Oil Is Killing Communism

There are not a lot of communist countries left. Two of them reside in Central America. Venezuela and Cuba. Being socialist BFF'S, they like to share things. Like oil. Cuba gets oil, and Venezuela gets teachers and social workers. This has been going on for years and everyone was happy. Until now. Venezuela is broke and their oil production is steadily dropping. They can no longer afford to hand away free crude. Exports to Cuba are down 20% already and further drops are expected to continue. Cuba doest have the strongest economy to begin with, so having to import oil from other sources is a tough pill to swallow. Venezuela is so broke that foreign drillers have cut them off over unpaid bills. So their death spiral will continue unabated.

North Sea

While people panic over inventory data, there is trouble a brewing in the North Sea. Workers are holding a one day strike, and are threatening more work stoppages over pay cuts and longer shifts. This may be just a blip now, but could blow up into a major outage if it continues.

The Sauds Are Full Of Shit Part 2

For the past few years the Sauds have been pumping at a record pace of ten and a half million barrels per day. They claim that this is still two million barrels a day off of their theoretical peak, but few beleive that they have that much spare capacity. Mostly because they are currently exporting more than they produce. For the past few months they have been drawing from their stockpiles to meet foreign demand.

Tight Oil

The current oil glut and the future of production is and will be driven by "tight oil", as made famous by the US oil shales.
Conventional oil reserves are big pockets of oil and gas that can be drilled straight down into, and can produce large amounts of oil for decades. Tight oil requires a lot more work for a lot less reward. Instead of one large reservoir, the fields are small pockets spread out over a larger area. Drilling straight down into them is not practical or economical at any price. It was not until horizontal drilling became established, and hydraulic fracturing was employed that these fields started being looked at. And when the price in the twenty tens surged to well over a hundred dollars a barrel, there was enough profit to develop those fields. With the surge of the US shale fields, other countries started to look in their own backyards. There are vast shale fields in Russia, Canada, and Argentina.

The future of global oil is these tight fields. There are tens of billions of barrels. The current issue is the economics. A typical oil well in the US Bakken or Eagle Ridge field only produces about a hundred barrels per day. And because of the specialized drilling and hydraulic fracturing required, the cost per barrel at those fields is around $60. The more economical Permian basin in Texas still costs about $40. Both are a far cry from the big Arab fields that cost less than ten bucks a barrel. 

Tight oil is also why US rig count data is so important. Conventional US oil is in decline, with most fields being fully mature. So it requires thousands of wells for oil shales to swing US production a million barrels one way or another. So when the rig count drops by 80% in a few months, it is a forecast of the US supply constraints in the future.

Tight oil is also why this current price devaluation can not continue for much longer. Global conventional crude has peaked. Tight oil is making up the difference, and will keep increasing as a percentage of total oil. Petro companies can not run those fields at a loss, so to meet global dand in the coming years the price of oil will be pulled up by production costs if nothing else.

Russia

The oil collapse severely hurt most of the large petroleum companies, except the Russian ones. Because Russia's economy revolves around oil, the Ruble tanked in value. This benefited the petros though. Globally oil is bought and sold in USD. So while every barrel is worth a third of what it was two years ago in USD in Russia it only experienced a twenty percent drop in Rubles. So by fucking over the country by over producing, the Russian petros (Putin) can continue to over produce and still take in all of the money. It's a beautiful thing.

The Idiocy Of US Drawdown Data

Every week day traders get all worked up over fluctuations of a few million barrels in Cushing. And the global price of oil swings one way or another. It is not a very good metric though. What should be more concerning is how much oil is at sea. The Arabic countries are increasing their production, and all of this extra production is being transported by ship to ports in Asia. And these ports are receiving ships faster than they can be offloaded. This is enough of a problem that the Saudi's have ordered thirty odd new VLCC class tankers. Each ship with a two million barrel capacity. That is a hell of a lot of additional oil that will go out to sea. And should be a lot more concerning than one or two million barrels in Oklahoma.

Canada

Canada is in a wierd place for oil production. Like the US, light oil peaked in the seventies, but we still produce enough to meet domestic needs. Where Canada is special is the oil sands. An almost unfathomable amount of bitumen. A reserve that will last for over 200 years at extraction rates of four million barrels per day. It has only been developed recently because of the extreme difficulty in mining it. Bitumen differs in crude in that it has a lower hydrogen content and more carbon. Crude at room temperature is a fluid, that makes it nice and easy to pump. Bitumen is a solid. It will only flow if heated or disolved. And because of this, it has a hight cost per barrel to extract. It only became economical to develop those fields once the price of oil reached a suitable level. But now that the industry has been set up, it has vaulted Canada into being a global partner and a hugely important partner to the US.
But while Canada has a damn near infinite amount of oil within driving distance of the US, we have a whole lot more. In northern Alberta and the Northwest Territories there is a vast shale field that potentially rivals the American Bakken formation. It has not been touched for one tiny reason. It is in the middle of absolute nowhere. It is very hard to set up a major oil drilling operation when the only roads exist in winter when trucks can drive on frozen lakes and rivers. Eventually though when other global reserves deplete, those fields will become economical. And by that point most of the Arctic should be melted, and we will have access to any fields in the Arctic Circle as well.

