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BBC claim about oil discoveries

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BBC claim about oil discoveries

Unread postby Mercian63 » Wed 25 Sep 2019, 03:13:13

There is an article about oil on the BBC website:

https://www.bbc.co.uk/news/business-49499443

Towards the bottom it contains the claim:

There was a time when it seemed as though oil might simply start to run out - "peak oil" was the phrase - pushing prices ever higher, and giving us the impetus to move to a clean, renewable economy.

In fact, oil is being discovered far more quickly than it is being consumed.


Is the latter point about discoveries true? It's a while since I did much reading on PO, but my recollection is that oil discoveries peaked about 50 years ago.

Is the writer getting confused with "recoverable reserves" growing more quickly than consumption? And is even that claim safe?
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Re: BBC claim about oil discoveries

Unread postby Pops » Wed 25 Sep 2019, 18:31:25

It's a good and evergreen question.
First, "discoveries" are a guess, perhaps educated but a guess that is inevitably revised.
Second, most oil is "owned" by states so their pronouncements are inherently political
Third, reserve numbers themselves are dependant on many factors including the price of oil on the last day of the year or some such, Roc knows the answer.

Here is a reserve to production ratio chart I found, this is number of years reserves at current production

Image

The huge jump in the green line is venezuela tar, huge resource but hugely hard to produce. The chart is from BP reprinted here but you can see the latest on page 15 here:
https://www.bp.com/content/dam/bp/busin ... report.pdf
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Re: BBC claim about oil discoveries

Unread postby Plantagenet » Wed 25 Sep 2019, 18:52:47

Mercian63 wrote:There was a time when it seemed as though oil might simply start to run out - "peak oil" was the phrase - pushing prices ever higher, and giving us the impetus to move to a clean, renewable economy.

In fact, oil is being discovered far more quickly than it is being consumed.


Is the latter point about discoveries true? It's a while since I did much reading on PO, but my recollection is that oil discoveries peaked about 50 years ago.

Is the writer getting confused with "recoverable reserves" growing more quickly than consumption? And is even that claim safe?


I started a thread on this very topic here at peakoil.com some years ago. The issue is how to account for shale oil deposits like the Bakken or the Permian Basin in Texas.

When companies like Pioneer began to recover oil in the Permian basin through horizontal drilling and fracking, suddenly there were huge new resources that were exploitable. The Permian Basin alone may still hold ca. 70 billion bbls of oil----comparable to Ghawar, the largest known "conventional" oil field in KSA. Put all the US oil shale deposits together and over 100 billion bbls of oil was "discovered" in the US alone in last couple of decades.

These huge new shale oil resources don't normally appear in lists of new oil discoveries, however, because people always knew the oil was there. It was just a matter of developing the technology and spending the big bucks to enable the oil to be recovered.

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Re: BBC claim about oil discoveries

Unread postby Outcast_Searcher » Wed 25 Sep 2019, 19:15:12

Plantagenet wrote:
Mercian63 wrote:There was a time when it seemed as though oil might simply start to run out - "peak oil" was the phrase - pushing prices ever higher, and giving us the impetus to move to a clean, renewable economy.

In fact, oil is being discovered far more quickly than it is being consumed.


Is the latter point about discoveries true? It's a while since I did much reading on PO, but my recollection is that oil discoveries peaked about 50 years ago.

Is the writer getting confused with "recoverable reserves" growing more quickly than consumption? And is even that claim safe?


I started a thread on this very topic here at peakoil.com some years ago. The issue is how to account for shale oil deposits like the Bakken or the Permian Basin in Texas.

When companies like Pioneer began to recover oil in the Permian basin through horizontal drilling and fracking, suddenly there were huge new resources that were exploitable. The Permian Basin alone may still hold ca. 70 billion bbls of oil----comparable to Ghawar, the largest known "conventional" oil field in KSA. Put all the US oil shale deposits together and over 100 billion bbls of oil was "discovered" in the US alone in last couple of decades.

These huge new shale oil resources don't normally appear in lists of new oil discoveries, however, because people always knew the oil was there. It was just a matter of developing the technology and spending the big bucks to enable the oil to be recovered.

Cheers!

I suspect the reporter is clueless and the thing increasing over time is known recoverable reserves.

Technology, as is often referred to re oil, greatly enhances productive reserves over the long run. This is reflected, IMO, in the gradually increasing global (gray) line in the chart.

