Big Oil Companies Should Adopt a Self-Liquidation Strategy • Hacker News Board

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

#31

Post by tahssa » Sun, Dec 27, 2015, 8:43 PM UTC

vardump wrote: post #7

The author should have done some basic fact checking. From the article: > "more sophisticated than nineteenth-century “nodding donkeys.”" That type of fields are getting rare. EOR [1] techniques are being applied everywhere. Although, AFAIK, some countries, such as Venezuela are somewhat backwards in their application of EOR. They wanted to nationalize oil fields and not invest in them, and look what happened. > new…

Well let's be clear.

1. What he said was true about nodding donkeys. OPEC countries are starting to use EOR, but most of their fields do not require it. Some countries like Saudi Arablia do have heavy oil and they are starting to invest in these areas, but that does not invalidate the authors point - that the U.S./Canada can help with that shift.

2. re: fracking being new. almost all reporting calls fracking "new", but they really are referring to the new form of fracking where it's done horizontally through shale. It's a minor misconception that can be forgiven considering the intent is really "new fracking technology".

Edit: here's a good video showing horizontal fracking -> https://m.youtube.com/watch?v=O0kmskvJFt0

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

#32

Post by nordsieck » Sun, Dec 27, 2015, 8:45 PM UTC

rubyfan wrote: 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.…

> Aren't OPEC essentially trying to starve out the competition (shale, fracking, solar, wind, etc.)?

My understanding is that OPEC has largely been a tragedy of the commons. The members all gain by limiting sale volume, but each member has an incentive to cheat and overproduce their quota. Historically, Saudi Arabia has underproduced to make up for the cheating and to hold the price line, but it sounds like they got fed up with doing that, and decided to show the other OPEC countries what life without OPEC would be like.

In regards to the competitors you mentions, you really have to split them into two groups: auto fuel and electric power generation.

OPEC really has no effect on electric power generation, mostly because no one burns oil for electricity. The main hydrocarbons people burn are coal and natural gas, and they're already really cheap.

It may be that Saudi Arabia wants to harm the shale-oil businesses, particularly the debt financed ones. I don't really know much about the business, but the thing to remember is that even if a business goes bust - its asses don't disappear. They get bought up by someone else. The high prices may discourage discovery work. The effect on currently producing wells is more difficult to predict.

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

#33

Post by graeham » Sun, Dec 27, 2015, 8:50 PM UTC

The article is calling for a "sell low" strategy [0]. The author is mistaking low oil prices as from lack of demand. This is part of the story, but a small part. The major factor is high supply, mainly from Saudi Arabia [1]. The motive is not entirely clear. Most think its a fight for market share, with Saudi hoping Russia, Venezuela, US fracking, Canadian oil sands, or other middle east players blinking before the Saudi's.

They are probably right, that other players have high expenses, less cash on hand, and will have to fold first. Certainly US shale is hurting, and practically no new oil sand projects are starting in Canada. In fact, this probably signals a good time to buy new assets, for companies prepare for this.

What I think Saudi/ OPEC is missing from the equation is that market share is not something that can be won long-term. US shale may have to cut back this year, but I think the time scale to turn production back on is about one year once prices return. Oil sands are a longer-term investment, but this also means that low prices don't cut production - the expensive investment has already been made.

Another major thing the article is missing from the equation is the demand side. Decrease in demand at the moment has come from efficiency investments that were economically driven by high oil prices. People bought smaller cars, took fewer road trips, and invested in home insulation. With oil prices lower, many of these things become less economical. Demand will increase, prices will go up.

[0] - http://www.nasdaq.com/markets/crude-oil-brent.aspx?timeframe... [1] - http://uk.businessinsider.com/saudi-arabia-has-no-plans-to-c...

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

#34

Post by justincormack » Sun, Dec 27, 2015, 8:54 PM UTC

tankenmate wrote: post #30

hughw wrote: 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…

Qatar did have a gas to aircraft fuel conversion process, but not really cost effective.

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

#35

Post by rubyfan » Sun, Dec 27, 2015, 8:54 PM UTC

ape4 wrote: post #18

Doesn't seem so crazy. If your industry isn't viable any more: liquidate rather than hang around. We all know what Alphabet (Google) would do if it owned some company that was in decline.

