[Graeme]

The inevitable demise of the fossil fuel empire

$this->bbcode_second_pass_quote('', 'T')he latest data from the International Energy Agency (IEA) and other sources proves that the oil and gas majors are in deep trouble.

Over the last decade, rising oil prices have been driven primarily by rising production costs. After the release of the IEA's World Energy Outlook last November, Deutsche Bank's former head of energy research Mark Lewis noted that massive levels of investment have corresponded to an ever declining rate of oil supply increase:

"Over the past decade, the oil and gas industry's upstream investments have registered an astronomical increase, but these ever higher levels of capital expenditure have yielded ever smaller increases in the global oil supply. Even these have only been made possible by record high oil prices. This should be a reality check for those now hyping a new age of global oil abundance."

Since 2000, the oil industry's investments have risen by 180% - a threefold increase - but this has translated into a global oil supply increase of just 14%. Two-thirds of this increase has been made-up by unconventional oil and gas. In other words, the primary driver of the cost explosion is the shift to expensive and difficult-to-extract unconventionals due to the peak and plateau in conventional oil production since 2005.

According to Lewis, who now heads up energy transition and climate change research at leading investment firm Kepler Cheuvreux:

"The most straightforward interpretation of this data is that the economics of oil have become completely dislocated from historic norms since 2000 (and especially since 2005), with the industry investing at exponentially higher rates for increasingly small incremental yields of energy."

The IEA's new World Energy Investment Outlook published last week revised the agency's estimates of future oil industry capital expenditures out to 2035 even higher, from $9.4 trillion to $11.3 trillion – an increase of 20%.

Oil prices could in turn increase by $15 per barrel in 2025 if investment does not pick up. Most of the investment increase required would be devoted not to new sources of production, but "to replace lost production from depleting fields," said Lewis.

[shortonoil]

In Richard Heinberg's book, "The End of Growth" he shows a graph that he took from Reuters, Wood Mackenzie Exportation Service (page 110). The graph shows what Reuters calls Oil Discovery Costs, and the Price of Oil. The graph also shows that Oil Discovery Costs have been increasing faster the Price of Oil since 2001. This strongly supports our claim (which is derived from a thermodynamic evaluation of oil production) that the cost of production for the average barrel of oil is now increasing faster than its price, and that this will continue until the two meet. That meeting will occur in the 2030 - 2035 time frame. This is further substantiated by the rapid decline in ROI that the industry has experienced over the last decade. That has amounted to about a 50% decline.

When the cost of producing the average barrel becomes equal to its price, producers will no longer have an incentive to continue production. Because petroleum is the foundation of modern industrial society, its demise would result in the cessation of many of the institutions on which the society is dependent for its continuous. If petroleum prices only increase by $15 between now, and 2025 the industry is going to be in very serious trouble. Our analysis indicates that production costs over that time frame will increase by 26%. $200 per barrel oil by 2025 is a much more likely scenario than $120.



http://www.thehillsgroup.org/

[KaiserJeep]

I believe anybody who has been around the Forum understands how oil will end. Now we are putting bounds on WHEN oil will end.

Based on your figures, we have a decade of relative normalcy left, and then the cost of vehicle fuels becomes unaffordable for most people, so you best have a nice Electric Vehicle by then.

Likewise any manufacturing of plastics becomes prohibitively expensive when conventional wells are abandoned, so for the second half of that decade, light manufacturing of all types will face bankruptcy at ever higher rates.

The escalating costs for anything that needs fuel to grow it or transport it are already apparent. Hard to generalize here, my personal metric is the cost of my favorite vegetable which is corn. The price last year was 3 ears for one dollar, the prices this year are two ears for a dollar. The average cost of food seems to be 50% higher than a decade ago, here in California we have gone from $8 per grocery bag in 1990 to $12 per bag in 2000, to $20 per bag in 2010 to $30 per bag in 2015. Clearly food has quadrupled in price in three decades, which does not mean much here, but in Africa and South America they are in trouble.

I could go on and on, but that last item is a killer. The underlying cause of the Somali pirates and the flood of South American children over the border is now understood to be the cost of food.

The declining supply and rapidly increasing cost of oil is also destabilizing regimes. Mexican gangs move North in search of income. Vladimir Putin invades the Ukraine in hopes of preserving his political power. Barack Obama plays golf and talks, having learned that he can't even get his own Massachusetts Democrats to back down and support Cape Wind, the proposed offshore wind farm on Cape Cod, which he called "shovel ready" in 2007, during his first campaign for President.

That last is a blessing, by the way. Better to have Obama rather than Putin. King Log is better than King Stork if one is a frog.

[Keith_McClary]

$this->bbcode_second_pass_quote('shortonoil', 'I')n Richard Heinberg's book, "The End of Growth" he shows a graph that he took from Reuters, Wood Mackenzie Exportation Service (page 110). The graph shows what Reuters calls Oil Discovery Costs, and the Price of Oil. The graph also shows that Oil Discovery Costs have been increasing faster the Price of Oil since 2001.