The fast crash doomer crowd, such as shortie, like to harp on new discoveries lagging consumption. Of course, they also like to pretend reserves don't get meaningfully increased by technology over time, to enhance their FUD ghost story re oil quickly running out.

And of course, past trends don't ensure future results. If green tech doesn't dramatically reduce the need for fossil fuels for transport, even absent AGW, there WILL come a time when cheap oil for transport reaches a major shortfall vs demand. Predicting when apriori, however, seems well nigh impossible.

I'm guessing declining demand from green tech will make net global oil more available and cheaper over the next few decades. But not dirt cheap, as things like the global petro-chemical industry are projected to grow like crazy over those same decades. Green tech. buying us time in no way solves that problem down the road.
Given the track record of the perma-doomer blogs, I wouldn't bet a fast crash doomer's money on their predictions.
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Re: BBC claim about oil discoveries

Unread postby Mercian63 » Thu 26 Sep 2019, 02:18:47

Thanks very much for the informed responses.
Superficially, it appears that recoverable reserves are growing at least as fast or faster than consumption. Presumably the recoverable reserve of an oil field is an educated guess, and heavily contingent upon expectations of the price of oil.

I always felt the weakness in the "simple Hubbert peak" anticipation of peak oil was not taking enough account of price rises + technology.
That said, governments nowadays are to a large extent legitimised by the "cheap oil" lifestyle they facilitate, and expectations grow by each generation. I grew up in quite comfortable circumstances in the 60s and 70s, but few of my peers then expected to enjoy a foreign summer holiday more than once or twice during their adolescence. Few families had more than one car, and it was probably a pretty basic car like a Cortina or a Viva (this is UK). Nowadays a winter and summer holiday abroad every year is taken as virtually a divine right by the vast majority in employment, as is driving to work (alone) in the second or third sophisticated, powerful car of the family. I won't even start on the "right" to cheap clothes, food from the far side of the world, amazing digital gadgets etc etc.

Behind the scenes, the whole pleasuredome is kept inflated by an every-increasing heap of debt.
In the UK, we are taking on more and more debt, but national productivity has not increased in ten years. That's crazy!

It's no mystery that governments are dragging their feet over Climate Change. To act decisively would hack away at their own legitimacy to rule. Cheap oil is inherent in the social contract.

I'm becoming a bit ponderous here, but what I'm getting at is a subtle but potent cocktail of rising expectations clashing with steadily rising (real) oil prices, against a backdrop of rising debt, generation by generation. This would undermine public faith in democratic government, unless there were leadership powerful enough to alter the above-mentioned "cheap oil" expectations. Personally, I don't believe it will happen. Since when did governments balance the books?

I foresee progressive stratification of societies into what amount to caste systems, as the Haves (essentially, the rentiers and their expert servants) continue to exploit positions of commercial power to sustain their "cheap oil" lifestyles whilst the Have-nots (salaried employees and semi-employed contractors) lose status. This has already been going on in the US for decades and the trend has spread.
In this scenario, nation-states would decline in influence relative to corporate power. This is dangerous, as the lack of government direction in a crisis like 2008 would likely be curtains for all concerned.

What makes this scenario plausible to me is the gradualness of it, plus, it's already happening and has been under way for decades.
There is a last factor, the chile sauce you might call it - overcrowding. The frustration of the Haves that wherever they go on their globe-trotting lifestyle, or wherever they try to distract themselves in their 12-cylinder cars, they are hindered by plebs, waves and waves of plebs. A hatred of crowds will grow across the arrogant classes. They will have a powerful collective interest to exert their private power against any collective power to draw as much wealth up to their level as possible to strangle the overcrowding problem. Perhaps this is how Climate Change will be "solved"? Then comes the big debt avalanche, and it all falls into history...

Whew! Right, those are a few thoughts for the day.
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Re: BBC claim about oil discoveries

Unread postby Plantagenet » Thu 26 Sep 2019, 12:03:41

Mercian63 wrote:I always felt the weakness in the "simple Hubbert peak" anticipation of peak oil was not taking enough account of price rises + technology.


Yup. Hubbert also developed a mathematical model that purportedly predicted exactly when peak oil would occur. This model has proven to be incorrect because rising prices allowed production of large amounts of oil from tight shales and other unconventional sources. Hubbert was aware of the huge amounts of oil in these unconventional reservoirs but believed that it couldn't be produced in large amounts.

