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Big Oil Companies Should Adopt a Self-Liquidation Strategy

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Re: Big Oil Companies Should Adopt a Self-Liquidation Strategy

#21
Aren't OPEC essentially trying to starve out the competition (shale, fracking, solar, wind, etc.)? They are basically flooding the market with cheap oil and thereby making all the alternatives economically unattractive?

Western oil interests are probably right to spend on discovery then, since they'd believe OPEC can't pump forever and non-OPEC sources will be profitable in the future and will take years to develop. This is probably where the author and oil executives differ in their belief, that there will be a market for oil in the future.

However the author doesn't present any evidence to suggest non-oil sources will be sufficiently more profitable, less expensive and widely available in the future. Further, there is no evidence presented that a non-binding climate change agreements will destroy the oil market.

Re: Big Oil Companies Should Adopt a Self-Liquidation Strategy

#22
post #21

Aren't OPEC essentially trying to starve out the competition (shale, fracking, solar, wind, etc.)? They are basically flooding the market with cheap oil and thereby making all the alternatives economically unattractive? Western oil interests are probably right to spend on discovery then, since they'd believe OPEC can't pump forever and non-OPEC sources will be profitable in the future and will take years to develop.…

> since they'd believe OPEC can't pump forever

In 50 years, OPEC will still have oil even at current consumption. But consumption is shrinking as energy production is already shifting to renewables and cars will have converted to electro/hydrogen by then.

Re: Big Oil Companies Should Adopt a Self-Liquidation Strategy

#23
Whoever wrote this seems to be predicting the present while having no awareness of how the petroleum industry works. Yes, they've outlined what most majors are doing to different degrees in different areas. However, you're stupid not to keep your ability to operate when oil prices come back up. (Caveat: I'm an exploration geologist at a "western major", so I do have a somewhat slanted view.)

First off, let's get something out of the way. The current price environment is every bit as artificially low as $120/bbl oil was artificially high. Saudi Arabia is deliberately producing at very high rates to keep their market share and drive companies that can't operate at $40/bbl out of business. They want to be able to maintain their control over global oil markets in the future, and they're in a geologically unique position of having huge reserves that can be produced at high rates and are economic at very low oil prices. Therefore, they've flexed their muscles with the knowledge that unconventionals can't keep up.

Most majors are operating on the assumption that oil will be back in the ~$60/bbl range within two years.

This is reasonable for several reasons.

1) Unconventional oil production _will_ decrease significantly over the next year. Unconventional wells have very rapid decline rates.

2) It's not clear that Iran's production coming onto the global markets can offset the decline in unconventional production. Iran has huge reserves in what should be a relatively cheap operating environment, they they also have aging infrastructure.

3) Saudi Arabia is likely to drop production once US unconventional-focused companies are no longer a threat.

Next, yes, they've outlined a strategy that all of the majors are following, albeit to less of an extreme. To be precise:

> For Western oil companies, the rational strategy will be to stop oil exploration and seek profits by providing equipment, geological knowhow, and new technologies such as hydraulic fracturing (“fracking”) to oil-producing countries. But their ultimate goal should be to sell their existing oil reserves as quickly as possible and distribute the resulting tsunami of cash to their shareholders until all of their low-cost oilfields run dry.

The first half is exactly what every major, non-national upstream oil company does. We provide the know-how to 1) find, 2) develop infrastructure to produce, and 3) efficiently recover hydrocarbons to countries who don't have a national oil company with the know-how or capital to do it on their own.

Next, most of the equipment and services portion of that isn't provided, developed, or controlled by oil companies. It's done by service companies (e.g. Halliburton, Schlumberger, etc). The in-house knowledge oil companies have is mostly around geology and managing huge infrastructure projects. (I'm biased towards exploration and I'm dramatically oversimplifying there.)

Finally, yes, most companies are selling a lot of assets right now. However, you only sell what you don't think you can operate economically in the current price environment. You're typically selling it to someone who can operate it more efficiently or who has a different idea of the potential for enhancing reserves. At any rate, finding a buyer for the stuff you'd want to sell most is difficult, and a lot of the rest is currently profitable.

"Wasting money by seeking new reserves" is just a silly statement. If we don't keep exploring, we'll wind up in the same boat we were back in the early 00's. It takes decades to go from exploration to first production. You cut back on major capital expenditures for exploration, but you don't stop entirely.

Re: Big Oil Companies Should Adopt a Self-Liquidation Strategy

#24
post #21

Aren't OPEC essentially trying to starve out the competition (shale, fracking, solar, wind, etc.)? They are basically flooding the market with cheap oil and thereby making all the alternatives economically unattractive? Western oil interests are probably right to spend on discovery then, since they'd believe OPEC can't pump forever and non-OPEC sources will be profitable in the future and will take years to develop.…

> since they'd believe OPEC can't pump forever In 50 years, OPEC will still have oil even at current consumption. But consumption is shrinking as energy production is already shifting to renewables and cars will have converted to electro/hydrogen by then.

