Rystad Energy Cost Curve for Various Crude Oils Globally (1/12/2015)

From an Essay by S. Tom Bond, Lewis County, March 11, 2020

Energy is a key to production, transportation, comfort and many other things in our world. War is a profligate use of energy. Until the use of steam power and electricity, technology changed slowly. The citizens of ancient Babylon or Assyria could adapt easily to the technology of Great Brittan of George III or the Germany of Wilhelm II, at the time James Watt developed the first widely used steam engine.

Today, cheap energy is the most sought commodity on earth. It is the key to both industrial and military power. For the present, oil is the preferred source of energy, and who has petroleum reserves, and the lowest cost of getting it to market, is the winner. Looking for a comparison of the cost leads to Rystad Energy data presented in graphical form below:

NOTE: Pumping costs by nation are in green and the total costs including capital and transportation in grey:

Petroleum Production Costs ($/bbl) by Country Vary Widely

Theoretically, oil prices should be a function of supply and demand. However, geopolitics and environment are also important concerns. The combined OPEC countries produce more oil than the United States but the U. S. is the top-producing nation, as well as the top consuming nation.

The United States imported 9.10 million barrels a day in 2019, while exporting 8.57 mb/d giving net imports of 0.55 mb/d in 2019. The two principal nations importing U. S. oil are Mexico and Canada. They also export to the U. S. so in net we send 0.54 mb/d to Mexico and receive 3.41mb/d from Canada.

As of late 2019, only four nations produced fracked oil and gas, the United States, Canada, China and Argentina. Many nations have frackable reserves, but the abundant reserves of easy to get oil and the high environmental costs outweigh it for many. The money cost of fracking is substantially more, even when the law allows externalization of environmental and health costs. Externalized costs are a most contentious subject in America today, and in other nations. In places fracking has been banned because of this, and we won’t get into that further here.

As for the greater cost of fracking to drillers, that is hard to track down. Sites are larger. Rigs are larger. More pipe is needed because wells are deeper. More cement is needed, more water, a larger impoundment, plus larger, more powerful equipment is needed. Special, imported, sand is used to keep the cracks open so the product oil and gas will flow. Several times as much water is produced than product, andmust be disposed of. Endless lines of trucks are needed to supply materials and carry away wastes, and vast amounts of diesel fuel.

There is a fracking cost given in the Rystad Energy graphic above, but it may be unrealistic, “politically correct.” More reliable is the following:

Shale oil costs more than conventional oil to extract, ranging from a cost-per-barrel of production from as low as $40 to over $90 a barrel.

A final point we want to consider is geopolitics. The four nations with lowest cost production are, first, Saudi Arabia, which can kill a famous journalist living in the U. S., visiting Istanbul, and carry away his remains in a brief case (Khashoggi). He was considered less valuable than the $110 million arms sales to the Saudi’s. Then Iran, Iraq and Russia. No need to say anything to this audience about the United States geopolitical stance toward them.

Indonesia trades mostly with the Oriental countries. The U. S. is pretty openly fomenting an overthrow of the government of Venezuela which has the world’s largest known reserves of oil. Nigeria is a mess, essentially the oil companies there do as they please. Brazil is essentially a dictatorship on good terms with United States.

Control of oil and gas is one of the reasons for the United States big military, larger than the next ten nation’s militaries combined. Unsurprisingly, this huge U. S. military is also the world’s largest single user of oil. The United States was the first nation to drill for oil, and for generations exported its resources. The “easy stuff” is gone here. Now the US must resort to other methods to retain its power.

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See also: Oil Price News: Saudi Arabia Aramco to Pump Record Crude in April – Bloomberg, March 10, 2020

Saudi Arabia escalated its oil price war with Russia on Tuesday, as its state-owned company pledged to supply a record 12.3 million barrels a day next month, a massive increase to flood the market.

The supply hike — more than 25% higher than last month’s production — puts Aramco above its maximum sustainable capacity, indicating that the kingdom is even tapping its strategic inventories to dump as much crude, on the market as quickly as possible.

Moscow responded within minutes, with Energy Minister Alexander Novak saying Russia had the ability to boost production by 500,000 barrels a day. That would put the country’s output potentially at 11.8 million barrels a day — also a record.

