Exxon shows why U.S. oil output rises as prices plummet

although there are many here who poopoo my posting these articles on the downward slide in world oil prices, I believe they are very important for the US maritime industry and it is important to understand why oil is down so far and why it may stay down for a long time to come. This is another of those articles from yesterday.

[B]Exxon shows why U.S. oil output rises as prices plummet[/B]

JOE CARROLL 12/18/2014

HOUSTON (Bloomberg) – Crude oil production from U.S. wells is poised to approach a 42-year record next year as drillers ignore the recent decline in price pointing them in the opposite direction.

U.S. energy producers plan to pump more crude in 2015 as declining equipment costs and enhanced drilling techniques more than offset the collapse in oil markets, said Troy Eckard, whose Eckard Global LLC owns stakes in more than 260 North Dakota shale wells.

Oil companies, while trimming 2015 budgets to cope with the lowest crude prices in five years, are also shifting their focus to their most-prolific, lowest-cost fields, which means extracting more oil with fewer drilling rigs, said Goldman Sachs Group Inc. Global giant Exxon Mobil Corp., the largest U.S. energy company, will increase oil production next year by the biggest margin since 2010. So far, the Organization of Petroleum Exporting Countries’ month-old bet that American drillers would be crushed by cratering prices has been a bust.

“Companies that are already producing oil will continue to operate those wells because the cost of drilling them is already sunk into the ground,” said Timothy Rudderow, who manages $1.5 billion as chief investment officer at Mount Lucas Management Corp. in Newtown, Pennsylvania. “But I wouldn’t want to have to be making long-term production decisions with this kind of volatility.”

A U.S. crude bonanza that has handed consumers the cheapest gasoline since 2009 has left oil exporters like Russia and Venezuela flirting with economic chaos. The ruble sank as much as 19% on Dec. 16 to a record low of 80 per dollar before recovering to close at 68; Russian bond and equity markets also crumbled. In Venezuela, the oil rout is spurring concern the country is running out of dollars needed to pay debt and swaps traders are almost certain default is imminent.

Profitable Wells

U.S. oil production is set to reach 9.42 MMbpd in May, which would be the highest monthly average since November 1972, according to the Energy Department’s statistical arm.

Output from shale formations, deepwater fields, the Alaskan wilderness and land-based wells in pockets of Oklahoma and Pennsylvania that have been trickling out crude for decades already have pushed demand for imported oil to the lowest since at least 1995, according to data compiled by Bloomberg.

Existing wells remain profitable even as benchmark crude futures hover near the $55/bbl mark because operating costs going forward are usually $25 or less, Tom Petrie, chairman of Petrie Partners Inc., said in a Dec. 15 interview on the Bloomberg Surveillance television program.

Shut Ins

That’s why prices that have tumbled 50% from this year’s peak on June 20 haven’t prompted any American oil producers to shut down wells, said Petrie, a U.S. Military Academy at West Point graduate who has advised Saudi Arabia, Alaska and the U.S. government on energy issues.

The average cost to operate an existing well in most parts of the U.S. “is about $20/bbl,” Petrie said. “It might be $5 higher or it might be $5 lower, that’s the out-of-pocket costs that we’re talking about. Until you dip into that and start losing money on a cash basis day in, day out, you don’t think about shutting in” wells.

Once oil companies sink cash into drilling wells, lining them with steel pipes and concrete, blasting the surrounding rocks into rubble with hydraulic fracturing, and linking them to pipeline systems, they have no incentive to scale back production, said Andrew Cosgrove, an analyst at Bloomberg Intelligence in Princeton, New Jersey.

Sunk Costs

Those investments, which represent “sunk costs,” are no longer a drain on cash flow, Cosgrove said. Instead, they generate capital companies use to repay debt, fund additional drilling, pay out dividends and buy back shares, he said.

Exxon, the world’s biggest oil producer by market value, is expected to boost crude and natural gas output by 2.8% next year to the equivalent of 4.1 MMbpd, based on the average of eight analyst estimates compiled by Bloomberg.

That would arrest a two-year production slide for the Irving, Texas-based company, which is spending about $110 million a day this year on everything from rig leases to offshore platforms to refinery repairs. Chairman and CEO Rex Tillerson pledged in March to raise output by an annual average of 2% to 3% during the 2015-2017 period.

At the same time, Tillerson said capital spending would drop below $37 billion in each of those years, partly because mammoth investments like the Kearl oil-sands development in western Canada and the Gorgon LNG project on Australia’s Indian Ocean coast will no longer be absorbing cash.