OPEC Is Dead

Since it's inception OPEC has been the global power in oil. The handful of countries that make it up account for almost half of all global production and more than two thirds of the alleged oil reserves. It's problem is that the two most important members hate each other. Saudi Arabia and Iran have been at each other's throuts for decades. Since the Iranian Revolution the Sauds have been piling on Iran. First by funding a proxy war through Iraq, then influencing the US into continuing to sanction them. This has now come to a head, and has broken OPEC. Since it was first required in the seventies, OPEC has functioned as a swing producer. They have increased and decreased production as required to maintain a steady supply and a reasonable price. That ended in 2008. When the global financial crisis happened, the price of oil tanked by a hundred dollars a barrel. OPEC cut production, and the price rebounded. But not all member countries cut production, it was mostly the Sauds. And this pissed them right off. They bore all the responsibility, and all other member countries were rewarded. So when the price tanked again in 2014 and OPEC was expected to have a production cut, the Sauds raised production. That was a complete disaster that has maintained low price of oil to the current date. The Sauds say this was to drive out the US frackers, but a lot of this is to piss off Iran. The frackers are all small operators that can bounce back relatively quickly. Keeping investment dollars out of Iran hurts them for years. And as long as the Sauds are petty and working to undermine Iran, OPEC will not function as required. It is an organization with untold power, but is too busy bickering to wield it.

India

China is currently the key to the global oil market. They are the largest importer, and their strategic oil reserve has been soaking up a good majority of the excess oil produced in the past few years. However they might soon be playing second fiddle to India.
India is ramping up hard to be a global industrial power, and that requires a whole lot of natural resources. And oil is one thing that they are short of domestically. They currently consume around four and a half million barrels per day, and have to import 75% of that. It seems like a lot, but for their population density, it is a remarkably small amount of petroleum. Something around half a liter per person every day. China on the other hand consumes around a liter and a half per person. And a good old America consumes almost 10. So it would be almost expected for India to double their oil imports in the next few years. There is a growing middle class in India, and the number of automobiles on the road is rapidly expanding. Any fears that China’s economy is contracting will be more than offset by the rise of India. The two countries will continue to combine for increased petroleum demand for the next few years.
India may be the savior that Iran is looking for as well. India is already spending large amounts of money on foreign oil projects, and are not concerned with any future US sanctions of Iran. Those two countries will almost certainly join forces on some huge projects. Iran is in desperate need of investment and a stable trading partner, and India needs cheap oil.

Rusty Bolts

There are problems a coming for most of the US offshore rigs and wells. Rusty Bolts.
Up until this coming July 28th, oil companies didn't have to report equipment failures unless they resulted in something major like an oul leak. But in the new "You done fucked up BP" law, they need to start disclosing problems. And word is getting out that a lot of problems. A major one being that the bolts holding everything together are corroding and snapping. That sure ain't good. And with Deepwater Horizon still fresh in everyone's minds, they need to be replaced. Some 2400 platforms look to be affected. They each need to be taken offline for weeks to be brought up to snuff. This is unfortunate timing for the US. With production already plummeting, this will just be one more hit.

Learn To Count

Oil seems like an easy thing to count once it is in storage. You see how much is in each tank and add it all up. Or take the previous week’s data then add up all the oil added and drawn from the storage tanks in a given week. Seems easy enough. Yet somehow it is not. The API (American Petroleum Institute) came out this morning and said that US storage unexpectedly levels rose by 2.2 million barrels. Day traders peed their pants and the global price of oil dropped. So later this morning the EIA (Energy Information Administration) comes out and says. Um actually there was a 2.5 million barrel draw down and US storage is now at 522 million barrels. So the two agencies were off in their counts by five million barrels. That’s a one percent margin of error. No big deal. Except that most of the oil is static. Only around 15 millions barrels moves around the US in a day. So they were off by five percent this week.

Oops.