Mercian63 wrote:That said, governments nowadays are to a large extent legitimised by the "cheap oil" lifestyle they facilitate, and expectations grow by each generation. I grew up in quite comfortable circumstances in the 60s and 70s, but few of my peers then expected to enjoy a foreign summer holiday more than once or twice during their adolescence. Few families had more than one car, and it was probably a pretty basic car like a Cortina or a Viva (this is UK). Nowadays a winter and summer holiday abroad every year is taken as virtually a divine right by the vast majority in employment, as is driving to work (alone) in the second or third sophisticated, powerful car of the family. I won't even start on the "right" to cheap clothes, food from the far side of the world, amazing digital gadgets etc etc.

Behind the scenes, the whole pleasuredome is kept inflated by an every-increasing heap of debt.
In the UK, we are taking on more and more debt, but national productivity has not increased in ten years. That's crazy!

It's no mystery that governments are dragging their feet over Climate Change. To act decisively would hack away at their own legitimacy to rule. Cheap oil is inherent in the social contract.

I'm becoming a bit ponderous here, but what I'm getting at is a subtle but potent cocktail of rising expectations clashing with steadily rising (real) oil prices, against a backdrop of rising debt, generation by generation. This would undermine public faith in democratic government, unless there were leadership powerful enough to alter the above-mentioned "cheap oil" expectations. Personally, I don't believe it will happen. Since when did governments balance the books?

I foresee progressive stratification of societies into what amount to caste systems, as the Haves (essentially, the rentiers and their expert servants) continue to exploit positions of commercial power to sustain their "cheap oil" lifestyles whilst the Have-nots (salaried employees and semi-employed contractors) lose status. This has already been going on in the US for decades and the trend has spread.
In this scenario, nation-states would decline in influence relative to corporate power. This is dangerous, as the lack of government direction in a crisis like 2008 would likely be curtains for all concerned.

What makes this scenario plausible to me is the gradualness of it, plus, it's already happening and has been under way for decades.
There is a last factor, the chile sauce you might call it - overcrowding. The frustration of the Haves that wherever they go on their globe-trotting lifestyle, or wherever they try to distract themselves in their 12-cylinder cars, they are hindered by plebs, waves and waves of plebs. A hatred of crowds will grow across the arrogant classes. They will have a powerful collective interest to exert their private power against any collective power to draw as much wealth up to their level as possible to strangle the overcrowding problem. Perhaps this is how Climate Change will be "solved"? Then comes the big debt avalanche, and it all falls into history...

Whew! Right, those are a few thoughts for the day.


Those are excellent thoughts, and I agree with almost everything you've posted there.

Our current situation is most grave. Its highly unlikely the government will do anything substantive about any of the problems facing us. They are far too busy yelling at each other over Brexit or Trump's impeachment to have time to think about mass extinction due to climate change.

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Re: BBC claim about oil discoveries

Unread postby Pops » Thu 26 Sep 2019, 15:49:11

Very good!

Reserves are indeed a function of price and as the price is currently 3x the price in 2000, a calculation must be made as to the relative utility available for any particular price. Presumably as oil with lower production cost is depleted, the cost must rise, not because cost (or thermodynamics or any other esoteric consideration) is the basis of price, but simply because price is based on scarcity. Taken together, without higher price, more expensive oil will not be produced.

So production may continue increasing for some period, but at what price?

I'm somewhat of a luddite to begin, and much of the material available from folks supposedly knowledgeable reinforced my view early on. Frankly, the shortcoming in my earliest assessments was a lack of confidence in technological advancement. Directional drilling, hydrofracking, xheavy production, scaling of PV, expansion of wind, battery tech, vehicle tech, even lighting efficiency have have all combined to mitigate scarcity 'enough' so that my personal wild ass guess of big problems by the mid-teens was averted.

I made big changes in the oughts in part because of po. It's all good, didn't hurt me, but a lesson I now take into account. The impossibility of mitigation seems less daunting to me now, though non-hydro renewables are still a fraction of the total. All we have to do is survive global warming, bio-collapse, peak population, and the next world war.

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Re: BBC claim about oil discoveries

Unread postby rockdoc123 » Thu 26 Sep 2019, 16:52:38

Let me clarify the Reserves issue once again since numerous folks here (Short for one) keep equating exploration discoveries with replacing Reserves. The press doesn't help as they also clearly don't have a clue what the term Reserves means. Many who post here and go on and on about Reserves clearly are confusing the various categories.

