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Kopits: Peak Oil is When . . .

General discussions of the systemic, societal and civilisational effects of depletion.

Kopits: Peak Oil is When . . .

Unread postby Pops » Mon 30 Dec 2013, 07:58:41

. . . "the marginal consumer is no longer willing to buy the marginal barrel".

If you want the clear-eyed view of the current situation this is it.
Kopits is a director at Douglas-Westwood.

The marginal consumer banged into the price of the marginal barrel, on a static basis, somewhere in 2011 at about $110-115 Brent. And then, oil prices essentially stopped rising. Those of us who use supply-constrained forecasting weren’t surprised. It’s entirely consistent with the historical record. But I think many in the oil business still thought, somehow, that oil prices would continue to rise as they had done in the 2000s. After all, the oil supply is widely acknowledged as constrained, even by those who are not necessarily believers in peak oil. So why wouldn’t prices continue to rise if we’re supply short? Well, because there was a price at which the marginal global consumer would rather reduce oil consumption than pay more. And that price is around $110-115 Brent, and from here on in, we should expect that number to rise only with the purchasing power of the marginal consumer.

On the other hand, the cost of extraction and production has continued to increase. Last year costs increased somewhere between 10% and 13%, depending on who you talk to. Exxon’s costs rose about 7% in excess of its increase in revenues, which were also falling. And Petrobras’ costs were rising 10% to 13% faster than its revenues. So what we can see is that in the contest between technology and geology, in recent times geology has been winning. Oil has become more expensive to extract.

You need to read the whole interview at ASPO-US, it's worth a couple of minutes of your time, even if you never read anything about peak oil again.

This is the reality; no drama, no zombies, just the economics of self preservation.

The consumer can only pay so much for oil and only increase what they pay by a limited amount and we've reached both of those limits. At the same time the cost of extraction has been climbing dramatically. To the point that the majors and even some NOCs are getting negative returns on their investment so are canceling huge projects and even begun divesting assets just to survive. When oil companies stop developing new production there is only one way to go - imagine what happens to a plane when you kill the throttle, you can glide for a while, then . . .

It's the wedge I drew a few years ago, I called it the demand ceiling and the supply floor. What happens when the cost of the last barrel becomes higher than the ability of the last consumer to pay?

Production falls.

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Re: Kopits: Peak Oil is When . . .

Unread postby Pops » Mon 30 Dec 2013, 08:16:31

Another from Kopits:

Most of the large operators now require $120-130 / barrel Brent to maintain their current dividend and capex programs. As this is not forthcoming, oil companies are re-thinking their investment strategies and portfolios. “Capital discipline” has become a watchword in investor presentations, and most operators have significant divestment plans now in place.
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Re: Kopits: Peak Oil is When . . .

Unread postby Tanada » Mon 30 Dec 2013, 08:28:18

Pops I will start by saying I think you are right as far as you have gone.

Where I differ is what I think happens when the supply and price demand converge. Yes at a price of $110.00 Brent they can sell every barrel they produce today. That is the Demand Ceiling on your graph at $120.00 allowing modest fluctuation in the price.

My contention is, the major oil companies based on your link are now seeing that investing more in geological oil production is a losing proposition, hence they are cutting back on their investments in future production.

This leaves these huge world spanning companies with a problem, where do they put their money for future reward? Putting it in the bank is not an option, interest rates are pitiful. They all know about the theories of Peak Oil and how it can impact the world economy so they are not going to want to put money into the Stock Market in a big way. Our investment planner told us that several of the big companies are engaged in quiet stock buy back programs to prevent having to pay dividends in the future, that hardly sounds like they want to spread their cash reserves around eagerly. So banks are out, stocks are out, future oil field production is limited...what now?

It is my hope they will invest in other forms of energy in a very big way. Failing that the only other logical choice I see is to rapidly expand coal to oil, natural gas to oil, biofuels and thermal depolymerization. Every one of those options is less efficient and more expensive than poking a hole in the ground to let the oil gush out, but the wells and fields being developed now and incredibly more expensive than poking a hole in the ground and letting the oil gush out as well.

