When will domestic oil production again be profitable? (q. for beatle)

Factual Questions
1

Oil is starting to push $30/bl. (Reference: http://oilworld.com/1obrent.htm ).

IIRC, during the last true “oil boom” in Texas (between the 1982 and 1986 crashes) oil was up to $35/bl, and at that price we were all living the good life: production was up, exploration was up, and firms were hiring geologists as fast as they could graduate. Then: the crash to $17/bl in 1986 and nothing’s been the same since.

Now, oil is pushing $30 and current trends have it exceeding that. At what price level will it once again be profitable enough to wake up the towns that were crippled in 1986–Midland, Odessa, etc.–with new production in Texas?

Just something I pondered while paying $1.60 for regular unleaded this morning: “maybe this means more oil jobs!”

And if you happen to know any of the oil geologists in Houston that I know, tell 'em I said “hi”!

2

It’s profitable right now. NYMEX light sweet closed over $34 two days this week and was at $31.55 at noon. And the rig count was back up to 790 this week (still quite low) from an April historical low of 488 (for contrast, it was over 4000 - hit 4500 IIRC - when I went to work in this business).

Most of what’s being drilled now are inventory exploratory locations and exploitation wells being drilled ahead of schedule to take advantage of the price. There has been very little in the way of exploratory activity in the last eighteen months because of the recent bust (~#10.60/bbl in December of 1998) and there is still very little. I predict a prospective location shortage in the next year. Layoffs continue and I have several friends in the 20+ year experience range going off to do other things (3 this week doing “Internet things”). The contractors are telling me (I’ve been talking to them because I’ve got a small 2D seismic program to shoot) that, despite SEG’s 100+ crew count, there are really only ~12 seismic crews working in the U.S. right now. The equipment sitting in the yard that hasn’t been seized by a creditor yet is being reported as a working crew. This is ominous because seismic activity can be taken as a leading indicator - i.e., seismic work comes before drilling. I just accepted a full-time position with a company for whom my own company consulted for several years. They never put the word out, and I sure wasn’t telling anyone, because they naturally just told me that they wanted to go with a full time staff geophysicist and offered me the job. They got flooded with resumes. So, some would say I was incredibly lucky, and I feel a bit that way right now, but there’s a little back buzz going on in my mind that says, “Hmmm, maybe it’s not so great that you found a way to remain in this career.”

Oh well, everyone’s attitude has been affected by the roller coaster ride.

So, yes, it is profitable right now, and the business is in the pits. Qu’est-ce que ce? Drilling dollars have just not returned to the game.

  1. Yes, the price is up and it is profitable right now, but just 16 months ago the price was at an historic low and activity and the industry infrastructure tumbled soon thereafter. Investor confidence has been shaken and a lot of the former sources for drilling funds do not really believe this will last. That is one factor in the current malaise. The investor appraisal of this current price rise as a spike combined with their knowledge that it takes time to generate ideas, shoot, process and interpret seismic, build an acreage position, drill and get product to market continues to put them off. I know of miracle tales, but generally speaking, if you start seeing revenue off an exploratory idea in a year, everyone involved has been Mr. Efficiency. Considering that, after a certain point, you’re usually working with partners, this is rare.

  2. The recent ('95-‘98) boomlet was driven by 3D seismic. As happens (probably in many industries) a new technology emerged and the "black box’" early success rate enticed investment in drilling programs. Exxon shot the first 3D seismic survey in 1964, but until the late '80’s, hardly anyone used the method. In the late '80’s a few of the majors picked it up, but it wasn’t until the crash of '92 (natural gas went to 0.80) that the method became preferred. A little side note here. The slumps in this industry have characteristically engendered the boom life of a certain technology/marketing combination. Pantellerite mentioned the '86 bust (where the price of a barrel actually, IIRC, dropped from ~$26 to ~$10 in a couple of weeks). That bust spurred the 2D spec seismic industry to a fever pitch that lasted until the 1992 denouement of that game. Prior to that bust, people still were able to move drilling deals supported by subsurface (i.e., well log) data alone. What that meant was they could put a deal together that could likely move in the marketplace for a lot less money up front than if they had to have seismic data to support it as well. After that bust, drilling minds decided that they needed, in the new, lean environment, to drill with more effort (money) spent up front on risk reduction. This same influence acted to spur our most recent spurt of activity, with 3D seismic being the cure-all technology. What happened (and we knew it was coming) was that 3D got overhyped and poorly used and the investors were faced with a situation where their upfront costs were much higher (3D changed the economics of the game by a lot - in the 1980’s a prospect that had geophysical front end (data) costs in the $150K range was an expensive project - in 3D world $2-5MM was/is typical) and their relative returns were much lower.

  3. Investor money has also been distracted by the recent phenomenal happenings with certain tech stocks. A widespread feeling amongst the dollar breeders in this business is that most of our potential drilling dollars have gone off to play tech stocks, and it’s a hard pitch to get’em back. I could take off on a tangent here, but I’ll try to stick to the question.

  4. OPEC did take action to influence the price, and all eyes that give a damn are on their late March meeting. Nevertheless (and I think I went through a lot of this rant recently…, maybe in GD or the Pit?), they don’t control prices. Current wisdom is that they might take the Clinton administration’s hint that lower prices are desired and increase production. They may not do that, but if they do, I suspect we might see a small psychological reaction in the market that drives prices down temporarily. But we’re really dealing with a situation where the demand (asian and, a bit later, the rest of the third world) is poised to increase dramatically; and the supply has not been replaced. Our own government has mumbled about manipulating prices with selective distributions from the Strategic Petroleum Reserve. Should they take that step, they may cause another little psychological dip in the market, but they don’t have enough to really drive the game.