By definition, all Reserves must be economically recoverable at the time of booking. Resources, on the other hand, are hydrocarbons that are discovered or known to exist but are currently not economic.

Reserves are divided into 3 categories, Proven, Probable and Possible. 1P reserves refers to Proven only, 2P refers to proven plus probable and 3P refers to proven plus probable plus possible. The guidelines for booking are that Proven reserves should have a 90% probability of being produced under current conditions with little in the way of additional capital. There is a special category of Proven reserves called Proven Undeveloped or PUDS which first became important for booking very large gas reserves and then became important for the unconventional reserves. The view is that PUDs are known to be there with very high certainty but need an additional well in order to be produced. Probable reserves or P2 have a 50% chance of being produced under current conditions and require additional expenditures to be elevated to P1 or Proven category. Possible reserves are usually those that sit between or close to existing wells where seismic or another similar tool have demonstrated their presence. They have a 10% chance of producing but of course need a well to move up to Probable and Proven categories.

The issue here is that when someone discovers hydrocarbons in an exploration program what they usually report is either a 3P or Resource number. What companies report in their filings in the US is Proven reserves (Proven and Probable in Canada) and production is balanced yearly against Proven reserves. Reserve replacement as measured by companies and by groups like E&Y, BP, WoodMac, IHS Energy etc. is the difference at year end between Proven remaining reserves and produced reserves in that year. But probable and possible reserves are always being upgraded so the Proven category can remain the same or grow each year even though a large portion of the original Proven reserves have been produced in a given year. This is why over the past 5 years companies in the US have replaced reserves by 160% on average and also why BP's analysis of reserve life for various countries often remains static for many years even though there is ongoing production. This highlights the issue that you cannot compare Proven reserves to new discoveries as a means of understanding depletion. And the EIA, IEA, BP, SEC, TSX etc all mean Proven Reserves when they use the term Reserves.

Plant was correct in pointing out that there was a large increase in Proven reserves in the US due to unconventional technology improving but the story is somewhat more complex. Price was also important. We saw this first with natural gas reserves booked in North America which jumped upwards quickly back when natural gas was seasonally bouncing up and around $10 - $14/Mcf. Companies like Encana one year looked like gold, the next year looked like dung and then the following year looked like gold again due to reserve adjustments based on price. The reserves were still there but they had dropped down a category (just to be upgraded when the price rose seasonally). It happened again when oil prices first hit over $100/bbl and suddenly all the heavy oil in Canada and Venezuela became economic resulting in a huge jump in proven reserves. Increased price along with land access and better horizontal testing and completion technology resulted in much of the unconventional becoming economic once again increasing reserves in North America and places such as Argentina. With prices falling all of these companies had to take reserve write downs. On the books they seemed to have less reserves but what really happened was their P1 decreased but P2 increased meaning 2P (proven plus probable) didn't actually change and indeed when prices recovered P1 reserves increased.

It is very difficult to know how much oil is actually left to be produced for several reasons:
- although we have a good understanding of P1 and likely 2P in most places we often have little idea of 3P and probably zero idea of Contingent and Prospective Resources.
- it is very difficult to make predictions of what may or may not be recoverable in the future given predicting oil and gas prices is a bit of a mugs game and advancing technology and prices go hand in hand (technology is unlikely to advance quickly in a low price environment). This does become important given that in conventional reservoirs around the world the average Primary recovery is somewhere around 30% but Secondary recovery can be quite high in water flood or gas sweep scenarios such as in Saudi Arabia (~70%) recovery. Going from 30% to 70% recovery is obviously non-trivial. This becomes even more important in the unconventional tight plays where average Primary recovery is in the 3% - 5% range. Just increasing that to 15% is very significant given the size of the in place resource.
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Re: BBC claim about oil discoveries

Unread postby Mercian63 » Fri 27 Sep 2019, 03:05:04

Excellent replies, especially that by rockdoc123.

A few questions:

Do all countries/regions report reserves in a consistent way? You note differences between USA and Canada. Worldwide, do producers report a mess that gets sorted out by analysts at places like IHI and WoodMac? Possibly with the assistance of a little inside knowledge?

How political are these proven reserve numbers? Would there not be a temptation to report the same proven reserves (or years of production remaining) every year? On the basis that rising reserves could set off expectations that could be difficult to sustain, whilst falling reserves have an obvious negative impact on public image.

