[Keith_McClary]

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.

As I understand him, he is saying that demand based prediction was OK in the past, but the underlying assumptions are no longer valid.

[Keith_McClary]

“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.

I was thinking in terms of the owners of the resource.

Consider a hypothetical world with a finite resource ("goop") which is owned by the rulers of various countries (so no tax/royalty complications). What is their pricing strategy for selling their portion of goop? I guess you would need to make some other assumptions, like "goop demand starts out low and grows exponentially at first" and "after peak goop, goop gets more expensive to dig up".
The question I am groping towards is, does the pricing strategy change from the early days to the post-peak days? And is this change somehow measurable or predictable?

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.

Again, lets consider this from the perspective of the resource owners (minimising the importance of the goop diggers ). I guess the hypothetical rulers would also consider the NPV of their goop. But that would seem to lead them to sell it as fast as possible, competing against each other and driving the price down.

I need to think more about this. Am I missing an assumption for the hypothetical world?

[ROCKMAN]

Keith - For sure it's a very different world for the NOC's then the private US oils. They are certainly guided by a combination of political and economic dynamics very different the us. When I talk about the oil patch this or the other I'm never thinking about the NOC's. On a variety of levels they really exist in another universe to a fair degree IMHO.

[Graeme]

Driven To Divest: Investor Pressure Could Make 2014 A Busy Year For Oil And Gas M&A

Attending last week’s CERAWeek in Houston, the Davos of energy as some attendees referred to it, one could have easily been mistaken into believing oil and gas are the new masters of the universe. Domestic and international news coverage in the last several years has decidedly become energy-obsessed, both good and bad. Fracking. Shale boom. All-of-the-above strategy. LNG and crude export. TransCanada and crude by rail. Pemex reform, Iranian sanctions, Fukushima. Even the geopolitical machinations taking place in Ukraine have an energy underpinning related to European gas supply.

Strange, then, that coeval with this resurgence, the energy sector’s stock performance has been “lackluster,” said Poppy Allonby, managing director of BlackRock Investment Management (UK), during a CERAWeek panel last week. As of March 7, 2014, the final day of CERAWeek, the US Energy space has provided the second lowest total return of eleven key sectors over the past five- and three-year periods, and only just barely managing to squeeze into third-to-last place in the last year, according to Morningstar data.

The point is emphasized by a string of recent disappointing financial and operational announcements by companies that normally don’t disappoint: Shell, Exxon and Chevron.

Oil and gas companies face “tremendous” pressure to decapitalize, said Jonathan Cox, managing director of natural resources M&A for Morgan Stanley, during the same panel. Companies are pursuing a “shrink to greatness” strategy, noted Peter Gaw, global head of oil, gas and chemicals investment banking for Standard Chartered. Even Asian national oil companies are becoming more disciplined in spending, said Gaw.

When Shell canceled its massive Gulf Coast gas to liquids (GTL) project, the stock went up 2%, Allonby noted. Aside from slowing down or canceling projects, big oil companies will have an “increasing focus” on divestitures, she said. However, Allonby wondered whether the market had capacity to absorb all the assets expected to go on sale.

Private equity may be part of the solution, said Maynard Holt, head of E&P investment banking for Tudor, Pickering, Holt & Co. During comments, Holt noted that in data rooms run by Tudor Pickering, the buyers and sellers have switched roles. In the 2010-2012 era, large oil majors were acquirers and private equity were the sellers. Now PE-backed companies are in buying mode, while big oil companies seek to shed assets, he said. Oil majors are at the beginning of a process of selling that could require them to make “painful” divestitures, said Morgan Stanley’s Cox.

forbes

[Pops]

When Shell canceled its massive Gulf Coast gas to liquids (GTL) project, the stock went up 2%, Allonby noted. Aside from slowing down or canceling projects, big oil companies will have an “increasing focus” on divestitures, she said. However, Allonby wondered whether the market had capacity to absorb all the assets expected to go on sale.

Wow.

This is the wave of the future I'm afraid. The assets will of course be sold to optimistic investors at much less than their book value - such a deal! The difference between the book value and the sale price is the value of the previous optimism. Then the assets will be sold again and again, each time at a lower price than before as more and more of the optimism evaporates.

That is what I foresee happening to the value of all "assets" - it will evaporate as the fossil fueled optimism deflates. Makes sense it happens to FFs themselves first.


Dang, it's gloomy out today.