[ROCKMAN]

"The latest data from the IEA and other sources proves that the oil and gas majors are in deep trouble." As I've pointed out on numerous occasion Big Oil has been in trouble (and knew it) for at least 40 years. A tad late for everyone else to catch on but better late then never. Too bad the US political system didn't come to this understand when I did in the 70's. Who knows...they might have made some meaningful changes when we still had time.

[Pops]

$this->bbcode_second_pass_quote('', 'O')ver the last decade, rising oil prices have been driven primarily by rising production costs.

[Graeme]

Oil Abundance? Not So Fast- A Risk Checklist

$this->bbcode_second_pass_quote('', 'E')NERGY, ESPECIALLY OIL, IS KEY TO THE ECONOMY

Nothing gets done without energy. The economy as a measure of real-world activity is based on energy and natural resource use, not finance. Whenever oil prices have risen sharply since the 1940’s, a recession has almost always followed. Attempts to manipulate the economy with fiscal and monetary policy cannot succeed if affordable real resources are not available. In particular, our water supplies and agricultural economy are very dependent on oil and other fossil fuels, while energy production requires a lot of water.

We have two energy systems, not one. Nearly all transportation around the world is powered by petroleum, and most petroleum is used for “transportation energy.” Other sources – coal, natural gas, nuclear, hydropower, wind, and solar – are mostly used for “process energy,” meaning electricity, heat, and manufacturing. Advances in the non-oil sector have done little to satisfy the demand for transportation energy.

High-priced oil tends to reduce other economic activity before slowing oil consumption directly, because there are few substitutes for oil. People do not drive 85% of the way to work, so they have to cut other spending to pay for expensive gas. The economic benefit from a gallon of gasoline or diesel is often greater in China and other developing economies than in the US and Europe, so they can afford to pay more than we can. Our economic growth has slowed when prices have risen rapidly, especially as oil prices exceed $100 per barrel.

Despite large increases in the price of gasoline, American consumption has remained nearly level at about 9 million barrels per day for the last ten years. Diesel consumption, the second largest use of oil, dropped briefly due to the economic slowdown, but has now fully recovered, growing since 2009.

THE COST OF OBTAINING OIL IS RISING

“Energy Return on Energy Invested” (EROEI) is an important concept showing how much energy (not just money) we get for the energy used in the extraction process. During much of the twentieth century, US oil extraction enjoyed an EROEI ratio of 50 or more, which meant that only 2% of the energy was consumed in the production process. Current estimates of oil from fracking and tar sands show an EROEI well below 10, which means we use 10% or more of the energy from that oil simply getting it out of the ground.

Low oil prices tend to reduce oil extraction, because the newest oil sources tend to be the most expensive – tar sands, tight oil, deepwater fields, and so on. If oil prices fall too far, investors will not get the return they need to justify new drilling efforts, so many new projects will be abandoned or delayed.

The rate of growth in conventional oil extraction around the world has slowed markedly since 2005, despite massive ongoing investments by oil companies in exploration and production efforts, because new oil is hard to find and hard to extract. Global oil extraction rates outside of the US grew only 3% in the eight years between 2004 and 2012, even though oil prices tripled during that period.

Another factor has reduced the amount of net exports of oil in world trade and thus contributed to higher prices: oil exporting countries often increase their consumption levels faster than extraction rates, and consumption may continue to rise even if extraction falls. China, Indonesia, Great Britain, Egypt, Vietnam, Argentina, and Malaysia have all changed from exporters to importers in the last twenty years increasing the competition for oil in world trade.

NEW SOURCES OF AFFORDABLE OIL ARE NOT AS ABUNDANT AS IS COMMONLY CLAIMED

[Timo]

$this->bbcode_second_pass_quote('ROCKMAN', '&')quot;The latest data from the IEA and other sources proves that the oil and gas majors are in deep trouble." As I've pointed out on numerous occasion Big Oil has been in trouble (and knew it) for at least 40 years. A tad late for everyone else to catch on but better late then never. Too bad the US political system didn't come to this understand when I did in the 70's. Who knows...they might have made some meaningful changes when we still had time.

[kuidaskassikaeb]

Two questions
Pops wrote
$this->bbcode_second_pass_quote('', 'F')act is, markets don't care what production costs are, they only care what the buyer is willing and able to pay.

[Pops]

$this->bbcode_second_pass_quote('kuidaskassikaeb', 'I')n other words up till when the profit disappears. Why doesn't this work in the oil market.

[Pops]

I love Kahn Academy,
Long run supply curve
https://www.khanacademy.org/economics-f ... mic-profit

[Graeme]

Chart of the Day: Oil Is Getting Harder and Harder to Find

$this->bbcode_second_pass_quote('', 'O')il expert James Hamilton has an interesting summary of the current world oil market up today, and it's worth a read. His bottom line, however, is that $100-per-barrel oil is here to stay:

The run-up of oil prices over the last decade resulted from strong growth of demand from emerging economies confronting limited physical potential to increase production from conventional sources. Certainly a change in those fundamentals could shift the equation dramatically. If China were to face a financial crisis, or if peace and stability were suddenly to break out in the Middle East and North Africa, a sharp drop in oil prices would be expected. But even if such events were to occur, the emerging economies would surely subsequently resume their growth, in which case any gains in production from Libya or Iraq would only buy a few more year.