Crude Oil Supply: Saudi Arabia & US

Oil Production is in Flux.  Gas Supply is Uncertain.  Where Are The Safe Investments?

Commentary by S. Tom Bond, Retired Chemistry Professor and Resident Farmer, Lewis County, WV

This graph is supposed to show the American ascendancy in oil production. The result is claimed over and over. Concealed are three important facts:

(1) The gap between the extraction cost in Saudi Arabia’s conventional oil and the US fracked oil is approximately $60/bbl. Extracting oil from shale costs $60 to $100 a barrel, compared with $25 a barrel on average for conventional supplies from the Middle East, according to the International Energy Agency [IEA]. Extreme energy extraction is just that – extremely expensive.

(2) U. S. shale drillers have to deal with high decline of production where redrilling the shales requires constant vast input of capital to keep up high production. They are on the “drilling teadmill.” Quarter by quarter they have to struggle to keep up appearances of profitability to attract capital.

(3) They are already beginning to have to deal with the fact there are “sweet spots” where production is good, but much of the drilling range is not so rewarding. They find the sweet spots in early drilling by spacing wells widely and drilling the second round adjacent to the best of the first round. Get out of the sweet spots and some wells are not even breakeven, although in the targeted shale.

You are sure to know the price of oil is down. As of this writing, $67.39 a barrel.  According to the Washington Post, down 40% since mid mid-June (then $115). Oil is a commodity, so it responds to supply and demand. It is notoriously unstable, a gambler’s dream. Storage capacity is small compared to the volume being used, so production has to go somewhere, and the price is reduced to get rid of it.

The fracking industry tells us price is down because of the increasing production of American oil. Too quick and self-serving, it is best to look for more substantial reasons, because we have not reached self sufficiency, and can’t for more than a short burst. Reserve calculations don’t factor in decline in return due to come, because of moving out of the sweet spots.

The decline in the economy world-wide is part of it – less demand. You’ve heard of the disappointment of Black Friday sales – they didn’t get as much as expected. Russia is nearing a recession. Much of Europe has trouble. Japan doesn’t seem able to pull out of recession, and China is slowing. It’s bound to have an effect, along with recent increased production by Libya, Nigeria, South Sudan, Iraq and Russia. Some think the previous high price has induced an increased efficiency of oil use, too.

All cite the decision by Saudi Arabia not to decrease production as a major part of falling prices. World consumption of oil is 85.5 million barrels per day, with Saudi Arabia contributing to it 10. 2 million a day. That’s about one-eighth world consumption. (It could pump 12.5 million, so it is already holding in, while most oil producing countries need money and pump all they can.) As a member of the Organization of Petroleum Exporting Countries (OPEC), the Saudi’s have a controlling interest. U. S. – Saudi relations is much too complicated to get into here, but basically the U. S. is pledged to protect the Saudi family’s hold on Arabia, in return for her control of the oil price for U. S. interests (Saudi Arabia also provides 40% of the U. S. arms production industry income. The U. S. is the largest arms producer in the world, $28B worth.)

The Saudi’s want the U. S. to wipe out Iran, their worst enemy, but Iran produces too much oil, 4.14% of the world supply. Since the U. S. is not complying, the shoe is now on the other foot. It may be that the real reason Saudi Arabia won’t turn down the production is because it is in their national interest. Here’s why.

Two things can be expected to happen if oil stays low:

(1) The other oil producing states will feel the hurt, because they need the money. If this continues for a year or more, they will be compelled to join OPEC, giving the Saudi’s much more power to raise of lower oil prices (which also effects natural gas, too).

(2) Low prices puts the fracking producers in the U. S. and elsewhere in trouble. Many of fracking companies are marginal now, because of the “fracking treadmill,” the necessity having to drill many new wells constantly to maintain production, and because of the high cost of inputs.. They have to seek new capital quarterly. If profits won’t allow repayment, the big banks will surely cut off funds and leave them swinging in the breeze.

These topics will be interesting for a long time to come. Anybody want to invest in shale?