Most of us believe business as usual is dieing, if these predictions are right peak oil supply/ falling off the plateau is at hand in the next three years. Buckle up your seat belts folks, this could be very rough terrain ahead.
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Re: Kopits: Peak Oil is When . . .

Unread postby Paulo1 » Mon 30 Dec 2013, 09:49:16

This is a display of entropy in a financial sense, both literally and figurtively. With oil, it is almost a pun as almost all of the embedded energy is converted by and for heat to make it useful. With the large dollars required for oil development, and the apparently diminishing and low returns, it is no longer such a 'hot' deal.

I have tried to imagine what the future holds as this 70 year surge in growth continues to wind down and confess I cannot. I would like to think it will simply be a slowing on the plateau and reductions will be spread out equally in society, but recent financial events say otherwise. Those with dollars seek out the 'quick return get rich scams' and those without just have less and less to work with. The paradigm of parents and youth believing if they only get more education, (financed if need be), is all that is required to get ahead of the others is starting to wane. "Get your degree and you will be all right". That story is rapidly developing holes of fact and disillusionment. Clearly, we are at Peak and a corresponding turning point in all things.

Society and individuals will still 'need things' to live and survive. Those products will have to be sussed out, designed, built, and marketed. However, with increasing energy costs a hierarchy will become obvious. Bicycles and efficient transportation options...yes, Dora the Explorer dolls.....not so much. Hose nozzles and sprinkelr heads for watering, maybe....super soaker 1,000 squirt guns probably not. Dirt bikes and hot cars.... probably not.

The words, "sorry_____, we just can't afford ___________ this year", will come back into use. (Fill in the blanks). Until now, folks just pulled out their credit cards or signed on the dotted line.

There will sure be a bunch more unemployed if this continues. 2014 is starting to get interesting.

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Re: Kopits: Peak Oil is When . . .

Unread postby dinopello » Mon 30 Dec 2013, 09:58:02

Well it's not getting any cheaper to produce that marginal barrel, so they just need to convince people that the higher price is worth it.

These ads seem to be running constantly
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Re: Kopits: Peak Oil is When . . .

Unread postby ROCKMAN » Mon 30 Dec 2013, 10:18:11

A couple of points. First: ” But I think many in the oil business still thought, somehow, that oil prices would continue to rise as they had done in the 2000s.”. I’m surrounded by the oil patch. Live and breathe it 24/7/365. I don’t know one person who thought oil prices would continue to rise. In fact, more than a few anticipated a slide in prices greater then we’ve seen. Oil/NG prices are cyclical…always have been. Very old oil patch philosophy: the higher prices go the more revenue you need to bank so you’re ready for the fall. Perhaps Mr. Kopits has been watching too many Chevron TV ads. Just as you have to do with politicians: ignore what they say and watch what they do. LOL.

As far as what alternative the oil patch has there are only two: sell out or acquire other companies. I’m always amazed when I see folks think any oil/NG company can readily switch to another business plan to produce alternative energy. Little Oil is no more capable of getting into solar or wind then Starbucks. My company has no expertise in that arena. My owner would hire a complete new staff…just like Starbucks or McDonalds would if they wanted to get into the alt energy biz.

Big Oil has the same problem: how many geologists does it take to build a wind turbine? Two: one to make the coffee while the other looks for the phone number of a turbine manufacturer. I know some very talented drilling engineers who I wouldn’t let rewire my bathroom let alone install a solar panel. LOL. Why would ExxonMobil be moving into alt energy and not McDonalds? Neither has a staff capable of doing so. The only asset each has is a big cash flow. Also consider the effect on XOM stock if they suddenly diverted huge amounts of capex to alt energy projects that would take years to show a profit while decreasing oil/NG expenditures would not allow replacing their depleting reserve base. What Big Oil will do when they can’t find enough new wells to drill is what they’ve always done since the dawn of the petroleum age: acquire other companies. Several years ago XOM acquired XTO. That single acquisition represented over 80% of the XOM reserve growth that year. All it takes is writing a check…something they can easily do today given the huge increase in revenue Big Oil has seen since oil prices boomed. And no need to hire a completely new group of technicians like they would in alt expansion: just assign the new wells to their existing staff. Given the decreasing amount of viable wells left to drill in the world they have a lot of folks without enough work to keep busy.