I think I really answered your question in my first sentence, but not. Ooh, can I take the BIG question on tonight? Probably not. When will drilling for a commodity we are still quite dependent upon attract investment dollars that are currently infatuated with the tech stocks?

Well, that really wasn’t your question. I think, and I’m gettin’ tired (might have to pop over to MPSIMS); the likely growth of worldwide demand combined with the future potential shakeups in the tech stock market will probably determine the future profitability of exploration. When and if a meltdown happens on the e-stock front, I suspect we’ll start seeing some of the historical drilling dollars return.

I’ll tell you what, pal, if you’re in an academic position and you like what you’re doing, stick with it.

3

Oh, and yes, I know lots of rock docs - I guess I can tell’em, “Greetings from Alpine (where they shake the earth when they party)!”

4

beatle: Is your new job in Alaska?

5

radar,

No, still here in Houston. How are things there (IIRC you’re with BP-Amoco who may not get to merge with Arco)?

6

beatle: Still a little uncertain about our future direction up here. Strangely enough (or maybe not), gasoline prices in Anchorage are approaching $1.60 a gallon. My guess is that the prices will go even higher this summer. BTW, the inside joke is that the merger with Amoco created a new company called “BamPoco” (the company is still called BP - Amoco is involved, but it’s silent). Wonder what will happen if ARCO ‘combines’ with BPAmoco? “Will we then be called ‘BAA’?”, he asked with a sheepish grin…

7

Thanks, beatle for the information. I had noticed that–starting in the mid-90’s–we were getting all sorts of calls from companies desparate for mudloggers, geophysical loggers, etc., and that has tapered back down to nothing.

It boggles my mind that oil can be so high, yet domestic investing in oil has not responded. Like you mentioned, demand is only going to rise.

(And, I fully plan on staying in academia. There are hardly any “real” jobs for hard rock petrologists out there, anyway!)

8

I don’t mean to sound like a doom-monger, but the oil industry in the Gulf of Mexico is in for some rough times, and soon. The problem is, the oil rigs are all about 100 miles out to sea. The oil flows down 100 miles of pipes to get to shore. But the cold seawater causes parrafin (wax) in the oil to condense on the pipe walls.

You guessed it. The worst cases of waxy buildup you can imagine occur in these pipelines, and most gulf oil rigs must replace at least one section of pipeline several times a year. This is costing a fortune, as the pipes are on the bottom of the ocean. Unfortunately, there are no good solutions on the horizon. You can’t remove the wax from the oil before piping it because we’re talking about hundreds of thousands of gallons of oil an hour. Mechanical cleaning devices are unfeasable because these clogs are usually 30 or 40 miles away from the rig. A seminar I listened to last year featured a method to use delayed-reaction chemicals to melt the wax clogs. As a chemical engineer, I’m rooting for these guys, but I haven’t heard anything to suggest this is any better than the other methods. Since oil rigs are only going to get further from shore, the problem is only going to get worse. It is very possable that operating those rigs will become unprofitable within the next few years. If/when this occurs, they will be shut down.

Beatle’s comments in investing are interesting. I guess the e-stocks are reaping the lion’s share of Alan Greenspan’s “irrational exuberance.” I want to believe he’s just a worry-wort, but given his record on these things, I doubt it.

–It was recently discovered that research causes cancer in rats.

9

in need of enlightenment . . how is it more economically savvy to buy and ship crude from halfway across the world . . than from texas?
domestic production can no longer keep pace with demand?
ie . . doesnt the price of imported oil have to go down as to compete with the cost of domestic production?
and whatever happened to the alaska pipeline?
and north sea production?
is their not enough barrels per day between us, europe, venezuala, mexico to break the dependance we endure on the middle east pipeline?

10

Just a quick look taken at bda’s post. Europe is a net importer - i.e., they use more than they can produce. Venezuela is an OPEC member, Mexico is an independent fellow traveler.

We’re not even close.

11

bda: The Trans-Alaska Pipeline System (TAPS) is still in operation, but it no longer carries 1.7 million barrels of crude each day from Prudhoe Bay, Alaska, to Valdez, Alaska, like it used to. Daily throughput is much less than that nowadays, because crude oil production in the North Slope area (which includes Prudhoe Bay, Milne Point, Kuparuk, Endicott, and Lisbourne fields, as well as other “puddles”) is on the decline. Other parts of the world show promise for exploration and development, but many factors make those enterprises very risky - and therefore, expensive. It is very hard for the general populace to understand why the U.S. ships oil to various places in the world and then has to import oil from other parts of the world, but there is a complicated system of trade agreements that the U.S. must adhere to in order to maintain global balance. Having said that, it is very disconcerting to live and work in Alaska, where we have lots of oil and several refineries, and pay over $1.50 for a gallon of gas.

12

::test post::
Just ignore little ol’ me.

And if you see a bunch of multiposts above, ignore them too. I’ll clean them up.

Change Your Password, Please and don’t use HTML, as it has been disabled, but you can learn about superscripts here

13

so what your saying is the alaskan puddle is close to drying up?

14

those electric vehicles should be looking a whole lot better to our government then. at least youd think from an economic and national security view.

15

Well, “close to drying up” isn’t a true representation of what I meant. The North Slope is in a steady decline in production, but will still be viable at least until the year 2030, perhaps beyond that - after all, it is still the largest oil field in North America.