Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on March 2, 2015
Low Oil Price May Stifle Deepwater Drilling And Oil Sands But Not Fracking
Saudi Arabia and OPEC may have dropped oil prices to stifle production in the U.S. and other competing nations, but they didn’t drop it enough to stifle the U.S. oil and gas boom from fracking, a senior expert with McKinsey and Company said in Chicago.
“If the Saudis think they’re going to put U.S. shale players out of business, they’re probably not, although there will be less drilling,” Joe Quoyeser told about 125 people, mostly graduate students, at Northwestern University’s Kellogg Energy Conference on Wednesday. ”But there are other elements of oil supply that are needed to balance the market that will have a hard time competing at $50 a barrel, including oil sands in Canada and much of the deepwater resources.”
Oil sands have to be heated to extract petroleum, a process that requires natural gas. Even at today’s low gas prices, that fixed cost means oil sands only become viable at about $75 a barrel or more, Quoyeser said.
Beside the inherent costs of drilling at depth, deepwater drilling faces increased regulatory oversight since BP’s Deepwater Horizon disaster in 2010, which delays revenues. (And in fact, on Feb. 25 Moody’s downgraded Transocean’s credit rating to junk status.)
“We think these need prices on the order of $75 to $80,” said Quoyeser, who advises petroleum executives on hydraulic fracturing, lateral drilling, deepwater strategies and supply chains.
Yet U.S. crude oil production continued to rise in February, according to the Energy Information Agency, thanks largely to fracked shale wells.
Oil prices dropped more than 50 percent since June. The largely unpredicted drop was caused neither by demand shock—like the drop in consumption that occurred during the Bush economic collapse of 2008—nor by supply shock—like the fall of the Shah of Iran in 1979, Quoyeser said, but by chatter.
“Our view is that OPEC and the Saudis talked this market down. This was a rhetorically driven price adjustment.”
Why would they do that? Because with oil above $100 a barrel, a lot of new players were entering the oil business, including Iraq, Lybia, and fracking operations in North Dakota. At the same time, the oil price was so high that it constrained the growth of emerging markets.
“Saudi Arabia, as a long term resource owner, their interest is that the demand for crude oil continue to grow.”
The Saudis and OPEC faced fast-growing supply and sluggish demand, which left them with an unattractive future.
“Our view is that they’d rather take the pain now than take the pain later,” said Quoyeser, who called it “a very profound short-term pain” for Saudi Arabia, a loss of about $500 million per day.
Saudi Arabia could recover those losses by decreasing supply by a million barrels per day, but it hasn’t.
Quoeyeser expects the Saudis to eventually act to balance the market as they have in the past, which means manipulating the price back up to about $75 to $85 per barrel, where oil sands and deepwater drilling can again participate profitably, but not so high that many more suppliers enter the market.
Even so, he predicted, the supply side will remain dynamic. Fracking operations, among the least mature of drilling technologies, have the best opportunity to make it more dynamic, he said, particularly if they begin to employ “smart fracking” technologies, which will help drillers locate productive shale resources before they drill.
“If the industry becomes much more efficient at using seismic technology to lower the cost of accessing light, tight oil, that has the potential to put downward pressure on oil prices.”
17 Comments on "Low Oil Price May Stifle Deepwater Drilling And Oil Sands But Not Fracking"
dashster on Mon, 2nd Mar 2015 11:38 pm
I have read that tar sands is expensive but the costs are front-loaded. Once they make the initial investments the ongoing costs are low enough that they can survive $50 oil.
gdubya on Tue, 3rd Mar 2015 12:23 am
Dash – I would agree, the infrastructure – haul trucks, upgraders, camps, airports – are more relevant than the daily NG costs.
Not only that but the tax structure allows the companies to defer paying taxes until the infrastructure is paid off. So it would make sense for the oil sands producers to reinvest as much money as possible into essential infrastructure to avoid the tax bill.
It would make sense now to stop building things to save money but the low oil price also keeps them from paying off the machinery.
