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Peak Oil Profits (POPs)

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

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Peak Oil Profits (POPs)

Unread postby Pops » Sun 02 Feb 2014, 22:03:54

So here is my 13,000th post, a prediction.

Peak oil will not be a function of geologic constraints, "demand destruction", substitution or EROEI; oil production will peak because the oil business can't make enough money.

Bookmark that to be used against me later. :wink:

--
I've posted a lot on economics over the years. Mainly because economics and politics is at least equal to geology as the regulator of oil production (apologies to Marion). And of course it is economics where the pain of depletion will be felt. I started the 5 Rules for Peak Oil Prep thread and all 5 of my rules were economic in nature for just that reason. I posted my theory that oil prices would actually fall over time because the economy would be less and less able to pay and so as the price ceiling fell so would the amount produced. My first post here (13,000 Submits ago) had more to do with economic bubbles than oil. Most recently Kopits got my attention, Peak Oil Is When & Peak Investment = Peak Oil. Besides, I don't know much about geology and anyone can come up with an "economic" theory, LOL!

So it is no surprise that my Grand Unified Resource Uber-theory of Peak Oil Profits (GURU POPs) is about the one thing: profit.
--

I define profit simply as more output than input. In a for-profit oil company, the unit of measure is currency, so profitability is more money returned than invested. In a "non-profit" NOC, the units might be measured in days the rulers get to keep their heads, once that number of days goes negative, well, then the ultimate liquidation begins.

Either way the units aren't Barrels or Tons Oil Equivalent or BTUs, the unit of measure is Profit, Baby, Profit.

--
There are said to be trillions of barrels of "technically recoverable oil reserves" - I don't know how many, it mostly depends on whose fluff you're feeling. But what does that mean in terms of profit? That there exists the technical know-how to extract energy from those sources says nothing about profitability. Since nothing is going to be produced without profit, those technical reserves give no real indication of the eventual total energy that will be extracted. It's exactly like saying there exists trillions of acre-feet of "technically" potable water in the oceans. That the reserves may require more capital to extract than consumers are able to repay - plus profit - is not generally mentioned.

I'm no fan of the political manipulations financed by oil profits in almost every country where oil is found, so don't get the idea that this is a defense of the power of oil. In spite of that, profit is still required to promote investment in exploration and new production.

So the metric to watch isn't the amount of oil extracted but the amount of "profit" extracted. Production when it can be measured with any confidence at all ebbs and flows as a result of any number of conditions from technology to geology, politics, seasons and even the weather. But the one thing that must remain constant in the long run is profit.

The oil business isn't a charity after all, in fact it isn't even about energy, it's about profit. The peak of profit will signal the peak of oil.
If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen we must live through all time or die by suicide.
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Re: Peak Oil Profits (POPs)

Unread postby Loki » Sun 02 Feb 2014, 22:59:24

Pops wrote:So it is no surprise that my Grand Unified Resource Uber-theory of Peak Oil Profits (GURU POPs) is about the one thing: profit.


Nice one.

The financial side of the liquid fuels problem certainly seems to be the weakest link, but also the most amenable to gaming, which makes it highly unpredictable. Accounting fraud has become the backbone of the US economy. The fracking bubble seems to be rife with it, yet they're producing significant quantities of energy. It's not “sustainable” of course, but the fast money can flow elsewhere if needed. I mentioned CTLs in your other thread. Add emergency public policy measures (QE being the tip of the iceberg), and we can continue fleecing ourselves for quite some time, I think.

As for the demand side of it, it'll be a delicate balance between demand destruction and rising production costs. Won't do Joe Sixpack any good on either end, it'll hurt but might not be catastrophic. At least for us Americans, we can outbid most other folks, who'll go back to donkey carts or whatnot. We'll eventually have to start shopping for donkey carts, too, but it'll probably be Joe Jr. who trades in the F150 for Eeyore.

