I don’t know much about fashion, but I have heard that blue is the new black. And I know that by the time I buy blue, everyone else will be wearing green.
In the oil business, modish pundits are now pronouncing, “60 is the new 90,” championing the thesis that productivity gains, cost improvements and price wars have pulled the global clearing price of oil to $60/B, down from $90/B a couple of years ago.
The oilfields of the world share some similarity to fashion ateliers.
Designers in Paris and New York collude every fall to convince us all to wear new colours in the spring. Meanwhile, innovators in Houston and cartel leaders in Vienna claim that $60 a barrel is the new, long-term marginal cost of oil. As a result, a $90-per-barrel breakeven cost has become about as appealing to an oil investor as a wide necktie to a millennial.
Here’s the thing: Not everyone looks good in blue and not all producers have the rocks, expertise and infrastructure to make their financial statements look good at $60 a barrel.
Behind the scenes, the oil industry has become more discerning in its own way.
If there is one new style that’s obvious it’s that “short-cycle” investing is the new “long cycle.” In other words, smaller capital outlays, faster payback and more certain returns have become de rigour for oil and gas investing. No more multi-billion-dollar, decade-plus projects that are subject to the long-term vagaries of geopolitics, the threat of expropriation, corruption, civil war, policy uncertainty or outright obsolescence.
Like a traditional navy suit, investing in short-cycle projects is a fad that’s unlikely to end soon. Premier American oil fields like the Permian, Eagle Ford and Bakken are conducive to drilling when the trading screen flashes $60 in New York. So too are equivalent Canadian oil plays that are becoming trendy.
More of the world’s oil resources are in vogue too at $60/B, more than there was two years ago. “Half-cycle”, partially developed projects with easily accessible infrastructure can be in business at $60 or less. And cheap Middle Eastern oil never goes out of style – although the above-ground social costs are necessities that can make a barrel considerably more expensive.
But this is all just theory in a world that is largely running on excess oil inventories.
There isn’t any field-tested evidence to suggest that there are enough short-cycle, $60 projects to satisfy our world’s near 100-million-barrel-a-day appetite over the next several years. What is certain is that the geography of places where under $60 works is not as great as where $90 used to work.
From a free-market perspective, it’s long been noted that about 80 percent of the world’s oil resides under state-controlled oil regimes. Twenty percent exists in places like the United States, Canada and the North Sea. Of that 20 percent, a significant portion was of the long-cycle variety, for example big oil sands and frontier Arctic projects. So, the set of investible opportunities is geographically and financially much narrower than it used to be, at least for now. Admittedly, the 80/20 ratio could become less skewed as new processes open up greater quantities of “unconventional” oil in places like Argentina, Mexico, Russia and China. However, North America is almost a decade further up the learning curve after drilling and completing tens of thousands of wells. Other regions have long-term promise for sure, but it will take considerable time to replicate the U.S. experience in a sub-$60/B price environment.
Once the oil storage glut clears, producing companies will need to ratchet up their upstream spending. Several hundred billion dollars must be invested over the next few years to bring oil out of the ground from a far more concentrated set of opportunities. And that looks problematic when looking at the historically high correlation between oil price – hence cash flow and investment – and costs (see Figure 1). Piling into North American tight oil plays, or even some new ones abroad like Argentina, has high potential to over-capitalize concentrated areas and drive costs much higher. Land prices in many potentially sub-$60 plays are already inflating quickly.
(Click to enlarge)
All of this is to say that $60 may be the new $90, but only until such time as everyone strips the rack of $60 opportunities, driving costs up again. Then just like cycles in the fashion business, the oil industry might be wearing $90 again.
But all of this fashion lingo is just talk right now. The price of oil hasn’t shown $60 yet. The industry is still wearing a skimpy 50 bucks a barrel.
By Peter Tertzakian for Oilprice.com
Truth Has A Liberal Bias on Wed, 19th Oct 2016 7:47 pm
Well Saudi Arabia is fucked so we got that going for us
http://tinyurl.com/gwcb4b5
Hezbollah is probably the best infantry in the Middle East. I’d love to see them take a round out of Saudi Arabia.
rockman on Wed, 19th Oct 2016 10:17 pm
“…investing in short-cycle projects is a fad that’s unlikely to end soon.” Well, they got right. Of course that fad has been running strong ever since the Rockman started 41 years ago. Obviously this fool has never tried convincing management to drill a well that took more then 3 years to recover its investment. Of course offshore field development can take much longer. Which is exactly why only much bigger fields are drilled…especially true with the Deep Water.