The oil patch is on the path to death? As I’ve mentioned many times my first mentor at Mobil Oil pointed out that reality about 4 decades ago. He knew it then, all oil patch management knew it then and then I knew it. Today’s senior oil patch management knows it also. It doesn’t matter to the vast majority of them what their companies will be doing in 20+ years because they know they’ll be taking a dirt nap by that time. No one in my company, including my 74 yo owner, gives a crap as to how much oil the US will be producing or what it’s price will be in 20 years. The CEO of ExxonMobil has to pledge daily his best efforts to ensure the company’s long term health. If he didn’t the board would fire his ass in a heartbeat. What he actually sees in the future isn’t relevant to his words or actions.

But how is that different then how Joe6pack views the world? When was the last time you heard your neighbor contemplating US oil production rates in 2020? The price of NG in 2025? Their electric bill in 10 years? They are focused on the immediate and the near future. The oil patch, the politicians and the citizens are on the same page in that respect. And always have been. Which is exactly why we’re in the mess we’re in.
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Re: Kopits: Peak Oil is When . . .

Unread postby Subjectivist » Mon 30 Dec 2013, 10:45:42

Gee Pops you sure know how to cheer people up for the coming New Year!

On the one hand I wish you had found and posted this when it was written. On the oher hand I had a relatively cheerful fall and Christmas.

This is pretty convincing stuff, we appear to finally be teetering on the edge of the real down slope. That means China is going to set the world price, if they can afford $125.00/bbl then ha is where the price will settle soon. That pushes gasoline up around $3.80/gal in Ohio and for many of us will club the weak economy up ide its foolish head. So much for all those super optimistic economists and my retirement funds faithfully invested based on their well meant advise.
II Chronicles 7:14 if my people, who are called by my name, will humble themselves and pray and seek my face and turn from their wicked ways, then I will hear from heaven, and I will forgive their sin and will heal their land.
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Re: Kopits: Peak Oil is When . . .

Unread postby Ibon » Mon 30 Dec 2013, 11:09:19

Thanks Pops, great summary and article.

If this upper price level defines when the consumer starts to pull back, it is worth repeating that what the consumer is pulling back from is the non essential discretionary use of oil. Which is also worth repeating that since the GDP of our economy is 70% consumer driven, this non essential use of oil is kind of an essential part of our economic strength, however illusionary that is.
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Re: Kopits: Peak Oil is When . . .

Unread postby Pops » Mon 30 Dec 2013, 11:20:25

Good points all. (sorry Sub, LOL)

I think we saw BP try to pivot to Beyond Petroleum and Shell had a big stake in PV at one point (that China killed as a matter of course). ROCK's right, they are no more qualified than Starbucks to move into alts.

Shell has said repeatedly that they're abandoning this and that (arctic, LNG, LTO, Nigeria to be specific) to focus on "better opportunities" . . . I'm not sure what those are.

The overall point is that as they abandon trying to develop the "new" oil that's not affordable for the marginal consumer, the "old" profitable oil is depleting. The net effect then is their profits are continually shrinking so there isna't ant profit to be invested at any rate.

--
Kopits also mentioned something else I hadn't thought of (shocking that, LOL) the one cost that is "elective" is the government's take. So expect to see real efforts at reducing royalties, taxes, etc. at the threat of real supply shocks.
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Re: Kopits: Peak Oil is When . . .

Unread postby Keith_McClary » Mon 30 Dec 2013, 12:54:52

Subjectivist wrote:I wish you had found and posted this when it was written.

http://peakoil.com/production/interview ... eve-kopits

I don't remember reading that myself - had to search it.
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Re: Kopits: Peak Oil is When . . .

