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Page added on December 5, 2015
Crude Price Crash Could Drill a 19-Million-Barrel Hole in Future Supplies
Each day crude prices remain weak, it puts the industry one step closer to a potential day of reckoning. In the near term, that reckoning could be with the industry’s banks and credit investors, which are growing worried about the impact that low oil prices will have on the entire industry’s ability to pay back debt. However, a bit further down the road is another potential day of reckoning for those outside the industry: It’s a day when a world that’s currently swimming in an abundance of oil could find itself well short of supply.
Drilling a hole
According to analysis from Houston-based energy investment bank Tudor, Pickering, Holt & Company, or TPH, the oil industry has deferred or canceled about 150 projects that could unlock 125 billion barrels of oil and gas over their lifetime. At peak production, these projects represent 19 million barrels of daily production, potentially leading to a big hole in future supplies given the combination of growing demand and shrinking legacy production, both of which are noted on the following chart from a presentation by Chevron (NYSE:CVX).
Image source: Chevron.
According to David Pursell, the head of macro research at TPH, “By not sanctioning projects today, you’re putting a hole in production in 2017, 2018 and 2019 — potentially a big hole.” ExxonMobil (NYSE: XOM), for example, could delay up to 25 projects representing roughly 2.5 million barrels a day of capacity. In fact, Exxon has already significantly scaled back its spending in recent years, with spending expected to average around $34 billion over the next several years, which is well off its peak of $42.5 billion in 2013. What’s important to note is the lag between that elevated spending level and the expected production ramp, which is going from 4 million barrels of oil equivalent per day (BOE/d) last year up to 4.3 million BOE/d by 2017. It’s a number that could flatline — or even fall — in the future if ExxonMobil really pulls back the reins on spending by delaying those projects.
Counting the cost
The big factor in project delays is economics, with many projects simply not making economic sense at current prices. In fact, a new oil sands project can have a breakeven point upwards of $95 to $114 per barrel. Because of this cost, international oil giants such as Statoil (NYSE: STO) and Total (NYSE: TOT) have postponed projects until the economics make sense. Statoil, for example, decided to put a three-year pause on development of its 40,000-barrel-per-day Corner project when oil prices started to slide in September of 2014 because rising costs and limited pipeline capacity put the project’s economics at risk. Meanwhile, even before crude took a dive Total suspended work on its nearly $10 billion Joslyn oil sands mine due to the troubling economics of that project.
Deepwater projects, likewise, can be just as costly, often requiring a $75 oil price, if not more. Chevron, for example, delayed its Rosebank North Sea development in November of 2013 — when Brent crude was well above $100 per barrel — saying that it did not “currently offer an economic value proposition” to justify the estimated $8 billion investment. That prohibitive price tag will likely keep Rosebank’s estimated 240 million BOE underground for quite a few more years.
Investor takeaway
Big oil producers have significantly reduced spending on major projects, which could leave a big hole in future oil supplies. That said, these are pure economic decisions, with many of these projects still requiring triple-digit oil prices to justify the investments. So, either oil prices need to rebound or costs must come down before this oil will ever see the light of day. That said, the concern is that with so much oil staying underground that oil prices could significantly spike and stay elevated for a while because it would take years before these projects would deliver a drop of oil. The implication being that some producers might need to bite the bullet and begin work on a project that currently not economically rational in anticipation of prices improving in the future given the fact that supplies naturally decline if adequate investments aren’t made to bring new supplies online.
27 Comments on "Crude Price Crash Could Drill a 19-Million-Barrel Hole in Future Supplies"
makati1 on Sat, 5th Dec 2015 7:20 pm
Fool is still spouting foolish ideas like a petroleum company actually spending billions to develop a source that will never pay back the investment let alone make a profit.
These investor fools cannot accept that their black gravy train is about to leave the tracks forever.
Harquebus on Sat, 5th Dec 2015 7:37 pm
The global economy has already proved that it can not survive high oil prices and producers are proving that they can not survive without them.
Pretty much in line with the peak oil induced boom and bust.
keith on Sat, 5th Dec 2015 9:24 pm
What the general public imagine when they think peak oil, I was among them once, is the long lines at the gas pumps back in the early 70’s. I realized recently that that wasn’t peak oil, it was something else, maybe, some kind of shift or even an orchestrated event. My point is this. We are now witnessing Peak oil, and that includes human behavioral shifts in response to peak oil to maintain BAU. I am beginning to understand that BAU is all about short term cash flow.
