
The World Is Still Producing More Oil Than It Needs - n0pe_p0pe
https://www.wired.com/story/the-world-is-still-producing-more-oil-than-it-needs-why/
======
deblacquiere
I work in surface production facilities (rather than reservoir) but I think
this article misses the point by a long margin. For the vast majority of oil
reservoirs, shutting in is good for production. The reason is fairly intuitive
- you drill into the oil-bearing part of the reservoir which is in the middle
(beneath the gas but above the water). When you suck on the oil, you pull
water and gas through with it ("coning") but when you stop, it all settles
down again. When you restart production you get more oil (valuable) and less
gas (far less value, possibly worthless) and less water (worthless).

Lifting costs vary a great deal but for my high-cost-of-living part of the
world, we still don't spend more than about $20 a barrel to produce the oil.
Most of the world would be far less.

I think for the vast majority of the oil industry, we still make a small
profit on low oil prices. The economics of oil production is really that you
spend a shitload up front (CAPEX) and then your continuing costs (OPEX) are an
order of magnitude smaller.

And as our CEO said recently, when prices are low everybody expects to rise
back to what we're used to again soon, because we're naturally optimistic. But
that's not a law written in stone, it might be true that oil prices drop again
in future, so we're better off selling it today.

Also what they mentioned about waxy pipelines doesn't affect most facilities.
Usually we would do a shock biocide dose for preservation, which is not a
particularly high cost. And if you've got a waxy crude, you're probably going
to get your wax issue within 12-24 hours anyway as soon as you cool to
ambient, so a long shut-in and a short shut-in would be dealt with similarly.

~~~
moralestapia
Your input is great but it begs the question: why, then, isn't production
being shut down during this time?

~~~
simonh
If I've got this straight, the $20 per barrel cost of production includes the
up-front CAPEX costs. However those costs have already been paid. The marginal
cost of production per barrel is lower, so right now ignoring sunk costs $20
per barrel oil is still economical to pump for many producers. Is that right?

~~~
beerandt
Yes, that's basically correct, but think less _econ_ and more _accounting_.

Keep in mind:

1) That the $20/bbl cost is likely with capex amortized on the assumption that
the well _isn 't_ shut-in. You'd either have to add a one-time write-off for
the capex balance (if you can afford to), or at least re-amortize. Either way,
looking at the existing/assumed $/bbl cost vs market price isn't correct for
most decision making purposes.

2) The act of shutting-in (and re-starting production) have direct costs to be
accounted for. It's not as simple as pushing a button that activates a remote
controlled valve. There's (almost) always physical work to be done, plus
compliance / permitting work associated with any changes. More-so for
restarts, if you assume the shut-in will be temporary, and want to account for
that cost in decision making.

3) opex costs are largely still discrete to some extent (ie, not literally a
cost in $/bbl, except pipeline transport and royalties), and can still be sunk
costs.

Shutting-in wells doesn't necessarily reduce opex to $0, whether immediately
or longer term.

Yearly maintenance might have been done last week. Tanker service already
contracted for the year, or a direct pipeline already built. Lease and permit
fees paid for the next X years. The lease might be contracted at some fixed
cost plus royalties, for 10+ years, with the fixed cost guaranteed.

New for 2020: If the company took a PPP loan (or otherwise is trying to avoid
layoffs) they have to keep surplus personnel, which then becomes a sunk cost.

Now if you look at exploration instead of production, it's much more likely to
be a textbook case of if (cost > price), then (stop work immediately).

~~~
hinkley
I recall years ago when people would argue about tape or spinning rust for
safekeeping old backups and the drive people would talk about tapes sticking
together, while the tape people would talk about bearings seizing if they
don't spin the drives up from time to time.

Things that are meant to keep moving tend not to fare well when they are left
to sit for too long. If you have a classic car you have to drive it or
everything starts to seize, separate, or gel.

I expect oil well equipment is not so different.

