Category Archives: Oil & Gas

The Great Oil Slump of the 2020s – Part 1, Supply

Guest blog by S. A. Shelley  Many readers are probably wondering what is happening with oil prices, especially with all the efforts by OPEC+ to curtail supply and all the efforts by various trade groups and governments (e.g., Denmark and China) to affect demand. Every year in January, big companies (BP, EXXON) and big organizations (OPEC, EIA, IEA, OECD) release their energy reports. I don’t have quite the scale or resources that they do, but I try my best. Back in 2016, when I wrote about oil demand peak, I included a chart of a possible oil price path for the next few years (Fig. 1). I was under on the demand and supply a bit, and relied upon the 2016 futures prices to guide my price thinking, but I was damn near bang on with the timing of the most recent collapse of oil prices, Q3 of 2018.

Fig 1 – SAS prediction of oil price collapse from 2015

In order to get a sense of the future direction of oil prices, and by extension which technologies to invest in or which companies will thrive or fold, we need to consider the current likely future states of oil supply and demand in order to make a self-educated forecast of where the equilibrium will be in the future (down). This blog, Part 1, will focus on oil supply and another blog, Part 2, to be posted later, will focus on oil demand. So, all other things being equal, as oil prices crashed (again) then that means that the world must be in an oversupply condition (again). Sit back, grab a beer and a smoke, or a Timmies and a donut, and hold on tight as I lead you through a wonderful collection of charts and divinations.

I. Increasing Oil Supply due to Increasing Tight Oil Production

A lot of global oversupply is the result of the amazing growth in shale oil production in the United States, primarily the prolific production coming out of the Permian Basin in West Texas (Fig. 2).

Fig. 2 – The Rise of Shale Oil

In terms of global oil supply, the United States has surpassed both Russia and Saudi Arabia to become the largest oil producer in the world (Fig. 3).

Fig. 3 – Monthly crude oil production

(Aside, this resurgence of United States oil production, along with the fracturing of OPEC, was forecast back in 2008 by Paul Michel Wihbey in his prescient book, “The Rise of the New World Oil Order”).

The United States is not done growing its supply. Once the pipeline constraints in West Texas are resolved, Permian basin production can increase by another few million barrels of oil per day. Furthermore, if Americans can replicate the success of the Permian basin with the Bakken, Marcellus, and eventually the Greater Green River Basin (with estimated reserves of over 4 trillion barrels of oil, yes trillion), the United States will become totally self-sufficient in oil, and oil from the Middle East could be stranded. One thing I never wager against is American ingenuity to figure things out, but hopefully without reverting to again using atomic bombs.

There are huge tight oil formations in other places too, including Argentina, Canada, Mexico, and Poland, and thus the potential for tight oil production from those places is also significant. Though maybe I should not include Canada as a potential tight oil supplier as Canada is suffering a politically self-inflicted mess that is making it difficult for Canada to maintain its current supply to global markets let alone expand it. The particular problems of Canada will be addressed in a separate blog.

II. Decreasing Oil Supply due to Mismanagement by Low Tech Legacy Suppliers

In addition to the growing shale oil production in the Unites States, there is the danger of Low Tech Legacy Suppliers (LTLS), also coming back on stream to quickly add to the global oil supply. My two favorite LTLS states are Mexico and Venezuela (Fig. 4). Looking at oil production in the last ten years together between Mexico and Venezuela, the loss of production is almost 1,400,000 bbls / day.

Fig. 4 – Crude oil production decline in Mexico and Venezuela

This loss of production is mainly due to mismanagement of fields and infrastructure and not so much because of depletion or loss of access to world markets. Thus, with a bit of investment in hardware and meritocratic operators, the production of these two states could quickly increase back to historical levels which would then add back those 1,400,000 bbls of oil / day to an already well supplied global market.

A similar review of production in states like Libya, Angola, etc., reveals that compared to historical averages, those states are under-producing by around 500,000 bbls / day, each, and those states could also, if the political will and competence is there, quickly rebuild production volumes.

