting short term noise) in the range of $75-$100 bbl.
This is, of course, dependent upon political factors.
Majors in the oil industry tend to have a long term view. Too many of their projects take a decade from spending money to making money.
If the EPA would be shut down, with available technology, there would be decent-sized 60MPG diesels, and without $3000 and 200 pounds of junk.
Moreover, with rapid decline rates, the shale revolution is expected to fade away in the 2020’s,
if those investments are not made today we will not see that badly needed production growth around the 2020s,
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Tesla wants to be producing 500,000 cars a year by 2020. The rest of the world’s auto makers will likely kick in another 500,000 cars annually. That number will go up from there.
The auto industry is moving toward much more serious investments in alternative fuels.
Then there’s this that’s started making the papers in the last month or so.
Meet the guy who’s reportedly running the secret Apple car project
http://www.businessinsider.com/steve-zadesky-apple-car-profile-2015-2
imho the big revolution in the next five years will be that batteries and maybe even fuel cells will be ready for prime time. In the next five years there will be a rapid change of the auto infrastructure over to alternative fuel vehicles.
between now and about +-2025 oil prices will gyrate wildly.
Tesla sales forecast cut by 40%
http://money.cnn.com/2014/12/17/investing/tesla-oil-prices/
Adam Jonas, auto analyst with Morgan Stanley — and long a bull on Tesla — published a note Wednesday forecasting that Tesla will only be able to sell just under 300,000 cars by 2020. That’s far short of the 500,000 cars that Tesla is predicting it will sell by that date.
The biggest drag on Tesla sales will be the lower-priced, mass market Model 3 expected in showrooms in about three years.
Jonas’ doubts that Tesla will be able to price the Model 3 in the $35,000 range as many have been expecting. He’s now thinking the price could be closer to $60,000.
“While nobody buying a Model S today (for nearly $105,000) is doing so to save on their monthly expenses, the longer-term story is far more dependent on the volume success of the Model 3,” he wrote in the note. “Oil price is a factor for Model 3.”
Tesla’s Loss Widens as Deliveries Fall Short
http://www.wsj.com/articles/teslas-loss-widens-as-spending-increases-1423695065
Elon Musk said all is well with Tesla Motors Inc. and predicted brighter days in 2015, even as the company reported that its fourth-quarter loss widened to $108 million, missing analysts’ forecasts, as deliveries of its $71,000-and-up luxury electric cars fell short of an already lowered forecast because of weather and customers unable to accept deliveries.
The car maker, based in Palo Alto, Calif., posted a loss of 13 cents a share, below analysts’ consensus expectations for a 31-cent-a-share profit, both adjusted to exclude stock-based compensation and other costs.
the big revolution in the next five years will be that batteries and maybe even fuel cells will be ready for prime time
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I’ve heard that claim about batteries for decades.
It isn’t the range of batteries that is the problem it’s the long recharge time.
I would say it is both, along with life expectancy.
In 1799, Alessandro Volta developed the first electrical battery. This battery, known as the Voltaic Cell, consisted of two plates of different metals immersed in a chemical solution. Volta's development of the first continuous and reproducible source of electrical current was an important step in the study of electromagnetism and in the development of electrical equipment.
http://www.ieeeghn.org/wiki/index.php/Milestones:Volta%27s_Electrical_Battery_Invention,_1799
In addition I am hearing that exploration started slowing pace in 2014 due to the risk of some countries adding or increasing their “reserves” or amortization tax structure. New finds may be impacted by tax structure as much as actual discoveries - in short we aren't going to explore in Country A because of their tax structure.
Devon Energy expects production to rise this year even as it cuts capital spending
According to the USGS the Green River Formation weighs in at 3 TRILLION Barrels, with 1 Trillion barrels recoverable with todays technology.
The known worlds reserves of oil are about 1 Trillion barrels.
we talking for global consumption? I see anything from 30 - 35bb
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Depends if you count only “oil” meaning liquid in the ground and still liquid at atmospheric temp/pressure, or include items like Natural Gas Liquids.
78 Million Barrels a day for the first.
~90 Million Barrels a day for the second.
Some numbers will include all liquid fuels, including ethanol, biodiesel, refinery gain from splitting large hydrocarbons into less dense transportation fuels. About 92 MMBPD for that.
http://www.eia.gov/forecasts/steo/report/global_oil.cfm
Green River isn’t oil, but kerogen that requires retorting to produce, then conversions to a synthetic crude. Technically recoverable isn’t the same as economically recoverable. Proved Reserve numbers require technically and economically recoverable, so they actually go down with oil prices.
Methane Hydrates are huge, but so far, so are the cost for recovery.
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