And of course a little money coming in is better than nothing, so production will continue.
apneaman on Tue, 3rd Mar 2015 12:33 am
“For as long as 400-ton dump trucks have been rumbling around the open pit mines of Canada’s oil sands, crews from Kal Tire have been on hand to replace and repair their $70,000, 13-foot diameter tires.”
http://www.nytimes.com/2015/02/03/business/energy-environment/lower-oil-prices-strike-at-heart-of-oil-sands-production.html?_r=0
GregT on Tue, 3rd Mar 2015 12:44 am
“Alberta’s Tar Sands: One of the Most Destructive Projects on Earth:”
A few quick facts:
• The Tar Sands can single handedly prevent Canada from meeting it’s international obligations under the Kyoto protocol. By 2020 the tar sands are expected to release over 141 megatonnes of GHG – twice that produced by all the cars and trucks in Canada.
• An area the size of the state of Florida (149,000 km2) can be leased to oil sands development in the future.
• It takes 3-5 barrels of fresh water to get a single barrel of oil from the tar sands. 350 million cubic metres is the volume of water currently allocated to the tar sands, the equivalent to the water required by a city of two million people.
• Cumulatively, the environmental impact of the tar sands has made Alberta the industrial air pollution capital of Canada, with one billion kilograms of emissions in 2003.
• 600 million cubic feet of Natural gas is used every day – that’s enough to heat more than three million Canadian homes.
https://stoptarsands.wordpress.com
Northwest Resident on Tue, 3rd Mar 2015 1:30 am
Alberta Tar Sands demonstrates exactly how desperate civilization has become to keep the party going for just a little longer. We need to let go and just face reality. The longer we put off the day of reckoning, the worse it is going to be.
“Ah, when to the heart of man
Was it ever less than a treason
To go with the drift of things,
To yield with a grace to reason,
And bow and accept the end
Of a love or a season?”
Some guy named Robert Frost
Richard Ralph Roehl on Tue, 3rd Mar 2015 3:18 am
Imagine what this planet will look like 100 years from now. 2115-2125.
Indeed! Picture 300 million human baboonies surviving the $tate of Florida in 2125. Think about 100+ million baboonies living in the Los Angeles basin! Yeah! And almost all of these folks speaking Spanish!
Phuck! Phuck! Hooray! We are human! We’re number one! We’re number one!
rockman on Tue, 3rd Mar 2015 7:00 am
Just one more spinmeister who probably never earned a dollar by actually drilling a well:
“And in fact, on Feb. 25 Moody’s downgraded Transocean’s credit rating to junk status.” FYI: Transocean doesn’t produce 1 bbl of Deep Water oil…and never will regardless of the price of oil.
“We think these need prices on the order of $75 to $80,” said Quoyeser”. FYI: the vast majority of current DW GOM fields were developed at prices of $50/bbl or less. In fact, according to the US govt before 2005 when oil prices typically fell in the $25 to $40 per bbl price range a total of 151 DW GOM fields had been discovered holding 11.4 BILLION BBLS OF PROVED RESERVES.
“Yet U.S. crude oil production continued to rise in February, according to the Energy Information Agency, thanks largely to fracked shale wells.” Again either intentional misrepresentation or just stupidity of ignoring the time lag between when a well is drilled and when the production from that well is publicly available. But if he wants to play that game the Rockman can do likewise:
“Gulf operators are gearing up for a surge in production this year. Oil output from federal waters is expected to hit 1.55 million barrels per day in 2015, on par with the region’s 2009 historic high, according to government estimates. Production is expected to jump to 1.65 million in 2016. Chevron started production in December at its $7.5 billion Jack/St. Malo floating platform in the deepwater Gulf of Mexico, one of the largest platforms of its kind.”
So there you go Mr. Quoyeser: despite low oil prices US crude oil production continues to rise today and will increase even further in the next 2 years. In fact with oil prices at half the level of 2009 the DW GOM play will match the record with oil around $50/bbl.