Iraq, much affected by war, has started to rebuild its production and is already producing at around 3,200,000 bbls / day with plans to increase production by another 1,500,000 bbls / day. Iraq is another LTLS country which just needs to apply a bit more hardware and people to ramp up production quickly.

OPEC+ has for reasons of self-interest been ignoring the problems of Venezuela, and OPEC+ has probably been grateful that many other oil states have also been under producing.

III. Increasing Oil Supply due to the Application of “Big Data”

A new technology that is contributing to a boost of oil production and upward revisions of recoverable reserves is digital and data analytical technology. Though not yet widely applied in the industry, where it is applied, data analytics is already having a profound impact on production and costs. A good example is the announcement by BP that with better data analysis, BP was able to find additional, significant reserves in way of its Thunder Horse platform in the Gulf of Mexico. The result of this discovery at this one site is forecast to boost oil supply by about 100,000 bbls / day.

It is not just the success with reevaluating data about existing fields; data analytics is now being used to improve efficiencies and output across the whole spectrum of oil production activities, including drilling. Most applications of “big data” to oil are still somewhat hush-hush, but conversations with a few neighboring firms suggest that the impact is substantial.

IV – The World is Awash with Oil

The global oil market is already well supplied with oil and it won’t take much to flood the global markets. Adding even just a fraction of the technically available LTLS or tight oil to the global markets is very doable in the short term. Perhaps just an additional 100,000 bbls / day of new supply is enough to flood the market and keep oil prices low, even very low, because supply is plentiful but demand is weakening. Demand will be discussed more in Part 2.

Right now suffice it to say that oil supply and oil oversupply is here to stay for a while.

Published by Our World of Energy

It’s a Trap!

Guest blog by S. A. Shelley

Revenue Trap: ” A focus on revenue at the expense of weakened strategy and reduced profits.”

Oil prices seeming to whipsaw back and forth, weekly, daily, even hourly is the result of many oil and options traders clearing trades at whatever slim profit they can eke out. Of course, multiply that slim profit by the huge volumes traded and well, Wall Street still makes a hefty profit whether oil is up or down.

Other folks are starting to talk about oil supply and demand hitting a new equilibrium, or that shale production has peaked. Fair enough. In fact, I agree that efforts to constrict oil supply are starting to have some effect. I doubt however that restricting oil supplies will be effective in the long run. OPEC claims that compliance with the production quotas is strong, but on the other hand, some OPEC members have recently vowed to opt out of the quotas and to even increase production. Don’t forget about some of the African members of OPEC who were free to pump and sell as much oil as they could. Continue reading It’s a Trap! Published by Our World of Energy

Can the United States become Energy Self-Sufficient?

Guest blog by S. A. Shelley Absolutely, the United States can become energy self-sufficient, but it is unlikely to become self-sufficient in oil production.

Since the end of last year and the beginning of this year, several governmental and intra- governmental bureaucracies, independent think-tanks of all sorts and large energy producing companies have issued annual energy outlooks in one form or another. I characterize them as “Business as Usual” (BP, Exxon, etc.), “Business is Changing” (Shell, Carbon Tracking Institute, etc.) and “Fanciful Delusion” (OPEC). In all forms these reports are interesting reading. Continue reading Can the United States become Energy Self-Sufficient? Published by Our World of Energy

OPEC Supply Cuts Will Accelerate Decline in Oil Demand

Guest blog by S. A. Shelley Imagine a future where your choices for purchasing a new car include numerous options for electric vehicles (EV’s) and internal combustion vehicles (ICV’s). But competing with the typical federal or state subsidies for the EV’s are hefty rebate checks from OPEC or Russia for purchasing a fossil fuel burning ICV. That may sound crazy, but in today’s age of large supplies of easily produced shale oil, inexpensive renewable energy options, and changing societal demographics, it’s only a matter of time before the current oil glut results (see EIA figure below) in stranded oil resources that are too expensive to produce for many of the suppliers, drastically reduced supply-side control from oil producers, and a critical need for oil suppliers such as OPEC to find creative ways to stimulate demand.

