19 Million Barrels Missing

Jim Brown
 
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Energy investment bank, Tudor, Pickering, Holt & Company said the oil industry has deferred or cancelled about 150 projects that could unlock 125 billion barrels of oil over their lifetime.

Those 150 projects could produce about 19 million barrels per day at their peak. In a separate presentation Chevron said the decline in mature fields would need $7-$10 trillion of additional investments to prevent the drop in production. In today's energy market with oil prices under $40 that investment is not going to be made.

In the chart below, Chevron illustrated the problem. Demand will continue to rise since the global working population rises +200,000 per day. The existing base of production declines every day as the oil is taken out of the ground. Between now and 2030 another 200 billion barrels of oil will need to be discovered and produced in order to keep up with demand.


With active drilling declining at a rapid rate and capital expenditures by the major oil companies being slashed every quarter those discoveries are not going to be made. The major reason is that all the cheap oil that could be produced profitably at $40 a barrel was discovered long ago.

The majority of oil discovered today requires an average of $75 a barrel to be profitable. There are some exceptions but for every lower priced barrel, there is a higher priced barrel to offset it. Any deepwater offshore oil requires $75 or higher to be developed. You cannot spend billions of dollars developing a 10 well field at $40 oil. Chevron halted development on a North Sea project costing $8 billion because profitability required $100 per barrel or more. The vast majority of shale oil requires prices over $40 and that is why active drilling is rapidly declining.

Since it takes 5-7 years to develop a newly discovered offshore field, the projects that are not being approved today will cause a significant decline in production 5-7 years from now.

Newly discovered onshore fields require 2-4 years to develop and have pipelines approved and laid to take the oil to market. That means all those new shale developments that are being delayed will not be ready to offset declining production in other fields in 2017 and 2018.

If oil prices do not rise soon Exxon Mobil is considering delaying up to 25 projects that would generate about 2.5 mbpd . That is production that would arrive 3-5 years from now that would be needed to offset declines in existing fields.

Oil sands projects, which were expected to add 1.0-1.5 mbpd in 2017, cost from $95-$115 per barrel. This has caused Total and Statoil to postpone the expansions. Total halted a $10 billion oil sands project.

While oil prices are plunging now we all know they will return a couple years from now. The nearly $1.2 trillion in cancelled, delayed or abandoned projects over the last 18 months will cause a material decline in future production.

We currently produce about 95 million barrels per day of liquids. That is roughly 85 mbpd of oil with the rest natural gas liquids, which are not really oil but they are counted in overall production by the IEA.

Global depletion, the normal decline in production in existing fields as the oil is removed, is about 6% per year. Some agencies say 4.5% others as much as 7.5% so we will use the 6% average or roughly 5.0 million barrels per day per year. That means we have to find and produce 5.0 mbpd of new oil every year or production declines.

Since companies are limited today to developing oil that cost under $40 the outlook for production in 2017, 2018 and beyond is grim.

In 1998, oil prices declined to $10 a barrel when Saudi Arabia flooded the market with oil in a dispute with their OPEC partners. Active oil rigs declined to 488 in 1999. That was down from a high of 4,530 in 1981. We are at 555 active rigs today and still falling.

Without a surge in prices soon, we will see a sharp decline in production in 2017 but that should be the beginning of the end. Super low prices cause severe disruptions in the energy sector and the companies that survive will accumulate the assets of those that do not survive.

Lipow Oil Associates said on Friday that 36 energy companies have filed bankruptcy so far in 2015. Sixteen were in Texas, 4 in Colorado, 4 in Delaware and 6 in Canada. They expect more in the months ahead because cash flows have been cut by more than half and drilling activity is still crashing.

We are approaching an entry point on energy equities. It may not be in the next few months but the mother of all buying opportunities will eventually appear. Every oil cycle has its lows and those lows produce the next new highs 3-5 years later. This cycle has been so severe that the next cycle high could be well over $100 a barrel. Companies are always slow to ramp up activity after a cycle low because they are cash poor and they are scared the rebound could be temporary.

Energy investors should be patient. Oil prices still have further to fall.

Active Rigs

Active drilling rigs declined -7 to 737 for the week ended on Friday and that is another 10 year low. Oil rigs fell -10 for the week to 545. Active gas rigs rose +3 to 192. Active rigs have now declined -1,194 since the high of 1,931 in September 2014. Active offshore rigs were dropped -5 to 25.


Oil Inventories

Crude inventories rose +1.2 million barrels to 489.4 million. That is only 1.5 million below an 80-year high.

Refinery utilization rose from 92.0% to 94.5% as the fall maintenance season ends. That is up from the low of 86.0% on October 9th.

U.S. production rose +37,000 from 9.165 to 9.202 mbpd. That is a ten-week high!

Cushing inventories rose from 58.6 million to 59.0 million and nearing a record high.

Gasoline inventories rose +0.1 million barrels to 216.9 million as refiners accelerated production of winter blended fuels.

Distillate inventories rose 3.1 million barrels to 144.4 million.

In the graphic below green represents a recent high and yellow a recent low. The blue-green represents a record high.


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