How thoroughly are proven reserves independently audited around the world?

Concerning reserves and price, how is it that the "years of production" lines on the chart shown by Pops do not show an obvious correlation with oil price? They should rise to a peak in 2008 and then fall away as the oil price collapsed, followed by a slow rise. The sharp rise for Venezuela is sustained after the fall in oil price - politics?
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Re: BBC claim about oil discoveries

Unread postby rockdoc123 » Fri 27 Sep 2019, 13:03:14

Do all countries/regions report reserves in a consistent way? You note differences between USA and Canada. Worldwide, do producers report a mess that gets sorted out by analysts at places like IHI and WoodMac? Possibly with the assistance of a little inside knowledge?


most countries now adhere to reserve reporting guidelines developed by SPE along with AAPG and required by SEC for reporting. Those guidelines almost verbatim for the Canadian ones (COGEH) and the only real difference is that in reporting to SEC US listed companies only are required to report Proven Reserves whereas in Canada they report Proven and Probable reserves. The rules of how those reserves are calculated are the same. Countries and companies who work there need to use major banks for financing their oil and gas activities and those banks adher to the standards so it is easier for them to rate, risk and rank individual projects.

How political are these proven reserve numbers? Would there not be a temptation to report the same proven reserves (or years of production remaining) every year? On the basis that rising reserves could set off expectations that could be difficult to sustain, whilst falling reserves have an obvious negative impact on public image.


For companies that are listed on major exchanges or governments that have National Oil companies listed on public exchanges, there are laws that require regular independent third-party audits of reserves. Those auditors have to sign off on the reserves booked and are legally liable for their work. For private companies there is no such control other than the fact these companies will one day likely want to list (i.e. equity event for founders) which means their books need to be held to the same standard as a public co. We saw that with Aramco going for public debt this year. They had to have their reserves and financials independently audited and it demonstrated they had not been fabricating reserves as had been claimed by many over the years.

How thoroughly are proven reserves independently audited around the world?


If you are publicly listed on a major exchange you will have your reserves audited regularly. Rules were traditionally less stringent on foreign exchanges such as Singapore but that has been changing over the years so they come closer to mimicking what is required by the SEC. Major oil and gas firms such as Shell and BP have to report to the SEC, TSX and LSE so they have rules stacked on rules. Years ago I worked in Russia and at that time there was little in the way of requirements for Russian companies to submit audited reserves. Nowadays the large Russian companies either work in other jurisdictions (meaning they have to report there adhere to those rules) or they hold foreign debt which requires the same level of disclosure as if you were listed on a major exchange.

The reserve life index plot you ask about (regularly published by BP) is simply a plot that shows how much Proven reserves each country has left at the end of that year. As I said previously what happens over the year is that Proven reserves are produced and Proven reserves are added either through upgrades from Probable and Possible Reserves due to commodity price increase or upgrades due to technology improvements or something affecting the economics of those reserves. The fact that they remain flat means reserves are being fully replaced year on year, if they are decreasing it means that they are not replacing production (for various reasons) and if they increase it means they more than replacing reserves.
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Re: BBC claim about oil discoveries

Unread postby Mercian63 » Sun 29 Sep 2019, 07:56:29

Rockdoc123, thanks once again for the detailed explanation.

There is one point, although I may be just being obtuse.

The reserve life of Venezuela shot up in 2006/08 as the oil price rose. Why did it not fall back as the oil price collapsed in the recession? Similarly, why did other regions not see a large rise in reserve life with higher oil prices? You note that reserves are revised in line with commodity price changes, so the effect should have been seen across the world (surely?).
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Re: BBC claim about oil discoveries

Unread postby marmico » Sun 29 Sep 2019, 08:40:38

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Re: BBC claim about oil discoveries

Unread postby rockdoc123 » Sun 29 Sep 2019, 10:54:03

The reserve life of Venezuela shot up in 2006/08 as the oil price rose. Why did it not fall back as the oil price collapsed in the recession? Similarly, why did other regions not see a large rise in reserve life with higher oil prices? You note that reserves are revised in line with commodity price changes, so the effect should have been seen across the world (surely?).