Every project the Rockman has seen drilled over the last 4 decades was evaluated on the basis of rate of return. Which is dependent upon the time frame. Big or small, fast or slow dervelopment…it didn’t matter as long as the projected ROR was high enough.
joe on Thu, 20th Oct 2016 1:20 am
We hit peak conventional oil in 2005, the world has struggled to make progress since. Since peak easy oil we have seen China rise up, North Korea rise up, the collaspe of the middle east state systems, nuclear deals with Iran, even the Philipines is changing allies. Peak oil is here, the West is falling apart. You just didnt get the memo.
Davy on Thu, 20th Oct 2016 6:05 am
“What It Takes to Be the World’s Biggest Crude Producer”
“Get your pumping tips from the Russians.”
http://tinyurl.com/htlzg2k
Clyrate on Thu, 20th Oct 2016 7:12 am
Why this article is more irresponsible full of rhetoric and scare tactic to falsely drive up oil prices more than we thought….
David W. Morris on Thu, 20th Oct 2016 7:51 am
Oil will be in a trading range for the foreseeable future between 52 and 30. In the long run technology will overrun oil i.e. solar panels and electric cars and oil will crash. It behooves the oil producing countries to keep the price low to slow the pace of technology.
Bill Stipek on Thu, 20th Oct 2016 7:58 am
Zzzzzzzz!
Don Wiltsie on Thu, 20th Oct 2016 8:12 am
So we know that speculators don’t care about fundamentals and this is just another fear mongering report to boost short term pricing because the author knows the speculators only care about seeing the price of energy rising. Irresponsible and should be illegal.
Roberta on Thu, 20th Oct 2016 8:25 am
Some Economists are predicting oil dropping to $30/barrel before the supply peaks and then going up to $50-$60 in 2017.
Lonie on Thu, 20th Oct 2016 10:00 am
Oil is still the cheapest and easiest method of storing energy… especially mobile energy, so it’s going to be around a long, long time.
Not only that but it has many decades of R & D over substitutes like Hydrogen, wind, solar and biomass for instance, as an energy source. Granted, the massive world population means a huge number of scientists to do R & D means they can catch up pretty quickly, but changing a world-wide infrastructure will take a long time, maybe two or three generations as a guess.
So as a consumer (without family which frees me up somewhat)I can pick the most economical time to make an infrastructure switch. I’ve currently got a pre-order for an 84 MPG 3 wheel auto that keeps me in the oil fed world for at least the life of the little auto, but I can see me adopting a self-contained battery based electric grid for my home as soon as some of the promising battery tech becomes mainstream… maybe more for energy security than anything.
As far as oil price goes, it will pretty much mirror the savings gained through new technology for extraction for the time being. I really don’t see the high cost extraction fields opening up until the lower cost fields are somewhat depleted or at least overwhelmed from demand. In those cases, the profit margin will rise in those lower cost fields while the margins will remain smallish (by comparison) in the hard-to-get-oil fields. The low cost field plays look good for now, but even better when things next get crazy.
cww on Thu, 20th Oct 2016 10:14 am
Lonnie…. I agree with the logic esp in light of world pop increases and overall demand for hydrocarbons vs ooip, costs to extract inexpensive vs more expensive. throw in wars and rumors of wars.
shortonoil on Thu, 20th Oct 2016 10:56 am
It is amazing that there are still people who do not understand that inventories are going up, and have been for more than three years. It is also amazing that they don’t understand that as they do the price goes down; not up.
http://www.resilience.org/stories/2016-10-10/peak-oil-review-oct-10-2016
It is amazing that they think that it is size of King Abdula’s underwear that controls the price of oil, and not its energy function.
It is also amazing that there are still people remaining who buy their baloney.
Back to oil in the $40s in 2017! 2018 is going to be a blood bath for the industry.
Ghung on Thu, 20th Oct 2016 12:15 pm
Lonie said; “…but I can see me adopting a self-contained battery based electric grid for my home as soon as some of the promising battery tech becomes mainstream… maybe more for energy security than anything.”
