[GHung]

CNN -
These countries are getting killed by cheap oil
http://money.cnn.com/2014/10/30/investi ... index.html

The price is not right for many oil rich nations.

Oil is selling for roughly $83 a barrel on the global market. That's bad news for Iran, Nigeria, Venezuela, Russia, and Saudi Arabia, among others. They need the black stuff to trade at far loftier levels in order to balance their budgets.

Iran's budget, for example, is built on oil at $135 dollars per barrel, according to data from Deutsche Bank and Thomson Reuters compiled by DoubleLine Capital.
Russia has oil budgeted at $100, while Saudi Arabia will break even at $95 per barrel....

Iran breaks even at $135?! KSA at $95? How can Iran's budget be built on an oil price it's never seen (on average)?

[rockdoc123]

Iran breaks even at $135?! KSA at $95? How can Iran's budget be built on an oil price it's never seen (on average)?

This is not what "break even" price refers to. It actually refers to the price at which NPV = 0 or lifting a barrel of oil is no longer profitable due to revenues being completely offset by costs. The hurdles you refer to are relatively artificial in that they are the budget targets these countries have set for themselves in terms of internal spending. So when price drops they throw out some of that budgeted spending, usually large capital programs. Why this number is important, however, is that countries such as Saudi Arabia count on their internal spending on projects to keep the population happy (jobs, infrastructure, social programs etc) so if they cut too much or for too long they risk internal political instability. But there is a long way from the price required to meet their former budget demands ($94/bbl) versus their actual lifting costs ($5/bbl).

[ROCKMAN]

Folks – we really need to start speaking more clearly otherwise we’re going to waste a lot of time posting and counter posting. First, on a variety of levels, a “breakeven price of oil” is a completely meaningless concept. There is cash flow (net and gross), both positive and negative. There is rate of return, payout time, net present value, etc. IOW terms that more clearly define the profitability metric.

And even more basic: is someone talking about the economics of drilling new wells or producing existing wells? So often I see folks refer to the cost of “producing oil” when it’s clear they don’t mean actually producing oil from an existing well but are referring to spending capex to drill new wells. The “profitability’ of producing an existing well is the net income determined by the price a bbl is sold less the cost (“LOE”) to produce that bbl. Nearly everyone outside the oil patch greatly overestimates the LOE. Typically less the $10/bbl to even under just a few $’s. The KSA can generate a very large net income selling their oil for $20/bbl or less. I have a well in LA that I can sell my 400 bopd at a positive cash flow even if oil fell to $5 bbl. But that’s a positive cash flow. It doesn’t mean I would drill a comparable well if oil were selling for $5/bbl. It also doesn’t mean I would recover 100% of my investment in that well if oil suddenly dropped to $5/bbl. So here’s the question: what is the “breakeven price” for that well? Don’t feel bad if you can’t answer because I can’t either since I don’t know what that means.

As far as oil budgets of the exporters go I wish folks would finally get clued into how those budget are planned. They are based for the most part on anticipated revenue. And yes there are some minimal budget required to meet mandatory expenditures. And the KSA will tell you what that number is IMHO. Don’t have a link handy but read a report that a short while back the KSA had a huge budget surplus that year…something like $70 billion. And the reason: they had not anticipated the spike in oil prices and had built their budget based upon a lower anticipated income. Pretty much the same way everyone on this site handles their own finances. Old joke from S La: why do you pay your Cajun workers weekly and not monthly? Easy answer: if paid monthly that coonass would be the richest SOB in the neighborhood for that first weekend…and then his family would eventually go hungry before the next paycheck comes in. No: the KSA isn’t going to have a budget short fall because they have already adjusted the revenue projections and are modifying their budget accordingly. They will have every $ they need to handle their NEW budget. And that goes for their drilling budget also: if they anticipate current oil prices to stay down for an extended period they are going to cancel some projects that can’t be justified at that price. Just like every other oil company on the planet will do.

I don’t expect everyone (especially the MSM) to fully understand the dynamics of the oil patch. But that also doesn’t excuse them for making blatantly misleading representations of the situation IMHO.

[Tanada]

Adding to what rockdoc123 said above, Iran has a vastly larger population than KSA. That means for every social welfare program the budget has to also be vastly larger. Subsidized virtually free fuel and food imports at subsidized prices are just two aspects. National healthcare, the education system, you name it and the bigger the population the bigger the expense. Add in the factor that Iran exports far less oil to the world market than KSA and all these factors together mean to fit the budget that Iran wants to spend they need to sell their exports for $135.00/bbl. When they can't do that something has to be cut out of the budget.