Unread postby sparky » Mon 30 Dec 2013, 13:46:13

.
On the upper price , it's not a hard line more like a dropping off from an auction

some users , like joe/jane average and the local town hall , cut down their consumption

some users , like the pharmaceutical industry would function with oil at 500$ a barrel
it's a small part of their cost ,they have a high value product and can pass it onto the consumer
the drop in their employees standard of living might even balance it nicely

other like the airlines must put up their prices to the point of extreme pain
the airlines industry is all about burning huge quantity of fuel
consumers numbers will have to drop off

@ Rockman , your point about a company not changing it's business model is totally correct
the normal way is to buy a company in this line of business and run it parallel in some holding

it doesn't have to be a very successful one either
bad luck , a wrong move or poor management can make them cheaper to buy
and failure is a great teacher ,

the oil industry survivors are pretty wise on the boom and bust cycle
any surge in price see a delayed response , the profit line is pushed above some fields cost
everybody get into it , the price of the marginal barrel drop to the cheapest available
production has a delayed response ,
existing production cost are low while exploration/development is very expensive
depletion and increased demand whittle down the supply margin ,prices rise

the free market work great but if there is a time lag of years , it work in great boom and great bust
Last edited by sparky on Mon 30 Dec 2013, 13:57:45, edited 1 time in total.
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Re: Kopits: Peak Oil is When . . .

Unread postby Keith_McClary » Mon 30 Dec 2013, 13:52:12

ROCKMAN wrote:I’m always amazed when I see folks think any oil/NG company can readily switch to another business plan to produce alternative energy. Little Oil is no more capable of getting into solar or wind then Starbucks. My company has no expertise in that arena. My owner would hire a complete new staff…just like Starbucks or McDonalds would if they wanted to get into the alt energy biz.

Big Oil has the same problem: how many geologists does it take to build a wind turbine? Two: one to make the coffee while the other looks for the phone number of a turbine manufacturer. I know some very talented drilling engineers who I wouldn’t let rewire my bathroom let alone install a solar panel. LOL. Why would ExxonMobil be moving into alt energy and not McDonalds? Neither has a staff capable of doing so. The only asset each has is a big cash flow.
I think investors recognise this. If I want to invest in alt energy I invest in wind or solar companies.

Companies like Polaroid, Bell & Howell and Britannica failed to transition to the digital era, even though in retrospect they seemed well-positioned compared to some of the companies that now dominate their markets. For the oilcos to switch to alt energy would be a much bigger transition in "business model" and "corporate culture".
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Re: Kopits: Peak Oil is When . . .

Unread postby ROCKMAN » Mon 30 Dec 2013, 14:17:58

Pops – As much as I try to avoid making predictions I’ll answer: “I'm not sure what those are.” I suspect that in the next 5+ years (especially if we have a short period of lower oil prices) significant consolidation of the oil patch will happen. Just as it has periodically done throughout its entire history. What’s the history of mergers/acquisitions in the oil patch? Here an interesting link: http://www.oiltrash.com/index2.cfm?modu ... erlist.cfm

I did everyone a favor and added it up: in the last century there have been 101 acquisitions, 61 partial acquisitions and 160 mergers in the oil patch. Over 300 individual consolidations. How many youngsters here are familiar with the names Gulf Oil, Getty oil, Tenneco, Transco, Arco, Texaco, Mobil Oil, etc. etc. Some recognizable…some not. And there’s a much longer list of companies that no one here would recognize.

Major shareholders are always looking at their exit strategy….know when to hold them and know when to fold them. Every company is a potential target for a takeover…even the majors like ExxonMobil or Chevron. All it takes is an offer sufficiently large enough to satisfy the exit plan of those controlling shareholders. And an acquisition often has nothing to do with the acquired company being in bad financial condition. It boils down to shareholders seeing an opportunity to max their investment: either sell when a company has a bright future or when it’s heading down the toilet. The objective is the same: max the cash out. If ExxonMobil can acquire Anadarko for less per bbl then they are spending drilling for oil why wouldn’t they? But why would Anadarko sell? Because they see a future with great difficulty adding to their reserve base with the drill bit.

