Energy Sector

[John Hjorth]

Meanwhile : [KAL's cartoon November 30^th 2023 :] 

 

[backtothebeach]

80,000 attendees, I’m sure they are all having a jolly time sipping champagne in the desert. What a farce.
 

https://news.yahoo.com/80-000-attendees-cop28-largest-101058582.html

[james22]

 

[Sweet]

28 minutes ago, james22 said:

 

Permain oil production “less than $11 per barrel on average”.

 

No it’s not.  It’s not even close.  It’s not lower than the Saudis breakeven cost.

[james22]

2 hours ago, Sweet said:

Permain oil production “less than $11 per barrel on average”.

 

No it’s not.  It’s not even close.  It’s not lower than the Saudis breakeven cost.

 

From a response to the same question in the comments:

 

The numbers you are looking at are a weighted average of current production. Wells from fifteen years ago might have had a break even cost of $100; ones from 10 years ago, $60; 5 years, $20; etc. The tech has improved a lot.

 

Instead of looking at costs for the sector overall, Zeihan is giving the number for brand new wells, because that is the number that is most pertinent for projecting into the future.

[Sweet]

7 hours ago, james22 said:

 

From a response to the same question in the comments:

 

The numbers you are looking at are a weighted average of current production. Wells from fifteen years ago might have had a break even cost of $100; ones from 10 years ago, $60; 5 years, $20; etc. The tech has improved a lot.

 

Instead of looking at costs for the sector overall, Zeihan is giving the number for brand new wells, because that is the number that is most pertinent for projecting into the future.

It’s possibly not $11 in the Permian anywhere nevermind the weighted average.  I’ve never seen anything that’s remotely close to those costs.  Costs have come down a lot but not by that much.  Middle East like Saudis are still near the lowest cost producers, way cheaper than US Permian shale.

 

 

[james22]

8 minutes ago, Sweet said:

It’s possibly not $11 in the Permian anywhere nevermind the weighted average.  I’ve never seen anything that’s remotely close to those costs.  Costs have come down a lot but not by that much.  Middle East like Saudis are still near the lowest cost producers, way cheaper than US Permian shale.

 

Yeah, I'd like a citation.

 

Costs have come down by a lot, however:

 

... drilling costs have been reduced by about 42 percent ...

 

https://www.pheasantenergy.com/the-numbers-the-permian-excels/

 

And ME costs only increase.

 

 

 

[Sweet]

41 minutes ago, james22 said:

 

Yeah, I'd like a citation.

 

Costs have come down by a lot, however:

 

... drilling costs have been reduced by about 42 percent ...

 

https://www.pheasantenergy.com/the-numbers-the-permian-excels/

 

And ME costs only increase.

 

 

 

That seems about right on average, maybe a bit more.  The EIA does some work on cost of production in regions, it can be found there.  
 

That’s not to understate the importance of US shale, it’s huge.  Just as an investor, if anyone watching that video thinks the Permian productions costs are $11 production per barrel, their estimates of value are going to be off.

The thing about oil that’s crazy is a 10% swing in the price could oil could double / triple the profit per barrel of a company if the price is around their production breakeven point.

[Sweet]

On the sector as a whole, I think the higher for longer mantra coming out of covid might be wrong.  

 

US shale guys are producing a lot, Saudis and UAE plan to add a couple of extra million, US trying to get Venezuela production back, Brazil looking to increase production significantly.  And amidst all this demand has been more patchy that expected, Saudis with a 1 million barrel voluntary cut to support price is not bullish.

 

Id be careful about owning here.

[UK]

So all the recent underinvestment, ESG, sanctions, strategic reserve drain, two conflicts (one in the Middle East), substiantial infliation...and yet oil is somewhat cheaper even in nominal terms than it was a 10 yers ago? It is kind of a bit perplexing if you look at it this way, isn't it? And I still have no idea even how to explain this ongoing situation, not to speak about trying to predict the future:)

[Sweet]

41 minutes ago, UK said:

So all the recent underinvestment, ESG, sanctions, strategic reserve drain, two conflicts (one in the Middle East), substiantial infliation...and yet oil is somewhat cheaper even in nominal terms than it was a 10 yers ago? It is kind of a bit perplexing if you look at it this way, isn't it? And I still have no idea even how to explain this ongoing situation, not to speak about trying to predict the future:)

I think it was perplexing but I think it’s understandable now.  There actually isn’t underinvestment, there isn’t much strain on the available supply, and there appears to be a decent amount of new oil coming on the market.  
 

