The economics of oil …

In light of the oil glut, Exxon has announced that it’s moth-balling some rigs and cutting capital expenditures.

That fits a bigger trend … supply high, demand slow, prices down, production down.

 

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From a supply side, the economics of the business raise some interesting questions …

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First, the hardcore production economics … every production source is losing money at $30 per barrel.

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A couple of observations …

1) High cost Saudis: I was surprised to see the high Saudi costs.  I always assumed that the Saudis were low cost producers.  Not so.

2) Shale boom & bust … What a roller-coaster ride in places like North Dakota.  When prices were over $100 and supplies were tight, shale makes sense … both from the security perspective (i.e. energy independence) and pure economics (i.e. profits and jobs).

3) The Iranians … With sanctions lifted, they’re back in the game … even with production costs far higher than the current market price.

The Iranians are the wildcard … with emphasis on “wild”.

Obviously, they need to rebuild their market share … and, they’re best situated for a price war?

Why?

First, they have a cost advantage over their political foes: the Saudis and U.S. frackers.

Second, Obama’s “deal” handed the Iranians $150 billion.

That’s a big price-war chest.

Do you think that the Administration considered these implications when crafting “the deal”.

I’m betting the under on that one.

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#HomaFiles

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2 Responses to “The economics of oil …”

  1. Chris Says:

    Ken,

    A couple of clarifying points:
    1) The numbers for the OPEC nations include all the social spending supported by oil revenues. So the Saudi’s need $96/BBL to balance their budgets. On a field cost basis they are still the low cost globally.

    2) The US shale operators consider two types of cost: production costs and drilling costs. On a production cost basis, many wells are cash flow positive in the low $30s. However, they do not produce enough cash to cover drilling costs (CAPEX). So many shale producers are basically declining trusts at current price levels unless they can access capital markets.

    3) There’s a significant backlog of wells that have been drilled, but are not producing but can be brought online with in 30 days if prices reach certain levels. This implies we’ll likely see production and prices follow saw tooth patterns as the supply surplus works itself out over the coming months.

    4) Shale producers have cut back drilling and are focusing on the highest quality areas of shale plays. This focus, coupled with advances in drilling techniques have lowered the cost to drill and complete a well significantly and increased initial production rates. So for much of 2015 we saw increasing production despite seeing fewer wells coming online.

    Shale is still a new game for the industry and the combinations of geology, engineering, business models, value chains, and the global supply/demand backdrop make this a very volatile and uncertain time in the industry. I’m not sure the Saudi’s really understood what they were starting when they began this gambit.

  2. Chris Says:

    Update to my point #2 above, many shale producers are not cash flow positive in the low $30’s but best of breed performance is getting closer to that level.

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