[Subjectivist]

When Shell canceled its massive Gulf Coast gas to liquids (GTL) project, the stock went up 2%, Allonby noted. Aside from slowing down or canceling projects, big oil companies will have an “increasing focus” on divestitures, she said. However, Allonby wondered whether the market had capacity to absorb all the assets expected to go on sale.

Wow.

This is the wave of the future I'm afraid. The assets will of course be sold to optimistic investors at much less than their book value - such a deal! The difference between the book value and the sale price is the value of the previous optimism. Then the assets will be sold again and again, each time at a lower price than before as more and more of the optimism evaporates.

That is what I foresee happening to the value of all "assets" - it will evaporate as the fossil fueled optimism deflates. Makes sense it happens to FFs themselves first.


Dang, it's gloomy out today.

Just whom do you expect to be doing the buying Pops? The institutional investors have been divesting for about a year based on that thread about about ho we should all dump our oil stocks. The big mutual funds will stick with th sellers because they will see this as a money maker in the short term. Do you think the big money people like Bloomburg and Gates will buy them up? Or China?

[Pops]

They will mark the assets down to the point that they appear profitable at current prices and there will be an optimistic buyer. Eventually the government will mark down the "taxes" on FFs and that will increase profitability. Likewise, reduced use, increased utility and "demand shifting" (eliminating other spending in favor of FFs) will all allow consumers to pay higher prices so the assets will still have life.

It just won't be life as we know it, LOL

[Pops]

Oil and gas majors now cutting back in U.S. shale gas fields
Mar 18

Yesterday Chesapeake Energy, the second largest U.S. based oil and gas company, filed with the Securities and Exchange Commission to sell off its oilfield services unit which does the majority of the company’s oil and gas exploration, hydraulic fracking and drilling. Stung with high costs and mired in more than $20 billion in debt on its U.S. shale operations, the company continues to sell off billions in its assets base as it struggles to right itself.

http://www.examiner.com/article/oil-and ... gas-fields
h/t Resilience

So the magic fades . . .

[Graeme]

‘Saudi America’: Mirage?

At a time when Russia is saber-rattling and the Middle East is in turmoil, a welcome geopolitical trifecta could be in the making. The United States is poised to surpass Saudi Arabia and Russia as the world’s top oil producer. Canada’s oil sands have vaulted the country to energy superpower status. Mexico is embarking on a historic constitutional energy overhaul that its president promises will propel the country’s economy.

And there is no shortage of cheerleaders. “The North American production outlook is incredibly bright,” said Jason Bordoff, a former senior energy adviser in President Obama’s White House. “Everything we see on the ground suggests reasons to be optimistic.”

A Petróleos Mexicanos complex in the Gulf of Mexico. Pending legislation could open exploration and production in Mexico to international oil companies.Energy Special Section
But as bright as the future may appear, energy executives and other experts say it is time for a reality check before declaring energy independence for the United States and its continent. Gushing oil and gas give North America hopes of becoming what some call “Saudi America,” but fossil fuels development is always contentious for its environmental costs.




But the biggest concern is the oil price, which has a history of gyrating in unexpected ways. Just a couple of years after the natural gas drilling boom took off, the ensuing glut caused prices to drop so sharply from 2009 to 2012 that producers were forced to stop drilling in several shale fields until prices partly recovered this year.

“Industry took the rig count down, production down and investment down,” Mr. Maloney, the Statoil executive, recalled. “So why couldn’t the same thing happen with oil?”

Industry executives note that the typical oil shale well needs a price of roughly $50 a barrel to break even, given the expense of drilling horizontally and hydraulic fracturing. “Bankers don’t want to see oil near $65,” said Mr. Faulkner, the chief executive of Breitling Energy, an active shale driller in Oklahoma and Texas. “Capital would dry up quickly like it did for gas.”

In September, Royal Dutch Shell announced its intention to sell 100,000 acres it had leased in the Eagle Ford shale field of South Texas because of out-of-control costs. An analyst at the Oxford Institute for Energy Studies has estimated asset write-downs approaching $35 billion in recent years among 15 of the main operators in the shale gas and oil fields, a tiny percentage of the total investment but a sign that shale field development is sensitive to market shifts and drilling disappointments.

What makes shale drilling particularly challenging is that wells produce most of their oil and gas in the first years of production, requiring more and more drilling in lower-quality zones of the fields.

“If W.T.I. prices come down hard,” said Lawrence J. Goldstein, a director of the Energy Policy Research Foundation, referring to West Texas Intermediate, the American benchmark crude, “investment will fall off, and you need constant investment for production just to stand still.” He added: “I am very optimistic, but only if we continue to invest.”

nytimes

[vtsnowedin]

Drill baby drill but apparently the author doesn't know the USA does not own Canada or Mexico.

