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Michael Lynch: Here Comes The Oil

Production

For much of the past decade, the mantra “the easy oil is gone” could be heard throughout the industry, not just from peak oil advocates.  The idea was that the industry was now having to go to ever-harsher environments and tolerate increasing political risk in order to obtain the needed supplies, which translated into higher costs and, thus, prices.  However, this belief is more wrong than right.

The notion that oil used to be ‘easy’ is often presented as Jed Clampett ‘shootin’ at some food’ and oil bubbles up from the ground, or, more accurately, images of gushers sending oil skyrocketing into the air, emblematic of both the amount and pressure of the oil discovered, a sign that exploitation of the resource is immature.  In the U.S., and much of the world, such gushers are unusual, partly because engineers now control the flows from the beginning rather than letting it run free.

But somehow this translated into the easy oil disappearing roughly in 2003, when oil prices began to rise from $20 to, ultimately, $140 a barrel in 2008.  Few questioned why the change would be so sudden and coincidental with the strike in Venezuela and Gulf War II, both of which removed millions of barrels a day from the oil market for an extended period.

Needless to say, producing oil from East Texas or Southern California seems like it must have been much easier than drilling in 5,000 feet of water for a high-temperature, high-pressure deposit.  On the other hand, talking to veterans of the industry yields a different picture:  former President George H. W. Bush is known to chide ‘youngsters’ by talking about how tough he had it starting out, painting pumps in the California desert.  Presumably a brush rather than a remote-controlled robot.

There are two particular aspects of oil supply that tend to confuse observers.  First, for long stretches of time, much supply growth is concentrated in a few places:  supply does not rise evenly around the world.  Yet those who are pessimistic about supply often point out that most growth is occurring in a few countries, or that many countries are “in decline,” without understanding that this is normal and does not portend either a peak or tight supply in the future.

In the table below, growth by countries in different periods are shown, focusing on the main producers.  In the 1990s, a big part of the gross increase (by country) occurred in the North Sea—Norway and the U.K.  After the 1998 oil price (and ruble) collapse, oil from Russia and the former Soviet Union more generally became the main source of new supply from 1998 to 2008.  More recently, the U.S. and Canada have made the primary contributions.

The other factor is the difference between gross and net supply additions, or more specifically, the extent to which some areas are declining or not, and how that impacts the net change in supply.  This is important because when oil prices are low, or resource nationalism is impeding access to supply, the net growth in supply tends to be lower as declining areas offset the expanding ones.  From 1990 to 1998, only the U.S. showed major production declines (excluding the Soviet Union, where production fell as consumption collapsed along with the economy), but from 1998 to 2008, only five countries—Indonesia, Mexico, Norway, the U.K and the U.S.) accounted for 4 mb/d of declines, offsetting half of the increase from other major producers.

The table below shows how these numbers add up.  (The ‘special cases’ alluded to in column one is the Former Soviet Union and in column three are Syria, Oman, Sudan and Yemen, where political upheavals cut production.)  In the 1990s, when prices were supposedly low, the net increase in non-OPEC production was much stronger in part because—outside of the FSU—few countries were experiencing declining production.

 

What now?  Despite the perception of many that current prices are “low,” the reality is that they are easily sufficient to support the majority of prospective oil development projects, not just ones that have large sunk costs.  A subsequent post will go into some detail about where this oil will be coming from.

Forbes



17 Comments on "Michael Lynch: Here Comes The Oil"

  1. rockman on Sat, 29th Apr 2017 8:08 am 

    “…the mantra “the easy oil is gone” could be heard throughout the industry, not just from peak oil advocates.” The Rockman has not heard one oil patch hand say “the easy oil is gone”.

    But this goes full circle to the misuse of the concept of “producing oil”. Producing oil is producing oil from existing wells. Generating new oil production by drilling new wells is not: that’s oil development.

    The equipment used to PRODUCE wells has improved. Slowly but it is easier/more efficient to PRODUCE oil today then ever before. That’s one of the reasons the US is a major oil producer despite the average well delivering less then 15 bopd.

    And how much more difficult is it to identify new identify new drilling opportunities? It is MUCH EASIER today the ever before to map new drilling opportunities. Yes…easier. Primarily a result of advances in seismic technology. Had the same tech been available in the 40’s and 50’s when the major onshore trends were developed it would probably cut the number of drill holes by 90%+. As mentioned before in the late 80’s the Rockman hit 23 out of 25 wild cats using seismic in a trend that had an historic success rate of just 10% before the tech became available.

