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Page added on August 28, 2014

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The oil industry – looking a bit peaky, after all

The oil industry – looking a bit peaky, after all thumbnail

It was Woody Allen who said “if you want to make God laugh, tell him your plans.” However, if that doesn’t work, then try some energy price forecasts – preferably those produced by government or industry experts.

By way of example, here’s an Economist article from 1999:

“The chairman of Royal Dutch/Shell, Mark Moody-Stuart, three months ago unveiled a five-year plan that assumed a price of $14 a barrel. He has since publicly mused about oil at $11. Sir John Browne, chief executive of BP-Amoco, is now working on a similar assumption.

“Consumers everywhere will rejoice at the prospect of cheap, plentiful oil for the foreseeable future.”

Just fifteen years ago, the oil price was about a tenth of what it is now – which even allowing for inflation is quite a difference. However, back in 1999, there were those who predicted a price trend in the opposite direction:

“We may be heading for $5…Thanks to new technology and productivity gains, you might expect the price of oil, like that of most other commodities, to fall slowly over the years. Judging by the oil market in the pre-OPEC era, a ‘normal’ market price might now be in the $5-10 range. Factor in the current slow growth of the world economy and the normal price drops to the bottom of that range.”

The laughs keep on coming:

“Last week Algeria’s energy minister declared, with only slight exaggeration, that prices might conceivably tumble ‘to $2 or $3 a barrel.’

“Nor is there much chance of prices rebounding. If they started to, Venezuela, which breaks even at $7 a barrel, would expand production; at $10, the Gulf of Mexico would join in; at $11, the North Sea, and so on.

“All this explains why oil prices will remain low.”

As we know from our vantage point in the present, oil prices did not remain low. The first decade of the 21st century saw them rocket upwards to a 2008 peak of $147 a barrel. They then crashed with the world economy, before staging a recovery that has yet to be matched by many other commodities.

It has become fashionable to mock the pessimists who saw the events of the last decade as evidence of peak oil, but while the Jeremiahs overstated their case, what the Economist article shows is that the Pollyannas got it wrong too.

The undeniable fact is that the most readily extractable oil is running out fast. If that weren’t the case, then the price of Brent crude wouldn’t be hovering around $100 a barrel in the wake of the worst recession in living memory.

Nor would the industry be bothering to look for oil in dangerous and difficult areas like the Arctic if there was enough of the stuff coming from more easily accessible fields.

According to Ambrose Evans-Pritchard of the Telegraph, the cracks are beginning to show:

“The US Energy Information Administration (EIA) said a review of 127 companies across the globe found that they had increased net debt by $106bn in the year to March, in order to cover the surging costs of machinery and exploration, while still paying generous dividends at the same time. They also sold off a net $73bn of assets.

“This is a major departure from historical trends. Such a shortfall typically happens only in or just after recessions. For it to occur five years into an economic expansion points to a deep structural malaise.”

How long this can go on for is anyone’s guess – but anyone who tries had better have a taste for humble pie.

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25 Comments on "The oil industry – looking a bit peaky, after all"

  1. dashster on Thu, 28th Aug 2014 9:48 am 

    Steven Kopits has a graph in his presentations where he shows exchange listed oil companies peaking in production in 2005 and going into decline, while their capital expenditures keep increasing.

    And he says that they are confused by what is going on, since they are mostly of the mind that we are not close to Peak Oil.

  2. Plantagenet on Thu, 28th Aug 2014 10:12 am 

    The oil majors have peaked. Small oilcos like Kodiak, Pioneer or Arex continue to grow their production by developing tight oil deposits

  3. forbin on Thu, 28th Aug 2014 10:34 am 

    ““Consumers everywhere will rejoice at the prospect of cheap, plentiful oil for the foreseeable future.”

    Where for art thou Abundance Concept?

    and

    “… price of Brent crude wouldn’t be hovering around $100 a barrel in the wake of the worst recession in living memory….”

    If it gets any lower Rockman will be driving taxis again …. if anyone can afford one !