The oil guys have been saying since 2016 that the oil crash from 2014 would cause underinvestment and lead to a supply crunch - but that was historic cycles.  I think we have sufficient evidence now that Shale has dramatically shortened the investment cycle and those old models are busted.  

[rohitc99]

US oil production 2018 - 10951 thousand barrels/day

Rig count 2018 ~ 877

 

US oil production 2023 - 11,911 thousand barrels/day

Rig count 2023 ~ 500

 

oil production up by 9% while rig count is down 43% which means US shale is getting more and more efficient. my guess is that the assumption that we need the same $ for incremental production, where as the stats show that the industry continues to grow production at lower cost (for now). maybe this explains it ?

Edited December 3, 2023 by rohitc99

[TwoCitiesCapital]

I'm no expert, but if we're suggesting that there's no mismatch between supply/demand, then how did nearly every major economy work down oil inventories to extreme low levels over 2021/2022 without cratering the price w/ a ton of new/excess supply? 

 

Generally speaking, US and European inventories are significantly below pre-covid levels. Chinas inventories are normalized, but down significantly from the highs in 2020 when they loaded them up. 

 

So US, Europe, and China are all having enough demand to work down inventories substantially without cratering the price of oil with all that excess supply?

 

Or does that point to demand outstripping supply and we've used inventories to manage that price impact for the last 2-years,? I'm leaning more towards #2 and #2 won't always be a solution once inventories are at critical levels. This is especially true of an environment where the muted demand out of China during 2021/2022 period probably also has an impact but will be more of a tailwind for prices going forward. 

 

I'm not saying prices will go to $150/barrel, but I do think average prices will be higher, not lower, than intermediate history going forward. 

Edited December 3, 2023 by TwoCitiesCapital

[SharperDingaan]

Demand/Supply thing:

Most people would add an annual 1% for natural growth to global demand, then adjust for demand effects primarily from Asia and the US. For global demand growth to flat-line, Asia/US combined need to consume around 1M boe/d less. Global demand is now back to what it was pre-covid; lot of upside should global affairs stabilise. 

 https://www.statista.com/statistics/271823/global-crude-oil-demand/

 

Global supply comes from 3 sources. Long-cycle oil (mostly off-shore); steadily declining for some time, for a variety of reasons. Short-cycle oil (primarily shale); currently rising as 'manufacturing' kicks in. Disrupted oil ('locked-up' via sanctions, lack of egress, etc.); about to jump by 500,000+ boe/d in Q1/2024 once the TMP expansion kicks in. In the short-term most would expect supply to outstrip demand, hence the current pressure on WTI.

 

Thing is - that short-cycle oil has a depletion rate of 25%, whereas the long-cycle oil depletes at around 6%. Even the simplest modelling, demonstrates material price volatility if things don't go perfectly. Hence the $150+/bbl forecasts.

 

It's also 2023. Full-cost break-evens for field consolidators 'manufacturing' shale in NA's major basins is around USD 42-48/bbl; cash flow break-evens are a lot lower. At USD 70-80 WTI, most producers do very well.

 

SD

 

Edited December 4, 2023 by SharperDingaan

[Sweet]

2 hours ago, TwoCitiesCapital said:

I'm no expert, but if we're suggesting that there's no mismatch between supply/demand, then how did nearly every major economy work down oil inventories to extreme low levels over 2021/2022 without cratering the price w/ a ton of new/excess supply? 

 

Generally speaking, US and European inventories are significantly below pre-covid levels. Chinas inventories are normalized, but down significantly from the highs in 2020 when they loaded them up. 

 

So US, Europe, and China are all having enough demand to work down inventories substantially without cratering the price of oil with all that excess supply?

