[Zarquon]

http://www.bloomberg.com/news/articles/ ... 04-scandal

Shell said its reserves replacement ratio -- the proportion of oil and gas production during the year that was offset by the addition of new resources -- was minus 20 percent. The company not only failed to replace any of the 1.1 billion barrels equivalent it pumped in 2015, but also wrote off another 200 million barrels to account for the plunge in oil prices.
...
BP Plc reported Feb. 2 a reserve replacement ratio of 61 percent for 2015, while Chevron Corp. achieved 107 percent.

And Exxon's reserve-replacement ratio fell to 67 percent in 2015, for the first time in 22 years. I still have some reading to do on how proved & probable reserves are actually estimated. Difficult research for amateurs, I guess (unless someone can point me in the right direction?). Even more difficult to say how much of the replacement gaps is due to falling prices (reserves becoming uneconomical) and how much is due to simply being unable to find or buy enough new reserves. And even more difficult (but probably less important) is guessing how accurate these reserve statements actually are. I remember that in 2004 the news was that Shell had overstated their reserves for years by 20%.

Anyway, I'm asking because a while ago I saw a presentation video by Steven Kopits (a presentation at Columbia Uni. IIRC, 2013 or 2014) where he stated that E&P costs in the industry had increased by about a whooping 500% in the last decade, a trend likely to continue, and that he wondered whether the big private players would still exist ten years from now, at least in their present form as industry giants. Back then I thought that to be a shocking statement.

But was it? If low prices are here to stay, could the Big Five really go the way of the dinosaurs so soon? Or could they survive much better due to being vertically integrated, so if the upstream business is tanking, they could hang on to refining and retailing? And are the Rockefellers really shedding their oil stocks to save the planet, or are they the canary in the coal mine?

[diemos]

Ladies and Gentlemen! ... The Great Prophet Zarquon!

He said he'd come again.

[StarvingLion]

The prices are low because the Zombie Fraud Banks are monetizing poverty and handing (via risk offloading deregulation and fake money derivatives) the bill to the producers. The producers are supposed to deal with high demand but few paying customer.

The enabler of this sociopath behavior was the assumption of a stream of new finds in crude oil never ending plus the non stop growth in useless education centres that spawned the ideological reincarnation of the Vladimir Lenin Mass Electrification Society where everything is free and "progress" is infinite.

Now that the real currency of new crude oil fields appears to have gone 'poof' all hell is breaking loose.

[ROCKMAN]

Z – I won’t try to give you a course on petroleum geology or engineering. Just tossing out a few tidbits. First, “proved reserves” is based mostly on two factors. How much oil/NG is in the ground: sometimes that’s not a difficult number to come up with and other times it’s very difficult. Again, I won’t go into those details. But “proved reserves” isn’t the accurate term: it’s “economically recoverable proved reserves”. You are already be aware that even if I can draw a map that definitely proves 20 million bbls of oil in a reservoir the ERPR may be zero if those reserves aren’t economic to produce. Those one time huge “proven shale reserves” stand as a good recent example.

So let’s just focus on finding those reserves in the ground and worry about the economics later. When I started my career at Mobil Oil in 1975 my first mentor clearly explained PO to me. Which we didn’t call it (and still don’t call) PO: it has always been the “reserve replacement problem”. In 1975 the US oil industry was trying to find and replace reserves for those we had already developed. Everyone in the oil patch understood that was never going to be possible. And even less likely today. A simple reason: in the first 50+ years of the “Age of Oil” the US was the Saudi Arabia of oil. In fact we were actually almost the entire universe of oil reserves. Consider what the KSA says their reserves are (which most feel are greatly over stated): 250+ billion bbls of oil. As of 2015 (ignoring the recent shale boom) the US has produced about 200 billion bbls of oil since records began in 1920. And by the US PO was reached in the 70’s we had produced about 90 billion bbls of oil. And much of the oil produced later came from fields that were decades old. IOW from long ago proven reserves.

Shorty will hopefully chime in with his numbers on the current ratio of new discoveries vs current production.

Also please don’t ever say: ”Yeah, that was all that “easy oil” we found back then. Oil/NG was never easy to explore for. In fact today it is much easier than it was 50 years ago thanks to huge leaps in exploration technology. The problem today isn’t the difficulty in finding new reserves (the oil in the Bakken and Eagle Ford Shale has been known for more than 50 years). The problem isn’t finding those hydrocarbons…the problem is finding big reserves. In the 80’s I had a very high success rate exploring for shallow NG using new seismic data…about a 4-fold increase over the historic average. The hitch: the reserves I developed were just a very small percentage of the huge fields found in the same trend 30 years earlier. Though so much bigger those huge old fields were not easy to find with the tech available at the time.