[Pops]

Pretty goofed up article, the author rhapsodizes about the impending glut and how low prices might stop investment then turns around and offers the example of Shell who not only stopped investing but sold at a loss . . .
in the midst of the highest average oil prices ever.

[ROCKMAN]

Pops - And it offers the same lame explanations: "“Industry took the rig count down, production down and investment down,” Mr. Maloney, the Statoil executive, recalled. “So why couldn’t the same thing happen with oil?” The rig count dropped because NG prices dropped from the ridiculous expectations by the oil patch. I was there...saw it first hand. Dog save you from management armed with a spread sheet filled with imaginary numbers and a glitzy Power Point presentation. LOL. And no production didn't drop: we are producing more NG today then when prices hit over $10/mcf...more than twice what it's selling for today.

Not like it hasn't happened before: during the "drill, baby, drill" hype of the late 70's the industry fooled itself into running more than 4,500 drill rigs...almost 3X as many as during the current boom. As you point out we are experiencing all time high prices. And how have consumers responded to the increase: we are consuming more oil then ever before I history.

[Graeme]

Drilling sector pressure mounts as oil companies cut costs

Pressure is continuing to mount on rig rates with a clear softening across most segments of the global fleet as more and more oil companies focus on ratcheting down costs.

Seeking to get back to previous profitability has increasingly become the priority of oil and gas companies where the ratio of total assets to earnings before interest, tax, depreciation and amortisation (EBITDA) has plummeted from 24% over the period 2004-08 to almost 15% last year.

However, analyst RS Platou warns in its latest monthly rig report that profitability of oil and gas companies is likely to drop further given expectations of increases in E&P (exploration and production) spending, unless there is a sustained rise in oil prices.

RS Platou says in its June report that leading surveys are pointing to 3-4% growth in E&P spending this year, while estimates of oil service companies’ revenues is expected to increase 5.7% this year and 8.1% next (2015).

The growth of oil service revenues has been revised down lately; nonetheless growth is still expected from at least some segments, though falling rig rates point to shrinking demand for the services of mobile offshore drilling units.

“One datapoint as released by the Norwegian central statistical agency (SSB) is pointing to a drop in E&P spending of 20% in 2015 on the Norwegian Continental Shelf (NCS),” warns RS Platou.

“The drop has mitigating factors, but nevertheless it points toward a slowdown in E&P spending.”

The analyst points out that, as price takers the “only tool” oil companies have to return to higher profitability is of course to cut costs and this will naturally have ramifications for the oil service industry.

energyvoice

[Graeme]

As Cash Flow Flattens, Major Energy Companies Increase Debt, Sell Assets

Source: U.S. Energy Information Administration, based on Evaluate Energy database. Note: Annualized means each point on the graph is the sum of the previous four quarters. Thus, the first-quarter 2014 results on an annualized basis mean the data represent the sum of the four quarters ending March 31, 2014. The data above are the aggregate results of 127 global oil and natural gas companies.

Cash from operations for major energy companies has flattened in line with flat crude oil prices, which have had the lowest price volatility in years. Based on data compiled from quarterly reports, for the year ending March 31, 2014, cash from operations for 127 major oil and natural gas companies totaled $568 billion, and major uses of cash totaled $677 billion, a difference of almost $110 billion. This shortfall was filled through a $106 billion net increase in debt and $73 billion from sales of assets, which increased the overall cash balance. The gap between cash from operations and major uses of cash has widened in recent years from a low of $18 billion in 2010 to $100 billion to $120 billion during the past three years.

The cash flow statement is one of the most useful items in a company's financial report for analyzing its major sources and uses of cash over a given period. While there are many line items to compare, the largest drivers of cash inflow and cash outflow are summarized in the table below.

theenergycollective

[Pops]

Thanks G. What I want to know is who they sold assets" to?

Each other?

LOL, that doesn't sound good

[Graeme]

Yeah, I saw this today too.

Is Big Oil Gearing Up For Mega-Mergers?

Big Oil may once again be getting ready to eat its own. The Guardian’s Ben Marlow raised the prospect once again this week, exploring the idea that Royal Dutch Shell might be warming to the idea of a merger with BP.

forbes

[Graeme]

Major Oil Companies Should Consider Downsizing

You're gonna need a smaller boat. That is the message from the latest round of results from Big Oil. Take the biggest of the supertankers, Exxon Mobil. XOM -0.14% Its stock fell 4% last week and is now the only one of the majors in negative territory for the year, on a dollar basis.