That the business is in decline is the bone of contention here. The author doesn't present evidence that the market for oil is in decline. He suggests as much referring to projections of long term low oil prices but ignores realities. Low prices can be fixed on the supply side as well as demand.

I don't believe there is compelling evidence to suggest clean energy is making substantive inroads against oil. Short term analysis seems to suggest oil consumption will increase[1]. Past actuals suggest renewable energy as a percent of total energy had declined over the last 50 years[2].

At the moment OPEC are essentially overproducing and are telegraphing that they will cut supply in the future[3] as they expect prices to rise. This is a vote of confidence for higher prices and economic growth in the future which is hardly a reason to start selling off reserves now.

[1] http://www.eia.gov/forecasts/steo/report/global_oil.cfm [2] https://en.m.wikipedia.org/wiki/Renewable_energy_in_the_Unit... [3] http://www.wsj.com/articles/opec-report-suggests-oil-price-r...

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

#36

Post by justincormack » Sun, Dec 27, 2015, 8:56 PM UTC

hughw wrote: 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…

Huge numbers of US oil companies are filing for bankruptcy right now, and many are not profitable even at zero debt. I am not sure where your "most are succeeding" figure comes from.

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

#37

Post by vardump » Sun, Dec 27, 2015, 8:59 PM UTC

tahssa wrote: post #31

vardump wrote: post #7

The author should have done some basic fact checking. From the article: > "more sophisticated than nineteenth-century “nodding donkeys.”" That type of fields are getting rare. EOR [1] techniques are being applied everywhere. Although, AFAIK, some countries, such as Venezuela are somewhat backwards in their application of EOR. They wanted to nationalize oil fields and not invest in them, and look what happened. > new…

Well let's be clear. 1. What he said was true about nodding donkeys. OPEC countries are starting to use EOR, but most of their fields do not require it. Some countries like Saudi Arablia do have heavy oil and they are starting to invest in these areas, but that does not invalidate the authors point - that the U.S./Canada can help with that shift. 2. re: fracking being new. almost all reporting calls fracking "new", b…

1. 19th century well implies at most a few hundred feet depths. There just aren't spots left on earth where such a well would still yield meaningful amounts of oil.

2. Principal driver behind those horizontal wells is money. Those wells cost 2-3x more to complete. Horizontal tech has advanced, but in the end that advancement has been dollar driven. Expensive oil made it economical.

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

#38

Post by MichaelGG » Sun, Dec 27, 2015, 9:08 PM UTC

ams6110 wrote: post #25

nextweek2 wrote: post #19

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.

That's pretty much political though. Nuclear powered cargo ships have already worked, and Russia says they're putting theirs back into service in a bit.

Although if foreseeable future means obvious stuff, then yes, the huge number of non-nuclear ships means it'll take a long time even if everyone liked the idea tomorrow.

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

#39

Post by fauigerzigerk » Sun, Dec 27, 2015, 9:08 PM UTC

OK, here's the question: Who will buy all those supposedly worthless assets and provide that "tsunami of cash" to the shareholders of oil companies?

A fire sale of assets of questionable value is only going to prove their worthlessness and they will have to be marked down very quickly on the balance sheets of oil companies.

The result will not be a tsunami of cash but a tsunami of bankruptcies.

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

#40

Post by ryanjshaw » Sun, Dec 27, 2015, 9:15 PM UTC

MichaelGG wrote: post #3

I don't know anything about oil, but it seems unrealistic to claim to be able to predict markets. Liquidating all your reserves at current price is unlikely to be seen as a wise move. (And wouldn't selling more oil than the US uses annually impact prices somehow?) If you magically had knowledge of the range of prices over 10+ years you could do all sorts of money making things. Edit: Looked into this a bit. Futures o…

> I don't know anything about oil, but it seems unrealistic to claim to be able to predict markets.

The author's position is less about predicting markets than it is about "if you're operating a horse & buggy business in 1885, you're best off winding it up". The debate here seems to be about whether 'today' is 1885 or 1855 or 1825, so to speak.