“…could the Big Five really go the way of the dinosaurs so soon?” Absolutely not. It is times like this when Big Oil typically develops some of its biggest proven reserve gains. Consider that few months ago Shell saw a huge gain in reserves when it paid $53 billion for BG. Shell just reduced its E&P budget for 2016 to $30 billion. It was physically impossible for Shell to add the BG reserves it acquired by drilling new wells…even when prices were much higher. OTOH Big Oil doesn’t like the revenue loss from lower oil/NG prices. But as I pointed out for the public companies (especially Big Oil) the really big pressure has always been adding reserves to replace production and not cash flow. Think about future stock valuations: do you think Shell’s huge gain in long term reserves (mostly NG) hurts or helps their long term viability? IOW there is no more BG today but there is a significantly bigger Shell Oil.

As pointed out before: the oil patch is not one big “band of brothers”. We are competitors who will gladly eat our own if it helps achieve our long term goal. Some folks say the KSA refusal to reduce production is designed to hurt US oil companies. Some US companies, like Shell Oil, are reaping some nice LONG TERM benefits from the current low oil/NG prices. That huge amount of BG LNG resource might not look too valuable today. But in the next 10 to 20 years?

Big Oil has been playing the long game for more than 50 years. Which is why they significantly reduced their activities in the US in favor of foreign theaters so long ago. In fact most big acquisition by Big Oil, like BG, won’t be in the US: much of that BG NG is in Australia.

[Tanada]

http://www.bloomberg.com/news/articles/2016-02-04/shell-posts-worst-performance-on-oil-reserves-since-2004-scandal

Shell said its reserves replacement ratio -- the proportion of oil and gas production during the year that was offset by the addition of new resources -- was minus 20 percent. The company not only failed to replace any of the 1.1 billion barrels equivalent it pumped in 2015, but also wrote off another 200 million barrels to account for the plunge in oil prices.
...
BP Plc reported Feb. 2 a reserve replacement ratio of 61 percent for 2015, while Chevron Corp. achieved 107 percent.

And Exxon's reserve-replacement ratio fell to 67 percent in 2015, for the first time in 22 years. I still have some reading to do on how proved & probable reserves are actually estimated. Difficult research for amateurs, I guess (unless someone can point me in the right direction?). Even more difficult to say how much of the replacement gaps is due to falling prices (reserves becoming uneconomical) and how much is due to simply being unable to find or buy enough new reserves. And even more difficult (but probably less important) is guessing how accurate these reserve statements actually are. I remember that in 2004 the news was that Shell had overstated their reserves for years by 20%.

Anyway, I'm asking because a while ago I saw a presentation video by Steven Kopits (a presentation at Columbia Uni. IIRC, 2013 or 2014) where he stated that E&P costs in the industry had increased by about a whooping 500% in the last decade, a trend likely to continue, and that he wondered whether the big private players would still exist ten years from now, at least in their present form as industry giants. Back then I thought that to be a shocking statement.

But was it? If low prices are here to stay, could the Big Five really go the way of the dinosaurs so soon? Or could they survive much better due to being vertically integrated, so if the upstream business is tanking, they could hang on to refining and retailing? And are the Rockefellers really shedding their oil stocks to save the planet, or are they the canary in the coal mine?

I believe the lecture you are referring to is this one from February 2014. Pops posted it way back then and I have watched it several times in the intervening period.
https://youtu.be/dLCsMRr7hAg

In terms of your question, I don't think the majors will be failing, though we may see another merger in there somewhere leaving 4 or even 3 still standing. What I expect to kick in strongly over the next year is for the big five to gobble up a lot of the bankrupt little fish which will serve as reserve replacement for them. The Shale Boom for whatever its worth created hundreds of little fish fracking companies, each with their own debt structure and reserve claims.

As far as I can tell none of the really big oil majors like Exxon-Mobile or BP did much if any work in the shale boom. They sat back and watched to see who would accomplish what, and where they would do it. Now they are not over burdened with debt, and they can see what areas of the shale reserves are worth fracking at different price points. If they decide to get into the fracking boom they will buy out the small fish that have reserves profitable at anything under the price they expect to be common in the next year or so, say all the reserves exploitable at a profit for $45/bbl or less.

I am not an oil exec and I don't know what models they use for making these decisions, this is just an opinion.

[shortonoil]

"Even more difficult to say how much of the replacement gaps is due to falling prices (reserves becoming uneconomical) and how much is due to simply being unable to find or buy enough new reserves. And even more difficult (but probably less important) is guessing how accurate these reserve statements actually are."