 

Or does that point to demand outstripping supply and we've used inventories to manage that price impact for the last 2-years,? I'm leaning more towards #2 and #2 won't always be a solution once inventories are at critical levels. This is especially true of an environment where the muted demand out of China during 2021/2022 period probably also has an impact but will be more of a tailwind for prices going forward. 

 

I'm not saying prices will go to $150/barrel, but I do think average prices will be higher, not lower, than intermediate history going forward. 

We do have a mismatch between supply and demand in 2023, especially the last 6 months, there is too much supply.

 

SPR has stopped, are US inventories dropping?  No - they up vs a year ago and OPEC+ is producing 2 mbd less than 1 year ago.  

 

There is a lot of planned oil coming to the market too, there was a great chart on the oil planned to come online in the next few years and it’s not small.  I can’t find it right now but if I can I’ll post.

 

Just a year ago I was thinking higher for longer too, now I think otherwise and believe we are likely stuck in this sort of range we are currently in with spike below and higher.

 

The big risk is OPEC+, at some point I think they will step in to crush shale again.  I, like they did I suspect, thought US shale wouldn’t be much more disciplined after its near death experience - wrong again I guess.

 

 

 

Edited December 4, 2023 by Sweet

[bizaro86]

3 hours ago, rohitc99 said:

US oil production 2018 - 10951 thousand barrels/day

Rig count 2018 ~ 877

 

US oil production 2023 - 11,911 thousand barrels/day

Rig count 2023 ~ 500

 

oil production up by 9% while rig count is down 43% which means US shale is getting more and more efficient. my guess is that the assumption that we need the same $ for incremental production, where as the stats show that the industry continues to grow production at lower cost (for now). maybe this explains it ?

 

You can't really compare rigs to overall production. If the rig count went to zero production would stay the same initially and then start declining at the rate of natural decline (varies by reservoir/pressure/stage of a well's life)

 

Rig count is better compared to growth/decline of production.

[TwoCitiesCapital]

1 hour ago, Sweet said:

 

Just a year ago I was thinking higher for longer too, now I think otherwise and believe we are likely stuck in this sort of range we are currently in with spike below and higher.

 

Would love to see the chart re: planned supply of you find it. 

 

This range is more or less what I suspect as well. I just tend to think the 70s are the low end of that range and oil companies are still relatively profitable at those levels with profits super charged at $90+

[Sweet]

11 hours ago, TwoCitiesCapital said:

 

Would love to see the chart re: planned supply of you find it. 

 

This range is more or less what I suspect as well. I just tend to think the 70s are the low end of that range and oil companies are still relatively profitable at those levels with profits super charged at $90+

It was by a guy on Twitter, WTI realist, an annoying person, son of a Canadian oil CEO, but a good chart and referenced, which showed planned production from a range of global plays over the next 5ish years.  Unfortunately it looks like he has hid it behind his substack paywall so I cannot find it.

[Xerxes]

Saudi break-even is not comparable with shale break-even because you are looking at “production break-even”

 

Shale producers are private companies beholden to the market. 
 

Aramco is the swing producer beholden to the national interest of a government. So I think one needs to look at “budget break-even” as a proxy when it comes to the national champion rather than the pure production breakeven.
 

Do you really think Saudi government will let price drop so much as to put their national budget and all of the initiatives at risk.

 

It did happen twice (late 80s and 2014) I think and both times within 1 year or they had to do a u turn. 
 

The Spice must flow. 

[SharperDingaan]

12 hours ago, Sweet said:

I, like they did I suspect, thought US shale wouldn’t be much more disciplined after its near death experience - wrong again I guess.

 

Keep in mind that US Shale is now largely controlled by the majors; deep discounting just lets them consolidate the basins faster, producing field oligarchs with cash break-evens close to OPEC+. The strong-arming happens behind closed doors, as the majors are partners in most all OPEC production.

 

Much of the cartel's power rests on its very low production cost vs everyone else. OPEC's production costs have risen every year for many years, and shale production costs have fallen dramatically as 'manufacturing' has come on stream. Start a price war, and they have to go a lot deeper if the intent is to stop shale; today it's much smarter to just do a business deal with the majors.