[GHung]

I used "break even" since that was initially what the article implied; what their economies need to not accumulate a lot of debt and still provide current services and subsidies (not what they need to bring their oil to markets). I take a more systemic view than some here seem to; as in not robbing Peter to pay Paul's bills while keeping the broader economy happy.

Iran's $135/barrel price point seems pretty,,, hopeless? They certainly aren't going to make up that shortfall exporting pistachios. Hoping for some comments along those lines.

How locked in do exporting economies become to a certain price range, and what happens when those prices aren't met? Of course, Iran's price point seems questionable, but if KSA needs $95, what happens as ELM kicks in?

[ROCKMAN]

Ghung - So if I understand you the thought is that Iran needs $135/bbl for the oil from their eisting wells to meet their minimum budget requirements. Of course how do you define "minimum budget requirements": different folks have vastly different idea on what the govt MUST fund. Here's what I found on the subject of Iranian budgets. Apparently the Iranian govt doesn’t appear to be as concerned about dealing with the budget as do some other folks. Not that they have easy days ahead but it looks like they are beginning to do a good job getting control of the situation. How much oil they export and at what prices they must get isn’t determined by their budget requirements. It’s just the opposite: they are fixing their heavy handy govt spending habits. How that is received by the locals will be a different question. From last February:

Reuters - The first state budget proposed by Iranian President Hassan Rouhani has sailed through parliament, handing him a political victory as he seeks to build domestic support for international negotiations on the country's nuclear programme. Parliament approved on Sunday a budget bill worth 7,930 trillion rials ($319 billion at the official exchange rate) for the next Iranian calendar year, which starts on March 21, official media reported. The budget slows growth in spending in an effort to repair state finances that have been ravaged by economic sanctions. Expenditure is to rise about 9 percent from the original budget plan for the current year - not nearly enough to keep pace with inflation, which is running near 40 percent.

Rouhani, who took power last August after elections, needed only 10 days of debate to get his budget passed, an apparent endorsement of his administration as it tries to get the sanctions lifted by reaching a deal with world powers on Iran's disputed nuclear plans. By contrast Rouhani's predecessor Mahmoud Ahmadinejad, who took a hard line with the West, continually feuded with parliament over economic issues including the budget, which was passed with delays of several months.

Rouhani told parliament in December that Ahmadinejad had squandered oil revenues on cash handouts and housing projects, and that Iran faced a mix of high inflation and stagnating growth, with the economy shrinking 6 percent in the past year. His budget suggests he views spending discipline as key to rescuing the economy; the 9 percent rise in his plan is much lower than the 31 percent increase envisaged in Ahmadinejad's last budget. Iranian-born economist Mehrdad Emadi, of the Betamatrix consultancy in London, said that after years in which Ahmadinejad tried to offset the economic sanctions with huge jumps in government spending, Rouhani was starting to reimpose normal budget constraints, a process that would take years. Last week parliament approved politically sensitive plans to slash subsidies on fuel and food, potentially saving some 630 trillion rials annually in subsidy payments.
Implementation of the reform has been delayed for several months while authorities try to soften the blow to consumers by handing out food packages to over 15 million poorer families. Next year's budget plan projects a rise in spending on government operations of about 14 percent to 1,950 trillion rials.

{The recent drop in oil prices might force them to lower that amount}

[GHung]

Thanks, Rock. You've pretty much fingered the reason for posting the link to this article; the utter cluelessness of the MSM as to POD; there is no set price these exporters need to remain 'solvent', any more than there are absolutes in much of anything. Meanwhile, comments over there are gloating about how the US is kicking Russia's and Iran's asses by driving down oil prices. Not any mention that we (the US) is still the net importer in this rubber room, or that things will swing back the other way, likely sooner than later, about the time a lot of shale players begin shutting production.

Meanwhile, my position that we are better off when those countries' economies are in better shape than worse drew plenty of attacks.

[ROCKMAN]

Ghung - It is strange how some folks ignore how many economies are linked together on various levels...whether we like it or not. Why would the residents of a country that uses a very disproportionate share of the global oil resources rejoice over worsening economic conditions of a couple of major suppliers to the global oil export market? Like I said before about a guy being happy about his mother-in-law driving off a cliff...while he's in the passenger seat. Simple thoughts for simple minds, I suppose.

