Oil price discussion and analysis

[cutz]

I'm not sure what I'm missing but the producers need to shut down wells and go into hibernation just like the rest of the global economy??

Why is this not happening ??

 

[Boggo]

Cadogan, take or leave him but his videos are somewhat entertaining and often informative.
His summary of the oil crisis.

 

[tonyparis]

I'm not sure what I'm missing but the producers need to shut down wells and go into hibernation just like the rest of the global economy??

Why is this not happening ??

I cant work this out either...I have been reading that it is cheaper to keep them running than to stop production,. Surely there is a negative barrel price where this no longer applies!
When the nozzle of your water hose accidentally comes off, you close the tap. The oil industry seems to madly run around looking for buckets??

 

[PZ99]

They should just let it run back into the ground

 

[InsvestoBoy]

I'm not sure what I'm missing but the producers need to shut down wells and go into hibernation just like the rest of the global economy??

Why is this not happening ??

Because it isn't an off switch.

Shutting in a well can damage it. You need capital to restart. You have hedges on that mean you have contracts you need to deliver on. You need cash flow to pay bankers their interest. You lose market share to companies that don't shut.

I'm not saying what should be done or what is right or wrong.

 

[Value Collector]

I'm not sure what I'm missing but the producers need to shut down wells and go into hibernation just like the rest of the global economy??

Why is this not happening ??

Because the "cost if production" is largely front loaded.

Meaning when some one says a shale oil play produces oil at $40 per barrel, most of that $40 is the sunk cost of the original drilling and setup of the well, that is amortised over the life of the well.

Those oil companies that own a bunch of these wells with high sunk costs, also have high fixed costs on their debt, leasing payments, land access fees, wages etc etc.

So even though the price may drop below the $40 break even point, they may have to continue to pump the oil to generate cashflow to pay the fixed costs, even it it means they are bleeding the equity value of the well, by accepting less in cashflow than what it originally cost to set up the well.

 

[cutz]

Because it isn't an off switch.

Yeah I get that there is no off switch !!

Thinking along the lines of buying back future contracts and putting the well into low output maintenance only state, conserving as much cash as possible, sort of like what the biggest consumers of the stuff have done, sounds counter-intuitive to keep pumping, bit like flying empty planes around.

Anyhow definitely no expert on oil matters, more of a curiosity for me.

Also thank's Value Collector for your reply.

 

[PZ99]

Australia says first in line to buy crude to store in U.S. strategic reserve

MELBOURNE (Reuters) - Australia is at the head of the queue to buy oil and store it in the U.S. Strategic Petroleum Reserve (SPR), taking advantage of a glut that has hammered oil prices to 21-year lows, Energy Minister Angus Taylor said on Wednesday.

Australia is close to finalizing an agreement announced in March with the Trump administration to lease capacity in the SPR, part of an effort by Canberra to meet its fuel security obligations with the International Energy Agency and a U.S. effort to help U.S. crude producers.

https://www.reuters.com/article/us-...-store-in-u-s-strategic-reserve-idUSKCN2240AA

 

[Junior]

Australia says first in line to buy crude to store in U.S. strategic reserve

MELBOURNE (Reuters) - Australia is at the head of the queue to buy oil and store it in the U.S. Strategic Petroleum Reserve (SPR), taking advantage of a glut that has hammered oil prices to 21-year lows, Energy Minister Angus Taylor said on Wednesday.

Australia is close to finalizing an agreement announced in March with the Trump administration to lease capacity in the SPR, part of an effort by Canberra to meet its fuel security obligations with the International Energy Agency and a U.S. effort to help U.S. crude producers.

https://www.reuters.com/article/us-...-store-in-u-s-strategic-reserve-idUSKCN2240AA

Is it just me, or is it incredibly stupid to store emergency reserves on the other side of the planet?

 

[Junior]

Just saw this in AFR, maybe there'll be some common sense here:
"
Australia to build strategic energy reserve: Taylor
Luke Housego

The Energy Minister Angus Taylor has announced plans for Australia to build a strategic energy reserve while oil prices remain at historic lows.

Speaking to the media at a press conference taking place now, the minister said: "now is the time to get in and build strategic fuel reserves".

Under the plan, the government will spend close to $100 million on the initiative initially, with crude purchases to be stored at facilities in the US while options for storage in Australia are considered.
"

 

[HelloU]

Is it just me, or is it incredibly stupid to store emergency reserves on the other side of the planet?

probably makes strategic sense when that is where all the factories and workers are located (sarcasm)


That Taylor announcement was so painful to watch that i feel embarrassed to be an Australian (not sarcasm)

 

[PZ99]

Is it just me, or is it incredibly stupid to store emergency reserves on the other side of the planet?

We're just paying the bills to big brother - I don't think any of this is for our benefit

 

[InsvestoBoy]

We don't have the storage here now so they need to store it somewhere.

Personally, given how terrible we have been on the SPR front, I am happy they are doing anything about it.

 

[Smurf1976]

I'm not sure what I'm missing but the producers need to shut down wells and go into hibernation just like the rest of the global economy??

Why is this not happening ??

The problem is a technical one of doing so without damaging the well.

Not something I'm an expert on by any means but the basics of it are that for the lower pressure wells, stopping production has a good chance of killing it outright which then means a huge cost to restart.

For many operators, shutting in production is effectively closing for good and writing off the assets. From a financial perspective, they're better off keeping going if they see any long term average price above the marginal cost of operation which is fairly low. That it means a loss overall is irrelevant when that money is already spent at the exploration and development stage.