Here is something for you to worry about, as I am –

Commentary by S. Tom Bond, Jane Lew, Lewis County, WV

The current dust-up in Iraq is more than an insult to the nation whose leader proudly proclaimed “Mission Accomplished” on May 1, 2003. It wasn’t the end of major combat operations, which dragged on for years, with troops still in Iraq in an advisory capacity, many of them within the walls of the huge embassy constructed in Bagdad, the largest in the world. The unrealistic goals and incompetent subsequent management continue today.

The group calling itself the “Islamic State of Iraq and Greater Syria,” represents the Sunni faction of Islam in a war against the Shiite branch. The United States deposed Saddam Hussein, who controlled the Sunni branch which subdued the numerically larger Shiite segment of the Iraq population. What the United States did was set up a Shiite government in Iraq, reversing the historical arrangement. Iran, much larger and next door, is also Shiite, and this brought Iraq and Iran much closer together. Then the Iraq duly elected parliament voted in 2011 to have the United States leave.

Both Iraq and Iran are considered an oil and gas powerhouse. Lots of very high grade petroleum. Iran is a current hate object not only for Israel and the United States, but also for the other Gulf States, which are Sunni.

It occurs to many observers that the Islamic State of Iraq and Greater Syria is no longer conducting a terrorist attack, but a full scale war. The group has the reputation of being too violent even for al-Qaeda, which kicked it out.

Who pays? According to this article in The Economist, in Mosul ” The jihadists seized huge stores of American-supplied arms, ammunition and vehicles, apparently including six Black Hawk helicopters and 500 billion dinars ($430m) in freshly printed cash.” (Incidentally this Economist article is great for events leading up to its publication on June 14th.)

Labor is cheap. Part of the supply is from Saddam’s underground resistance still fighting, and part is from Islamic idealists streaming in from all over the Mid-east. At one time war was largely a matter of courage, but today war is industrialized and it takes money. Where does it come from? Some would have you believe it just grew.

This looks more reasonable to me. “Supporters in the region, including those based in Jordan, Syria, and Saudi Arabia, are believed to have provided the bulk of past funding.” You have to read the original paragraph carefully – it does not included Iran, which supported al-Qaeda in Iraq, although that crosses sectarian lines. (This is another very helpful article.)

In short, this is our payments to the Mid-east for oil coming back to us from the oil sheiks.

Now, back to the oil supply. For this section I am indebted to the Energy and Capital Newsletter. Iraq has huge proved oil reserves, 143.1 billion barrels according to the U. S. Energy Information Administration. Iraq is currently pumping out 2.9 million barrels a day. (E&C) Production is falling. If the ISIGS continues, production will fall further, causing a world wide price shock. This is because the world supply is delicately balanced, and decreased supply will increase the price sharply because more can’t be produced to meet demand. Lybia’s output has fallen because of disruption there. Mexican oil is running out.

The North Sea (between the United Kingdom and Denmark) will fall by 22% this year. Nigerian and Venezuelan production is declining. Sanctions cut off Iran, and Russia is a big question mark. Demand is rising.

OPEC (the Organization of Petroleum Exporting Countries) appears willing to keep its production constant, at least this year. So an oil price shock seems to depend in part on the advance and control of the Islamic State of Iraq and Greater Syria fighters. The “inelastic” nature of supply and demand for oil suggests one should be prepared for a substantial increase in price if supply goes down.

How will this affect natural gas prices? If oil goes up, where ever possible energy demand will be shifted to natural gas. This is especially important in the US Northeast, rapidly shifting to natural gas anyway, and in industry and electrical generation. This will tend to increase the price of natural gas, even if it is being over produced. And, more fracking means much more environmental impacts in our Region.

World conditions will particularly boost the worth of the “wet” part of wet gas, because the ethane, propane and butane extracted from wet gas can serve as a source of olefins, used to make plastics, i.e. petrochemicals. Much of this also comes from the lowest boiling fraction of oil, called naphtha. Less oil, particularly the light oil from the Mideast, less naphtha. It appears then the environmental impacts will almost certainly continue for years to come, as continued reliance on fossil fuels means more greenhouse gases, more global warming and more climate change.

>> Tom Bond is a retired chemistry professor and resident farmer in central West Virginia, and a member of the Guardians of the West Fork and the Monongalia Area Watersheds Compact <<