[rockdoc123]

nd even more basic: is someone talking about the economics of drilling new wells or producing existing wells? So often I see folks refer to the cost of “producing oil” when it’s clear they don’t mean actually producing oil from an existing well but are referring to spending capex to drill new wells. The “profitability’ of producing an existing well is the net income determined by the price a bbl is sold less the cost (“LOE”) to produce that bbl. Nearly everyone outside the oil patch greatly overestimates the LOE. Typically less the $10/bbl to even under just a few $’s. The KSA can generate a very large net income selling their oil for $20/bbl or less. I have a well in LA that I can sell my 400 bopd at a positive cash flow even if oil fell to $5 bbl. But that’s a positive cash flow. It doesn’t mean I would drill a comparable well if oil were selling for $5/bbl. It also doesn’t mean I would recover 100% of my investment in that well if oil suddenly dropped to $5/bbl. So here’s the question: what is the “breakeven price” for that well? Don’t feel bad if you can’t answer because I can’t either since I don’t know what that means.

Breakeven price is defined as I said....the price at which cost and revenue are equal. It is a concept used extensively by investment banks to rank various production and it is used by most majors as the floor by which they judge projects (i.e. NPV10 = 0). It can be a moving target with static prices and changing costs but it is meant as a measure taken at a given point in time. For instance I can determine what the breakeven price for a SAGD project in Northern Alberta is based on todays discounted oil price and the existing cost structure. If prices drop below the breakeven price and costs remain static the project becomes uneconomic if costs are contained it might be that the breakeven price can be lowered. I watched this happen in the Marcellus where in the early days the breakeven price was around $7/Mcf and within a couple of years dropped to between $3 and $4/Mcf due to cost control. Breakeven price as it is applied by the investment banks refers to all in costs to drill, complete and develop a particular project. It has nothing to do with lifting cost which refers to the cost required to produce a barrel of oil from a well where all drilling, completion and development costs have been sunk. Using SA as the example its lifting cost is actually around $5/bbl meaning that for current production they could deal with very low prices as long as no additional capital was required, their breakeven price is higher (the MRC wells are expensive but also have high production rates) and I am lead to believe sits somewhere around $40-$50/bbl and their price to balance their budget sits around $92/bbl. Toss out additional spending on desalination plants or other public works and the price to balance the budget drops. Sustained low commodity price will almost certainly result in lower steel prices and hence lower cost environment which would lower the breakeven price somewhat.

[shallow sand]

I have noticed that the "break even" price for oil exporters seems to keep going up, while the "break even" price for continued US onshore horizontal development seems to be going down, as per US media reports. Almost never is there any discussion, even lightly, of what "break even" means in either scenario. It seems the more right wing the news agency, the lower the cost of US onshore horizontal development, whereas the more left wing the news agency, the more talk of losses, Ponzi scheme, etc. I notice the inverse when it comes to oil exporters "break even". I do notice that most spokesmen for US public independents say they are not slowing down CAPEX. However, I also note they are also saying they see low prices as a short term phenomenon and may adjust CAPEX if low prices persist. I have given up on getting good information from US media on this issue. Especially when I started hearing them ask if any US companies were "capping" wells. Give me a break.

[ROCKMAN]

Shallow - Again it begs the question: breakeven price of producing existing wells vs drill new wells. Do you notice that the breakeven conversation seems to focus on how exporters will deal with reduced cash flow from their exports. And that has nothing to do with the economic analysis of drilling new wells. So once again I'll make the point that non-oil patch hands have varying definitions of the term "breakeven" and, more important IMHO, don't typically understand whether they are discussing drilling or production economics.

[shallow sand]

ROCKMAN. Exactly. Is there incentive to keep producing our little stripper wells at the current price? Yes. Some of our LOE is under $20 or even $10. Is there incentive to drill many new wells like these at the current price or even $100? No way. Question still out is incentive to drill the high cost horizontals. As discussed previously, there will be overshoot, don't want to admit reality. However did notice both Shell and Conoco intend to cut CAPEX onshore US for 2015. However cutting CAPEX seems to be the rage for majors.

[ROCKMAN]

Shallow - "However cutting CAPEX seems to be the rage for majors." Just one way for pubcos to increase "profits" as well as deliver bigger dividend checks: cut budgets. Whatever it takes to keep stock value from falling. And then add the difficulty of finding new large projects to develop.