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Drilling Efficiency To Keep Oil Prices Low
Submitted by Michael McDonald via OilPrice.com,
Economics 101 tells us that prices in a free market are set by the interaction of supply and demand. The world oil markets have gotten a graphic lesson in that truth over the last year, as the dramatic surge in US oil production has met stagnant demand. This, in turn, has pushed down spot prices by nearly half.
The recent uptick in oil prices, however, has buoyed hopes among market watchers that a strong oil price rally is in order. Unfortunately economics is working against these investors.
Gasoline demand is starting to rise as prices have reached multiyear lows. As it continues to rise, motorists around the world will begin to suck up extra all of that extra supply. That would normally lead to a strong rebound in prices.
But unlike the 2008 fall in oil prices, which was driven by a collapse in demand across the industry, the current price quandary is supply based. And the massive expansion in supply is overwhelming the newfound demand. That may make it more difficult for prices to bounce back.
Over the past few years exploration companies have unlocked extraordinary new unconventional resources like the Alberta oil sands and US shale, leading to a historic increase in supply. More impressive is the fact that even at today’s low prices, there is likely to be some small production increase in 2015.
That is because many firms are looking at new efficiency improvements that should increase oil production while lowering production costs. Statoil, for example, says it has lowered its per well drilling cost by $1 million or roughly 22%, and it can now drill wells faster than ever before. The rise in efficient oil production has led to more than half of the country’s rig fleet being idled with many firms now drilling multiple wells at a time rather than single ad hoc wells. These innovations have led to a 20% fall in the per barrel cost of production according to some industry executives, and more improvements are still to come.
As a result, the EIA is forecasting oil production will rise to 9.2 million barrels of oil per day for 2015 versus 8.7 mopd in 2014. That’s right, an increase in oil output this year even though prices have cratered.
It should not be a surprise, in light of all this, that many industry experts are pretty grim about the future of oil prices, including recent studies announcing that it may be a decade or more before the price of oil hits $100 a barrel again. With drillers able to profitably produce at ever lower price levels, the ceiling on oil prices could remain low for quite some time. We are in a new era.
The new oil price environment will take some adjustments and it will definitely result in economic pain in some areas. At the end of the day, oil companies are starting to get used to the idea of lower prices and they are adapting to the new reality. Now investors need to do the same.
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Demand destruction plain and simple.
To fully understand why oil prices dropped and where the oil market is going you must understand the root cause.
this is my favorite bitch and moan forum!
#doom and gloomers matter!
Unfortunately economics is working against these investors.
No.
As long as bankers continue to work against economics....
And what u and every baffon u writes here don't get is that areas now being milked for low cost oil won't last forever... What will happen then in 2016 I ask? Despite cost improvement s this will force prices higher
Oil has become a tech product, and like all tech products, subject to something like Moore's Law. Peak oil was a fantasy.
What you buffoons don't understand is obamacare, higher rent,s and taxes have sucked all the remaining money out of the middle class. While the fed and bankers have an unlimited supply of FRN, the average middle class family doesn't. Gasoline at $10 per gallon? How long will that last before bank accounts are empty and credit cards maxed out? I guess you guys believe in unicorns and skittles.
Only if QE counterfeiting returns.
EIA projections? We should look at their past projections and compare them to what actually happened. On all fronts, not just production.
War generally escalates because of "energy". This time it won't be different.
If you take into consideration what has been written, gas should be about $2.00 a gallon. The ballance of supply and demand has been destroyed. Like every other market, there is fraud ripping off every consumer.
Since there is about 20 times the market in oil-based derivatives relative to the physical supply of oil, it's not hard to push the price higher for those with the financial muscle--Exxon, Aramco, etc.
Exxon & Aramco my pasty white ass...
try the ICE cartel... BP, Shell, Total, Societe General, Deutsche Bank, Goldman Sachs, Morgan Stanley... they are the real culprits behind all of this... anything Exxon & Saudi Aramco did was purely in self defense from ICE Euro supply chain manipulation and subsequent impact on Brent pricing...
every time someone from Europe points a finger at the US they should look at the three pointing back at themselves, frankly...
Gas is always kind of high in my small rural town due to one station with no others for 10 miles. It's $2.49 a gallon.
Remove the 41 cents a gallon in state and federal taxes and the extra refining costs for boutique fuels mandated by the EPA and the cost of gas is under $2.00 a gallon, even here.
Gasoline is cheaper today than it was in 1970, adjusted for inflation!
Fill'er up.
Yeah right in July 2014 the supply suddenly exceeded the demand and in July 2008 the demand suddenly dropped below the supply.
