[Zarquon]

http://www.bloomberg.com/news/articles/ ... 04-scandal
$this->bbcode_second_pass_quote('', 'S')hell said its reserves replacement ratio -- the proportion of oil and gas production during the year that was offset by the addition of new resources -- was minus 20 percent. The company not only failed to replace any of the 1.1 billion barrels equivalent it pumped in 2015, but also wrote off another 200 million barrels to account for the plunge in oil prices.
...
BP Plc reported Feb. 2 a reserve replacement ratio of 61 percent for 2015, while Chevron Corp. achieved 107 percent.

[diemos]

Ladies and Gentlemen! ... The Great Prophet Zarquon!

He said he'd come again.

[StarvingLion]

The prices are low because the Zombie Fraud Banks are monetizing poverty and handing (via risk offloading deregulation and fake money derivatives) the bill to the producers. The producers are supposed to deal with high demand but few paying customer.

The enabler of this sociopath behavior was the assumption of a stream of new finds in crude oil never ending plus the non stop growth in useless education centres that spawned the ideological reincarnation of the Vladimir Lenin Mass Electrification Society where everything is free and "progress" is infinite.

Now that the real currency of new crude oil fields appears to have gone 'poof' all hell is breaking loose.

[ROCKMAN]

Z – I won’t try to give you a course on petroleum geology or engineering. Just tossing out a few tidbits. First, “proved reserves” is based mostly on two factors. How much oil/NG is in the ground: sometimes that’s not a difficult number to come up with and other times it’s very difficult. Again, I won’t go into those details. But “proved reserves” isn’t the accurate term: it’s “economically recoverable proved reserves”. You are already be aware that even if I can draw a map that definitely proves 20 million bbls of oil in a reservoir the ERPR may be zero if those reserves aren’t economic to produce. Those one time huge “proven shale reserves” stand as a good recent example.

So let’s just focus on finding those reserves in the ground and worry about the economics later. When I started my career at Mobil Oil in 1975 my first mentor clearly explained PO to me. Which we didn’t call it (and still don’t call) PO: it has always been the “reserve replacement problem”. In 1975 the US oil industry was trying to find and replace reserves for those we had already developed. Everyone in the oil patch understood that was never going to be possible. And even less likely today. A simple reason: in the first 50+ years of the “Age of Oil” the US was the Saudi Arabia of oil. In fact we were actually almost the entire universe of oil reserves. Consider what the KSA says their reserves are (which most feel are greatly over stated): 250+ billion bbls of oil. As of 2015 (ignoring the recent shale boom) the US has produced about 200 billion bbls of oil since records began in 1920. And by the US PO was reached in the 70’s we had produced about 90 billion bbls of oil. And much of the oil produced later came from fields that were decades old. IOW from long ago proven reserves.

Shorty will hopefully chime in with his numbers on the current ratio of new discoveries vs current production.

Also please don’t ever say: ”Yeah, that was all that “easy oil” we found back then. Oil/NG was never easy to explore for. In fact today it is much easier than it was 50 years ago thanks to huge leaps in exploration technology. The problem today isn’t the difficulty in finding new reserves (the oil in the Bakken and Eagle Ford Shale has been known for more than 50 years). The problem isn’t finding those hydrocarbons…the problem is finding big reserves. In the 80’s I had a very high success rate exploring for shallow NG using new seismic data…about a 4-fold increase over the historic average. The hitch: the reserves I developed were just a very small percentage of the huge fields found in the same trend 30 years earlier. Though so much bigger those huge old fields were not easy to find with the tech available at the time.

“…could the Big Five really go the way of the dinosaurs so soon?” Absolutely not. It is times like this when Big Oil typically develops some of its biggest proven reserve gains. Consider that few months ago Shell saw a huge gain in reserves when it paid $53 billion for BG. Shell just reduced its E&P budget for 2016 to $30 billion. It was physically impossible for Shell to add the BG reserves it acquired by drilling new wells…even when prices were much higher. OTOH Big Oil doesn’t like the revenue loss from lower oil/NG prices. But as I pointed out for the public companies (especially Big Oil) the really big pressure has always been adding reserves to replace production and not cash flow. Think about future stock valuations: do you think Shell’s huge gain in long term reserves (mostly NG) hurts or helps their long term viability? IOW there is no more BG today but there is a significantly bigger Shell Oil.

As pointed out before: the oil patch is not one big “band of brothers”. We are competitors who will gladly eat our own if it helps achieve our long term goal. Some folks say the KSA refusal to reduce production is designed to hurt US oil companies. Some US companies, like Shell Oil, are reaping some nice LONG TERM benefits from the current low oil/NG prices. That huge amount of BG LNG resource might not look too valuable today. But in the next 10 to 20 years?