Cheapest Oil

In the U.S., Exxon spent an average of $12.72 to extract a barrel of oil last year, its cheapest operating region aside from Asia and Europe, company figures showed. Some operators have even lower costs: Continental Resources Inc. spends about 99 cents to pump each barrel from its 1.8 Bbbl discovery known as the South Central Oklahoma Oil Province, or SCOOP. Continental, controlled by Oklahoma billionaire wildcatter Harold Hamm, discovered the SCOOP in 2012.

Laredo Petroleum Inc., an explorer of Texas’s Permian basin that has more than tripled production since 2010, said this month it will slash capital spending by about 50% next year. The company still sees 2015 output expanding by 12%. Shares in the Tulsa, Oklahoma-based company jumped as much as 15% after the Dec. 16 announcement.

As oil explorers retrench in response to the market’s decline, they will drill more selectively, Eckard said. Seismic surveys will be more closely scrutinized to ensure the best chances of striking crude and only the most-promising opportunities will be greenlighted, he said.

“We’re only going to see the very best wells drilled over the next 12 to 18 months,” Eckard said. “It’s going to be exciting.”

of course, this article mentions nothing about GoM offshore drilling and production but like the OPEC nations, shale is competing with the offshore for market share and as shale grows, it makes investment in the deepwater GoM a good bit less attractive given that shale costs so much less to drill for and to put into production. $25/bbl fixed costs to produce shale oil must be a whole hell of a lot less than to produce deepwater oil when up front costs are figured in. I am waiting to see the formal announcements from Shell, BP, Chevron et all of their E&P spending for 2015 and how much of that will be pulled from the offshore?

Only pleasure in these times of layoffs, is that Russia and Venusuela is going to hell! Putin is way too cocky.

[QUOTE=Kraken;150194]Only pleasure in these times of layoffs, is that Russia and Venuzuela is going to hell! Putin is way too cocky.[/QUOTE]

YES! I want nothing more that to see his head on a pike. I hate that lousy EMMEFFER!

Maduro is a nobody and hardly worth the mention…

[QUOTE=Kraken;150194]Only pleasure in these times of layoffs, is that Russia and Venusuela is going to hell! Putin is way too cocky.[/QUOTE]

What is the effect of lower oil prices in Norway?

Are alot of people really being laid of in the GOM? I keep hearing this. If so thats pretty bad news. If they have towing endorsements there are plenty of new ATB’s coming out.

[QUOTE=tugsailor;150197]What is the effect of lower oil prices in Norway?[/QUOTE]

Norway has a sovereign wealth fund which I have heard is enough to fund all social welfare programs in the country for 150years if the North Sea dried up tomorrow

plus, the fund is an available pool of capital ready to be invested back into Norwegian businesses such as maritime industries and technology

that is the benefit of having the profits from resources in a nation go to the people as opposed to the corporations

[QUOTE=c.captain;150195]YES! I want nothing more that to see his head on a pike. I hate that lousy EMMEFFER!

Maduro is a nobody and hardly worth the mention…[/QUOTE]

I don’t get where all the hate for Putin comes from. It is a complicated situation, but he tries to protect areas in Ukraine that are populated with a majority of ethnic Russians, he annexed Crimea from Ukraine in a similar manner to the way the US annexed Texas from the Mexicans. The current fighting in the Donbas region of eastern Ukraine is in an area where most of the population is ethnic Russian and seemingly would like to be part of Russia instead of Ukraine.

I get the feeling that the situation is getting manipulated because the military complex needs an enemy to justify high financial expenditure. Make Russia appear a bigger enemy than they actually are so that more tax money can be dished out in military spending and filter its way into certain peoples pockets.

[QUOTE=tugsailor;150197]What is the effect of lower oil prices in Norway?[/QUOTE]

As all nations with expensive oilfields, we will have a downturn. Norway have been doing well the last year’s and I hope we are prepared for some years with low oil prices. Several shipping companies has already sent out layoff notice.

[QUOTE=follow40;150200]I don’t get where all the hate for Putin comes from. It is a complicated situation, but he tries to protect areas in Ukraine that are populated with a majority of ethnic Russians, he annexed Crimea from Ukraine in a similar manner to the way the US annexed Texas from the Mexicans. The current fighting in the Donbas region of eastern Ukraine is in an area where most of the population is ethnic Russian and seemingly would like to be part of Russia instead of Ukraine.