Just because the Rockman detests spin it does mean he can’t be good at it also. LOL.
shortonoil on Tue, 3rd Mar 2015 7:12 am
“If the Saudis think they’re going to put U.S. shale players out of business, they’re probably not, although there will be less drilling,”
According to Fobes tars sands, and ultra deep water are not going to survive in this market, but shale will? Shale is a light oil where 37% (1.2 mb/d) of its production has very little market. It has an API greater than 50, and that light oil only has a value as a feedstock:
http://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/energy/images/eneene/sources/petpet/images/refraf1-lrgr-eng.png
Gulf Coast storage is now full of the stuff, and in a few months there will be no place to put it. Once wells drilled are completed production will go into catastrophic decline. The financial industry now has over $1 trillion sunk into shale, and they are praying that prices will soon zoom back to $100/barrel to save their bacon. Its not going happen:
http://www.thehillsgroup.org/depletion2_022.htm
Depletion has taken its pound of flesh, and the shale industry will be one of the first to go. Its need of huge constant investment, low quality oil, and rapid well decline rates ensures its demise. Forbes is now trying to convince the rats not to abandon the ship. They are saying “pay no attention to that water swirling around your feet”. In the mean time, they are heading for the life boats!
http://www.thehillsgroup.org/
Mark Ziegler on Tue, 3rd Mar 2015 8:13 am
The Saudis did not do anything. The frackers flooded the market and as long as they keep doing that the price of oil will remain low.
viewcrafters
dave thompson on Tue, 3rd Mar 2015 8:38 am
If the US refining industry wanted to recalibrate and rebuild capacity for the LTO that is “glutting” the market, It would have been done. The industry is well aware that LTO is a flash in the pan of extraction and knows full well what we are in for. That is, liquid fossil carbon extraction, negative return on investment and source depletion.
Speculawyer on Tue, 3rd Mar 2015 10:49 am
Yeah, apparently this guy has not seen the Baker-Hughes rig count.
Plantagenet on Tue, 3rd Mar 2015 10:57 am
Interesting that fracking tight shale has evolvolved to the point that it is profitable at $50 bbl.
If thats the case, then this oil glut is going to get worse. All those retired folks out there in their RVs should be celebrating!
Kenz300 on Tue, 3rd Mar 2015 11:58 am
There are safer, cleaner and cheaper ways to produce energy than oil sands and deep water……
If we end the oil monopoly on transportation fuels there will be no need for these environmentally destructive practices.
Bring on the electric and hybrid vehicles……..
It is time to speed up the transition to alternative energy sources and away from fossil fuels.
Pope Francis On Climate Change: Man Has ‘Slapped Nature In The Face’
http://www.huffingtonpost.com/2015/01/15/pope-francis-climate-change_n_6477388.html?utm_hp_ref=generation-change
—————-
Pope Francis’s edict on climate change will anger deniers and US churches | World news | The Guardian
http://www.theguardian.com/world/2014/dec/27/pope-francis-edict-climate-change-us-rightwing
rockman on Tue, 3rd Mar 2015 1:30 pm
“Interesting that fracking tight shale has evolvolved to the point that it is profitable at $50 bbl.” Sorry…I must have dozed off and missed those hundreds of rigs that had been stacked the last few months move back into the shale plays. LOL
rockman on Tue, 3rd Mar 2015 1:46 pm
Actually the condensate production is critical to US refiners. Despite what folks think our refineries don’t crack heavy oil or light oil: they crack a blend of oil. And that blend has not typically varied by more then 3 degrees API for decades. First, the refiners aren’t cracking 100% Canadian oil sands production because it has to be blended with up to 25% light oil just to transport it.
