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Oil Exploration
OIL EXPLORATION....Dan Drezner is puzzled by news that that the oil majors are cutting exploration projects:
So, let me see if I have this right:
If oil prices are sky-high, the energy sector explains that it will be slow to develop new fields, because exploration requires massive fixed investments and no one knows what the price of energy will be 5-10 years from now;
If oil prices are low, the energy sector explains that it is unprofitable to develop new fields because… energy prices are low.
Seriously, am I missing something here? Given lag times and the natural propensity to consume more of something when prices are low, doesn't it make sense to "drill, baby, drill" when the price of energy is low?
High oil prices do spur extra exploration, but not by as much as you'd expect. And while uncertainty about future oil prices is certainly part of the problem, I doubt it's a major one: generally speaking, everyone knows which direction oil prices are going in the long term, and it's the opposite of "down."
No, the underlying issue here is that there really aren't that many great places left to explore. Last week, for example, Lesley Stahl of 60 Minutes did a breathless segment on Saudi Arabian oil exploration that would have done credit to a nine-year-old. She went out to Shaybah, a drilling project that's been three decades in the making, and spent ten minutes gushing over the almost impossible odds the Saudis overcame to get the project up and running. 135 degrees in the shade! Hundreds of miles from nowhere! One hundred million cubic feet of sand! 400 miles of pipeline! Oil that didn't want to flow! Storage tanks with roofs that move!
But she never asked the one question she should have: if Saudi Arabia really has as much easily extractable oil as they say they do, why are they building projects like Shaybah? Why not just sink a few holes into the easy stuff instead?
Almost certain answer: because there isn't any easy stuff left. It's either Shaybah or nothing. And that's pretty much the story in the rest of the world too. There just aren't any easy sources of oil left. It's almost all in desolate wildernesses, deep underwater, in polar regions, or locked up in tar sands. And just to make it worse, projects to extract this stuff are risky too. At least half will come up dry after tens of billions of dollars worth of test drilling.
This is why oil companies are so eager to open up the American coast to drilling. There's not really very much oil there in the big scheme of things, but at least it's relatively easy to get to. In the rest of the world, the easy pickings are gone, and the appetite for sinking vast sums to get what's left just isn't always there. Like it or not, we're running out of oil. Spending money on alternatives is looking like a better and better bet to everyone, including even the oil companies.
Regardless, they MUST drill in ANWAR.
Y'know, we sneer at ignorant Africans who denude their landscape of the few remaining trees as the desert invades their lands.
We sneer at the Incans who overran their resources.
Thank goodness we know better and we are better people now, because we would never make those stupid mistakes. Certainly not on a global scale where there is nowhere else to move.
Yeah. We are wiser. We are smarter. We are not ignorant animals like they were. We know better now.
I'm confused...
You may be right about all this, but that doesn't explain why the oil majors are cutting projects. It only deepens the puzzle. If future high prices are as certain as you say, the projects should make as much sense as ever.
Where's Governor Palin and her "Drill, Baby, Drill" now that we need her?
doesn't it make sense to "drill, baby, drill" when the price of energy is low?
These are publicly traded companies. Even if they are seeing a few years forward they are most concerned about next quarter. In the short term it makes the most sense to prospect for oil in Wall Street (by looking for low priced medium sized oil companies with significant proven reserves). It also apparently makes sense to buy oil at todays price, store it offshore in oil tankers (dirt cheap storage cost because of the economic decline) and sell the oil into the three month futures market.
A serious question is why national governments aren't expanding strategic petroleum reserves at today's prices.
-- anyway, yes, further exploration has diminishing returns but 100 dollar a barrel oil will push technology and exploration toward new targets. Tar sand experts and petroleum exploration folks are not going to be out of a job in the long term. It's just a short term hiring freeze.
This is why oil companies are so eager to ....
Well, that and a bit of the main problem with Detroit: A nearly total concern with the numbers of the next financial quarter to the exclusion of important, and even common sense longterm planning.
Although the oil crashers are a little apocalyptic in their interpretation of what happens after an oil crash, two things are outside of the realm of opinion. First, all oil production that we have ever witnessed, whether at the single derrick or national level, has followed the rough shape of a bell curve, with production getting successively easier and easier until a midway point is reached and then it gets harder to produce until the cost of production literally exceeds the value of the oil. The second is the fact that no matter how much oil lies under ANWR or the Atlantic coast, it is still a finite supply, and at the US' rate of consumption, it is unlikely to exceed 10-15 years worth of oil anyway.
It is irresponsible and foolish to run the risk of environmental damage that is part of tapping into a short-lived resource. Unfortunately, with gas back below $2 a gal in most cities, we are likely to see reductions in consumption disappear before our eyes. All of a sudden the annoying coworker who was a decent carpool buddy at $4 a gallon is a little too much to deal with at $1.80
the oil crashers are a little apocalyptic in their interpretation of what happens after an oil crash
Actually AFAIK there is no 'crash' in a bell-shaped curve.