To answer that question it is first necessary to state that there is no shortage of liquid hydrocarbons on earth. According to a 2000 USGS study there could be as much as 4,200 Gb. We have extracted about 1,400 to date. The problem lies in determining how much of that resource can actually be used. There are two approaches to the question; one from an economic, and one from a thermodynamic perspective. Although they both approach the same point they will probably not do it at the same rate.

The economic perspective simply states that the reserve (liquid hydrocarbons that can be extracted) are a function of price, and production cost. The problem with this approach is that even though production costs can be fairly accurately estimated, the price it will be selling at is usually in question. The short term price is a matter of market sentiment, which can include everything from outages caused by geopolitical events to what brief case the head of the FED takes to the office.

The thermodynamic perspective sees price as an effect not a cause. It results from the underlying physics that controls petroleum production. It is based on the observation that once petroleum can no longer act as an energy source its use will be discontinued. We have approached the question of ultimate reserves from the thermodynamic perspective, and written a 67 page report on our determinations:

An introduction to the report "Depletion: A determination for the world's petroleum reserves" can be found here:

http://www.thehillsgroup.org/petrohg10.pdf

The result of the study is that the world's reserves when viewed from the thermodynamic perspective are much smaller than the economic approach is suggesting. The reasons for this are complex, but the primary one is that the dollar value of energy is not a constant:

http://www.thehillsgroup.org/depletion2_008.htm

That is, using the dollar to determine the value of a field that was developed twenty years ago, at a cost of X dollars, will not give the same result if that same field had been developed today. The dollar in energy terms has changed.

As a result of our study we have changed the focus of our consulting organization. The big integrated oil companies of the past are, as you say, going the way of the dodo bird. In the near future there will simply not be enough energy available to sustain them. The future of petroleum will become regional, as opposed to global. Petroleum products will come from small local sources serving a local market. The fuel that you use will come from a well fifty miles away, and processed in a small refinery down the street.

Thanks for your comment, it is a critical component to the future development of modern civilization. It is one that few want to invest the time and energy needed to fully understand. As a result they will be left standing outside, looking in!

http://www.thehillsgroup.org/

[AdamB]

Anyway, I'm asking because a while ago I saw a presentation video by Steven Kopits (a presentation at Columbia Uni. IIRC, 2013 or 2014) where he stated that E&P costs in the industry had increased by about a whooping 500% in the last decade, a trend likely to continue, and that he wondered whether the big private players would still exist ten years from now, at least in their present form as industry giants. Back then I thought that to be a shocking statement.

He apparently wasn't aware of some studies that were ongoing at the time, showing something quite different, including even lower costs. But then he is off on his own now, Princeton partners something or another, and the EIA and IEA are the 800# gorillas on knowing this kind of stuff.

https://www.eia.gov/analysis/studies/drilling/

But was it? If low prices are here to stay, could the Big Five really go the way of the dinosaurs so soon? Or could they survive much better due to being vertically integrated, so if the upstream business is tanking, they could hang on to refining and retailing? And are the Rockefellers really shedding their oil stocks to save the planet, or are they the canary in the coal mine?

Energy experts at UC Hastings think that oil will ultimately die when faced by lower demand over the course of the current generation. She has some quite effective arguments, if you get a chance to see her presentation, take it.

http://www.wsj.com/articles/why-the-wor ... 1430881507

[rockdoc123]

But “proved reserves” isn’t the accurate term: it’s “economically recoverable proved reserves”. You are already be aware that even if I can draw a map that definitely proves 20 million bbls of oil in a reservoir the ERPR may be zero if those reserves aren’t economic to produce. Those one time huge “proven shale reserves” stand as a good recent example.

actually under the definition used by the SEC, OSC and specified in documents such as COGEH and the SEG, AAPG, SPE guidelines the term "proven reserves" actually means it is economically recoverable under current conditions. Using the term "economically recoverable proved reserves" is hence not a lot different than Yoggi Berra saying "deja vu all over again" or using the phrase "close proximity". In essence it is a redundant phrase given the accepted definitions. Each year companies find their reserves and contingent resources bounce around considerably if oil prices have moved significantly. The hydrocarbons are still there they are just termed something different. A few years back I remember a couple of companies who had booked huge amounts of PUDs (proven undeveloped reserves). This was done at $6 - $10 /MMcf natural gas and when the price dropped below $4/Mmcf they all took huge write downs simply because according to current rules only proven reserves are reported. If your PUDs are suddenly degraded to probable reserves even though you still have access to all that gas your companies metrics (recycle ratio, reserves/share, reserve life index etc) all take a massive hit...in print. Prices come back up and those reserves get elevated again and the company suddenly looks like it is really doing well.