    Forbin

  4. rockman on Thu, 28th Aug 2014 10:47 am 

    dashter – “…since they are mostly of the mind that we are not close to Peak Oil.” I obviously don’t break bread on a regular basis with the majority of oil patch hands. But every public company I’ve worked for over the last 40 years has been worried about PO…just as they are today. No one I know in the oil patch is the least confused about what’s going on. And the timing of global PO is of little to no interest to anyone in the oil patch. It doesn’t matter one bit to ExxonMobil what that dat might be. They care about is replacing their produced reserves with new reserves. After that they care about the price of oil/NG. Which we called the “reserve replacement problem”. I’ve told the story many times: my first mentor at Mobil Oil in the late 70’s explained clearly the problem we’ve faced every day since then. He was also smart enough to not do what he wasn’t able to do: predict neither the timing of PO nor the future price of oil at any particular point. But he understood the peak oil dynamic very well and everything that’s happened in the last 40 years has followed his general forecast. And 25 years ago I explained to my nephew the world his very young daughters would face when they were well into their adulthood. Which is exactly where they are today.

    Folks really need to appreciate that everyone in the oil patch, from CEO’s to the secretaries, understand exactly where we are today. And that the press releases coming out from the company PR machines in no way represent how the rest of us view the situation. I only discuss “PO” here because that’s the theme of the site. Not once have I used the term “PO” in a discussion with any oil patch hand. Not once.

  5. rockman on Thu, 28th Aug 2014 11:04 am 

    forbin – Now that the MS has me using hand controls to drive I suspect I wouldn’t be able to renew my taxi permit. LOL. I might have to sink even lower: become a lawyer. I here wheel chair bound lawyers have a much better success rate…can’t underestimate the sympathy factor. LOL.

  6. Northwest Resident on Thu, 28th Aug 2014 11:08 am 

    rockman — I remember quite a while back when you explained in one of your posts that the oil industry workers all knew what the situation is/was with the peak oil dynamic, and that they were all silently and steadily preparing to deal with that time in the future, whenever it is, that things start to break down due to energy shortfalls. I’m paraphrasing you, obviously. And since then, how many articles and pronouncements and predictions have we seen emanating from the oil industry and from the financial organizations, trumpeting the bright future of oil/NG extraction and the implied continuance of BAU well into the future? More than we can count. Which all goes to illustrate that there are two “realities” existing side by side — the “reality” that the oil companies, government and financial centers WANT the masses to believe, and the actual grim reality that those of us here and in the oil patch know is the real deal. It’s a bizarre world that we inhabit these days, and it is just getting more so as the countdown toward some kind of major breakdown in BAU approaches, day by day.

  7. Speculawyer on Thu, 28th Aug 2014 12:51 pm 

    Peak oil musings from a conservative web site? OK, it is a UK conservative site. Well, it is nice to know some conservatives are thinking about this. In my experience, peak oil is something largely dismissed by conservatives.

  8. Plantagenet on Thu, 28th Aug 2014 12:57 pm 

    Many oil company people are conservatives. Your belief that “conservatives” deny peak oil doesn’t fit with Rockman’s observations that everybody in the oil biz is aware of peak oil.

    In my experience there are many liberals who deny peak oil—from the dummies in the democratic party n DC who blame high oil prices on evil speculators instead of oil supply limitations, to the Obama administration who boast about imaginary US energy independence to Harvard academics who write papers dismissing oil supply limitations.

  9. rockman on Thu, 28th Aug 2014 1:10 pm 

    NR – “…how many articles and pronouncements and predictions have we seen emanating from the oil industry and from the financial organizations.” And that’s the point I’ll keep beating to death: there is no “oil industry” saying anything. There are folks who work at some level in the oil patch and their statements cover the entire range of possibilities. The big difference is that some of those folks (like at Chevron) have $millions at their disposal to spread their stories. The Rockman just has a very small audience of folks like himself that have no lives and can spend time at sites like this. LOL.

    Seriously: 99.9% of the American public is basing their expectations on the words of 0.1% of the folks working in the oil industry. I don’t know the exact numbers but I’m certain I’m not far off. I’m not kidding: everyone from floor hands without high school degrees to CEO’s of all the majors know exactly how much BS is being feed the public and openly joke about it. Not on the record, of course. And the words of financial institutions? Let me ask you: when you need advice about you prostate do you go ask the guy that sells you tires or to you doctor? LOL. If folks are accepting advice from other folks who don’t have a background on the subject matter that’s their problem.