I heard this argument is now making the rounds. The idea the improved drilling and fracking technology will drive down recovery costs of the new and older oil plays. Well, that is really a debate sitting on a razor's edge of credibility. All new oil discoveries are high recovery cost plays, few will argue that point. That is WHY fracking took off. And frackers. like all smart business men, went after the very best fracking geology FIRST. In short. the recent fracking boom took place on the very best and cheapest plays. Obviously, those easy wells are running out.
The great fracking boom in Easter Europe is already been shown to be a hoax. Poland and the Baltics were lied to, and now the fact that their gas is not recoverable is well known. Ukraine is the new paradise for fracking, yet. that too remains to be seen. Same with England. The miracle of British fracking may not play out as the gas might just not be there in the way hoped. Other places, like California, that made massive headlines for their unlimited frack gas plays, have proved totally false.
Recovery costs is a race between advancing technology and harder to recover oil and gas. Which way it goes is hard to know. But, it might be a zero sum game, the more costly to recover energy plays may get developed because recovery costs can be brought down. But the laws of physics have a stern limit on how cheaply frack energy and deep energy or arctic energy can be recovered.
I don't believe that reduced cost of production will keep energy prices low. The massive difficulty of recovery of every new energy find negates that whole idea.
Believe whatever you like. The costs of fracking have dropped and are still dropping. It's called innovation, look it up. No, it will never be as cheap as vertical drilling, but fracking is getting cheaper and there will be an equilibrium reached where the energy industry makes a profit and people can afford all things that oil does to keep us from living in the stone age.
Almost 30% of all oil use has nothing to do with fuel, by the way. Everyone conveniently ignores that important fact.
Oil is synthetic textiles, fertilizers, herbicides and pesticides, industrial tar, pavement. Essentially it is food and it is water - it is the means of production and delivery that none of pure energy alternatives such as solar, wind, geothermal, tidal and nuclear can substitute.
The only reason energy alternatives appear semi-reliable is because they are still produced with the use of oil. If, say, a solar panel had to be produced solely with the energy generated by a solar panel, then throughout its service cycle, every watt would go towards manufacturing, transportation and material synthesis of the end product. It would be a zero sum game.
Also, cheap oil-powered international transportation made it possible to import goods from anywhere on the planet where their production made most economic sense. Without oil domestic production of many items would revive, but they would by no means be cheaper and more affordable.
Oil affects absolutely everything.
There is not too much going on in the Ukraine. The fracking area in the east Ukraine is off-limits because of the conflict and the western area is small and not overly productive. Fracking is not going to work for the Ukraine. The economic disaster in the Ukraine is telling it's own story.
The politics of Ukraine energy supply and distribution is what has shut down the development. Same for much of Europe and fracking. If the minerals were privately owned they would be going hard at it and producing.
Fracking failures in Eastern Europe is a strawman. The real oil is found in Central Asia and Siberia, mostly untouched. There's more oil in any of those places than the entire Middle East.
hey
that explains everything that's happened in the world since 1990.
(You think Putin knows?)
More liberal views on Keystone expansion project. Ask one of these hipsters why Obama is 400k short in meeting his 1 million electric cars sold. Why don't you dirty liberal cunts purchase the rest of inventory and live in debt.
http://www.desmogblog.com/2015/05/21/transcanada-s-keystone-pipeline-net...
BMW M5, The Power Of Tenhttp://m.youtube.com/watch?v=QL1k8USiO9o
The point of the article--there is one, I think--is so shortsighted that it reminds me of a couple of day traders betting on today's "close." Thus, the only question I have is: Is the author shilling for friends/business buddies who are short or trying to get long?
After traveling to Yellowstone last week I realized that the price of gas must remain low so not to notice the hike in gas taxes.
For the time being oil is an income investment.
Nothing wrong with that. There are some good yields available out there and I'm enjoying them.
Money making money while I play, there's nothing better.
Where is this "new found" demand the author speaks of? Every major macro markets CPI & PPI numbers in both manufacturing and services looks deflationary.
If there's new demand, then why is the PBoC, BoJ, RBA, ECB, Fed., and various other central banks still in easing mode?
I believe it's part of secret fast track.
BMW M5 TV Commercial http://m.youtube.com/watch?v=3bqgQ8cAs7INice machine. I really liked the normally aspirated V-10 of the previous model. I know the new M-5 is supposed to be faster, but I'm not sold on the twin turbo charged, small block V-8.
New M5 is equipped with a 4.8L twin turbos. It does produce more HP. We are spitting cunt hairs. Coming from the 750iL V-12 to M5 V10. It's all the power you need without having to replace the twin turbo. I don't like turbo cars. Perhaps I will change with age, doubt it.