I can't speak directly to the Venezuela issue as I haven't seen the reserve bookings. My guess is much of the heavy oil was brought on stream with all of the heavy expenditures for steam and other treatments having been capitalized previously. What that means is that on a point forward basis the costs involved are lifting costs only (all the other investment having been capitalized). That would mean the economic break-even for Proven reserves is a lot lower than it previously was. But again I don't know the exact reason. With regards to other countries if their production is old and not a lot of new production that can be added through exploration then all of the reserves are P1 and all you will see is depletion even if prices rise.
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Re: BBC claim about oil discoveries

Unread postby Darian S » Tue 01 Oct 2019, 13:37:42

Some speculation:

The rumors of vast unprofitability of shale companies, even at high oil prices, suggest to me that it wasn't some revolutionary tech that allowed shale play to take place, the play was done even if unprofitable.

The timing around the 2005 conventional oil peak, suggests that it was done with the expectation that there'd be no significant competition from conventional oil and there'd be exhorbitant prices. The U.S did quantitative easing and artificial low interest to further lubricate the finances, even so many were still unprofitable.

OPEC managing to offer some competition by increasing production wasn't expected, and drove many to bankruptcy.
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Re: BBC claim about oil discoveries

Unread postby rockdoc123 » Tue 01 Oct 2019, 13:49:44

The rumors of vast unprofitability of shale companies, even at high oil prices, suggest to me that it wasn't some revolutionary tech that allowed shale play to take place, the play was done even if unprofitable.

The timing around the 2005 conventional oil peak, suggests that it was done with the expectation that there'd be no significant competition from conventional oil and there'd be exhorbitant prices. The U.S did quantitative easing and artificial low interest to further lubricate the finances, even so many were still unprofitable.


I was there working with one of the companies that pioneered shale gas E&P in the US. At first it was not economic due to high drilling and completion costs. Technology and a manufacturing mentality dropped those costs by more than half and it did become economical. At the start we were looking for natural gas because the US had apparently run out of conventional gas and seasonal prices were hitting $10+ /Mcf. With so much success the gas prices dropped but oil rose and the business moved to looking for gas with large liquid volumes which also became successful. People always speculate what might be if say OPEC folded or oil prices rose etc. but in reality oil and gas companies work on the premise of only doing those things that can be profitable at the current price forecast which generally is the average price plus an inflation adjustment. Companies get caught in wild price fluctuations, over spending on land and acquisitions when prices rise and then being caught with high loan payments when prices drop. Predicting price is a mugs game, the successful companies have found a way to over time average out, muddling through the bad times and making hay in the good times. Unfortunately there hasn't been good times for awhile, the industry being a victim of it's own success with potential supply outpacing demand.
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Re: BBC claim about oil discoveries

Unread postby Pops » Tue 01 Oct 2019, 14:09:37

Darian S wrote:The timing around the 2005 conventional oil peak, suggests that it was done with the expectation that there'd be no significant competition from conventional oil and there'd be exhorbitant prices.

Probably right but there have been many improvements since: drilling multiple wells from one location, longer wells, amortized equipment, competition, etc.
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Re: BBC claim about oil discoveries

Unread postby Darian S » Tue 01 Oct 2019, 14:19:58

rockdoc123 wrote:
The rumors of vast unprofitability of shale companies, even at high oil prices, suggest to me that it wasn't some revolutionary tech that allowed shale play to take place, the play was done even if unprofitable.

The timing around the 2005 conventional oil peak, suggests that it was done with the expectation that there'd be no significant competition from conventional oil and there'd be exhorbitant prices. The U.S did quantitative easing and artificial low interest to further lubricate the finances, even so many were still unprofitable.


I was there working with one of the companies that pioneered shale gas E&P in the US. At first it was not economic due to high drilling and completion costs. Technology and a manufacturing mentality dropped those costs by more than half and it did become economical. At the start we were looking for natural gas because the US had apparently run out of conventional gas and seasonal prices were hitting $10+ /Mcf. With so much success the gas prices dropped but oil rose and the business moved to looking for gas with large liquid volumes which also became successful. People always speculate what might be if say OPEC folded or oil prices rose etc. but in reality oil and gas companies work on the premise of only doing those things that can be profitable at the current price forecast which generally is the average price plus an inflation adjustment. Companies get caught in wild price fluctuations, over spending on land and acquisitions when prices rise and then being caught with high loan payments when prices drop. Predicting price is a mugs game, the successful companies have found a way to over time average out, muddling through the bad times and making hay in the good times. Unfortunately there hasn't been good times for awhile, the industry being a victim of it's own success with potential supply outpacing demand.