Lots of small pubcos have seen big gains in stock value as they chased after the shales. And when they can’t maintain that race which way will their stocks head? A lot of profit could be realized by buying into a shale player…as long as you don’t hang around too long. As is always the case: timing is critical. Chesapeake has amassed a huge amount of oil reserves from the shale trends. But they’ve also amassed a huge debt in the process. The questions for those funds that hold their stock isn’t whether CHK is being run profitably or in a sustainable fashion. It’s whether the stock value has topped out with a minor growth future.
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Re: Kopits: Peak Oil is When . . .

Unread postby ROCKMAN » Mon 30 Dec 2013, 14:48:10

Pops - A timely example fresh from Rig Zone:

Vanguard Natural Resources has entered into an agreement to acquire natural gas and oil properties in the Pinedale and Jonah fields of Southwestern Wyoming for a purchase price of $581 million from an unnamed source. The properties being sold consist of approximately 87,000 gross acres (14,000 net acres) that are currently producing approximately 113.4 million cubic feet equivalent per day (MMcfe/d) with approximately 80 percent being natural gas, percent oil and 16 percent natural gas liquids (“NGLs”).

Scott W. Smith commented, “Acquiring an interest in one of the country’s most prolific natural gas fields, operated by companies with an unparalled history of successful development, is a milestone event for Vanguard. At closing, our reserves and daily production will increase approximately 80 percent and 55 percent, respectively, and we will add an inventory of approximately 970 proved undeveloped drilling locations. This property will be an excellent addition to our portfolio of long life, mature assets and represents a great start to our 2014 acquisition program.”

Guessing they're selling NG for around $4/mcf this acquisition pays out in about 3.5 years. That's a pretty decent payout time. Which tells me those 970 proved undrilled location mustn't have much profit potential. If they did this asset would have sold for many times what they paid for it. So here's a company that just increased it's proven reserves by 80% without drilling a single well. A 1/2 $billion deal and I doubt anyone here has ever heard of Vanguard Natural Resources.
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Re: Kopits: Peak Oil is When . . .

Unread postby Synapsid » Mon 30 Dec 2013, 15:59:57

Pops,

Shell announced that they were abandoning drilling in the Arctic for 2013. Is that what you're referring to at 11:20:25?
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Re: Kopits: Peak Oil is When . . .

Unread postby Pops » Mon 30 Dec 2013, 17:08:38

Yeah, Syn, I think they are trying to convince O to let them try again next year, now that they fired some VPs or something?
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Re: Kopits: Peak Oil is When . . .

Unread postby Synapsid » Mon 30 Dec 2013, 17:51:17

Pops,

Yeah, last I saw they had started the paperwork to keep open the possibility of drilling in 2014 but I've seen nothing definitive. They propose drilling only in the Chukchi Sea; they've ruled out the Beaufort, at least for now. That's a refreshing bit of realism on their part.

I'll look for an article I saw on just how much Shell has riding on this effort in the North. I remember it as an eyeopener.
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Re: Kopits: Peak Oil is When . . .

Unread postby Synapsid » Mon 30 Dec 2013, 18:09:24

Pops,

Found it; it's by Kopits and it's in the Oil and Gas Journal for 11/04/2013: Alaska's oil crossroads: lucrative OCS prize and TAPS pipeline fuse.

Here are the two points that stuck in my memory: "...Shell now reserves the right to abandon any project that fails to improve cash flow, and Alaska clearly will not generate cash flow for Shell for the next 15 years or so."

and

"If Shell withdraws, the days of the TAPS are numbered."

The reference to the dependence of the TAPS on Shell's efforts up there may be overblown, but it's part of the reason I've been interested in Great Bear's success on the North Slope.
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Re: Kopits: Peak Oil is When . . .

Unread postby sparky » Mon 30 Dec 2013, 22:09:13

.
Arctic off shore probably need a 150$ /Barrel horizon , minimum
not a spike ......a baseline
since this is not going to happen for a few years arctic projects are frozen ( pun)
some exploration will take place but it will just be poking around
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Re: Kopits: Peak Oil is When . . .

Unread postby ralfy » Mon 30 Dec 2013, 22:19:07

It is not likely that some will be available to afford very expensive oil as they ultimately earn from those who can only afford cheaper oil.
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