------
DyslexicAtheist
I used to work offshore in commercial diving / ROVs. The reasons are not so
much technical problems, but there is demand/supply for people who can do that
sort of job, as I wrote here[1].

people need many years of experience (recorded in a log-book), before they can
do the next certification. Unlike SW engineering where you're promoted to
Senior depending on company and sometimes for no apparent reason in oil+gas a
lot of people are in their 40ies and 50ies. Our super-intendant on one job was
78. I was the youngest guy out there with 23 yro while the next closest was 12
years older than me (ans also only on one job. one all other gigs all were
much older still).

Every 2 or so years you need to do a survival training. There are medical
fitness tests etc ... You can't just quickly train a few on-shore engineers
and then send them out there.

On the other hand there should be plenty of people "sitting on the beach"
without work right now and from my experience it sounds like big oil companies
rather not spend the money on this when they think there might be a chance of
this blowing over in 3 months.

[1]
[https://news.ycombinator.com/item?id=22619406](https://news.ycombinator.com/item?id=22619406)

~~~
raihansaputra
Can you share the format of the log book? Interested in doing that for my
career. Having a documentation of problems I faced, even not in detail, would
help a lot in the coming years I think.

~~~
DyslexicAtheist
sure, it's fairly simple. You can see some screenshots of the pages with a
google image search "commercial diver logbook" or "saturation diver logbook".

Has fields for name of ship/vessel, name of project, name of client, type of
gear, date, and then time spent in bell or lock-out, and what you were working
on, then you would calculate the total time spent in saturation at the end of
the decompression (e.g. number of days/weeks etc). there would be signature
field for yourself and supervisor/super-intendant:

[https://www.subsupply.eu/store/image/cache/catalog/logbooks/...](https://www.subsupply.eu/store/image/cache/catalog/logbooks/07_Commercial_divers-
logbook-record-of-dive-600x600-w62--2-27-44-0.jpg)

[https://www.google.com/search?q=commercial+divers+log+book&h...](https://www.google.com/search?q=commercial+divers+log+book&hl=en&tbm=isch#imgrc=jXgN0VDsawC6RM)

[https://www.google.com/search?q=saturation+divers+log+book&t...](https://www.google.com/search?q=saturation+divers+log+book&tbm=isch&hl=en)

ROV log books are similar with the difference that you're logging the time of
the vehicle and your experience as the pilot not the diver (so no saturation,
decompression etc):

[https://www.google.com/search?q=off+shore+rov+logbook&tbm=is...](https://www.google.com/search?q=off+shore+rov+logbook&tbm=isch&hl=en)

------
jillesvangurp
The elephant in the room is that the current crisis has revealed how dependent
some producers are on high prices for oil. Basically the current crisis is a
double crisis of first Russia deciding to stop voluntarily limiting their oil
production to keep the prices artificially high so the US producers don't go
bankrupt. And then the demand collapsed due to the lockdown. So over supply
and demand collapse happened nearly at the same time.

What this means for producers in the US, that are increasingly relying on more
expensive sources of oil is that Russia can collapse the prices to below their
break even point any time they want. Same for the Saudi's. That used to be the
nuclear option when Opec controlled the prices. This is also where the word
oligarchy comes from. Once oligarchies stop fixing prices they are suddenly
competing for cost per barrel. And the simple truth is that when it comes to
fracking, the cost is too high.

What that means in turn is that oil related investments suddenly got a lot
more risky than they already were. All the easy sources have long been
invested in and the remaining sources are increasingly difficult to exploit.
Institutional investors have already been divesting away from oil for a few
years. Price fluctuations like we've seen in the past decade ranging from
negative to above 100$ per barrel means it's a highly risky investment as you
simply can't know if you get back your money.

So, shutting down right now may get a permanent nature for a lot of companies
as they'll have a hard time getting investors to back bringing their plants
online. The longer this lasts, the worse it gets. I expect a lot of recent
investments to be written off completely. Also things like the Keystone
pipeline are probably dead in the water as it is debatable whether the thing
will ever be profitable.

IMHO that's actually good news and will force people to look at alternative
technologies and accelerate the agenda on e.g. switching to electrical
vehicles, battery technology, alternative energy etc.

~~~
dec0dedab0de
_This is also where the word oligarchy comes from_

Im pretty sure the word oligarchy existed before humans relied on petroleum.