Cars won't convert in large numbers if oil-based fuel is a cheaper option.

Re: Big Oil Companies Should Adopt a Self-Liquidation Strategy

#25

I'd be interested in seeing a breakdown of the lifespan of oil using transport. A car might have a 15 year lifespan so we can't see a massive change in petroleum use until that time. However boats, trains and planes have at least double that lifespan. Because of capital investments, surely an alternative to oil is still 20 years away?

Trains are feasible to run on electricity, since they run on fixed tracks and you can have overhead cables or 3rd rail configurations. There is no realistic chance that ships and planes will not use petroleum fuel for the foreseeable future.

Re: Big Oil Companies Should Adopt a Self-Liquidation Strategy

#26
post #17

The article ignores some realities. 1) The major OPEC producers need to recover far more than their lifting costs. Their oil revenues subsidize the rest of the economy and is their bulwark of social stability. Some estimate that Saudi Arabia needs $90/bbl. 2) Technological adaptation to the low price regime is happening as we speak. The years of $100/bbl oil developed expensive innovations, and now we are seeing thos…

That's pretty interesting about the new technologies and how small businesses can still operate profitably in the current price range. Where did you read about this?

Re: Big Oil Companies Should Adopt a Self-Liquidation Strategy

#27

I'd be interested in seeing a breakdown of the lifespan of oil using transport. A car might have a 15 year lifespan so we can't see a massive change in petroleum use until that time. However boats, trains and planes have at least double that lifespan. Because of capital investments, surely an alternative to oil is still 20 years away?

> Because of capital investments, surely an alternative to oil is still 20 years away?

It depends what you mean by alternative. The day when the last gallon of oil is burned may not ever even happen, but the day when 20% of things that currently burn oil have been replaced with something else could be very soon, and 50% only a few years after that, etc.

Re: Big Oil Companies Should Adopt a Self-Liquidation Strategy

#28
post #17

The article ignores some realities. 1) The major OPEC producers need to recover far more than their lifting costs. Their oil revenues subsidize the rest of the economy and is their bulwark of social stability. Some estimate that Saudi Arabia needs $90/bbl. 2) Technological adaptation to the low price regime is happening as we speak. The years of $100/bbl oil developed expensive innovations, and now we are seeing thos…

That's not their marginal cost though. They may need $90/bbl to balance their budget, but they don't need $90 to pump the next barrel.

Re: Big Oil Companies Should Adopt a Self-Liquidation Strategy

#29
post #21

Aren't OPEC essentially trying to starve out the competition (shale, fracking, solar, wind, etc.)? They are basically flooding the market with cheap oil and thereby making all the alternatives economically unattractive? Western oil interests are probably right to spend on discovery then, since they'd believe OPEC can't pump forever and non-OPEC sources will be profitable in the future and will take years to develop.…

If you're looking for evidence that non-oil sources will get more profitable, less expensive and widely available in the future, Ramez Naam has a series of excellent blog posts (with lots of cited data) that are a good starting point. The first is from mid-August of 2015, and the last in mid-October, so they are timely as well:

1. http://rameznaam.com/2015/08/10/how-cheap-can-solar-get-very... 2. http://rameznaam.com/2015/08/30/how-steady-can-the-wind-blow... 3. http://rameznaam.com/2015/10/14/how-cheap-can-energy-storage...

Re: Big Oil Companies Should Adopt a Self-Liquidation Strategy

#30
post #17

The article ignores some realities. 1) The major OPEC producers need to recover far more than their lifting costs. Their oil revenues subsidize the rest of the economy and is their bulwark of social stability. Some estimate that Saudi Arabia needs $90/bbl. 2) Technological adaptation to the low price regime is happening as we speak. The years of $100/bbl oil developed expensive innovations, and now we are seeing thos…

The break even price is estimated at current pumping rate vs gross profit; but Saudi Arabia can relatively easily increase their pumping rate. The cash cost for the Saudis per barrel is sub $5. So they can up their production rate to handle the difference; they are incentivised to do so if they truly believe that their reserves will become a stranded asset.

In contrast after running and royalties cash costs in the US are up towards $30/bbl and Canadian oil sands towards $40/bbl. But, the size of wells using these technologies are smaller. And, those wells cost more to discover, and tap. This means US / Canadian oil is more affected by marginal cost, both in terms of price flexibility and liquidity (both cash and oil).

And the biggest threat, in the medium term, to oil prices is some of the range of alternative energy sources. Solar costs are coming down quite rapidly. Wind is coming down but more slowly (a chunk of this is in real rather than nominal terms; depending on currency). And nuclear in time will probably come down if increasing investment leads to predicted efficiency gains.

Oil isn't going to disappear overnight, but it does have a bordering on existential threat in the medium term. The only largely protected part of this market I can see here is large scale transportation, i.e. sea and air transport.

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