Wishful Thinking

Iran wants to double their exports in the next five years. Good for them. I would like to double my income in that time frame as well. Unfortunately these are both pipe dreams that will not happen without massive amounts of outside capital.
Iran has the oil. They are pumping four million BPD now, and exporting two of that. But this is a far cry from pre revolution levels. Back then they were putting out more than nine million barrels a day.
When pesky things like a revolution then a decade long war with your neighbor happen, it tends to put a halt on large infrastructure projects though.
And who has the money and knowledge to modernize Iran? Large petroleum companies. Most of which are western owned and run. And they get a little twitchy handing out money to anything called the Islamic Republic Of... at the best of times. And these are not good times. Banks are hesitant to hand out any loans, and a lot of companies are still operating in the red. So when a country run by religious hardliners (who have a history of being subjected to economic sanctions) wants a hundred billion dollars for new infrastructure, there aren't many takers.

Extraction Rates

For most of my life I assumed that when you drilled for oil, you hit a pocket and sucked it all up until the well was dry. For most of the twentieth century we were a hell of a lot lazier. Most of the time a well was drilled and the oil was under enough pressure that it would flow out on its own. This primary extraction is not very effective however. It will only recover 5-10% of a deposit.
To get more we need to employ secondary recovery methods. This mostly involves pumping huge amounts of water down an abandoned well. This will raise back up the pressure of a deposit and will keep the oil flowing through other wells. It's good for recovering another 30% or so. Better, but still not great.
So then we move into the enhanced recovery methods. The first of which is steam injection. This warms up the oil which lowers the viscosity and makes it flow easier. It is especially effective in recovering heavy oil. The other relatively new method is CO2 injection. At sufficent depth, the gas will permeate the oil and will both increase the pressure of the deposit and lower the viscosity. These techniques will add another ten or so percent recovery to a standard field and more to the heavy oil fields.
Even with all of these techniques, oil recovery is still little better than 50%. It goes to show just how much oil we still have sitting in the earth.

Numbers In Perspective

The world consumes almost a hundred million barrels of oil every day. That’s a big number, one that is hard to wrap your head around. Its easier to fathom when you have a visual reference, like a football stadium. Cowboy Stadium has an internal volume of 104 million cubic feet. If you do some quick math that works out to around 778 million gallons, or 18.5 million barrels of oil. So we use five a bit more than five Cowboy Stadiums worth of oil every day.
As the rest of the stadiums are smaller than Cowboy, I will assume that every stadium has a combined capacity of 500 million barrels. Henceforth I declare that five hundred million barrels of oil be declared one NFL unit.
Here is the thing. We have done a pretty good job mapping the earth. We have found most of the large oil deposits. The three NFL field discovered offshore of Guyana is the biggest find in years. And that is exciting. And it sounds like a lot of oil. And kind of is, except for the fact that its total production will only be enough to supply the planet for two weeks. When you look at it like that it starts to be troubling. Every year we are discovering less and less. The amount that we add to the global reserve every year is only a fraction now of what we consume. Is 2015 around six NFL’s worth was discovered compared to the SIXTY that was consumed. It means that we are increasingly dependent on existing fields. And the largest of those are in the hands of some of the least friendly countries. Saudi Arabi, Iran, Russia, and Venezuela. The US and Canada have the reserves to be energy independent from the middle east. However Europe and Asia do not. OPEC currently has their largest market share since 1975. That should scare people. That much power gives them an absurd amount of price control. Instead of dropping production to stay rich, they bullied the market to the point where they have control of it again. Time will only tell how they choose to abuse it.

Stupid Speculators

OMG the US oil rig counts are up! The Cushing stockpile is down less than expected! Oil will go back to a dollar a barrel!
This is why looking at short term trends is idiotic. If you poke around in crusty government websites you can find real data of actual importance. Like how much oil the US is actually producing on a weekly basis. And you get to see real numbers like the US is down over almost a million barrels per day in production from peak. Almost a 200K BPD decline in the past week alone. The expected US collapse is happening. The only question is will the drop off in production be as sharp as the drop in drilling was last year. Next week’s data will be telling. It will almost certainly show a decline in production, but will it be as steep as the 200k BPD drop?

The US will still shed another few million BPD in the next year or two. Before the shale boom the US was producing just five and a half million barrels per day. With the continued lack of investment capitol and drilling the US could foreseeably drop back to those numbers.

