The concept that one should not bet against human ingenuity is key to realizing we won’t run out of oil and there won’t be a sustained runup in prices anytime soon. A few articles showing why I say that. Articles also show the severity of the catastrophic mistake made by the Saudi government.
- There is a difference cutoff for the breakeven price of the company Saudi Aramco and the country Saudi Arabia. US shale producers can crank out tons of oil at prices far below what the Saudi government needs to survive.
- Huge Kashagan oil field in Kazakhstan starts producing
- US shale producers in bankruptcy proceedings are producing almost as much oil as the they were before prices collapsed. They didn’t close in their wells.
10/17 – Gary Sernovitz in op-ed at Wall Street Journal – Trimming Oil Output Won’t Keep OPEC States Afloat – Main idea I draw from article is that if OPEC reaches a deal to cut production, and if they get Russia to go along, and if the cut is enough to push prices up the amount they want, and if none of the producers cheat, then it still won’t keep the petrostates funded at the level they need to keep all their social programs going.
That is a lot of ifs and even if they all happen, it won’t matter much.
Amongst the many reasons this is the case, two stand out to me.
First, for the history of oil production, the easiest and cheapest oil to come out of a field is the first drawn. After that, the oil gets more difficult and more expensive. The opposite is happening in the fracking fields. The breakeven price is lower today in Bakken, Permian, and elsewhere than two years ago and the breakeven price looks to be going lower. That means the frackers can keep functioning with low prices and thrive with moderate increases.
Second, the petrostates need prices in the range of $100 a barrel to keep all their social programs going. The deal in many of the OPEC countries is that the autocratic government makes tons of money from oil and shares much of that with the populace in terms of massive subsidies and well-paid government jobs in return for maintaining social peace.
On this second point, consider the following breakeven prices for producing oil:
- $10 – Saudi Aramco, current production, per linked article above
- $25-$30 – Saudi Aramco, new production, estimated, per article above
- $40 or less – Permian basin, new production, per article above
- $70 to $90 – U.S. frackers back in 2013 and 2014, per article above
- $106 – government of Saudi Arabia
- $131 – government of Iran
- $160 – government of Venezuela
The breakeven for the company Saudi Aramco is different from the government of Saudi Arabia. Saudi Aramco can make money on a new well with a price of $31. The government is in distress at $99 and severe distress at $50.
The massive problem the OPEC producers face is all those independent frackers can make money if prices go up a bit while the petrostates are in distress unless prices go up massively.
The alternative faced by the governments in the Middle East is
… to embark on radical new social engineering, transforming their disenfranchised populations, [who are currently] dependent on state revenue, into dynamic, entrepreneurial, free people.
That is a massive cultural and attitudinal shift. Especially if the time available to do so is just a few years.
So here are the two competing options to consider in the geopolitical realm, according to the author:
If the question is whether American shale producers can ramp up production and drive down their break-even prices faster than OPEC rulers can re-engineer their societies, I’ll put my money on the guys in Midland.
If I were a betting man, I’d side with the fracking wizards.
10/15 – The American Interest – At Long Last, Kashagan Comes Back Online and 10/13 – Bloomberg – Oil From $50 Billion Kashagan Field Starts Flowing to Export – It took 16 years (3 longer than planned) and $50B to develop (for a $30B overrun) the Kashagan oil field in Kazakhstan. The first shipments of crude departed in tankers on 10/7/16.
The owning company says their target is 370,000 bopd by the end of 2017. Wood Mackenzie is estimating average production will be 154,000 bopd in 2017.
Long term target is 1,000,000 bopd.
Let’s look at that 154K bopd average in 2017. Making the massive assumption that prices will be around $50, that would be $7.7M a day (154K bopd x $50/barrel). For the full year of 2017, that would be around $2.8B a year.
At the targeted production rate for the end of 2017 of 370K bopd, that would be an annualized revenue of somewhere around $6.7B a year.
You know where I’m going.
- 154K bopd – average for 2017
- 370K bopd – production rate end of 2017
- 1,000K bopd – long-term target
All that from a field that was only a dream 20 years ago.
So, here goes:
- What Peak Oil?
Here is another indication of how badly the Saudi oil ministers misjudged the US and a free market.
10/24 – Wall Street Journal – Bankruptcy Bust: How Zombie Companies Are Killing the Oil Rally – The concept behind Saudi Arabia increasing their production back in 2014 was that dropping oil prices would crush shale producers, driving them into bankruptcy, getting them to shut down, and taking their oil out of the market.
Here is the latest tidbit of information showing how terribly wrong their decision was.
Seventy oil and gas companies in the US declared bankruptcy in the last two years. Their production levels are about the same as before going into bankruptcy.
On a related issue, the graph at the start of the article says 3 of the 4 biggest coal producers in the US have declared bankruptcy, but their market share is barely changed.
Point of the article is that not even bankruptcy takes the producers out of action or stops the pumping at their wells.
Not exactly what the Saudi oil officials had in mind.
Check out this quote from a names analyst at Wood Mackenzie:
The theory that bankruptcies would help balance the market “was misguided to begin with, … (a)nd people are starting to come around to that now.”