@yencross yep. If nobody has the money to buy a 50,000 large SUV, gas prices aren't going to recover like they did in 04. What can't be paid for, won't be.
And the thing is, the business press is so vapid, or disingenuous, they write like this doesn't even occur to them. Oh, it's such a riddle, why isn't consumer spending recovering when the unemployment rate is down and stawks are at ALL TIME HIGHS!!!1!11!!!
People forget that in hyperinflation, demand crashes because nobody can afford anything. They still live in a unicorns and skittles world where prices will double or triple and demand for all products will remain the same.
The only people who'd remember 'that demand crashes' in hyperinflation are those who lived during hyperinflation somewhere. And also who know what 'demand' is.
Except for a couple of foreigners and senior citizens, in America that would be nobody.
This is propaganda from the oil industry. Even if it were correct it does not explain why companies enjoy production at conditions which produce a negative cash-flow.
I still park my SUV's into a compact parking slip. Fuck off. Don't mandate to us that we need a clown car to fit into your fake society role.
Eat shit and die central planners.
A friggin loaf of bread is $4 (and that's a good deal,because Goldman says there's no "glut" of starch),a quart of motor oil is $4.50 (but Goldman says that's a good deal,because motor oil is packaged in a neat plastic bottle),and Netflix is as valuable as Exxon Mobile (because Godman says renting movies is more important than getting to work)...
Remove the glass steagall Clinton Act. Watch Goldman Sachs ass pucker. Chelsea Clintons daughter is VP of Clinton Foundation and her husband works for ..... Old news
http://www.zerohedge.com/news/2015-02-03/chelsea-clintons-husband-suffer...
Definitely a "Snarky Tyler" post.
"Economics 101 tells us that prices in a free market are set by the interaction of supply and demand."
If this is the case, Aramco would have slammed the spigots shut a long time ago and sat on their thumbs while prices exploded.
"as the dramatic surge in US oil production has met stagnant demand."
The surge is the total and utter desperation that is the completely farcical tight oil industry, which survives on subsidy and structured finance and a wish and a prayer.
"Gasoline demand is starting to rise as prices have reached multiyear lows. As it continues to rise, motorists around the world will begin to suck up extra all of that extra supply. That would normally lead to a strong rebound in prices."
There is no "extra supply". There is just desperate insolvent drillers stuffing storage capacity and hastening their own demise in their absolutely pathetic attempt to stay operational for another day, and Aramco flooding the market in an also desperate bid to kill US tight oil and punish the banks that are providing it life-support. There is no "extra supply," they are just trying to bring (non-existent) demand forward.
"the current price quandary is supply based."
Half right and all wrong. Tight oil supply is peaking and demand can fall faster than supply, as each marginal barrel costs these moronic drillers more than the last.
"Over the past few years exploration companies have unlocked extraordinary new unconventional resources like the Alberta oil sands and US shale, leading to a historic increase in supply. More impressive is the fact that even at today’s low prices, there is likely to be some small production increase in 2015."
Extraordinarily desperate and at immense upfront cost. None of these will ever be profitable. Their EROEI is rapidly approaching 0 or below. Of course they're spinning a production increase, IT'S THE ONLY THING THEY CAN DO TO HAVE A CHANCE AT REMAINING PSEUDO-SOLVENT.
"Statoil, for example, says it has lower particularly around the british isles
ed its per well drilling cost by $1 million or roughly 22%, and it can now drill wells faster than ever before"
This says it all, folks. They are so desperate, and have spent so much money looking for non-existent new conventional fields, that all they have left is to try to cut drilling costs so they can tap more wells into tight formations in a desperate attempt to increase production rates which will only exhaust these never-to-be-profitable reserves even faster.
"That’s right, an increase in oil output this year even though prices have cratered."
Right again. The industry has passed the event-horizon of neo-classical economics. They can push supply as high as they want as fast as they want, what they can't do is make the world's farmers and drivers creditworthy enough to be able to buy any more of it than they are right now. The ignorant idiots in the MSM will keep crying "glut!" and demand will not rebound.
"With drillers able to profitably produce at ever lower price levels, the ceiling on oil prices could remain low for quite some time. "
Ahahahahaha. That's why the entire tight energy industry is bankrupt and practically in liquidation already, right. Prices remain "low" relative to $100, not relative to consumers' ability to pay. Drillers tighten their belts as much as possible, thermodynamics laughs. There will never be more supply than there is right now at the moment the tight oil drillers finally die. It looks like a glut because demand is dead, in reality, it's a dearth. They are hoping they can wait it out until demand picks up again, which will not happen, because the credit system humanity uses to finance oil consumption has broken down (whence global central bank policy since 2000-2008) because said credit is ultimately a claim on things (everything in an economy) which require energy inputs, and the supply of the master energy input, crude, has ceased to grow in both total volume and global net energy terms.