What are you waiting for? PV has never been cheaper and quality lead-acid batteries can last a decade or more.
Simon on Thu, 20th Oct 2016 12:27 pm
I’ve studied and wrote on the economics of oil and gas for over 15 years now, and I would suggest that now may be the best time to invest in oil. There is a moment in the history of every industry where external factors come together at the same time to create an optimal investment opportunity. I believe this is that time for oil.
O.J.Aspen on Thu, 20th Oct 2016 12:37 pm
Oil will probably Reach 60 dollars through 2017,and I will not be surprised if the oilprice reach between 90 and 100 dollars in 2020.Buy the equities in this field now as they are cheap.O.J.Aspen Owner of O.J.Aspen Oil Ltd.
Joe D on Thu, 20th Oct 2016 1:05 pm
“It is amazing….,and not its energy function”.
Most people ‘believe’ energy is some cosmic karma rainy down from the heavens. It is amazing and sad.
Kim on Thu, 20th Oct 2016 3:11 pm
All hell is about to break loose in the Middle East. I would be long on oil.
rockman on Thu, 20th Oct 2016 3:16 pm
Simon/O.J – “…and I would suggest that now may be the best time to invest in oil.” The companies buying tens of $BILLIONS in proved producing oil reserves for $15 – $20 per bbl would seem to be in agreement. Which means future revenue from those acquisitions still generate a profit at $30/bbl. And a big profit at $60/bbl.
The healthy remaining companies are acquiring proven oil reserves at a lower cost then they’ve been able to for more then 10 years. And almost zero geologic risk compared to drilling. While many companies that drilled wells during the price boom went belly up companies buying those same wells are getting them for a small fraction of what they originally cost. And almost no question of “IF” those wells will be profitable…more a question of how profitable.
As I’ve already mentioned the KSA made a huge strategic mistake by not taking Aramco public when oil was $100/bbl. They could have sold $800 BILLION of stock and then when oil dropped below $30/bbl they might have been able to buy all that stock for $300 BILLION. After all there were large US pubcos that lost 70% to 85% of their stock value with the price bust. So the KSA might have pocketed a half $TRILLION and still owned 100% of Aramco.
The “Golden Rule” has never and will never change: you buy gold when the price is low and sell when the price is high. Always strange to see so many “experts” follow just the opposite biz plan. LOL.
Sissyfuss on Thu, 20th Oct 2016 4:44 pm
Short, with a hundred wives, King Abdul a needs a whole lot of energy function in his underwear.
rockman on Thu, 20th Oct 2016 5:17 pm
Sissy. Wow…a hundred wives? Long ago in my wild youth I had the opportunity to bed just two women at the same. But I decided to pass. I figured dealing with one disappointed woman would be bad enough let alone two of them. LOL.
makati1 on Thu, 20th Oct 2016 5:33 pm
Rockman, perhaps it explains the insanity rampant in the ME? LOL
Oliver A. Harris on Thu, 20th Oct 2016 8:03 pm
VERITABLY, VERITABLY, STRICTLY WISHFUL THINKING!!!!!!!!!!!!!!!!!
shortonoil on Thu, 20th Oct 2016 8:05 pm
“Oil will probably Reach 60 dollars through 2017,and I will not be surprised if the oilprice reach between 90 and 100 dollars in 2020.Buy the equities in this field now as they are cheap.O.J.Aspen Owner of O.J.Aspen Oil Ltd.”
The price of oil is determined by the state of the economy, not the supply of oil. The world is already 5.6 mb/d oversupplied. The amount of oil that it is consuming is the amount that it will consume at $50/ barrel. Unless the economy changes that will not change.
How anyone can think that prices will increase with 30% of the world’s sovereign bonds selling at negative interest rates is exercising sheer delusion.
Northwest Resident on Thu, 20th Oct 2016 9:02 pm
Sheer delusion is the chosen method of many to deal with today’s realities. I hear it is a blissful state of existence — until reality suddenly bites.
green_achers on Thu, 20th Oct 2016 9:59 pm
At this point, you could make a statement with the phrase “Oil Could” followed by any random string of words and it would have as fair a probability of being correct as any other.