Source: EAI Dec 2016

Continue reading OPEC Supply Cuts Will Accelerate Decline in Oil Demand Published by Our World of Energy

Did the World Hit “Peak Oil” in 2015 and Nobody Noticed?

Guest blog by S. A. Shelley The concept of “peak oil”, i.e., the time when production of oil hits its maximum and then declines, has been postulated for decades, but, as time passes, industry experts push the peak oil date further and further into the future. However, the events of the past 2 years since the collapse of the price of oil raise an interesting question: “Did we experience peak oil in 2015, and nobody noticed?” As someone who’s had a career in the oil and gas industry and who observes and tries to understand both the successes and failures of that industry, I postulate that we might have passed such a crucial point in history. Continue reading Did the World Hit “Peak Oil” in 2015 and Nobody Noticed? Published by Our World of Energy

Toxic Nature of Energy Dialogue in the US

Aerial view of Aliso Viejo gas leak
Aerial view of Aliso Viejo gas leak

A perfect example of the toxic nature of the energy dialogue in this country arose last week in Southern California. There has been a long running environmental disaster north of Los Angeles involving a methane gas leak from an injection well at the Southern California Gas storage facility near the town of Aliso Viejo and the community of Porter Ranch. Continue reading Toxic Nature of Energy Dialogue in the US Published by Our World of Energy

The Human Side of the Oil Price Collapse

To the typical American consumer, the recent collapse in the price of oil is viewed as a good thing on several levels: 1) it means more money is available from income to spend on other fixed or discretionary expenses and 2) it means the evil oil companies are hurting. The downsides are rarely considered or understood. For example: 1) some of the highest paying professions in the US are in the oil industry and employees are being laid off by the tens of thousands, 2) economies in cities like Houston, and entire states like North Dakota, that are highly dependent on the oil industry are in a tailspin, leading to foreclosures, business failures, and reduced public spending, 3) oil companies that took on too much debt during the oil boom are declaring bankruptcy and defaulting on their debts, which has contributed to the recent stock market slide, and 4) one of the goals of the Saudi Arabian orchestrated price collapse, that of destroying the US shale oil industry and maintaining Saudi market share has been successful. Continue reading The Human Side of the Oil Price Collapse Published by Our World of Energy

Cancellation of Keystone Pipeline – A win for climate change or misplaced symbolism?

On Friday President Obama announced that he had rejected the request from TransCanada to build the Keystone XL oil pipeline which ultimately would have transported 800,000 barrels a day of heavy oil from the Canadian oil sands to the US Gulf Coast refineries. This ended a seven-year review that had become a contentious political issue and symbol of the debate over his climate policies.  Continue reading Cancellation of Keystone Pipeline – A win for climate change or misplaced symbolism? Published by Our World of Energy

Shell Abandons Arctic Exploration

The oil industry has taken a number of huge hits this year with the collapse of oil prices. The latest is the announcement from Royal Dutch Shell that they are abandoning their Arctic drilling program in the Chukchi Sea off the coast of northwest Alaska after years of effort, over $7 billion spent, numerous regulatory battles, and unrelenting challenges from environmental groups. Shell announced that they found indications of oil and gas, but that they weren’t sufficient to warrant further exploration in the so-called  Burger prospect. The well will be plugged  and abandoned in accordance with U.S. regulations. The problem is that geologists believe the Arctic holds a quarter of the world’s undiscovered conventional oil and gas reserves. Shell’s high profile failure likely means that other companies won’t make similar attempts, and this resource will be unavailable to meet both US and world demand for oil  that is expected to grow by another 10% over the next several decades. Continue reading Shell Abandons Arctic Exploration

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