We see the dynamics at play already. Rising energy and food costs (due largely to resource limits) combined with the collapse of a global Ponzi scheme. The US sees a nasty little depression, but nowhere near the severity of the 1930s. Parts of Europe are lingering at Great Depression levels of economic activity, Egypt experiences food and fuel shortages and is plunged into chaos, Japan continues to stagnate, etc. Yet the global economy continues to lurch along.
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Re: Peak Oil Profits (POPs)

Unread postby Plantagenet » Sun 02 Feb 2014, 23:23:56

Pops wrote:So here is my 13,000th post, a prediction.

Peak oil will not be a function of geologic constraints, "demand destruction", substitution or EROEI; oil production will peak because the oil business can't make enough money.


Thats one way to look at it.

But the only reason the oil business can't make enough money is that the easy oil is gone, i.e. we've reached geologic constraints on additional oil production.

There is more than enough money to drill more Spindletops, Ghawars, and Cantarells----if there were any more Spindletops, Ghawars, and Cantarells out there to drill.

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Re: Peak Oil Profits (POPs)

Unread postby rollin » Mon 03 Feb 2014, 06:52:58

I am going to have to side with Plant on this one. Although profit and price can cause oscillations in the production curve, the overriding and base factors are geologic constraints and harsher locations. The "easy and cheap" to get oil is gone. It's all uphill as far as difficulty to produce and it's all downhill as far as production.

In one way, I agree that price (profit) could be a major player, but only in a sane and non-self destructive society. In a non-self-destructive society the destruction of the environment and ecosystems would be heavily considered and either heavily taxed or not allowed at all, thus rendering the end of oil soon after it began because of cost.
In the current societal paradigm such considerations are secondary or non-existent as fully demonstrated by tar sands extraction. In this amoral and greed driven paradigm prices will rise as far as structurally possible for fossil fuels thus allowing geologic factors and location factors to come to full or near full play.

I fear the general realization that the incessant pursuit of fuel to run techno/machine civilization is highly destructive to the underpinnings of life on this planet will come far too late in the game. I quote a line from Jurrasic Park "... and then the screaming begins.".
Once in a while the peasants do win. Of course then they just go and find new rulers, you think they would learn.
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Re: Peak Oil Profits (POPs)

Unread postby Paulo1 » Mon 03 Feb 2014, 09:24:25

What Pops said seems to me pretty much what Gail said in her last post if one distilled it into a few paragraphs and overlooked the forecasted doom and gloom. She also laid out a timeline scaled to 5 years. Pops suggests a winding down and/or backing away due to failing profits, perhaps a slower version of the same thing.

Of course if oil supply is so vital to......it wouldn't be a stretch to see the system gamed even more with direct subsidies (as opposed to tax breaks) for ff production. And of course such production could be put under control of a dictatorial state much like Hitler did with his war industry and synthetic oil production. Our society will be kaput and unrecognizeable, but there will/could still be ff production going on for agriculture, and necessary transportation (like politician limos)..ha! Too bad there is no money left. Oh yeah, we can just create it, right?

I still think we will simply become poorer with fewer opportunities interspersed with violent protests and crackdowns (Ukraine?) until our social management structures localize over time.

regards....Paulo
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Re: Peak Oil Profits (POPs)

Unread postby AndyA » Mon 03 Feb 2014, 13:26:21

The peak of profit will signal the peak of oil.

I agree with the general direction of this post, but would be more inclined toward a peak at the end of profits, as opposed to the peak of profits. I doubt IOC's and NOC's will stop drilling because their IRR is declining, which is arguably already happening and has been happening right alongside the decline in EROI. Nice acronym though :)

Obviously the oil price aka income is a big driver of price, but in the expenses part of the cashflow statement (which I have never seen for an IOC) the biggest item generally for a capital intensive business is interest. I believe the biggest mistake Gail among others makes is having an unshakeable faith that interest rates 'must rise eventually.' Central banks have been setting interest rates for decades, I doubt they are stupid enough to let them rise too high.

One more factor to consider is the way shale gas has played out. Art Bremen the most concise analyst (jmo) wrt the profitability of the shale gas companies. His claims that they are making a loss, have been contradicted by the fact that even today they are still fracking these unprofitable wells. I think he is right that they are making a loss, yet they are still drilling. Clearly there are other dynamics involved.
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Re: Peak Oil Profits (POPs)

Unread postby Keith_McClary » Mon 03 Feb 2014, 13:57:07

Pops wrote:So here is my 13,000th post, a prediction.