    So what has gotten difficult? There are fewer economically viable prospects to drill. The key word being economically. US oil production surged in recent years primarily because oil prices boomed. Proof: when prices fell the rig count fell. And as oil prices increased and stabilized the rig count increased as companies focused on the best remains prospects remaining.

    IOW finding new locations to drill is still much easier today then ever before. For instance the industry has identified thousands of potential locations in the shales and tite reservoirs. But the majority are NOT ECONOMIC to drill today. But every location is already spotted on a map in someone’s file cabinet.

  2. Boat on Sat, 29th Apr 2017 9:18 am 

    rock,

    So all these wells being drilled in the Permian average 660 bpd. 4 years ago they averaged less than 100 bpd. What happened in your opinion for this dramatic rise in per well production.

  3. onlooker on Sat, 29th Apr 2017 9:18 am 

    So then the question to Rock and others will it ever be economical to drill and produce the majority of the reserves that are out their now? If not can the US Oil Industry nevertheless remain viable for the foreseeable future?

  4. Boat on Sat, 29th Apr 2017 9:46 am 

    onlooker,

    The rise in American production, Iran, Iraq and Russia happened at $43-$53 prices. If a supply deficit emerges as reported in 2020 prices would then go up. As prices go up oil that is not economically feasible to drill now will become feasible.
    In countries like the Saudi, Iraq and Iran oil drilling can expand rather quickly with higher prices. What is holding them back now? An agreed to cut in production because of a glut.

  5. onlooker on Sat, 29th Apr 2017 9:55 am 

    “As prices go up oil that is not economically feasible to drill now will become feasible.” Are you sure the US economy and other Economies can handle higher price Oil Boat?

  6. coffeeguyzz on Sat, 29th Apr 2017 10:14 am 

    Rock

    Suggest you glance at the March 15, 2017 article from JPT titled “Momentum Gathers for Austin Chalk Revival”.
    Offers a glimpse of future hydrocarbon development in the US focusing on your old stomping grounds, the Chalk.
    But it could spread far, far beyond that (in fact it has already started), as more permeable reservoir structures are targeted in eastern Colorado, Ohio, and elsewhere combining a slew of tools to extract hydrocarbons from known resources.

    While the seismic evaluations, ultra-precise, fast horizontal drilling, increasingly effective fracturing are all well known, newer refinements continue to enhance the process.
    Two of the more recent aspects are the diversion technologies combined with micro proppant (200/400 mesh).
    The diversion stuff can now temporarily “plug” the bigger fissures found in the Chalk, while micro proppants can dramatically open up large areas of rock where 100 mesh could not access.
    Combined with Vorteq-type pumping facilities where expensive, high pressure pumps are physically isolated from the corrosive proppant slurry, operators continue to obtain tools to extract WAY more hydrocarbons from already-recognized sources.

    Early innings, still.

  7. bobinget on Sat, 29th Apr 2017 11:11 am 

    One learns more about generic oil bidness on these pages than in so called investor chat rooms where EVERYONE’s sole purpose is making money.

    Thank you contributors.

  8. Sissyfuss on Sat, 29th Apr 2017 12:15 pm 

    As long as the Ponzistas can create fiat digits with a flick of their finger, oil will flow til there ain,’t no mo.

  9. Apneaman on Sat, 29th Apr 2017 12:25 pm 

    Here comes more Cancer & the end of your descendants, so keep fucking cheerleading their horror filled future.

    Hopey Dopey deluded liberals still think the humans can be saved by deploying another social justice march – wrong.

    In Defense of Our Earth — A People’s Climate March

    https://robertscribbler.com/2017/04/28/in-defense-of-our-precious-earth-a-peoples-climate-march/

    This sheeple response is exactly what the establishment want. It’s why they help make it happen along with bunk & unenforceable climate “agreements”. Trump is too fucking stupid to see that it’s a ploy to keep them hoping, because if millions of them give up hope and begin despair that will be the point where some of them start sabotaging the cancer infrastructure. Blow that shit up. 100 of them well organized could bring the country to a standstill in one day. Cheaper and safer just to manufacture more false hope.