Drilling "efficiency" is a canard for reasons already explained - improvements are subject to diminishing marginal returns, initially low investment brings enormous efficiency gains, but by now, 100 and some years, despite the efforts of the wealthiest most powerful industry in history, each invested R&D dollar yields almost no efficiency gains while the EROEI on the deposits continues to fall. The only reason the drillers retain creditworthiness is a) investors think they can get out fast enough and b) (unlike the world's consumers, drillers are businesses with assets and, until recently, a nominally profitable income stream, and) banks, as should be known to all, book the profit but assume essentially no risk, as the loans are whisked off the books and out the door even before the ink is dry. Same playbook they used for the housing bubble. But now even the banks are getting cold feet. Hence the push for a new round of greater fools to pile in.
Bring back $4.85 premium gas prices. We don't care. Watch transportation costs raise and grocery store items declare inflationary Quantitative Easing.
You will invoke another quarterly revenue loss, Janet will advise. We don't need Corporate Whores, you need us. If we don't spend on your cheap prices, depreciated inventory will land on your shoulder. You play the taxes.
Go peddle your China garbage in Africa.
Much talk and numbers about supply.
NO talk or numbers about DEMAND.
Meanwhile the price of gas at the pumps is getting
back up to pre oil slump level highs even as oil only bounces
from $45 to $60... even though fundamentals say it
should be $75 right now...
As with any economic prediction, the price of oil might stay suppressed for some time; but, then again, it might not...
http://olduvai.ca
So a Bakken well that cost $6M now costs $5M. And this makes marginal benefit greater than marginal cost?
According to the EIA, between 1960 and 2009 world petroleum production increased from 20.99 mb/d to 72.26 mb/d. That is a <b>50 year</b> average annual increase of 2.51% per year. Between 2012 and 2013 world production increased by 0.23% per year.
Between 2012 and 2013 production was increasing at about 1/10 the rate it has been increasing for the last half century. Apparently, according to the "oil glut" theory of recent over production the world has been in a glut for the last half century!!!!!
Stay tuned for the next Fairy Tale --- its about a bear, and some brat kid.
The article tells me that they can drill more wells per rig, but it doesn't say they can get more from a well, or that the number of producing wells is increasing at a rate to offset the decline in production from existing well depletion.
If they cant replace depleting wells with similar new well production then the oil price will go up. If they can then the price will stay low.
Oil prices won't go up unless the FED starts counterfeiting again. Demand has/is being killed by many factors, like higher prices and taxes. If demand falls faster than production, prices would fall in a free market. We ain't in a free market. Oil is like gold, it's a reflection of the US fiat/debt level. Look at this chart;
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=crude+oi...
Notice what happened in Oct., when QE ended.
What we are seeing is the consequence of a system built on cheap oil trying to survive on expensive oil. Growth has stagnated across the economy with the only two remaining vibrant segments being high finance and government. Neither of which creates anything. Conjured credit is the only thing holding this together.
The convergence of two factors has created this momentary surplus. First the economy has been in free fall since the last quarter of last year. Anybody here remember Black Friday? So, demand destruction began to hit. Second, a lot of hot money has been created by the Fed and that money was seeking yield. In a no interest environment with rising oil prices, shale oil and tar sands seemed the rational investment. When most of the big fish in the pond came to the same conclusion, the shale oil bubble was blown. The ramped up production was only marginally connected to the market place of supply and demand.
The only reason a surplus exists is because expensive oil ramped up its production while the rest of the economy either stagnated or contracted.
Zerohedge there you go again with a negative article on oil. Do you really believe that it is about technology vs geology. What you should be worried about is the steep decline that most giant fields experience after a long plateau or the fact that over 60% of our oil comes from these fields that average over 50 years old. How about the fact that we are now selling over 80 million cars a year cuz that adds up you know. So with this new drilling efficiency i guess gold will now be plentiful.
I'm new to ZH. Can you explain the petrodollar recycling? How does new oil development work to import /export supply chain.?
Please help my confusion. I have six months to find my thesis subject on alternative solutions.
"Economics 101 tells us that prices in a free market are set by the interaction of supply and demand."
In the real world prices are set by traders in internet chatrooms with names like "The Cartel".
The free market, a utopian dream.
Or, a central banker's nightmare.
OIL has a long way to go before it finds a solid bottom...
http://www.globaldeflationnews.com/oil-light-sweet-crudeelliott-wave-upd...