Twocats on Sat, 5th Dec 2015 9:45 pm
And when the shortfalls come it will be blamed on economics not peak oil. If only the price hadnt spiked. Just wait a few more years well get this problem licked. Only years and years later will they finally admit what weve known since 2005
rockman on Sun, 6th Dec 2015 9:20 am
“Each day crude prices remain weak, it puts the industry one step closer to a potential day of reckoning. In the near term, that reckoning could be with the industry’s banks and credit investors, which are growing worried about the impact that low oil prices will have on the entire industry’s ability to pay back debt.”
This piece seems more as if it was written in Jan 2015 then Dec 2015. Not difficult to make predictions after events have happened. LOL.
jjhman on Sun, 6th Dec 2015 11:42 am
I continue to be amazed that tight oil production continues and that, somehow, companies stay in business. While I still believe the underlying situation is dire and prospects are declining, the resiliance of BAU is awesome.
Are the banks painting themselves into a corner by continuing to support frackers or are the frackers still generating enough cash flow to keep the banks happy?
Rocky: Any insights?
Davy on Sun, 6th Dec 2015 11:54 am
JJ, if you look at the global picture we see extend and pretend policies. In China it revolves around excess capacity in key heavy industries as an immediate high profile example. The Chinese gov now owns 10% of their markets equities. In the US fed liquidity and rate repression allow the extend and pretend through banks and lending agencies.
There are many mechanisms for this currently. It is the only way the ship remains afloat. The problem is the real economy cannot be extended and pretended at all levels. Debt dynamics cannot be completely done away with. At some point bad debt is bad debt regardless. As this extend and pretend cycle pushes forward along with a shrinking global economy bad debt realization will be forced upon the system.
antaris on Sun, 6th Dec 2015 12:05 pm
I wonder how many of those idled drill rigs actually were adding to the production numbers. From what I understand Rock has said, a good bit of investor fleecing was taking place in the oil patch the last few years.
shortonoil on Sun, 6th Dec 2015 12:14 pm
As a result of the inevitable depletion cycle that occurs to all finite natural resources the capacity of petroleum to power the economy is declining. There comes a point where petroleum is no longer a value adding commodity. The economy is not going to spend $2 for petroleum to produce a $1’s worth of goods, and services. Its called affordability and it is a calculable quantity:
http://www.thehillsgroup.org/depletion2_022.htm
As the process cost of producing petroleum, and its products increases its affordability for the remaining sectors of the economy declines. Presently the return on petroleum products is 1:1.03; the economy as a whole is getting less out of petroleum than it is putting into it. Consequently, the highest petroleum cost products will be phased out, and as they do demand will fall. Supply must also disappear with that fall in demand. This will be seen as a slowing of the economy; punctuated with periodic monetary, and financial crises.
The world has a gigantic resource base of liquid hydrocarbons remaining. Perhaps as much as 4,200 Gb, or several centuries worth at present consumption rates. The possibility of shortages is obviously an oxymoron. The world will not be producing less petroleum in the future because it is unavailable. It will be producing less because what is being produced at present is not giving an adequate return for its costs to the economy. The industry is not investing too little into the future, it has invested too much into the present. Like Shale, money was spent on production that had insufficient market to justify the expenditures.
The future of any producer today depends on reducing investments, cutting cost, and preparing for the further decline in prices that is coming.
http://www.thehillsgroup.org/
marmico on Sun, 6th Dec 2015 1:31 pm
Presently the return on petroleum products is 1:1.03
Bullshit.
jjhman on Sun, 6th Dec 2015 1:44 pm
I understand all of the theoretical and analytical reasons why the banks shouldn’t be keeping the fracking industry running. However instantaneous doom is a staple on this forum yet BAU keeps running. A few years ago, on The Oil Drum we had regular reports backed by data showing that oil would peak around 2005 and conventional oil apparently did peak then. I would just like to see some realy data explaining why Wily Coyote keeps running so far past the end of the cliff. If I knew where to look into the hearts of bankers I would. But they are either continuing to lend to drillers or drillers are producing enough cash flow to pay, at least, the interest on loans. Several months ago I saw some numbers on the debts of oil companies and their output. Does anyone have a source for recent data on that subject?
Davy on Sun, 6th Dec 2015 2:00 pm
JJ, it is called human nature and it is exhibited by confidence that allows global liquidity. You are not going to find any solid data anymore. Normal price discovery is over moral hazard policies are in. This is an end game of economic decay we are in. We are adrift in an ocean of trouble without a compass. No amount of data will explain what is going on. The status quo will continue on until it can’t.
shortonoil on Sun, 6th Dec 2015 3:12 pm
“I understand all of the theoretical and analytical reasons why the banks shouldn’t be keeping the fracking industry running.”