 

SD   

[Sweet]

45 minutes ago, SharperDingaan said:

 

Keep in mind that US Shale is now largely controlled by the majors; deep discounting just lets them consolidate the basins faster, producing field oligarchs with cash break-evens close to OPEC+. The strong-arming happens behind closed doors, as the majors are partners in most all OPEC production.

 

Much of the cartel's power rests on its very low production cost vs everyone else. OPEC's production costs have risen every year for many years, and shale production costs have fallen dramatically as 'manufacturing' has come on stream. Start a price war, and they have to go a lot deeper if the intent is to stop shale; today it's much smarter to just do a business deal with the majors.

 

SD   

 
There is a lot of dead weight in OPEC, i could see the Saudis and UAE go after market share aggressively for a few years, to hell with the rest of them.

 

They aren’t going to take millions off the market and just allow shale to gobble market share.

 

Although there is something to be said that the Saudis and Shale oil is so different that they cater to nearly different markets.

 

Who knows.

[rohitc99]

14 hours ago, bizaro86 said:

 

You can't really compare rigs to overall production. If the rig count went to zero production would stay the same initially and then start declining at the rate of natural decline (varies by reservoir/pressure/stage of a well's life)

 

Rig count is better compared to growth/decline of production.

Fair point, but i am looking at the trend. Over a 5 year period, the number of rigs is reducing with production still growing. With shale wells, where the drop is high after year 1, wouldnt this number move proportionally at the same productivity level ?

 

point i am making is that the industry seems to be getting more efficient and may that explains why lower investments are still supporting the same or higher production

 

again this is just my guess and i dont have any special insight

[bizaro86]

1 hour ago, rohitc99 said:

Fair point, but i am looking at the trend. Over a 5 year period, the number of rigs is reducing with production still growing. With shale wells, where the drop is high after year 1, wouldnt this number move proportionally at the same productivity level ?

 

point i am making is that the industry seems to be getting more efficient and may that explains why lower investments are still supporting the same or higher production

 

again this is just my guess and i dont have any special insight

 

I understand what you're trying to do, but I think you're looking at the wrong data. In 2018 US oil production was 10.951 MMbbl/d. That was up from 9.357 MMbbl/d in 2017. So production increased ~1.6MM bbl/d in 2018. 

 

By comparison, Sept 2023 production was 13.236 mmbbl/d compared to 12.325 mmbbl/d in Sept 2022. So production increased 0.9 MM bbl/d in the last year. 

 

So production increased ~57% as much and the rig count was ~57% as high (using your numbers of 500 and 877). That doesn't seem like much of an argument in favor of increased efficiency to me. 

[rohitc99]

1 hour ago, bizaro86 said:

 

I understand what you're trying to do, but I think you're looking at the wrong data. In 2018 US oil production was 10.951 MMbbl/d. That was up from 9.357 MMbbl/d in 2017. So production increased ~1.6MM bbl/d in 2018. 

 

By comparison, Sept 2023 production was 13.236 mmbbl/d compared to 12.325 mmbbl/d in Sept 2022. So production increased 0.9 MM bbl/d in the last year. 

 

So production increased ~57% as much and the rig count was ~57% as high (using your numbers of 500 and 877). That doesn't seem like much of an argument in favor of increased efficiency to me. 

two comments - 877 was the rig count in 2018 and 500 is now, so the rig count is down. so not sure if i am following your point

 

also will you not account for the well depletion which i think is 8% per annum?

 

again, not arguing against your point, but trying to understand if i am missing something

[bizaro86]

43 minutes ago, rohitc99 said:

two comments - 877 was the rig count in 2018 and 500 is now, so the rig count is down. so not sure if i am following your point

 

also will you not account for the well depletion which i think is 8% per annum?

 

again, not arguing against your point, but trying to understand if i am missing something

 

Right. Rig count is down and production growth is down.

 

Rig count 2023 is 57% of Rig count 2018.

Production growth 2023 is 57% of production growth 2018.

 

Seems like productivity is similar to me.

 

You're correct that there is natural depletion of the existing production base, but that's very difficult to determine. I'd suggest that it's probably a very comparable number between the two years - production is higher now but the % decline is probably slightly lower as the production base is more mature than it was in 2018 so has lower decline.