[Pops]

Several articles recently talking about the rising cost floor of oil extraction, which of course is the base of the wedge.

From CrudeOilPeak

$this->bbcode_second_pass_quote('', 'I')n Fig 4, oil supplies are stacked by 2014 economic cost of oil, starting with Saudi Arabia ($25/barrel, green) and going up to Canadian tar sands ($80/barrel, dark red). The colors have been extended over the whole period to 1980 so that the production history can be seen. Lines in various styles show 4 different cost levels, whereby their lengths are indicative only to show corresponding production levels for the last years.

It seems that oil supplies up to around $75 have peaked (all countries up to Brazil). In other words, if the world is willing (or able) to pay only $75 a barrel, corresponding oil production declined since 2012 – at around 1.6% over 2 years. $50 oil was up and down, but at only 56 mb/d or 60% of current demand. What is important here is that affordable oil does not appear to increase in volume. That has serious implications for economic and transport planning

[ROCKMAN]

" You couldn't really hit and maintain that number in the 1986 crash when many more virgin conventional reservoirs of oil were available." I'm sorry...where exactly was all those f*cking virgin conventional reservoirs? LOL. Those must be the fields that were developed when the rig count surged to 700. LOL. With the exception of the Deep Water GOM trend, which began producing in the late 70's, I don't recall any hot onshore oil plays in the last 30 years other then the horizontally drilled unconventional Austin Chalk fractured carbonate shale.

"...read, he makes a simple and convincing case that the floor, once $10...". Huh? Adjusted for inflation the price of oil has only been under $20/bbl (1998: $17/bbl) since 1947. So exactly when was the floor $10/bbl? As far as I can tell the oil price "floor" has never been determined by the cost to develop oil reservoirs. I've never priced a single bbl of oil I've sold based on what it cost me to develop it. I always sold for exactly what the market was willing to pay. It seems to have been controlled by consumption. More specifically what the economies could afford to pay. For instance at the lowest price point in 58 YEARS (1998) consumption was on a stead climb from 1982 to 2008.

I don't know what the future price "floor" of oil might be. But in 1980 when oil was selling for $107/bbl I don't recall anyone predicting even a $50/bbl floor. And then the global economy crashed and prices fell to $31/bbl in 1986. And from there oil stayed below $50/bbl for the next 18 years. IMHO predicting the future oil price floor will essentially be more a prediction of global economic health then the rate of global oil production or the cost to develop the remaining reserves.

[Pops]

Seems pretty simple, the price that oil goes to when there is a whatever kind of glut is what he sees as the floor.

[Subjectivist]

My prediction, once world supplies can no longer keep up with demand at a price the economy can support many governments will institute price controls and rationing.

[forbin]

Rock

back in 1986 North Sea oil sold for $10 in the summer , well reportedly at least .....

"A little over a decade ago, when oil prices were around $10 per barrel and oil companies were making exploration and investment decisions underlying some of today's fields, "

From old Telegraph article

but the North sea wasn't the world ....

cheers

Forbin

Ps : other link > Bang!: A History of Britain in the 1980s
By Graham Stewart

[ROCKMAN]

Forbin - "...back in 1986 North Sea oil sold for $10 in the summer..." Sorry, no it didn't. Adjusted for inflation oil in 1986 was priced at $31.10/bbl. See:

http://inflationdata.com/inflation/infl ... _table.asp

[ROCKMAN]

Pops - "...the price that oil goes to when there is a whatever kind of glut is what he sees as the floor."

So in 1988 when oil bottomed at $29.73/bbl there was a glut of oil when the world was producing just 63 million bbls per day there was a glut of production but in 2011 when oil was selling 90+ million bbls per day for the top at $91 per there wasn't a glut of oil production even though the world was producing around 50% more the it was in 1988?

You see my point now: the world in 1988 WASN'T paying the bottom price because it was producing too much oil. That price was set by what the global economies could afford to pay for oil. I don't think it's a question of semantics either. The world was paying almost twice what it was a year ago when it producing about the same amount of oil it is today. IOW the production rate didn't determine the bottom oil price floor...the economies' ability to pay for oil did. Just as it did in 1988.

[Pops]

$this->bbcode_second_pass_quote('', 'T')he world was paying almost twice what it was a year ago when it producing about the same amount of oil it is today. IOW the production rate didn't determine the bottom oil price floor...the economies' ability to pay for oil did.

[sparky]

.
As a rough guess , I would put the floor price around 70$ a barrel and the ceiling at 100$

anything in between is fine more or less , with a price curve dipping and soaring but coming back in the band
the problem is the extraction cost is heavily dependent on giant and super giant fields
Kashaghan is a 10 Billions disappointment , and Lula a very very large interrogation point
anyone is aware of a super giant coming on line next year ?

[ROCKMAN]

Pops - " The floor is determined by the cost to produce.". It looks like we're probably talking about two different "floors". You're focused on the minimum price that would encourage companies to drill. My floor is what consumers can pay. If we were to slide into a deep recession the consumer generated selling price floor could be $35/bbl...or less. But in your interpretation it really isn't a particular price, is it? There are still oil prospects that can be drilled at $25/bbl today...just not many. And there's a number that can be drilled at $50/bbl. BUT there are still a great many that can't so is $50/bbl a true floor per se? And obviously there are a lot more wells that can be drilled at $100/bbl. So that means there's also a $100 floor, right?

Also a friendly reminder to everyone about your wording. Obviously by "...cost to produce" Pops means the cost to drill a well. The floor to produce any of my existing wells is $15/bbl at most with one the "floor" being just $2/bbl.