Iranian Contracts

Iran is in the process shooting itself in the foot over oil contracts. Historically Iran has been offering the big oil companies “buy back” contracts to develop their fields. The way these work is an oil company comes in and does all the work to get a well up and running, then sells the operation to the national Iranian petroleum company. They are then reimbursed for the start up costs and an agreed upon amount out of the profits. This seems like an OK deal, but they never really work out to be one. If a field is not productive then the Iranians won’t pay for it and the oil companies are on the hook for all of the costs while Iran bears no risk. This doesn’t sit well with the big petros, some of whom have lost a lot of money on these deals. This year though things looked like they were changing. Iran’s new president Hassan Rouhani is somewhat of a moderate (in terms of Iranian rulers) and has been trying to make changes towards working with the west. One of his initiatives has been to rewrite the oil contracts to make them more enticing to oil companies. This sparked a lot of interest and seems to be just what was needed to jump start Iran’s floundering oil industry. However it looks like this might all come crashing down. The hard line Iranian oil minister looks like he will not sign off on the new contracts, and wants to stick with the old buy back deals. And he is not doing this for any good reason, it looks to be a purely political motivation. It is all to spite the president and make him look bad. Unless this is worked out it looks like Iran will continue on their path and delay their development into a global petroleum powerhouse.

The Saudi's Are Full Of Shit Part 1 Of Many

All Saudi oil is owned and controlled by the state company Saudi Aramco. They control all production, exploration, transport, everything. Any and all information on the state of their oil is known only to them. This wasn't always the case. Back in the thirties it was American companies who first started drilling and found oil. And for the next forty years American companies were pumping like mad. This went on until the end of the seventies when the Sauds booted them out in favour of a state company. When they left they took all of their knowledge and disclosed the state of the country to the US Senate. In 1979 they declared that the Sauds had about 110 billion barrels remaining of recoverable oil. This continues until the eighties when the Sauds declared that they now had 170 billion barrels left. Then a few years later 260 billion barrels. And today they estimate 220 billion barrels.
Where did this oil come from? No major fields have been found since the seventies. They have pumped 90 odd billion barrels since 1979 too. Yes we have improved recovery techniques and proven reserves creep up for all fields, but doubling your reserves? While still pumping? I'm sorry Saudi Arabia. I call bullshit.
The only question is how much do they really have left? With Aramco in total control, we may never know. Or at least won't know until their output sharply declines.

Fragility

If the Niger Delta Avengers are proving anything to the world, it is how fragile oil infrastructure is. A small group of people are able to severely damage the production of a country with minimal amounts of effort.
Huge amounts of oil moves around the world in above ground pipelines. It only takes a small amount of explosives to completely destroy one. And with the vast distances that these pipes travel, they are impossible to protect. A small dedicated group like the NDA easily roams around, and can damage pipes faster than they could ever be repaired. The same could be done to the wells themselves. A lot of those are unmanned or barely staffed. If a group was inclined it would not be hard to create a repeat of the Kuwait fires of the Gulf War. ISIS seems to be turning its attention to Saudi Arabia, and there is no better way to hurt them than to go after their oil. Damaging production would piss off the Sauds, something major like a refinery fire would hurt them.
If a terrorist group wanted to make their point, knocking a few million barrels out of production would get the world listening. Because unfortunately, affecting the stock market gets more global attention then the slaughter of innocents.

Make American Production Great Again

Unfortunately no one can.
US production has crested the cliff and is now in free fall. Daily barrels per day is now a million less than its peak last year. With a 100k BPD drop in June alone.
There is talk about completing all of the drilled wells, and how that will bring production levels back up. If it was that simple, then companies would have already done do. There are no shortages of workers or equipment. If the petro companies don't think they are worth completing, then the estimated yields are not worth the cost of completing them ar $50 per barrel. And if they are not worth that, then they don't have a chance at stopping the US drop, let alone reversing this decline.
America still has a lot of oil in the ground. It is just in small deposits that are hard to get to, and cost a lot per barrel. It's why the catastrophic drop in rig counts should be concerning. These shale fields deplete quick, and new wells are required to keep coming online to replace them. These past 18 months have ground all progress to a halt though. Nothing is being developed, and everything is aging. The big offshore rigs in the Gulf will decline slowly, but the shale fields are starting to run out quick. And the numbers are showing it. I can only see this decline increasing. By the end of the year the US could be down another million BPD.

Looking Ahead

In the past four years we have found five new fields larger than 500 million barrels. That's a lot of oil. Well yes it is. But in the big scheme of things those fields don't account for much. Globally we use close to a hundred million barrels a day. So a half billion barrel field will only last humanity a week. So as fields age and dry the new ones we bring online are less and less plentiful. Long gone are the new hundred billion barrel fields. Those are already tapped. It is now a case of diminishing returns.
The new field found offshore of Guyana is exciting. At 800-1400 million barrels it is a huge new find. One that will cost almost twenty billion to bring online though. At current prices the entire field is only worth forty billion. Not quite the gold mine is seems at first glance.