Big Oil has been playing the long game for more than 50 years. Which is why they significantly reduced their activities in the US in favor of foreign theaters so long ago. In fact most big acquisition by Big Oil, like BG, won’t be in the US: much of that BG NG is in Australia.

[Tanada]

$this->bbcode_second_pass_quote('Zarquon', 'h')ttp://www.bloomberg.com/news/articles/2016-02-04/shell-posts-worst-performance-on-oil-reserves-since-2004-scandal
$this->bbcode_second_pass_quote('', 'S')hell said its reserves replacement ratio -- the proportion of oil and gas production during the year that was offset by the addition of new resources -- was minus 20 percent. The company not only failed to replace any of the 1.1 billion barrels equivalent it pumped in 2015, but also wrote off another 200 million barrels to account for the plunge in oil prices.
...
BP Plc reported Feb. 2 a reserve replacement ratio of 61 percent for 2015, while Chevron Corp. achieved 107 percent.

[shortonoil]

"Even more difficult to say how much of the replacement gaps is due to falling prices (reserves becoming uneconomical) and how much is due to simply being unable to find or buy enough new reserves. And even more difficult (but probably less important) is guessing how accurate these reserve statements actually are."

To answer that question it is first necessary to state that there is no shortage of liquid hydrocarbons on earth. According to a 2000 USGS study there could be as much as 4,200 Gb. We have extracted about 1,400 to date. The problem lies in determining how much of that resource can actually be used. There are two approaches to the question; one from an economic, and one from a thermodynamic perspective. Although they both approach the same point they will probably not do it at the same rate.

The economic perspective simply states that the reserve (liquid hydrocarbons that can be extracted) are a function of price, and production cost. The problem with this approach is that even though production costs can be fairly accurately estimated, the price it will be selling at is usually in question. The short term price is a matter of market sentiment, which can include everything from outages caused by geopolitical events to what brief case the head of the FED takes to the office.

The thermodynamic perspective sees price as an effect not a cause. It results from the underlying physics that controls petroleum production. It is based on the observation that once petroleum can no longer act as an energy source its use will be discontinued. We have approached the question of ultimate reserves from the thermodynamic perspective, and written a 67 page report on our determinations:

An introduction to the report "Depletion: A determination for the world's petroleum reserves" can be found here:

http://www.thehillsgroup.org/petrohg10.pdf

The result of the study is that the world's reserves when viewed from the thermodynamic perspective are much smaller than the economic approach is suggesting. The reasons for this are complex, but the primary one is that the dollar value of energy is not a constant:

http://www.thehillsgroup.org/depletion2_008.htm

That is, using the dollar to determine the value of a field that was developed twenty years ago, at a cost of X dollars, will not give the same result if that same field had been developed today. The dollar in energy terms has changed.

As a result of our study we have changed the focus of our consulting organization. The big integrated oil companies of the past are, as you say, going the way of the dodo bird. In the near future there will simply not be enough energy available to sustain them. The future of petroleum will become regional, as opposed to global. Petroleum products will come from small local sources serving a local market. The fuel that you use will come from a well fifty miles away, and processed in a small refinery down the street.

Thanks for your comment, it is a critical component to the future development of modern civilization. It is one that few want to invest the time and energy needed to fully understand. As a result they will be left standing outside, looking in!

http://www.thehillsgroup.org/

[AdamB]

$this->bbcode_second_pass_quote('Zarquon', '
')Anyway, I'm asking because a while ago I saw a presentation video by Steven Kopits (a presentation at Columbia Uni. IIRC, 2013 or 2014) where he stated that E&P costs in the industry had increased by about a whooping 500% in the last decade, a trend likely to continue, and that he wondered whether the big private players would still exist ten years from now, at least in their present form as industry giants. Back then I thought that to be a shocking statement.

[rockdoc123]

$this->bbcode_second_pass_quote('', 'B')ut “proved reserves” isn’t the accurate term: it’s “economically recoverable proved reserves”. You are already be aware that even if I can draw a map that definitely proves 20 million bbls of oil in a reservoir the ERPR may be zero if those reserves aren’t economic to produce. Those one time huge “proven shale reserves” stand as a good recent example.

[ROCKMAN]

doc- All true but I was trying to make the process more palatable for Z. You and I can discuss details all day long but for many here that's too much inside info to absorb in an effort to appreciate the big picture.

[vtsnowedin]

While a major such as Shell can increase its reserves by buying up little fish companies that does not add any more to the worlds reserves. They are merely changing the name on the leases and not finding anymore oil. Rising prices may make more reserves economical but again does not actually make any more oil in place. So if we have reached the point where we are burning through total world reserves faster then we are finding replacements we are headed down to the end of the curve.
And majors concentrating on refining and marketing won't save them because you can't refine oil that someone has not found and delivered to their refinery.