Peak oil will not be a function of geologic constraints, "demand destruction", substitution or EROEI; oil production will peak because the oil business can't make enough money.

Bookmark that to be used against me later. :wink:
I think you're pretty safe, unless you translate it into a testable prediction.
i.e. , define the terms:
geologic constraints,
"demand destruction",
substitution
EROEI;
enough money
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Re: Peak Oil Profits (POPs)

Unread postby ralfy » Mon 03 Feb 2014, 20:54:34

Related:

"Our Oil-Constrained Future"

http://www.motherjones.com/kevin-drum/2 ... ned-future
http://sites.google.com/site/peakoilreports/
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Re: Peak Oil Profits (POPs)

Unread postby Pops » Tue 04 Feb 2014, 08:06:34

Thanks Ralfy. The article says:
If this model is accurate—and if the ceiling on global oil production really is around 90 mbd and can be expanded only slowly—it means that every time the global economy starts to reach even moderate growth rates, demand for oil will quickly bump up against supply constraints, prices will spike, and we'll be thrown back into recession. Rinse and repeat.

That's the Bumpy Plateau and what we all expected but guess what? It ain't so bumpy after all. Notice on the plot here (Brent price) that the price has stayed pretty close to $110 for 3 years now.

Image

It doesn't look like we're going to be "thrown back into recession" after all because it doesn't look like we're going to recover from recession. Subtract the imaginary gains QE and zero interest rates given the Corp-se; and factor in their "cost cutting", which seems akin to an airliner dumping fuel to increase altitude . . .

I don't see anything surprising that LTO, for example, just happened to explode at the very moment Bernanke squirted all that free liquidity over the markets. Interest rates make investing on margin riskier but make the rate effectively negative and risk becomes less - it subsidises the risk in effect. Of course negative rates also cause institutional and international investors to go hunting for a return in areas more risky than they normally would as well.

All that borrowing and cost cutting lends the appearance of profits where there are really none.
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Re: Peak Oil Profits (POPs)

Unread postby ralfy » Wed 05 Feb 2014, 00:05:31

I'm not sure, but it looks like a bumpy plateau (i.e., around 74 Mb/d).

We should also look at global consumption, which has been rising steadily even with high oil prices:

http://www.energytrendsinsider.com/2013 ... ly-demand/
http://sites.google.com/site/peakoilreports/
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Re: Peak Oil Profits (POPs)

Unread postby sparky » Wed 05 Feb 2014, 02:17:03

.
Pops , I totally agree with you , money is only the measure of exchange ,
if the exchange is a bad deal private companies bail out

BUT ...
considering the importance of the black gooey stuff , it is a national imperative to keep it flowing
during WW1and WW2 oil was deemed a strategic resource and the free market was told to take a hike
...solution , the taxpayer , AKA the end user , will pay for it through "government incentives"
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Re: Peak Oil Profits (POPs)

Unread postby Pops » Wed 05 Feb 2014, 08:43:27

10 points to Sparky.

A good portion of the cost of producing oil everywhere is the government take - and, it's the only cost that is "adjustable".

When you lower the government's take you increase the producer's profit . .
except when the producer IS the government, which is the case in what? 80% of production?

"Increasing incentives" in the case of NOCs is the same as lowering profit.
If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen we must live through all time or die by suicide.
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Re: Peak Oil Profits (POPs)

Unread postby sparky » Wed 05 Feb 2014, 18:46:24

.
Yep the producing countries are in a pickle ,
they get the cream and the money of the cream but are not as efficient as one could wish
their cash cows are flogged too hard ,the solution so far is to call in competent partners

were it get interesting is the government would want to export as much as they could for the highest price
but the stupid citizens want petrol as cheap as possible
it should be no contest, screw the yokels......... but they tend to protest or even revolt or vote you out
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Re: Peak Oil Profits (POPs)