I get the feeling that the situation is getting manipulated because the military complex needs an enemy to justify high financial expenditure. Make Russia appear a bigger enemy than they actually are so that more tax money can be dished out in military spending and filter its way into certain peoples pockets.[/QUOTE]

Don’t be so quick to drink Putin’s Kool Aide. The history, and the present situation, are not as you or Putin describe it.

If one were to accept Putin’s story, the same logic could be applied to all the other former Soviet satellites (such as the baltic republics) that have large Russian ethnic minorities. If Putin gets away with it in Ukraine, who is next, Estonia? Poland?

[QUOTE=c.captain;150193]although there are many here who poopoo my posting these articles on the downward slide in world oil prices, I believe they are very important for the US maritime industry and it is important to understand why oil is down so far and why it may stay down for a long time to come. This is another of those articles from yesterday.

[/QUOTE]

It is a good article.

The book “The Frackers” was an excellent read, and really puts thing into perspective.

[QUOTE=Kraken;150209]As all nations with expensive oilfields, we will have a downturn. Norway have been doing well the last year’s and I hope we are prepared for some years with low oil prices. Several shipping companies has already sent out layoff notice.[/QUOTE]

I would think cheap fuel would benefit the shipping companies. There for a while we were hearing of ships that would shut down or at least idle their main engine while they rode the currents in order to consume less fuel.

Cheap oil prices are definitely good for the US economy. The market problems are change, uncertainty and volatility.

Cheap oil is good for transportation, but tends to favor trucking over rail and barges.

Cheap oil is bad for the oil patch.

The good news for the oil patch is that drilling and production is becoming more cost efficient, and oil prices will be back up in another year or two. This is just a bump in the road.

[QUOTE=tugsailor;150250]The good news for the oil patch is that drilling and production is becoming more cost efficient, and oil prices will be back up in another year or two. This is just a bump in the road.[/QUOTE]

Agree, wish I had to wherewithal to guess the price bottom and forward future a tanker full of refined petroleum.

[QUOTE=tugsailor;150230]Don’t be so quick to drink Putin’s Kool Aide. The history, and the present situation, are not as you or Putin describe it.

If one were to accept Putin’s story, the same logic could be applied to all the other former Soviet satellites (such as the baltic republics) that have large Russian ethnic minorities. If Putin gets away with it in Ukraine, who is next, Estonia? Poland?[/QUOTE]

If there were regions in former USSR countries, or indeed any country, where the majority of people wanted to be part of the Russian federation then they should be given the right to self determination of what country they are part of. The people of eastern Ukraine and Crimea want to be part of the Russian federation again so who are we in the west to deny them that right. Anyway, outside of Ukraine, there are very few areas where Russians form any kind of ethnic majority, there are a couple of tiny areas, such as Trans-Dniester in Moldova. Belarus have spoken in the past about joining Russian federation, but that doesn’t look like happening any time soon.

Putin is just unlucky that he has happened to be picked as the target to vilify in order to justify dumping more tax money into the military complex so it can filter into the right offshore bank accounts.

So Texas should be able to vote to join Mexico or the Southern states should be able to vote to become their own country?

The southern states did vote to become their own country…

All the fellas on my boat keep saying the union shot first and Lincoln was a tyrant?

[QUOTE=Number360;150298]So Texas should be able to vote to join Mexico or the Southern states should be able to vote to become their own country?[/QUOTE]

Yeah if the majority of the people that live in Texas got fed-up with the establishment in Washington, and wanted to re-join Mexico, or become an independent country, then they should be given that right. It is called democracy.But they never will beacuse the overwhelming majority of people want to stay part of the USA, guess the Texans need to watch that the number of Mexicans doesn’t reach >50% of the population…

The UK recently gave the people of the Falklands, Gibraltar and Scotland a vote on whether they wanted to stay part of Britain or join other countries or become independent, and all voted to stay part of Britain.

To solve the current crisis in Ukraine they should give the people of the Donbas region in the east a free and fair referendum to see if they want to stay part of Ukraine, join Russia, or become independent. That would solve the crisis in one go. They already had a referendum in Crimea and the people overwhelmingly voted to re-join Russia, so that decision should be respected.

There is a good video about Texas leaving the USA linked below.

I will have to look it up to double check! But I believe Texas gave up that right a long time ago.

[QUOTE=rigdvr;150300]The southern states did vote to become their own country…[/QUOTE]

and with this simple statement and all the thanks it received my point is proved that in the minds of so many southerners that the Civil War never ended and the Confederate States never returned to the Union.

now rigdvr, I hope you can reply to this without the nasty personal attack and just tell us how this isn’t so?