    Seriously…I’m not kidding: the folks who work day to day to find oil/NG will readily ridicule the public for their naiveté. They just don’t get to do it in 30 second spots on prime time TV.

  10. Northwest Resident on Thu, 28th Aug 2014 2:17 pm 

    rockman — the 99% or so of the public deserve to be ridiculed for their naivete. I heap ridicule on them too, because they’ve got it coming to them. Thanks to forums/sites like this and to educational/informative posters such as yourself, I’ve learned enough and am fortunate to no longer be in that 99%!!

  11. Don on Thu, 28th Aug 2014 3:00 pm 

    George W. Bush, March 5th 2008 “We gotta get off oil, American has got to change its habits,”.. “It should be obvious to all, demand has outstripped supply, which makes prices go up.”

    Not that W was really a conservative but…

  12. rockman on Thu, 28th Aug 2014 6:34 pm 

    Don – Unfortunately realizing what “needs to be done” doesn’t help much unless significant actions are taken to address the problem. Granted one must first clearly characterize a problem before efforts are made to resolve the situation. But repeating a thousand times that X must be done, in and of itself, changes nothing.

  13. trickydick on Thu, 28th Aug 2014 7:42 pm 

    dashster on Thu, 28th Aug 2014 9:48 am

    Steven Kopits has a graph in his presentations where he shows exchange listed oil companies peaking in production in 2005 and going into decline, while their capital expenditures keep increasing.

    And he says that they are confused by what is going on, since they are mostly of the mind that we are not close to Peak Oil.

    I can agree with the first statement – that majors may have peaked from an earnings standpoint, due to cap ex. I did a very quick review of the last earnings releases and got that impression. I will be looking up this reference you mention above with interest, if he’s done all the work for me.

  14. rockman on Thu, 28th Aug 2014 10:15 pm 

    “…that majors may have peaked from an earnings standpoint…”

    XOM revenue:

    2005 = $370,000,000,000
    2012 = $490,000,000,000

    The 30% increase in XOM revenue from 2005 to 2012 created the largest revenue in the company’s history. So 2012 might be the ultimate peak in the company’s revenue…time will tell. As a general rule Big Oil always feels pressured to spend as much of the revenue (less dividends) as capex on new projects. Holding huge cash reserves is typically viewed as a negative.

  15. dashster on Fri, 29th Aug 2014 4:04 am 

    “Folks really need to appreciate that everyone in the oil patch, from CEO’s to the secretaries, understand exactly where we are today. ”

    Kopits would disagree with that. In his presentation he talks at length about the Oil Majors and banks still using “Demand Driven Forecasting”. They try and calculate how much the economy wants, and then assume that it will all be provided for. He also mentioned some top guy (technical side) at ExxonMobil who will ask as a conference “How many people believe in Peak Oil”. Kopits said he was only one, or one of just a few, to raise his hand.

  16. sunweb on Fri, 29th Aug 2014 5:50 am 

    Rockman – thank you for another clear explanation of the oil world. I would like to use it sometime in an essay. Would that be okay?
    Also, sorry to hear of your illness. The best to you.

  17. Davy on Fri, 29th Aug 2014 5:54 am 

    Rock, my sympathies on your illness. You are a wealth of knowledge. You have plenty to give to the world despite your physical challenges. Give em hell Rock!

  18. rockman on Fri, 29th Aug 2014 6:35 am 

    dasher – I don’t want to be rude to Mr. Kopits but does he work in the oil patch? Has he had first hand discussions with thousands of working boots in the oil patch as I’ve had over the last 4 decades? If the answer to both is no then it confirms he’s as f*cking ignorant of what the oil industry feels about our situation as the vast majority of the public. LOL.

    My statements aren’t some theoretical theory of what the oil patch thinks about the situation…it’s what they say about it 24/7. Either Mr. Kopits is either extremely naïve to swallow the corporate BS or he’s just taken up the role of a shill for the oil patch.