[ralfy]

Investors also want a better return on their investment. That will be difficult if costs keep rising and prices cannot be raised without affecting various businesses that sell middle class conveniences.

[shortonoil]

Fact is, markets don't care what production costs are, they only care what the buyer is willing and able to pay.

Markets may not care, but producers sure do. Producers will operate until they can't make money, after a little while, they shut their doors and go golfing. The point I think you are trying to make is Production costs can, and will go up forever, the price the end consumer can pay - can't. $100 oil has already brought the world economy to a point of zero growth. If, and when the production costs go up anymore, more doors will be shutting.

http://www.thehillsgroup.org/

[MD]

Of course it's inevitable. Just look at the diminishing returns.

Yes, it's that simple.

[vtsnowedin]

$this->bbcode_second_pass_quote('Pops', '
')Fact is, markets don't care what production costs are, they only care what the buyer is willing and able to pay.

[ralfy]

Repost:

"Commentary: Interview with Steve Kopits"

$this->bbcode_second_pass_quote('', 'P')eak oil does not occur when we run out of oil. Peak oil occurs when the marginal consumer is no longer willing to pay the cost of extracting and processing the marginal barrel of oil. And we can actually calculate what the related numbers are.

[Pops]

$this->bbcode_second_pass_quote('', ' ')KSA can only supply so much at $30/barrel so could not meet the demand for oil at $30

[JV153]

$this->bbcode_second_pass_quote('Pops', '
')
The part where the product meets the consumer is the market and the market doesn't care about the cost, only about what the consumer wants and is able to pay.


I've always thought that the big problem with PO isn't transportation or ag or home heating, it is the economic activity provided by 120 energy slaves per American consumer. Really, it is like having an economy 100 times as large as our actual population because of the efforts made by the FF Slaves benefiting each of us 100 to 1.

[ROCKMAN]

A nice civil discussion for a change…congrats all. I’ll toss in just a few responses to earlier posts. As far as oil companies “going bust” you have to break it down into publics and privates. As long as neither takes on more debt than they can eventually service no company ever goes bust. But I’ve seen many slowly dissolve into nonexistence as their reserves deplete while, for a number of reasons, they don’t drill anymore.

And I’ll point out that we need to keep a clear distinction between the economics of development costs (drilling) vs production costs. DC obviously requires a much higher commodity price then PC. I doubt few Eagle Ford Shale wells would be drilled if oil were $40/bbl. But even if oil fell to $10/bbl I doubt many, if any, producing EFS wells would be abandoned. And just because a well is producing X bopd that’s selling for $100/bbl doesn’t mean the well will ever net a profit. I have several wells today that will never recover their total costs. But they still generate positive cash flow so they still add to the US production stats. This is one of the potentially misleading stats about the shale play: it’s nearly impossible for an operator to know if his shale well will make a profit or not until he’s been producing for a while. I can evaluate what I find when I drill a conventional reservoir (with some uncertainty) and decide if I want to spend completion money or plug it. The shale drillers rarely have enough info to make such a decision. That’s why the shale plays have such a high “success rate”: once the decision to drill has been made it carries the assumption the well will be completed and produced even though it won’t be clear that it justifies a completion.

And just a side note about conventional reservoir completion decisions: I’ve completed many wells over the years that I knew would never recover the TOTAL investment in the well. I might have spent $6 million to drill a well and after logging it estimate it will only net me $4 million. But I will spend $2 million to complete it because the economics are simple: spend $2 million to make $4 million. The $6 million I spent to get to this decision point doesn’t have a bearing on the decision to complete the well.

This was also a significant factor in the early days of the shale plays: a well might costs $6 million to drill and then $1 million to complete and frac. So if the initial evaluation after drilling wasn’t to promising it would only cost another $million to try to make a well out of it since it only had to recover that $1 million to make it a go decision to complete. But today, thanks to greatly increasing the frac stages, the typical number has increased from several to more than 20. So a well might costs $6 million to drill but then another $6 -$10 million to complete and frac. So one might think fewer wells might be completed. But from what I can tell from the stats this hasn’t happened. Remember almost all the shale players are pubcos who 1) really never want to report a “dry hole” to Wall Street and 2) hope they can book more reserves for such a well then they think it will actually produce.

Over my career I’ve seen many pubcos complete a well that didn’t make much sense to do so from an investment standpoint but just to give the appearance of success the shareholders. When I started my career at Mobil Oil I was assigned as caretaker to a number of old heritage fields in S La. There were wells just producing a small amount that appeared to have better potential zones up hole that could be recompleted in. But in many cases my recommendations were rejected because such zones carried more booked reserves then they would likely produce. As long as they weren’t completed the company didn’t have to “write down” those reserves. In fact over the years I had the responsibility for timing such write downs to be more advantageous to the company.

A long winded tale but it also shows why I never take anyone’s “proven reserve” numbers at face value. Over the years I developed a strong reputation at being very good at “cooking the books”. And I have known quite a few others that were much better at it than me. LOL.