BUT I suppose it depends on what one calls a crash.
People have already starved to death because we (globally) burned our food in our cars.
Recently people have died from cholera because they could not afford the carbon footprint to boil their drinking water.
This will obviously get worse and, IMHO, result in the loss of 3 billion or so human lives. Am I being apocalyptic?
Sure, we can tighten our belts and put up with inconveniences but after that will come bigger problems. The bigger problems have already started for the world's poorest residents.
Is it apocalyptic to expect starvation, disease, and social unrest?
All of a sudden the annoying coworker who was a decent carpool buddy at $4 a gallon...
That, and how change did we actually get at $4/gallon? Doubling the bicycle ride-share, shaves perhaps 1% off the car ride share. From one point of view, big news, but in terms of actual consumption reduction, mostly a yawn.
It's not really in the interest of the oil companies to increase production. Oil is now worth half as much as it was in the summer. To generate the same kind of revenue, they need to double production, which is pretty much impossible, and would be very expensive to do even if it were possible. From their perspective, creating a shortage generates more revenue than maintaining a consistent supply. And creating a shortage has the added benefit of not costing any money. Spending less on production is the best way to maximize revenues. Eventually, this stops working because an individual company that can increase production quickly will do so when prices get really high. So the best strategy would be to buy up easy to reach leases and prepare to ramp up the production after oil prices rise again. In other words, drill and cap a bunch of offshore leases, but don't actually pump any oil until prices rise much higher.
One reason big oil is interested in off-shore is that there's just not many places in the world where they can drill and fully develop and profit from the oil field. Most countries have national oil companies, where at best, you partner with the country, and can be thrown out, or paid off at a moment's notice, as has happened numerous times in recent years.
While the big oil companies may have enough accumulated profits from the recent period of high prices, that they could afford to aggressively drill today, this is not the case for many of the smaller firms, who rely upon credit to fund their operations. The credit crunch, as well as the drop in price is taking a major toll on oil (and other scarce commodity) investments.
There is also a strong human and institutional tendency to plan for the worst case. For an would be oil driller, the worst case is cheap oil once his project is producing. For us consumers the worst case is high prices. Given the events of the past year, the divergence between best/worst case price predictions is now extreme. Many have proposed using taxes to impose a minimum price for oil. Having a guaranteed minimum price would reduce the fears of potential producers (of alternatives as well as drillers [Toyota just put on hold a Mississippi Prius plant]). But I don't think there is any political appetite for such an action.
I am in the industry, and the really bizarre thing that is happening here is that drilling is slowing way down, and rigs are getting shut down, even though it is probably 50% cheaper to drill now than it was just six months ago. A smart company would use their cash reserves to drill leases they have now, shut the wells in, and bring them on line when the price starts going up. Sadly to say, there aren't many, if any smart companies.
I think companies are so scared to get hit on Wall Street that the are laying off people and trying to hold declining profits. Problem is, in the current climate it doesn't matter if profits decline 50% or 35%, you're gonna get the same hit. And when others in your sector report, your gonna get hit again. On the backside, coming out of a recession, a little foresight now could help a company book 100% increases instead of 50%, and that edge on competitors I think that would be worth the short-term hits in a crappy market.
It's better to create a shortage than to avoid one.
flounder,
Most likely that says we haven't hit bottom yet. Why drill now if drilling will be cheaper next month and the month after that? We won't bottom out until everybody thinks we've hit bottom.
I think that is the very definition of deflation. Those with the money hold it because it will be worth more every day. But I could be wrong.
Not drilling due to either high or low prices recalls arguments once held by Republicans with respect to arms control: don't negotiate if you're ahead (as the lead will be lost) and don't negotiate if you're behind (and thus can't catch up).
Add to the mix that the international oil cartel can, pretty much at will, manipulate oil prices so that it could drop the bottom out just when domestic oil exploration and drilling had sunk enormous investments in high price oil. Drilling is a fool's errand.
The ignorance of most of the world about what we do in oil exploration is amazing.
I would like to inform you, that to significant increase of exploration success and country energy potential there is new technology for oil/gas detection.
With new exploration technology (patented invention US 7,330,790) oil industry could make up to three times more oil and gas discoveries than when using conventional technology. And the fact that new technology won't need more investments one is also very important. It can significantly mitigate energy problems.
The technology is designed and successfully tested in the Barents and the Black Seas as well as in the Gulf of Mexico (see: www.binaryseismoem.weebly.com).
geolog,
Pardon my ignorance but am I wrong when I say that the number of discoveries is irrelevant if the discovered pockets of petroleum are smaller and contain less of the good stuff than previous discoveries?
I mean finding a zillion new locations with a few molecules of oil each might sound extremely dramatic but that wouldn't get my car to work and back for one trip would it?
Please enlighten this ignorant one.
Tripp,
Everything isn't so bad.
See www.peakoil.com/forum1.html
Catalog of recent oil discoveries.
Do not worry about your car and cars your children.