Most of the energy industry has that characteristic financially. Nuclear, hydro, wind, solar, gas production and in some cases coal all have at large portion of total costs being incurred before anything is produced. Actually running once its built is pretty cheap, hence once built there's generally a reluctance to close. Even if it turns out that the operation is uneconomic over its lifespan, most of the money's already spent so the question in deciding to continue, so long as the company isn't literally bankrupt, is about ongoing costs versus ongoing income noting that the ongoing costs aren't much.

There's a lot of ways overall energy production could be curtailed but they mostly have the same basic economics. Eg nuclear and coal could be reduced and more oil used to generate electricity, that works from an engineering perspective in places where the required infrastructure exists, but the problem is that nuclear and coal also have most of their costs up front and are cheap to continue operating. So the same basic economics applies, there's a reluctance to halt production be it oil or anything else.

Ultimately I think we'll see a bit of everything. Some oil production reduced, storage filled to the max, some reduction in the production of non-oil energy (eg coal, gas) and some substituting the use of oil as furnace fuel etc. We'll see some of all the above at the global level is my expectation but probably not without some financial crises associated with it.

 

[qldfrog]

it are that for the lower pressure wells, stopping production has a good chance of killing it outright which then means a huge cost to restart.

Was going to answer but @Smurf1976 had the answer already.some of the wells are "helped with injection of water gas to build a flow thru porous rocks.
Once stopped it might be impossible to restart,.the reserve is gone and lost forever.
So no real choice..

 

[Value Collector]

Is it just me, or is it incredibly stupid to store emergency reserves on the other side of the planet?

emergency reserves yes, investment no.

 

[Smurf1976]

There's a lot of ways overall energy production could be curtailed but they mostly have the same basic economics.

Posting this just as one of many possible examples which illustrates the concept of substitution in the energy industry. For illustration of the point only - there are numerous comparable examples globally.

In south-west Victoria there's an underground natural gas storage facility, Iona, currently 72% full. Pipelines from this connect to both Melbourne and Adelaide.

Victoria and SA both have a number of gas-fired power stations which are technically capable of firing fuel oil, diesel and/or jet fuel instead of gas. The reason to not do so normally is economic but from a technical perspective the switch is easy, indeed in some cases it can be done whilst the plant remains at uninterrupted full production. Likewise some manufacturing plants have boilers or furnaces able to switch between various fuels most commonly oil and gas.

To cut a long story short, if oil was used to generate power, fire boilers in industry etc and the gas saved was put into Iona then the gas required to fill it completely is equivalent to 1.2 million barrels of oil.

That amounts to effectively downgrading the resource. Take 1.2 million barrels of oil, burn it in power stations, industry etc and store the gas that was saved. Since gas normally has a lower value per unit of energy than does oil that would normally make zero sense financially but it sure would if the oil price dropped low enough. It's another way to store something, albeit one that involves getting rid of the oil as such and replacing it with lower value gas but it does provide a solution which retains some value.

That is just one example, there are others in Australia and plenty more globally where instead of storing oil physically it's a case of burning the oil and storing the gas, coal or water (hydro) that was saved. It effectively downgrades the resource, you can't turn it back into oil, but it's better than not being able to do anything with it at all.

So if the price for physically delivered oil gets low to the point that the economics stack up then some other physical options for what to do with it do open up.

 

[IFocus]

Is it just me, or is it incredibly stupid to store emergency reserves on the other side of the planet?

Not only that but if the US wants the oil anyone think they will hand it over?

Cringe worthy, still take IB points anything is better than nothing.

 

[Value Collector]

Not only that but if the US wants the oil anyone think they will hand it over?

The USA is the worlds largest Oil Producer, the have it on tap, hence they aren’t rushing to use the strategic reserve themselves.

 

[sptrawler]

Posting this just as one of many possible examples which illustrates the concept of substitution in the energy industry. For illustration of the point only - there are numerous comparable examples globally.

In south-west Victoria there's an underground natural gas storage facility, Iona, currently 72% full. Pipelines from this connect to both Melbourne and Adelaide.

Victoria and SA both have a number of gas-fired power stations which are technically capable of firing fuel oil, diesel and/or jet fuel instead of gas. The reason to not do so normally is economic but from a technical perspective the switch is easy, indeed in some cases it can be done whilst the plant remains at uninterrupted full production. Likewise some manufacturing plants have boilers or furnaces able to switch between various fuels most commonly oil and gas.

To cut a long story short, if oil was used to generate power, fire boilers in industry etc and the gas saved was put into Iona then the gas required to fill it completely is equivalent to 1.2 million barrels of oil.

That amounts to effectively downgrading the resource. Take 1.2 million barrels of oil, burn it in power stations, industry etc and store the gas that was saved. Since gas normally has a lower value per unit of energy than does oil that would normally make zero sense financially but it sure would if the oil price dropped low enough. It's another way to store something, albeit one that involves getting rid of the oil as such and replacing it with lower value gas but it does provide a solution which retains some value.

That is just one example, there are others in Australia and plenty more globally where instead of storing oil physically it's a case of burning the oil and storing the gas, coal or water (hydro) that was saved. It effectively downgrades the resource, you can't turn it back into oil, but it's better than not being able to do anything with it at all.

So if the price for physically delivered oil gets low to the point that the economics stack up then some other physical options for what to do with it do open up.

A lot of power stations have strategic reserve oil tanks, one would assume they are being filled ATM, which most operators would never have seen in their careers.