by kublikhan » Tue 10 Dec 2013, 13:54:00
$this->bbcode_second_pass_quote('Threepwood', 'I')'m aware that financial pundits are conservative in straying from current prices, it's not wise to expose yourself too far out on a limb and have that blunder on your record, underestimating a move can always be more easily attributed to unforeseen variables
What about the rest of my post? You are ignoring a key point: All of that expensive exploration and drilling depends on high oil prices. You know, that increasing production you keep pointing out? If you are right and oil falls to $50 for a sustained period, all of that drilling would cease and oil supplies would start to shrink. Only currently producing conventional wells are economical to produce at that price. Sustained $50 oil would mean no new production coming online other that what is already in the pipe. We would have to be content with current production that continues to dwindle as older fields age.
$this->bbcode_second_pass_quote('', 'H')ere's the short version of why forecasts of low long-term oil and natural gas prices are almost certainly wrong: It costs more than that to get the stuff out of the ground. The people who are predicting $50, now $45 oil, and $3, now $2 natural gas (in the United States) for as far as the eye can see believe that such prices will result from the already widespread application of current technology. And yet, the very companies that use that technology to extract these hydrocarbons say that there's no way they can produce them profitably at those prices. ExxonMobil's CEO said last year, "We are losing our shirts" selling natural gas at such low prices. Forecasts for much lower oil prices would also represent losses on new wells for most oil producers.
Here's why: The full cost of producing new oil for the 50 largest publicly traded oil companies in the world is $92 a barrel according to Bernstein Research. While average costs are lower because they include previously discovered conventional oil which is cheaper and easier to produce, the Bernstein report challenges the notion that new technologies will lead to cheaper oil.
Those technologies including hydraulic fracturing will make it possible to extract previously uneconomic oil resources--but only at very high and rising costs. In fact, the cost of producing the marginal new barrel of oil has been rising at 14 percent per year since 2001, Bernstein says. Finding, developing and producing new oil isn't getting cheaper; it's getting much more expensive. So while oil prices could fall below the cost of producing new barrels for a while, they simply could not stay there unless the world were to become content with ever shrinking supplies of oil. No company will continue to drill for oil when each new well loses money.
So given that the world will probably continue to seek expanded supplies of oil, prices in the long run below $92 a barrel seem implausible. And, that floor is likely to rise as the oil resources that companies are now forced to pursue become costlier and more difficult to extract. We've already extracted the easy-to-get oil in the first 150 years of the oil age; now comes the hard stuff.
When it comes to oil,
major agencies such as the U.S. Energy Information Administration and the International Energy Agency recognize this reality and predict continuing high oil prices.barring a deep economic depression, we can look forward to prices for oil and natural gas that are consistently above the cost of production and therefore far above the bizarrely low forecasts in the air today. In fact, we should expect costs to continue to escalate as we seek out resources that are ever more difficult to extract and refine.
$this->bbcode_second_pass_quote('', 'I')n the world of energy, an unsettling trend has emerged over the past few years. The world's largest oil companies are spending massive amounts of money on new oil and gas projects each year, yet their production continues to stagnate or decline.
For instance, ExxonMobil, the world's largest publicly traded oil company, reported a 3.5% first-quarter decline in its total oil and natural gas production from the same quarter a year ago, while French oil major Total SA said its production fell 2% in the first quarter from year-ago levels.What's going on?
In a nutshell, new investments by the oil majors simply haven't resulted in enough output growth to offset declining production from maturing fields. It has to do with where the marginal barrel of oil is coming from.
With the era of "easy oil" a distant relic, energy companies are being forced to explore for and produce oil in harder to reach unconventional locations. Some of these include U.S. shale, Canadian oil sands, and deepwater sites off the coasts of Africa and Brazil.
While these sources have contributed substantially to global supplies, their costs of production are exorbitantly high due to the sophisticated equipment and highly skilled personnel they require. In fact, according to some estimates, oil prices need to stay above $85-$90 per barrel for many of these projects to warrant investment. As the sources of marginal supply have shifted from conventional fields toward unconventional ones, the industry's marginal costs of production – the expenses associated with producing the last barrel of oil – have soared.
As these developments highlight, the marginal barrel of oil has become – and will continue to become – more complicated and more expensive to extract. Already, this trend is evident in the diminishing returns from upstream capital expenditures.