Maybe a curve of oil price vs # of viable drilling prospect would characterize the dynamics better then a specific price. That's where my confusion stems from: in 40 years of drilling I've never used JUST the price of oil to make a drilling decision. It has always been based upon the risked rate of return. For instance I'm drilling horizontal wells in an old field that make an acceptable ROR (granted barely) at $35/bbl. So obviously my floor there isn't $50/bbl. And I also have a file folder on my computer that contains a lot of drilling projects I won't consider until oil get to at least $75/bbl. So that would be a $75 floor, right?

[sparky]

.
I take the "floor" price as the replacement cost of the same production
that's the usual measure in business to estimate an asset value.

The "customer" price is the price which see the production taken off your hands , totally or partially
obviously deviation can occur in a very liquid (pun) market ,
but the fundamental is how much does it cost to bring the same quantity on the market
that's just the hardware and know how for exploration and equipping the field for whatever production
since it's all spend upfront there is some financial costs too

megabucks can be spend before any significant production occur , that's the problem with the industry
Fracking has the advantage of requiring smaller sums per well head even for a smaller production

production costs include exploitation and maintenance ,usually transport and storage infrastructure
a levy by local authorities as a cost of doing business is near universal
usually running profits should cover those and leave some change

I would believe , in constant dollar ,"floor" cost has risen

[Pops]

Right ROCK, I'm talking about the direction of production (increasing or decreasing) at a certain price. The point being that as the cost to get oil has risen over the decades, it's put a bottom on the dollars required per barrel to get a given number of barrels of flow.

Today that looks like:
$40/bbl gets you 40mmb/d of total production
$60 = 60mmb/d flow rate
$80 = 80mmb/d

The chart shows there are a range of what it calls average full cycle prices. Each price level corresponds to a flow rate. Those flow rates aren't necessarily what actual production will be at a given price (because most producers will keep producing even at a loss in order to maintain cash flow) they are an indication of the direction of flow rates if the price were to remain at a certain level.

IOW, if oil prices stay at $60/bbl, all things being equal, you would expect the market to move toward 60mmb/d of production.




As you say, producers have some $50 prospects and some $75 prospects, if your guess is the market will stay above $50/bbl over the long run you develop it, but the $75/bbl project is gonna sit there if your guess is the market will stay at $60 over the life of that well.

No surprise that your viewpoint is at the well level because that is where price matters to you. Mine is the overall supply level because what flow at what rate is what matters to the consumer and the overall economy.

[ROCKMAN]

Pops - See...I knew we were too brilliant to view the situation differently. LOL.

[Tanada]

Where do you see prices going say over the next decade? Most of us think prices will go back up substantially, but timing is hard with all the global recession talk and conflicting information about shale production.

[Pops]

After 10 years of really high prices, I think it is fair to say conventional oil looks to be on a plateau. I think that is the central point. We are experiencing a slight glut of expensive supply along with pretty weak demand growth currently, but that is just today. Baring massive substitution or further demand destruction the upshot of peak conventional eventually means higher prices, either through increasing demand, depleting supply or both.

But it is all relative and interdependent isn't it?

I've argued both higher prices and lower. With the Wedge I came to the conclusion consumers would make better use of oil and get more utility for the same amount — so be able to constantly raise the price ceiling: "use less to pay more"

But, I also argued somewhere else that volatility causes economic instability and lowers ability to pay so a generally falling price (and of course lower supply) would result...



So... I've come to the bigger conclusion that, the price per barrel means little, too many variables to draw a conclusion.

Dollars per barrel of supply is the key, which is the chart in the OP. If the price rule is maybe something under a buck per mbbl of supply, then we're getting 90mbbl/day right now at half price. Great for right now but the long term price needs to be $90/bbl to maintain 90mbd supply. If that makes sense.

[ROCKMAN]

Pops - "...then we're getting 90mbbl/day right now at half price. Great for right now but the long term price needs to be $90/bbl to maintain 90mbd supply. If that makes sense." If I read you correctly it makes perfect sense: we're producing 90 mm bopd at half price because it creates a huge cash flow and profit. It does so because, in general, the cost to produce EXISTING WELLS is still rather low compared to a sales price of $45/bbl.

And as was well put above: the price needed to produce oil is much less then the price needed to REPLACE reserves recovered from those wells with new wells. Revenue may have dramatically drop for the producers but they are still makinh very nice positive cash flow. And by cutting new drilling projects they greatly enhance net income.

Of course those cut backs in drilling activity will eventually have negative impacts on global production. OTOH that was going to happen at $100/bbl oil. Just not as soon.

[hvacman]

$this->bbcode_second_pass_quote('', 'G')reat for right now but the long term price needs to be $90/bbl to maintain 90mbd supply.

[shortonoil]

Newly discovered oil is now less than a third of product extracted; or in other words, we are using it more than three times faster than it is being found. As almost every square foot of the planet has been explored, and re-explored there is very little chance that any significant quantities will be found in the future. Once the Giants that supply 60% of the world's oil go into decline there will not be any reserves to replace them. That is likely to occur this decade. At that point price becomes completely irrelevant!

[Cog]

$this->bbcode_second_pass_quote('Subjectivist', 'M')y prediction, once world supplies can no longer keep up with demand at a price the economy can support many governments will institute price controls and rationing.

[Cog]

$this->bbcode_second_pass_quote('shortonoil', 'N')ewly discovered oil is now less than a third of product extracted; or in other words, we are using it more than three times faster than it is being found. As almost every square foot of the planet has been explored, and re-explored there is very little chance that any significant quantities will be found in the future. Once the Giants that supply 60% of the world's oil go into decline there will not be any reserves to replace them. That is likely to occur this decade. At that point price becomes completely irrelevant!