~~~
sweetdreamerit
it comes from greek ὀλιγαρχία [0]: from ὀλίγος (olígos), meaning 'few', and
ἄρχω (arkho), meaning 'to rule or to command')[1]

[0]
[https://en.wiktionary.org/wiki/%E1%BD%80%CE%BB%CE%B9%CE%B3%C...](https://en.wiktionary.org/wiki/%E1%BD%80%CE%BB%CE%B9%CE%B3%CE%B1%CF%81%CF%87%CE%AF%CE%B1)
[1]
[https://en.wikipedia.org/wiki/Oligarchy](https://en.wikipedia.org/wiki/Oligarchy)

------
BurningFrog
Oil income is supporting many horrible regimes.

I have some hope a prolonged oil glut might make some of them fall.

A world where Russia or Iran or Venezuela was run by decent government would
be a great improvement!

I wish the same for Saudi, but I think that regime is safe.

~~~
lobotryas
I like your sentiment, but it conveniently forgets the significant amount of
bloodshed and instability that usually occurs when one such regime collapses.

Just look at Libya. The West got rid of Gadaffi and the country went from
stability under a dictator to fractured chaos where tourism industry is dead
and slave markets have opened.

~~~
BurningFrog
I'm absolutely not advocating US invasions.

These petrostate governments get their power from controlling the oil wealth.

If that becomes worthless, they have no power basis and serve no purpose
anymore. Sure, what comes after, nobody knows. But in general, I think non-oil
economies, that have to thrive of regular people working, produce much
healthier governance.

------
anticensor
It is hard to close, but is there no way to ramp down either?

~~~
wolfram74
The sources I've been encountering make it sound like ramping down is an
option up to a point, and then fluid dynamics kick in and the next flow rate
below ~60% is 0%. I'm giving them some credence because they're very obsessive
about the oil industry, but a bit of skepticism because they feel a little
apocalypse heavy.

~~~
anticensor
That is, like rocket engines :) Those are not usually designed to be throttled
below 50-ish% either.

------
cachestash
Walked past a petrol (gas) station earlier in the UK. Its still priced at
£1.07 a litre.

~~~
rootusrootus
Prices vary for a lot of reasons, and in the UK tax is a significant part of
the retail price. Right now perhaps it’s more than half of the pump price.

Some parts of the US are under a dollar a gallon. Couple weeks ago it was as
low as 89 cents a gallon in some places in Oklahoma. Looks like it’s up to
95-99 cents at Costco now.

But in Oregon, it’s just about $1 more a gallon. And not much of that is
taxes. We have a different refinery system for the western US, we never get
the really good prices here.

------
onetimemanytime
Is this why they pay to get rid of produced oil (negative prices)? I guess is
better to lose a bit hoping things turn around than closing well /suffering
long term damage.

~~~
goodcanadian
It is a question of whether it will cost more to store the oil than it does to
"sell" it at a loss.

That said, I doubt many producers truly sold for negative prices. The negative
prices were a commodities market effect where traders were required to pay to
offload their futures contracts in order to not take delivery of the oil. In
other words, I suspect the commodities traders bore the brunt of the negative
pricing.

~~~
perl4ever
"traders were required to pay to offload their futures contracts in order to
not take delivery of the oil"

That doesn't seem accurate, since the expiring futures rebounded to a positive
value the next (and final) day, right?

It seems more like people were panicking and _thought_ they had to unload at
any price, but it was simply an error. Although I'm not knowledgeable about
it.

~~~
toast0
If you were a speculative trader, and absolutely didn't want to have any oil
delivered to you, it makes sense to sell at close the day before the futures
become binding.

You _could_ wait until the last day, but you'd have a big problem if the
market was closed that day becomes of unexpected circumstances.

------
jshaqaw
My understanding is that at least some oil fields have a decay rate once
drilled whether producing or not.

------
miclill
Why do we call it "producing"? Most of the oil is harvested not produced,
right?

------
lowdose
People are extracting more oil from the planet than people are currently
consuming.

------
logotype
contractual obligations.