    TRILOGY FLASHBACK | THROUGH THE LOOKING GLASS: HERDING CATS FOR THE PEOPLE’S CLIMATE MARCH – WHAT WE REFUSE TO SEE

    “It is incredible (as in, difficult to believe) that today’s biggest shills for the Empire of the 21st century double as the iconic symbols of progressive change and activism for the so-called left. Aldous Huxley often expressed a deep concern that citizens could become subjugated via refined use of the mass media. His fears were most prophetic. There is little doubt that if he were alive today, even he would be taken aback by the sheer “success” and madness of it.”

    http://www.wrongkindofgreen.org/2017/04/21/trilogy-flashback-through-the-looking-glass-herding-cats-for-the-peoples-climate-march-what-we-refuse-to-see/

  10. onlooker on Sat, 29th Apr 2017 1:29 pm 

    Oh and Michael Lynch and Forbes are Primadonnas of the Oil Industry and the Status quo

  11. Outcast_Searcher on Sat, 29th Apr 2017 1:35 pm 

    Onlooker, only people that ignore economics, supply and demand, economic data like average incomes, growing US GDP, etc. keep acting like Americans “can’t afford oil” when they were affording it just fine in 2010-2014 at a much higher price.

    This idea that Americans and other first world economies, and even third world economies “can’t afford oil”, even as the global consumption of oil rises each and every year (aside from the 2009 recession) is just mindless short term doomer talk.

    Americans not only can afford oil, they are buying new cars in near record numbers, and MANY of those new vehicles are big, expensive, gas guzzling vehicles.

    So they can buy $50,000ish pickup trucks and $40,000 sedans with 300 HP, gas guzzlers all and many taking premium fuel — but they can’t afford to put fuel in the car?

    Absolutely ludicrous.

    Same thing for place like China, which is now FAR outpacing the US in how many new cars they buy each year. Less big pickup trucks, but the same principles apply.

    Fuel affordability is not even REMOTELY an issue in general unless prices greatly exceed the $100 a barrel level, and then we’ll have to see. (It was an inconvenience in the 2008 bubble, but not a show-stopper by any means).

  12. onlooker on Sat, 29th Apr 2017 1:46 pm 

    And Outcast only the willfully ignorant, ignore this immense debt bubble being created, the irrationally exuberant stock market. And see only the present and refuse to see the temporal nature of our oil bonanza ie. finite resource or that this resource is fundamentally altering for the worse the living conditions on this planet

  13. Boat on Sat, 29th Apr 2017 2:11 pm 

    Onlooker,

    Housing, cars and healthcare eat up a household budget. Fuel prices have a much smaller impact.

  14. Plantagenet on Sat, 29th Apr 2017 5:45 pm 

    Peak Oil is dead.
    Long live Peak Oil.

    Cheers!

  15. rockman on Sat, 29th Apr 2017 10:46 pm 

    Boat – “What happened in your opinion for this dramatic rise in per well production.” It hasn’t changed at all: hz wells that are currently being drilled are longer, have more frac stages and are being restricted to the sweeter remaining locations. Thus, as I’ve explained numerous times, newer wells should be more productive. That have to be at the current lower price or the wouldn’t be drilled. Same reason the EROEI’s of current wells have increased compared to identically drilled/frac’d wells of several years ago: the same well has to produce more oil to meet the required economic threshold at the current oil price.

  16. rockman on Sat, 29th Apr 2017 11:11 pm 

    Looker – “So then the question to Rock and others will it ever be economical to drill and produce the majority of the reserves that are out their now?” Easy answer: no. There were completed/frac’d wells that lost money when oil was $130+/bbl and should not have been drilled. There are wells being drilled today that are money losers and should not have been drilled. As I’ve mentioned before the last Deep Water GOM well the Rockman sat on was a $145 million dry hole. Should the company have drilled it?

    I hope you didn’t say NO. That was a trick question. You don’t know. Even the Rockman doesn’t have an opinion because he was never shown the basis for drilling. The Rockman’s sole responsibility was to help the drilling engineers get the well down without blowing out and killing all of us. LOL.

    You know what companies that don’t ever drill dry holes have in common? They never find oil/NG because they never drill a well. Every drilling project undergoes an economic analysis. And the most difficult assumption in the process: the Ps…probability of success. And companies don’t always drill wells with the highest Ps because such wells typically have much lower reserve potential then the risky ones.

    So yes, an easy answer but one with a fair bit of hair on it. And remember private companies, like the Rockman’s, focus solely on risk/reward ROR factor. OTOH pubcos are very focused on adding booked reserves y-o-y. Just one more variable to that answer.

  17. rockman on Sat, 29th Apr 2017 11:23 pm 

    Coffee – I don’t play in the Austin Chalk these days. But for folks not familiar: the AC carbonate “shale” was the hottest US horizontal oil play in the 90’s. Hot just like the Eagle Ford Shale of recent.

    But one big difference: the AC wells were naturally fractured unlike the EFS that required expensive frac jobs. Easy to expect some companies to experiment with frac’ng hz AC wells especially since much of that trend sits under acreage taken for the EFS.

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