Unread postby Keith_McClary » Wed 05 Feb 2014, 19:39:07

sparky wrote:but the stupid citizens want petrol as cheap as possible
it should be no contest, screw the yokels......... but they tend to protest or even revolt or vote you out
The yokels are smart enough to figure out that the only way they will benefit from oil resources is by cheap prices at the pump. Otherwise the revenues will be pocketed by corrupt elites.
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Re: Peak Oil Profits (POPs)

Unread postby Pops » Wed 26 Feb 2014, 08:54:02

rollin wrote:Although profit and price can cause oscillations in the production curve, the overriding and base factors are geologic constraints and harsher locations. The "easy and cheap" to get oil is gone. It's all uphill as far as difficulty to produce and it's all downhill as far as production.


The point of course is "easy and cheap" are relative terms whereas profit is a concrete number that everyone understands. When one says "easy" what is meant? Easy compared to what? The deserts of Arabia in 1920? The North Slope of Alaska in winter, or the North Sea for that matter? I've never been to those places, they don't sound easy but what is left out is that easy doesn't really matter when there is profit involved. LTO in fact is very hard and not at all cheap but it is being produced as we speak and will continue to be for how long?

That's right, as long as it is profitable.

The problem Peakers have had is trying to find a concrete number on which to hang their fears. GW prognosticators have a nice, simple number, temperature. Even CO2 concentration is pretty easily understood even if some might still argue with it's impact. But how do you measure "easy" or "cheap" and relate it to the uninitiated observer's world in a way he understands? Heck, I mentioned "easy" energy going away on this board on July 13, 2004 but what did that mean or how measurable was that prediction? It meant nothing really because it was not measurable in any objective way, here 10 years later energy is pretty easily obtained.

Because it is still profitable.
.
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Re: Peak Oil Profits (POPs)

Unread postby ROCKMAN » Wed 26 Feb 2014, 11:43:23

Pops – An excellent point some folks till seem to have a problem appreciating. Those old fields weren’t easier find. In fact, as I’ve explained, our current exploration tech is magnitudes better. The big difference is the individual size of those fields. I’m reworking one of the smaller fields in a trend that “only” produced 38 million bo. This field, using the tech at the time (1930’s), was not easy to find. But once found about 60 very low risk development wells were drilled. Consider the North Sea: I read years ago that there were 50+ wells drilled out there before the first major oil reservoir was discovered. But once found a lot of low risk development wells were drilled in that field.

And that’s the big difference between now and the old days. A few years ago I was drilling expensive 16,000’ wells in La. exploring for deep NG reservoir using state of the art seismic technology. That tech provided a high success rate. So not that difficult to do. About 20 years ago I was using similar tech to explore for shallow NG reservoirs and hit 23 out of 25 wells. Does get much easier than that, eh? But here’s the big BUT: but almost every successful well found just a one well field. IOW almost no low risk development wells to drill.

And the shale plays? What’s easier than that? For the most part they are drilling based on lease configuration and not the geology. But while they might drill a great well there’s no certainty that the next well they drill in the same area will be as good.
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Re: Peak Oil Profits (POPs)

Unread postby Quinny » Wed 26 Feb 2014, 17:16:37

A friend of mine worked mainly in ME/North Africa, but spent some time exploring in Southern UK. He told me he capped lots of wells that weren't worth touching at the time. He always argued against PO saying there were all these wells to go at, unfortunately they are already classed as 'reserves' so don't actually make much difference to overall situation.
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Re: Peak Oil Profits (POPs)

Unread postby Keith_McClary » Thu 27 Feb 2014, 00:30:56

Pops wrote:That's right, as long as it is profitable.

The problem Peakers have had is trying to find a concrete number on which to hang their fears. GW prognosticators have a nice, simple number, temperature. Even CO2 concentration is pretty easily understood even if some might still argue with it's impact. But how do you measure "easy" or "cheap" and relate it to the uninitiated observer's world in a way he understands? Heck, I mentioned "easy" energy going away on this board on July 13, 2004 but what did that mean or how measurable was that prediction? It meant nothing really because it was not measurable in any objective way, here 10 years later energy is pretty easily obtained.