Exxon clearly isn't immune from pressures afflicting the entire sector. At just over two million barrels a day, its oil-and-liquids output in the second quarter was the lowest since the merger with Mobil in 1999. In part, that is a good thing: Exxon is prioritizing profit over volume.

But it also highlights what is wrong. Return on capital employed has collapsed. Oppenheimer estimates the average for Exxon, Chevron, CVX -1.04% Royal Dutch Shell, RDSA.LN -1.19% and BP BP.LN -0.22% will be less than 12% this year, a third less than 2011's level and less than half of 2008's.

Heavy spending to rebuild reserves, and get growth going again, is the culprit and Exxon defended its model on Thursday, saying this would pay off as new projects start up. The problem: With key projects such as Kashagan and Kearl not performing as planned, and even the great hope known as Russia now in question, investors aren't convinced Big Oil can deliver.

Rather than business as usual, more-radical change sets pulses racing. It is no accident the best performing stock of the major oil companies over the past five years, by a wide margin, is that of ConocoPhillips. COP -2.18% It threw in the towel on bigness and split itself up in 2012.

Plans for spin offs and big disposals at Occidental Petroleum, OXY +0.18% Apache, Anadarko and Hess promise more bang for investors' bucks in the months ahead. Italy's Eni, meanwhile, is taking an ax to its downstream business to boost returns. Rather than just slowly turning the supertanker, major oil companies seeking approval should consider downsizing.

—Liam Denning

wsj

[Graeme]

Drillers Piling Up More Debt Than Oil Hunting Fortunes in Shale

Floyd Wilson raps his fingertips against the polished conference table. He’s just been asked, for a second time, how he reacted when his Halcon Resources Corp. (HK) wrote off $1.2 billion last year after disappointing results in two key prospects.

Wilson once told investors that the acreage might contain the equivalent of 1.2 billion barrels of oil. He fixes his interlocutor with a blue-eyed stare and leans forward. At 67, he bench-presses 250 pounds (110 kilograms) and looks it. Outside the expansive windows of his 67th-floor executive suite, downtown Houston steams in its July smog.

He responds, unsmiling, with a one-syllable obscenity: “F---.”

Wilson has reason to curse, Bloomberg Markets magazine will report in its October issue. On the wall behind him hang framed stock certificates of the four public energy companies he’s built in his 44-year career. The third, Petrohawk Energy Corp., discovered the Eagle Ford shale, now the second-most-prolific oil formation in the country. He sold Petrohawk three years ago for $15.1 billion.

Then came Halcon. Since Wilson took over as chairman and chief executive officer in February 2012, the company’s shares have dropped by about half, trading at $5.67 on Sept. 5.

Halcon spent $3.40 for every dollar it earned from operations in the 12 months through June 30. That’s more than all but six of the 60 U.S.-listed companies in the Bloomberg Intelligence North America Independent E&P Valuation Peers index. The company lost $1.4 billion in those 12 months. Halcon’s debt was almost $3.2 billion as of Sept. 5, or $23 for every barrel of proved reserves, more than any of its competitors.

bloomberg

[JV153]

The full Kopit's "Economic growth, a supply -constrained view" PDF
http://energypolicy.columbia.edu/sites/ ... 5B1%5D.pdf

Probably for most PO posters what we already knew, although the data on product supplied is neat.

[Graeme]

Big Oil Feels the Need to Get Smaller

As crude prices tumble, big oil companies are confronting what once would have been heresy: They need to shrink.

Even before U.S. oil prices began their summer drop toward $80 a barrel, the three biggest Western oil companies had lower profit margins than a decade ago, when they sold oil and gas for half the price, according to a Wall Street Journal analysis.

Despite collectively earning $18.9 billion in the third quarter, the three companies— Exxon Mobil Corp. , Royal Dutch Shell PLC and Chevron Corp. —are now shelving expansion plans and shedding operations with particularly tight profit margins.

The reason for the shift lies in the rising cost of extracting oil and gas. Exxon, Chevron, Shell, as well as BP PLC, each make less money tapping fuels than they did 10 years ago. Combined, the four companies averaged a 26% profit margin on their oil and gas sales in the past 12 months, compared with 35% a decade ago, according to the analysis.

Shell last week reported that its oil-and-gas production was lower than it was a decade ago and warned it is likely to keep falling for the next two years. Exxon’s output sank to a five-year low after the company disposed of less-profitable barrels in the Middle East. U.S.-based Chevron, for which production has been flat for the past year, is delaying major investments because of cost concerns.

wsj