I've been hearing for years that most shale companies are unprofitable, even when we had high oil prices.

Also heard that natural gas production from such collapses by like 85% within a few years. So not sure what they're looking for, with that, if that's true.
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Re: BBC claim about oil discoveries

Unread postby rockdoc123 » Tue 01 Oct 2019, 17:03:33

I've been hearing for years that most shale companies are unprofitable, even when we had high oil prices.


a number of times on this forum I've pointed out that those who make this claim seem to be incapable of understanding financial reports. They continue to report on Cashflow figures that show no profits but don't seem to realize those numbers include non-cash items such as DD&A which sometimes can be as large as revenue in any given year. Those non-cash items say nothing about how the business is doing, you need to look at cash in (revenues from sales ) and cash out (E&P costs, operating costs, land costs, interest costs etc) to see what cash is on hand. Also it is important to understand that oil and gas companies that do not pay dividends are expected to grow production and hence corporate value by the shareholders. That means that most of the cash from production needs to be reinvested. Having large amount of working capital at the end of the year is looked at as being a bad thing for independent oil and gas companies, shareholders want to see that reinvested. There are a bunch of metrics that are commonly used by oil and gas financial analysts for looking at companies and those do not show the health issues you point to for most companies. The big problem right now is there isn't a lot of attraction in the market to oil and gas investments.

Also heard that natural gas production from such collapses by like 85% within a few years. So not sure what they're looking for, with that, if that's true.


this is a product of the tight reservoir. It was predicted years before the business took off by Terry Engelder (a rock mechanics prof and former grad of Texas A&M Centre for Tectonophyics). The high rates are a product of gas in fractures being depleted, those created fractures have permeabilities in the Darcy to tens of Darcies range. The matrix permeability is on the other hand down in the nano-Darcy range. Hence once the fractures have been drained of flush production it takes time for the matrix to replenish the propped fracture. That rate of replenishment generally determines the flat rate at which shale well production levels out. Companies were fully aware of the two stage production in shale or tight siltstone wells. But the high rates usually pay all costs out and after that the low rates are continuous predictable cashflow with very little in the way of on-going operating costs. These wells can be producing at 50 bbls/day during the flat part of their production for a decade or more depending on the intial EUR of that well. If you have 1000 wells producing like this (not uncommon in the shale players) thats 50,000 bbls/day or somewhere around $640 MM/year in netback revenue at current price. You need to look at full cycle breakeven costs (Rystad Energy regularily publishes this info). As long as the full cycle breakeven is less than current price the company is making money on their production.
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Re: BBC claim about oil discoveries

Unread postby Darian S » Tue 01 Oct 2019, 19:31:40

rockdoc123 wrote:
I've been hearing for years that most shale companies are unprofitable, even when we had high oil prices.


a number of times on this forum I've pointed out that those who make this claim seem to be incapable of understanding financial reports. They continue to report on Cashflow figures that show no profits but don't seem to realize those numbers include non-cash items such as DD&A which sometimes can be as large as revenue in any given year. Those non-cash items say nothing about how the business is doing, you need to look at cash in (revenues from sales ) and cash out (E&P costs, operating costs, land costs, interest costs etc) to see what cash is on hand. Also it is important to understand that oil and gas companies that do not pay dividends are expected to grow production and hence corporate value by the shareholders. That means that most of the cash from production needs to be reinvested. Having large amount of working capital at the end of the year is looked at as being a bad thing for independent oil and gas companies, shareholders want to see that reinvested. There are a bunch of metrics that are commonly used by oil and gas financial analysts for looking at companies and those do not show the health issues you point to for most companies. The big problem right now is there isn't a lot of attraction in the market to oil and gas investments.

how about bankruptcies, haven't there been many for the past few years?
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Re: BBC claim about oil discoveries

Unread postby rockdoc123 » Tue 01 Oct 2019, 19:45:04

how about bankruptcies, haven't there been many for the past few years?


was discussed at great length by Rockman on this forum. Bankruptcy doesn't mean what you think it does. The vast majority of these companies entered into Chapter 11 which gives them time and cash to restructure, refinance or sell their company. In a few cases companies do go under but it is very few in the scale of things. Most exit in a few months time stronger than they were before. This is due to what I pointed out previously they were leveraged and the oil price dropped quickly and unexpectedly catching where suddenly their revenues could not cover debt carrying costs.
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