Because it is still profitable.
It has been suggested that PO is when it is more profitable to keep oil in the ground (so as to produce it later for a higher price). But how would we tell if this is happening? If oil rights are privately owned we have no way of knowing why the owner is or is not developing them.

If rights are owned by gubmints, they may be auctioned off with requirements for investment in exploration and payment of royalties ("severance" in USA ???) on oil produced. In this case we might see measurable evidence of PO if the auctions had no bids, so that gubmints have to reduce royalty rates or investment requirements in order to get any bids.
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Re: Peak Oil Profits (POPs)

Unread postby Pops » Thu 27 Feb 2014, 08:27:02

Good points Kieth.

Kopit points out that in contrast to the EIA, etc who forecast future oil prices and production based on demand, he thinks the correct method is to forecasts the market based on supply. So instead of looking at demand and simply expecting supply to adjust to it (namely OPEC supply) we should look at supply and expect demand to adjust based on the price that OPEC - KSA basically, will accept. KSA ostensibly being the only producer who will accept surplus capacity - everyone else always produces flat out.

--
I think you are spot on though regarding the government take, that is really the big question mark going forward and one we Peakers almost never address because it is the biggest "discretionary" part of deciding what is profitable and what is not. I say discretionary because royalties, fees, etc are completely arbitrary when imposed on a IOC. An argument can be made I suppose, that costs imposed by the entrenched bureaucracy in an NOC is not discretionary.

Lots of the PO crowd are geologists, so of course they talk about geology. But between Uncle Sugar and the Great State of Texas for example, at least a third of oil revenues (not just profit but total revenue) are skimmed right off the top not by geological constraints but by government. Texas alone takes 25% of every dollar paid for oil and gas produced in the state and several other states likewise take more than the fed gov's 12.5% for onshore - 17% offshore. The total can be up to 57% in the GOM. Other countries take even more - 76% in Norway for example. And that is the countries who don't take it all, IOW, who have their own "oil company".

So when we talk about the end of "cheap" oil, what are we talking about? Every time the price of unleaded spikes we get a chorus of "Tax the OilCos!" in the US. But as it is, the government take is already half or more of the cost of oil and gas. So even as the costs to find and extract rise, the cost imposed by the taxman rises exactly in step.


https://docs.google.com/viewer?url=http ... F94953.pdf
http://thinkprogress.org/climate/2013/1 ... ty-rates/#
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Re: Peak Oil Profits (POPs)

Unread postby ROCKMAN » Thu 27 Feb 2014, 08:49:04

“It has been suggested that PO is when it is more profitable to keep oil in the ground (so as to produce it later for a higher price).” Not saying it has never happened but in 4 decades not once have I seen this down with an oil well with any of the dozens of companies I’ve been involved with. But I’ve seen hundreds of cases of companies producing an oil well at too high a rate and damaging ultimate recover…if not destroying the completion itself. My company did cut back the rate on some of our NG wells last year due to low prices but we were by far the exception. Folks really do need to accept the absolute importance of Net Present Value for the oil patch…especially the pubcos. For every year a bbl of oil is held back it loses 10 to 15% of its NPV. So even if oil prices were to increase by that rate over time the NPV doesn’t increases. But the company does lose cash flow by holding back. And very few companies don’t give preference to cash flow.

“If rights are owned by gubmints, they may be auctioned off with requirements for investment in exploration and payment of royalties ("severance" in USA ???) on oil produced. In this case we might see measurable evidence of PO if the auctions had no bids, so that gubmints have to reduce royalty rates or investment requirements in order to get any bids.” Not sure you meant that to sound as it does: the govt has owned $trillions in oil/NG reserves for many decades. And much has been leased to the oil patch for many decades. And it’s a royalty payment and not severance tax. The oil/NG royalty was bringing in around $10 billion/yr to the govt last time I looked. And each company has to submit a detailed development plan that satisfies the govt or they have the leases taken back. And yes: during past periods of low oil/NG prices the govt has had to lower the trade to induce companies to lease/drill.
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