    In reality I haven’t really given folks here the true extent of the absolute contempt the oil patch has for the public. Not bragging but I rub shoulders with some of the biggest wheels in the Houston oil patch. One of the benefits of working for a $billionaire. In addition to CEO’s and presidents on occasion I’ve broken bread with the likes of Matt Simmons. Had dinner with him just shortly before he passed. And without a single exception they all have expressed the view I’ve described. But if anyone thinks the CEO of a public oil company is going to say anything very negative about future expectations they must be living in a very different parallel universe. LOL.

  19. rockman on Fri, 29th Aug 2014 6:43 am 

    sun – Feel free. I don’t copy write my rambling thoughts. LOL.

    In the world of MS I’m not in very bad shape. At this time it’s more of an inconvenience then a handicap. Now that I’ve gotten accustomed to the hand controls on my car I wish I had them decades ago. Essentially my hand is always on the brake control. Very handy during rush hour with all these crappy Houston drivers…especially the *ssholes in pickup trucks. LOL.

  20. sunweb on Fri, 29th Aug 2014 7:46 am 

    rockman – use to ride on the MS tours before my lung cancer then help as support here in Minnesota. Great experience.
    As I read it: There is a balance and dance between the price of oil, the ERoEI and demand. The fossil fuel world is a business and is there to make money. All else is secondary. If demand drops, if price goes to high or to low and if ERoEI moves toward zero. The business will respond.

  21. dashster on Fri, 29th Aug 2014 9:47 am 

    @Rockman What of the ad ExxonMobil ran:

    “In March 2006, ExxonMobil ran a peak oil advertisement in prominent newspapers. ExxonMobil ad says “Contrary to the theory, oil production shows no sign of a peak…A peak will not occur this year, next year or for decades to come…With abundant oil resources still available peak production is nowhere in sight.”

    Did they believe it when they ran that ad?

  22. dashster on Fri, 29th Aug 2014 9:50 am 

    “But if anyone thinks the CEO of a public oil company is going to say anything very negative about future expectations they must be living in a very different parallel universe. LOL.”

    But what stops them – their share price would decline if they acknowledged Peak Oil or they don’t want to upset general public with regard to infinite economic growth?

  23. dashster on Fri, 29th Aug 2014 11:01 am 

    “Did they believe it when they ran that ad?”

    I guess I really mean, did anyone at ExxonMobil, particularly the CEO, believe that when they ran that ad.

  24. rockman on Fri, 29th Aug 2014 11:38 am 

    Dasher – Looking at those ads very closely. You’ll notice that nothing solid is given as a promise. I couldn’t point to a single statement and say “Liar!!!”. But that’s the true art of the spin, isn’t it: making a statement that produces a desirable impression but don’t get caught in a provable lie.

    For instance: shows us verbatim any statement from Big Oil and I’ll bet you lunch I can’t provide a good argument that the statement is a lie. But I bet I could write a 1000 words exactly why the statement is misleading.

    I’m not talking about something I don’t know well. Just 15 minutes ago I wrote an email to my partners about a well we’re currently drilling in S La. Nothing in my message was untrue. But I spun it in an effort to get the majority of them to go along with my recommendation. Which I’m sure they will: I really am very good at doing exactly what I’m accusing Big Oil of doing.

    And have you noticed that in general my messages on this site tend to be well received? That’s because I know how to work the crowd here. LOL. That’s not meant as an insult: few here are going to swallow anyone’s bull sh*t…not even well crafted BS from the Rockman. It’s called the art of persuasion. No different here, in an ExxonMobil ad or in a singles bar as closing time is approaching. LOL.

    BTW do I believe everything in a Big Oil ad or TV spot? I don’t know: not once have I ever studied either. Seriously. Why would I waste my time? LOL.

  25. Northwest Resident on Fri, 29th Aug 2014 1:12 pm 

    rockman — Maybe you missed your calling as a Public Relations spinmeister. But seriously, everybody puts a little spin on their message when trying to persuade. That’s human. But the propaganda experts have elevated it to a science — a science that is used to mislead, distract from the truth and push outright lies.

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