So to make sure everyone uses the correct terminology...."reserve" whether it be 1P 2P or 3P (proven, proven plus probable or proven plus probable plus possible) means it is currently economically recoverable. Any discovered hydrocarbons that are viable producers but are not economically recoverable are termed "contingent resource". Hydrocarbons that are predicted in the subsurface by interpolation or extrapolation but have not yet been drilled are termed "prospective resource".

[ROCKMAN]

doc- All true but I was trying to make the process more palatable for Z. You and I can discuss details all day long but for many here that's too much inside info to absorb in an effort to appreciate the big picture.

[vtsnowedin]

While a major such as Shell can increase its reserves by buying up little fish companies that does not add any more to the worlds reserves. They are merely changing the name on the leases and not finding anymore oil. Rising prices may make more reserves economical but again does not actually make any more oil in place. So if we have reached the point where we are burning through total world reserves faster then we are finding replacements we are headed down to the end of the curve.
And majors concentrating on refining and marketing won't save them because you can't refine oil that someone has not found and delivered to their refinery.

[rockdoc123]

So if we have reached the point where we are burning through total world reserves faster then we are finding replacements we are headed down to the end of the curve.

possibly but again we have to use the right terminology. As long as the reserves refer to what is currently economically recoverable there are still resources that would convert to reserves at a higher price. As well the ability to increase recovery factor can change that picture as well. I am not a cornucopian by any stretch of imagination, it's a finite resource. The issue is trying to get a handle on how much of the OIP will eventually be recoverable and at what price. And for peak oil concerns at what time and rate.

An interesting example I think is Shedgun on the northern end of Ghawar oil mega complex. Originally Aramco was pegging 30% recovery from the field but after extensive finite element modeling, 4 D seismic and lots of laboratory work they now believe it will reach 70% or so. Field recoveries are all over the place when you look globally. Some water drive reservoirs with high permeability can reach 60% on primary recovery whereas some shale reservoirs are looking at 5% - 10%. Personally I don't see that we have beaten the recovery improvement beast to death as yet.

[vtsnowedin]

Yes there are too many variables in the equation. Rising price makes more oil "recoverable and economic" but that same rising price depresses the rest of the economy and along with that reduces the demand for oil.
I expect that a lot of oil will get left in the ground at the end because we just can't afford it or have found workable and cheaper substitutes.

[GoghGoner]

As far as I can tell none of the really big oil majors like Exxon-Mobile or BP did much if any work in the shale boom.

XOM went hog wild.

https://en.wikipedia.org/wiki/XTO_Energy

Exxon Mobil (XOM) Loses Top Credit Rating as Debt Level Rises

“We believe Exxon Mobil’s credit measures will be weak for our expectations for a ‘AAA’ rating due, in part, to low commodity prices, high reinvestment requirements, and large dividend payments,” according to the S&P.

Additionally, the S&P noted, “The company’s debt level has more than double in recent years, reflecting capital spending on major projects in a high commodity price environment and dividends and share repurchased that substantially exceeded internally generated cash flow.”

[ROCKMAN]

Goner - "XOM went hog wild." XOM didn't go wild drilling shales...they went wild buying reserves from company that had developed them. In fact the XOM acquisition of Cross Timbers emphasizes my point: the year that XOM gobbled them up the Cross Timbers reserves represented more then XOM reserves additions for that years. IOW they bought a sh*tload more existing reserves then they developed by drilling themselves. And to be clear those reserves were mostly NG and not oil. BTW they gave XTO $31 billion in XOM stock and assumed $11 billion in debt so a price of $42 billion. If they hung on to that stock would be worth about $37 billion today.

But to be fair XOM has used the XTO machine to acquire other resource players...and much of that NGplays. But XOM also used XTO to leverage a $3.2 billion deal to access oil/NG opportunities in the Russian Arctic. That hasn't turned out too good thanks to those sanctions.

I know it sounds odd but Big Oil can't handle drilling plays like the shales. They may look big on paper but in general they lack the internal manpower. That's why they have to go after big targets like the Arctic...or go after big acquisitions where all the work has already been done.

[Synapsid]

ROCKMAN,

XTO was Cross Timbers? Thanks.

