What Will 2015 do for Peak Oil?

[biffvernon]

they’ll keep pumping at the maximum rate possible,

Yep, that makes sense. The capital spent on developing a well is a sunk cost. So long as the price is above the actual day-to-day production cost it makes sense to pump as much as one can - just what Saudi is doing. Investment in exploration and development will dry up but all effort will be made to sell what can easily be won.

[clv101]

they’ll keep pumping at the maximum rate possible,

Yep, that makes sense. The capital spent on developing a well is a sunk cost. So long as the price is above the actual day-to-day production cost it makes sense to pump as much as one can - just what Saudi is doing. Investment in exploration and development will dry up but all effort will be made to sell what can easily be won.

And as we know, the US tight oil extraction rate collapses within a few years of the drilling - low prices - reducing drilling - quickly manifests itself in rapid extraction rate declines. This is a very different regime to conventional oil with an order of magnitude slower extraction rate decline.

I expect total liquid production to be 1 mbpd lower in Jan 2016 than Jan 2015.

[frayne]

One thing that I'm notice and that is the production of oil will never stay flat. Perhaps, it will be a bit down.

[vtsnowedin]

I expect total liquid production to be 1 mbpd lower in Jan 2016 than Jan 2015.

Why such a modest reduction vs. a five percent post peak decline? In your view are all producers so cash strapped that they will continue maximum extraction efforts regardless of cost. That would fly in the face of basic economic theory.

[biffvernon]

Economic theory suggests that they will forget sunk costs and maximise extraction just so long as they can sell the product at any price above actual production cost.

[vtsnowedin]

Economic theory suggests that they will forget sunk costs and maximise extraction just so long as they can sell the product at any price above actual production cost.

I have two problems with that. First sunk costs are part of actual production costs and second they can see that any oil left in the ground for now will most certainly be worth a lot more in the not too distant future. The must cover the payments on the loans of course but after that it would be in their best interest to throttle back and let this supposed glut run out.

[PS_RalphW]

That all depends on the cash reserves of the oil companies, and time limited leases on the extraction rights, and the risk of letting highly skilled workers move on not being available for re-hire, and a thousand and one other factors.

That said, a lot of shale wells are being drilled and not fracked at the moment. But that is a special case a fracked well is a one trick pony - If you frack a well and then shut it in, the fractures will slowly collapse again, destroying the flow rate, but if you frack and pump then extreme decline rates means that by the time the low oil price has recovered, you have insufficient oil left to cover your drilling and fracking costs. It makes sense to delay fracking until the price has recovered.

[biffvernon]

I have two problems with that. First sunk costs are part of actual production costs

No. By definition, sunk costs are not part of current production costs.

and second they can see that any oil left in the ground for now will most certainly be worth a lot more in the not too distant future.

In the case of our North Sea oil fields, the infrastructure of platforms and pipeline pretty much precludes that approach. If you stop using it, the maintenance / mothballing costs are far too high. It's use it or lose it.

[vtsnowedin]

I have two problems with that. First sunk costs are part of actual production costs

No. By definition, sunk costs are not part of current production costs.

and second they can see that any oil left in the ground for now will most certainly be worth a lot more in the not too distant future.

In the case of our North Sea oil fields, the infrastructure of platforms and pipeline pretty much precludes that approach. If you stop using it, the maintenance / mothballing costs are far too high. It's use it or lose it.

The difference is between "Total actual" and current cost. Drilling and fracking it vs. pumping and hauling it are two different things.
As for the North sea there must be a level between all out production and platform abandonment that keeps everything in working order but doesn't max out the wells. After all in a few more years of decline they will have to pump at this reduced rate anyway.

[PS_RalphW]

The overheads of running offshore platforms are so high that oil is always pumped at maximum rate, and EOR methods are deployed from day one. It is pumped or plugged.

[raspberry-blower]

The extent of the layoffs:

Layoffs are cascading through the oil and gas sector. On Tuesday, the Dallas Fed projected that in Texas alone, 140,000 jobs could be eliminated. Halliburton said that it was axing an undisclosed number of people in Houston. Suncor Energy, Canada’s largest oil producer, will dump 1,000 workers in its tar-sands projects. Helmerich & Payne is idling rigs and cutting jobs. Smaller companies are slashing projects and jobs at an even faster pace. And now Slumberger, the world’s biggest oilfield-services company, will cut 9,000 jobs.

Looks like a lot of folk will be seeking new employment.
As for Slumberger:

It had had an earnings debacle. It announced that Q4 EPS grew by 11% year-over-year to $1.50, “excluding charges and credits.” In reality, its net income plunged 81% to $302 million, after $1.8 billion in write-offs that included its production assets in Texas.

To prop up its shares, it announced that it would increase its dividend by 25%. And yes, it blew $1.1 billion in the quarter and $4.7 billion in the year, on share buybacks, a program that would continue, it said. Financial engineering works. On Thursday, its shares were down 35% since June. But on Friday, after the announcement, they jumped 6%.

This hardly inspires any confidence that this company will remain a functioning entity - more like someone is taking the money and running.
Problem is this is endemic:

Larger drillers outspent their cash flows from production by 112% and smaller to midsize drillers by a breathtaking 157%, Barclays estimated. But no problem. Wall Street was eager to supply the remaining juice, and the piles of debt on these companies’ balance sheets ballooned. Oil-field services companies, suppliers, steel companies, accommodation providers… they all benefited.

Now the music has stopped. Suddenly, many of these companies are essentially locked out of the capital markets. They have to live within their means or go under.

There are parallels with the banking crash of 2008 here. First, the fracking cos are holding essentially worthless assets (i.e. it is costing them more to extract oil than they can ever hope to achieve by selling the oil on the market).
Two: the extent to which these companies are leveraged are eye wateringly high and cannot pay these loans back. this is exactly the same scenario with the Sub Prime crises - substitute poor people who should never have been offered a mortgage in the first place to ill conceived oil extraction method that should never have seen the light of day
Three: the inevitable drying up of credit which will have dire consequences

Wolf Richter:Money dries up for Oil & Gas, layoffs spread, write downs start

[biffvernon]

Good stuff. The downslope of Peak-Oil will be a bumpy ride.

[emordnilap]

New condensing boiler this year, and electric car if I get a new job .

This one, Ralph?

[biffvernon]

Awesome (as they say).