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.
Yes, oil companies typically have to invest significantly in years before the production completes. 2015 reduction is spending will have a greater impact in 2016 and beyond production than 2015.
Well as a column in USAToday said
“Republicans talked a lot about drill baby drill but President Obama was the one that made it happen”
By Nov 2016 a majority of American voters will believe that.
Yep, that's expensive, too, but can be done.
In addition, the techniques learned in the past 15 years of experimentation and research on how to more efficiently exploit the current unconventional reservoirs being will prove to be adaptable to other more conventional reservoirs which have had some vertical well field development.
Especially in Carbonate reservoirs, the anisotropic reservoir properties of the geological formation will determine just how much oil can be recovered from existing and older plays thought to be tapped out.
I’ve felt for a year that Tesla was a slam-dunk short, but I’ve learned never to bet against a regime affiliate.
Obviously without the California/Northeast states mandate they would probably not even exist.
Agreed, and price will determine how fast it happens.
yeah so electric cars are not a slam dunk. I’m sure there’s also problems with the conversion of oil based trucks buses trains and buildings over to natural gas.
So its probably safest to say that high priced oil invites competitors.
Maybe with today's tech, but not at today's prices. (BTW, some of that tech was around in the 80s). Also, expect considerable environmental opposition, especially in that end of Colorado, and further complications of Federal Leases....
Cost and fuel storage mostly.
So its probably safest to say that high priced oil invites competitors.
And lower oil prices makes it tougher for them.
So its probably safest to say that high priced oil invites competitors.
And lower oil prices makes it tougher for them.
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Therefor oil prices will fluctuate wildly for the next decade.
Possible, if we knew for sure we could all be John Paulson.
Depending on your meaning of “wildly” that has always been the case of oil. Given the inelastic nature of the demand and supply, it is the reality of the commodity.
Given the inelastic nature of the demand and supply, it is the reality of the commodity.
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My understanding of energy demand has always been that the cheaper the price — the greater the demand. Conversely, the higher the price the lower the demand. This cause and effect is not immediate but rather plays out over several years. That this state of affairs is what we mean when we say that oil demand is elastic.
Oil supply is more inelastic because it is constrained by the limits of technology, natural resources -— as well as the cost of drilling.— But as the fracking revolution has shown—there is some elasticity to supply.
Further, the relative costs of starting and stopping fracking operations are not so great that projects that were halted when oil dropped below $70@barrel won’t be quickly restarted again when oil prices climb again over xxx level. That is, fracking lends an elasticity to supply that wasn’t available before.
how and why do you understand oil supply and demand to be inelastic?
I think the inelastic demand side is the easiest to understand, from a personal level. When prices are high, individuals still need to drive to work, to the grocery store, etc.
They may not take a vacation that year, or combine some trips, but the amount of fuel they buy six months after a price rise, is not that much different than six months before.
In the long run, the population will put higher value on better mpg, living closer to work etc, but that takes a lasting price increase to see the impact.
On the supply, smaller independents can act fairly quickly. Drilling contracts may be out several months but individual land rigs are not typically contracted for many years at a time. But the wells already in service, especially the newer wells are not getting shut down until the expense of keeping them in service exceeds the profit. Most of the money on shale wells is spent prior to production. Once it is in service, it will take a lot to shut them down.
The majors tend to chase bigger projects like offshore platform that can have a ten year window from first dollars spent to production. 6 years into a multiple billion dollar project with 70% of the dollars already spent rarely stops even with the price of oil cut in half. Major projects will more likely slow down than shut down. End the overtime and expediting while excepting some increase in schedule.
blah blah blah
Okay, I was just rolling my eyes on the headline.
If the headline said “Why Prices Will Go Up” and explains that oil will become more costly to find and exploit, I can buy it. I can even expect it. But the headline said prices MUST go up, which sounds like the author is trying to will it back up.
Okay enough about the headline.
Yes, oil prices will likely go up at some point, that is a really safe prediction.
The author is wrong that we desperately need to be pumping a lot more oil from Iraq. There is plenty of untapped oil under the ground, and it might be cheaper to exploit than trying to stabilize Iraq.
I find it more informative to concentrate on the article and not so much on a headline. After all, the headline’s only purpose is to get you to read the article, rather than convey the information contained in the article.
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