[rockdoc123]

$this->bbcode_second_pass_quote('', 'S')o if we have reached the point where we are burning through total world reserves faster then we are finding replacements we are headed down to the end of the curve.

[vtsnowedin]

Yes there are too many variables in the equation. Rising price makes more oil "recoverable and economic" but that same rising price depresses the rest of the economy and along with that reduces the demand for oil.
I expect that a lot of oil will get left in the ground at the end because we just can't afford it or have found workable and cheaper substitutes.

[GoghGoner]

$this->bbcode_second_pass_quote('Tanada', 'A')s far as I can tell none of the really big oil majors like Exxon-Mobile or BP did much if any work in the shale boom.

[ROCKMAN]

Goner - "XOM went hog wild." XOM didn't go wild drilling shales...they went wild buying reserves from company that had developed them. In fact the XOM acquisition of Cross Timbers emphasizes my point: the year that XOM gobbled them up the Cross Timbers reserves represented more then XOM reserves additions for that years. IOW they bought a sh*tload more existing reserves then they developed by drilling themselves. And to be clear those reserves were mostly NG and not oil. BTW they gave XTO $31 billion in XOM stock and assumed $11 billion in debt so a price of $42 billion. If they hung on to that stock would be worth about $37 billion today.

But to be fair XOM has used the XTO machine to acquire other resource players...and much of that NGplays. But XOM also used XTO to leverage a $3.2 billion deal to access oil/NG opportunities in the Russian Arctic. That hasn't turned out too good thanks to those sanctions.

I know it sounds odd but Big Oil can't handle drilling plays like the shales. They may look big on paper but in general they lack the internal manpower. That's why they have to go after big targets like the Arctic...or go after big acquisitions where all the work has already been done.

[Synapsid]

ROCKMAN,

XTO was Cross Timbers? Thanks.

[rockdoc123]

$this->bbcode_second_pass_quote('', 'I') know it sounds odd but Big Oil can't handle drilling plays like the shales. They may look big on paper but in general they lack the internal manpower. That's why they have to go after big targets like the Arctic...or go after big acquisitions where all the work has already been done.

[AdamB]

$this->bbcode_second_pass_quote('pstarr', '
')You mentioned Shell Oil above. Further proof that some oil resources will never make the grade as reserves:

[Zarquon]

Thanks, guys (and girls, if any).

"Ladies and Gentlemen! ... The Great Prophet Zarquon!
He said he'd come again."

A bit late to the party, as usual. But at least I'm here now.

"Shell just reduced its E&P budget for 2016 to $30 billion. It was physically impossible for Shell to add the BG reserves it acquired by drilling new wells…even when prices were much higher. OTOH Big Oil doesn’t like the revenue loss from lower oil/NG prices."

But if ultimately crude prices are set by refiners (and only indirectly by consumers), are the big integrated companies, all of them big refiners, not able to profit from the current glut, thereby able to offset some of the pain from low crude prices? How much of the crude they refine is their own oil, anyway?

And: If I feed my gas station with gas from my own refinery, which I feed mostly with crude from my own wells, then my profit is the difference between total production costs and the price at the pump. A low crude price drives down the latter, but the crude price is obviously the biggest, but not the only factor in gasoline prices.

Hmmm... there it is
http://www.eia.gov/energyexplained/inde ... ing_prices
The cost of crude is only 48% of gas prices. Seems to me that if I were 100% vertically integrated (I know no oil company is), then I'd be much better placed to weather the storm than somebody who has to make a living just by selling the smelly black stuff.

[Zarquon]

"Shell just reduced its E&P budget for 2016 to $30 billion. It was physically impossible for Shell to add the BG reserves it acquired by drilling new wells…even when prices were much higher."

If we get back to the 500% cost increase in a decade I quoted above (could be 400%, I didn't watch the video again, but thanks for posting the link) - where did those increases come from?
- I understand that exploration success rates are going down - more holes to drill if the prospects are getting more difficult
- better technology (3D seismic etc.) can bring costs down - if you actually find a commercial reservoir you would have missed without it. If not, it's a huge expense for nothing.
- the shale boom in the US drove up drilling and other costs when everybody was competing for the rigs. That trend should have reversed. Then the big IOC's were not particularly active there, anyway. They were bidding against each other to rent 1-billion-a-pop deepwater rigs to explore in the GuoM, off Brazil, off Alaska etc. Aren't rigs like these going for half of yesterday's price, too?

So, where are E&P costs headed in a low-price environment - up or down?