Prior to the surge in US condensate production from the shales the refiners had to import lighter oils to make their blends. When the shale production eventually decline the refiners will have to find substitutes for it:
The United States imported more than 7 million barrels per day of crude oil during the first seven months of 2014, despite the shale boom, according to the EIA. Some observers have expressed unease about lifting the ban on crude exports while the United States continues to rely on imports to meet such a high proportion of its needs. “With regard to the oil export question, we are looking at that,” Energy Secretary Ernest Moniz said in an interview with Platts earlier this month. “But a very important point that is just not emphasized is we remain a very large importer of oil.”
The problem with looking at broad aggregates like this, however, is that not all crude oils are created equal. It is not possible to treat them all as substitutes for each other. Refiners are very fussy about the quality of crude oil that they process. It is most definitely not the case that any old crude can be processed in any old refinery. Most refineries handle a range of crudes by blending them to ensure the average quality stays close to target. They employ complex computer models to tell them which crudes to buy based on current crude and product prices, the refinery’s technical specifications and the desired blend quality.
But refineries only have flexibility within a fairly narrow range. Blended crude quality must be kept within tight quality limits.
Keeping average quality within operating limits means that U.S. refineries could struggle to process all the country’s domestic output long before imports fall to zero. In fact, U.S. refiners could start running up against their operating limits.
OCEAN OF LIGHT OIL – In the case of the shale boom and U.S. oil trade, the key characteristic of the crude oil is its relative density or specific gravity. Water has a specific gravity of 10 degrees API. Extra heavy oils such as bitumen, which are denser than water, have a specific gravity of less than 10 degrees. Heavy oils, which are less dense than water, have a specific gravity of between 10 degrees and about 25 degrees. Medium crudes have a specific gravity between 25 and 35 degrees. Oils with a specific gravity of more than 35 degrees are known as light crudes.
U.S. refiners have shown a strong preference for a medium blend. Since 1985, the average density of oil processed by U.S. refiners has been fairly steady and not varied much in the short term. In statistical terms, the weighted average specific gravity has been 31.1 degrees. The problem for U.S. refiners is that almost all the extra oil being produced as a result of the shale boom is much lighter than they would like. Roughly 96 percent of the 1.8 million barrels per day growth in domestic production between 2011 and 2013 consisted of … grades with API gravity of 40 or above according to the EIA.
APPROACHING BLENDING LIMIT – If refiners had purchased and processed all the extra domestic oil without making adjustments to the other types of crude they buy, the specific gravity of the blend would have soared, making the refining process much less efficient.
Instead, refiners have held the average blend quality constant by substituting domestic crude for imported light oils, while maintaining imports of medium-heavy and heavy oils.
So while imports of medium-heavy and heavy oils (with specific gravity of less than 30 degrees) have remained roughly constant at 4.5-5.0 million barrels per day since 2007, imports of medium-light and light oils have shriveled from 6 million barrels per day to just over 2 million.
IOW the light oil from the shales have found a very nice home in this country.
Davy on Tue, 3rd Mar 2015 1:54 pm
Rock, just so you know I read every one of your post. You comment on subjects I have no expertise in but high interest. I feel I have gained valuable insight into the working of the oil industry at least at the level you interact in. While I still don’t understand all of what you say it is the steady diet that is increasing my understanding of a complex industry. An industry that MSM is unable to understand hence the very poor reporting we see on a regular basis.
rockman on Tue, 3rd Mar 2015 8:25 pm
Davy – Mucho thanks. And it’s only fair to reciprocate: until a short time ago I didn’t know sh*t about refining blending and the importance of the light oils. LOL. Really. I’m a freaking geologist…all I knew about the refining business is that use oil to make gasoline.
But I see folks here chasing their ass trying to figure all this crap out. Now throw in the fact that I spend almost every waking minute in a chair often with my computer or tablet in front of me…just like now as I watch “Just Call Saul”. So instead of being hooked on video games I’m a web junkie.
The best part is that I might not know sh*t about a subject but in just 20 minutes on the web I can absorb just enough info to post to make some folks think I’m f*cking genius. LOL. It actually only took 5 minutes to become a refinery blending “expert” because I got lucky: the second link I opened gave that great explanation I copied and posted here.