The Shale industry has spent over $1 trillion to build an industry that has annual gross sales of $360 billion. It’s obviously not a winner. Even though the banks that invested in it are seeing it go down the tubes they don’t know how to run an oil company, and they know that they don’t. If the banks foreclose on these loans they will be left holding some iffy assets that might bring 10 cents on the dollar in the open market. If they can keep them afloat for a little while longer, they may be able to find some sucker, I mean investor, to take over some of their liabilities. It is strictly a calculated risk on their part.
shortonoil on Sun, 6th Dec 2015 3:36 pm
“Several months ago I saw some numbers on the debts of oil companies and their output. Does anyone have a source for recent data on that subject?”
We don’t pay much attention to shale. Its energy contribution to the economy is so small that it doesn’t even affect our margin of error. It is just that all the hype that has been put out by the industry has made it a popular topic; in actuality, in the wider global scheme it is insignificant. But from what I have read to date it is estimated that 37% of the industry will not have enough positive cash flow this year to cover the interest payments on their loans. With drilling rig counts down 67% to date, and first year decline rates of 70% next year will probably see an avalanche of shale bankruptcies. Banks are trying to unload, and investors are spooked!
http://www.thehillsgroup.org/
bug on Sun, 6th Dec 2015 4:17 pm
Keith, I agree with you.
Long gas lines and rationing were what I figured would be peakoil. It seems to be about cash. Not what I thought at all.
rockman on Sun, 6th Dec 2015 5:06 pm
jj – “I continue to be amazed that tight oil production continues and that, somehow, companies stay in business.”. First the only thing close to an “instantaneous” reaction id the drop in rig count. What you outsiders don’t see is the wholesale slaughter of staff and management going on in the shale sector. This especially true od the companies that physically drill the shale wells. I continue soliciting bids for my conventional wells. Very depressing: more than half of the sales reps I’ve dealt with for years are gone. You’re not going to hear any negatives out of the shale pubcos beyond what the SEC required by law.
The blood is flowing in the streets of the oil patch. The public’s eyes are shielded from the carnage…so far. I belong to a volunteer group in Houston: Oilfield Helping Hands. Since it began it has given over $3 million to oil patch families in need. Not much support passed during the high oil price period. The situation has changed dramatically since the first of the year.
Tom on Sun, 6th Dec 2015 6:13 pm
Changing the subject. May be more appropriate elsewhere, but what ever happened to the much hyped mega oil field in Kazakhstan, Kashagan, or sometimes known as Cash All Gone? Did the big guys lose their butts on this one or are they still pouring in more cash?
shortonoil on Sun, 6th Dec 2015 7:36 pm
With the a permeability only slightly better than a concrete block, and a 15% hydrogen sulfide content Kazakhstan was a dead horse coming out of the gate. How the majors ever got talked into that cesspool we’ll never know. But I bet someone is now running well logs in Siberia!
Pete Bauer on Sun, 6th Dec 2015 7:41 pm
Oil companies are expecting at least $100 / barrel of oil. For anything less than that, they are not going to invest.
Hello shortonoil.
Can you please show the proof of the Return on Petroleum of 1 : 1.03.
I will be interested to know it.
I believe it may be more, but how much motor fuels like gasoline, diesel and kerosene that Petroleum can yield is of more interest since only these fuels can be sold at a higher price.
If more heavy oil is produced that yields residues like fuel oil and petroleum coke, then its not of much use since these products are sold at only the price of Coal.
So all that the market wants is Extra Light Crude, Light Crude and Medium Crude.
twocats on Sun, 6th Dec 2015 8:29 pm
Jjhman – if you are looking for the doom (beyond what rock pointed out) you have to look to more nuanced dishes. Things like student loan debt and subprime car loans. Almost every social class (save the very top) has slid in terms of living standard. People are just adapting to less or hustling the system to keep it up (taking out student loans to afford a laptop or buying iphone on a payment plan). Its there but its not publicly discussed.
twocats on Sun, 6th Dec 2015 8:33 pm
There is a resurgent of the down and out chic. Songs like macklemores Downtown or Lordes Royals are good examples. Within a generation displaying wealth may actually be taboo.
makati1 on Sun, 6th Dec 2015 9:12 pm
Twocats, it soon will be dangerous to display wealth on any US street or drive a reasonably new vehicle of any make or price. The US is now a 3rd world country covered with a thin veneer of US MSM bullshit.
shallow sand on Sun, 6th Dec 2015 10:37 pm
ROCKMAN. Have we hit 1986 carnage yet, or is that bust still the worst?
I feel this one is shaping up to be worse than 1998-99, but as I’ve written, I had no skin in the game in 1986.
I think if you look at price action, 1986 didn’t stay down so long, by mid 1987 you were back into the high teens, but then went back down in 1988.
1998 and early 1999 hurt bad, but we didn’t let anyone go. We finally did this year, after the August swoon.