[rockdoc123]

I know it sounds odd but Big Oil can't handle drilling plays like the shales. They may look big on paper but in general they lack the internal manpower. That's why they have to go after big targets like the Arctic...or go after big acquisitions where all the work has already been done.

in my experience it isn't that they lack the manpower, lord knows XOM hired the best and brightest with XTO. The issue is corporate culture and the manner in which they look at business. Years ago when we were all just chasing conventional plays companies would avoid partnering with Shell, Exxon, BP and Total purposefully just because they knew how poor controls over OPEX, CAPEX and G&A those companies had. We used to speak of Exxon as "gold plating" everything they did...got a problem just throw money at it. When you have a huge conventional field with high production rates and relatively cheap drilling costs this all gets lost in the noise. However, when you are dealing with the shales what makes the difference is being the low cost producer. It is much like a manufacturing business where your gains are mainly made through continually cutting drilling, completion and production costs. Companies like XTO, CHK, Pioneer, Range Resources etc all got that. The big companies just have had a hard time changing their corporate culture. That is why after a couple of years pretty much everyone who Exxon had brought over from XTO to help them learn the shale plays left...they just couldn't function in a company that "didn't get it". My guess is this issue had at least something to do with BHP's failure in the EagleFord, although admittedly they were not in the best area.

I remember sitting in a conference overseas where the government had invited Shell and Exxon people to talk about shale E&P. It was hilarious to the extent of being embarrassing. Basically they got up and each reiterated the simple summary of shale that you could find anywhere on the internet. Would have been fine if they were talking to a group of accountants or professionals who knew nothing about the subject or had been holed up in a cave for the last decade but the audience was riddled with experts from successful shale companies in the US and Canada. The Exxon and Shell guys actually thought they were impressing the audience which made it even sadder.

[AdamB]

You mentioned Shell Oil above. Further proof that some oil resources will never make the grade as reserves:

Once upon a time Ghawar was unreachable with a cable tool rig, and might as well have been on the moon.

And then the usual happened, technology changed, and Ghawar has been as normal as baseball and apple pie since then. Or 1901 when the rotary table became wildly successful at SpindleTop, be it speciic or generalized, the concept is the same.

The USGS has concluded that all known or envisioned oil and gas resources are recoverable in their entirety. The only issue is relevance to people today, some of these resources not being possible to convert to reserves because of cost.

The EIA says the same thing. As neither of those organizations were caught out by peak oil mania of a few years back, they seem like more reliable sources on the topic.

The USGS statement, page 5, bottom right hand corner.

https://pubs.usgs.gov/dds/dds-069/dds-0 ... ter_19.pdf

The EIA saying the same thing, except with a chart and an equation:

https://www.eia.gov/workingpapers/pdf/trr.pdf

[Zarquon]

Thanks, guys (and girls, if any).

"Ladies and Gentlemen! ... The Great Prophet Zarquon!
He said he'd come again."

A bit late to the party, as usual. But at least I'm here now.

"Shell just reduced its E&P budget for 2016 to $30 billion. It was physically impossible for Shell to add the BG reserves it acquired by drilling new wells…even when prices were much higher. OTOH Big Oil doesn’t like the revenue loss from lower oil/NG prices."

But if ultimately crude prices are set by refiners (and only indirectly by consumers), are the big integrated companies, all of them big refiners, not able to profit from the current glut, thereby able to offset some of the pain from low crude prices? How much of the crude they refine is their own oil, anyway?

And: If I feed my gas station with gas from my own refinery, which I feed mostly with crude from my own wells, then my profit is the difference between total production costs and the price at the pump. A low crude price drives down the latter, but the crude price is obviously the biggest, but not the only factor in gasoline prices.

Hmmm... there it is
http://www.eia.gov/energyexplained/inde ... ing_prices
The cost of crude is only 48% of gas prices. Seems to me that if I were 100% vertically integrated (I know no oil company is), then I'd be much better placed to weather the storm than somebody who has to make a living just by selling the smelly black stuff.

[Zarquon]

"Shell just reduced its E&P budget for 2016 to $30 billion. It was physically impossible for Shell to add the BG reserves it acquired by drilling new wells…even when prices were much higher."

If we get back to the 500% cost increase in a decade I quoted above (could be 400%, I didn't watch the video again, but thanks for posting the link) - where did those increases come from?
- I understand that exploration success rates are going down - more holes to drill if the prospects are getting more difficult
- better technology (3D seismic etc.) can bring costs down - if you actually find a commercial reservoir you would have missed without it. If not, it's a huge expense for nothing.
- the shale boom in the US drove up drilling and other costs when everybody was competing for the rigs. That trend should have reversed. Then the big IOC's were not particularly active there, anyway. They were bidding against each other to rent 1-billion-a-pop deepwater rigs to explore in the GuoM, off Brazil, off Alaska etc. Aren't rigs like these going for half of yesterday's price, too?

So, where are E&P costs headed in a low-price environment - up or down?