US onshore conventional, IMO, is sinking like a stone. Was around 2.6 million BOPD, will likely be 2.3 million BOPD by year end and may sink below 2 million at the end of 2016.
Thankfully no debt and stockpiled cash. I hear things are so bad the banks are just going to pretend, they do not want to foreclose on oil, just like they didn’t in 1998.
Good deal our soon didn’t start in chem or petro engineering. Yikes!
Interested to hear what you think ROCK. The public and most here are pretty clueless.
rockman on Mon, 7th Dec 2015 6:33 am
Shallow – “Have we hit 1986 carnage yet, or is that bust still the worst?” As my fading memories tell me the big difference between this bust and the 80’s was the speed of the collapse. Adjusted for inflation it took 5 years for the oil price in 1980 to fall 50% by late 1985. Compare that to just months this time. And I don’t have the stats but I doubt the oil patch accumulated as much dept in the few years that oil prices boomed in the late 70’s as it has done during this latest boom. Back then it seemed like most of the capex came from investors…not the banks.
Your memory has become as piss poor as mine. LOL. Inflation adjusted oil prices: 1986: $32; ’87: $37; ’88: $30; ’89: $35; ’90: $42. And then slide to $17 in ’98. It took 28 years for oil to get back to $100/bbl (1980 to 2008).
shallow sand on Mon, 7th Dec 2015 7:54 am
Yes, prices inflation adjusted were lower then, but LOE was too, I will bet.
A lease I have had since 1997 cost around $10 per bbl to operate then now costs $40-45. Of course it used to make 6 bbl per day, now making 4. If I was still making 6, would not be losing money on $35 oil.
Think we have to figure in the onshore wells producing now in US v then. As you have commented many times, economics is the reason ND etc were not produced until the 21 century.
What I do know, just from our experience, is we only lost $$ one year, that was 1998, it was a small amount.
Had we not fired people and shut in some stuff, plus had May and June, would have lost a lot. Still going to lose more per bbl than 1998.
We stay here or go lower, ouch, times one million.
shortonoil on Mon, 7th Dec 2015 1:36 pm
“Have we hit 1986 carnage yet, or is that bust still the worst?”
The 1986 price decline, and the 2014 decline were produced by two entirely different mechanisms. The 1986 decline came about when Saudi Arabia (and others in OPEC) came back into the market after reducing production for six years in an effort to drive prices up.
http://www.eia.gov/beta/international/data/browser/#?iso=SAU&c=0000000000000000000000000000000000000001&ct=0&ord=CR&cy=2014&v=T&vo=0&so=0&io=0&start=1980&end=2014&vs=INTL.53-1-SAU-TBPD.A~INTL.55-1-SAU-TBPD.A~INTL.57-1-SAU-TBPD.A~INTL.58-1-SAU-TBPD.A~INTL.59-1-SAU-TBPD.A~INTL.56-1-SAU-TBPD.A~INTL.54-1-SAU-TBPD.A~INTL.62-1-SAU-TBPD.A~INTL.63-1-SAU-TBPD.A~INTL.64-1-SAU-TBPD.A~INTL.65-1-SAU-TBPD.A~INTL.66-1-SAU-TBPD.A~INTL.67-1-SAU-TBPD.A~INTL.68-1-SAU-TBPD.A&pa=000gfs0000000000000000000000000000vg&f=A&ug=g&tl_type=p&tl_id=5-A
Prices fell by 48% in 1986 as a result. The market absorbed the excess over the next four years and the price rebounded.
The 2014 decline came about because of an increase in production over six years that the market never fully adsorbed. Over most of that six years prices actually increased, and inventories did also. Unlike 1986 were the economy eventually adsorbed the extra production, 2014 was an example of where it did not. The 1986 price crash is completely unrelated to the 2014 crash, except that the price crashed. It can not be used as an indication that the two situations will resolve themselves in the same fashion. In fact, it indicates that they will not.
Kenz300 on Wed, 9th Dec 2015 9:56 am
If It Owns a Well or a Mine, It’s Probably in Trouble
http://www.nytimes.com/2015/12/09/business/anglo-american-to-cut-85000-jobs-amid-commodity-slump.html?emc=edit_th_20151209&nl=todaysheadlines&nlid=21372621&_r=0
—————
AEP Dumps ALEC to Help States Implement Clean Power Plan, Expedite Renewable Energy
http://ecowatch.com/2015/12/09/aep-drops-alec/?utm_source=EcoWatch+List&utm_campaign=c07478649b-Top_News_12_9_2015&utm_medium=email&utm_term=0_49c7d43dc9-c07478649b-86023917
——————–
Oklahoma Earthquakes: Bombshell Doc Reveals Big Oil’s Tight Grip on Politicians and Scientists
http://ecowatch.com/2015/12/09/earthquake-state/