Jeffrey Brown: To Understand The Oil Story, You Need To Understand Exports

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Despite the attention-grabbing economic volatility that is grabbing headlines, it's important to keep our eye on the energy story firmly in focus. This is especially true as the headlines we regularly read about Peak Oil being dead " are "manifestly false" according to this week's podcast guest, petroleum geologist Jeffrey Brown. 

As concerning as the fact that global oil production has plateaued over the past decade, despite trillions invested in trying to goose it higher, are Brown's forecasting model for oil exports. His Export Land Model shows how rising internal consumption can swing (and has swung) countries from major exporters to permanent importers within a dizzyingly short period of time:

The crucial issue to understand about what has happened after 2005 is that we’ve had a very large increase in global gas production and natural gas liquids, but a much slower increase in crude plus condensate. So, what I think has happened is the actual crude oil production has basically flatlined while the liquids associated with natural gas production, condensate and natural gas liquids, have continued to increase. So, we ask for the price of oil, we get the price of Brent or WTI; but when you ask for the volume of oil, you get some combination of crude, condensate, natural gas liquids, biofuels. So, the fact is that substitution has worked and is working in that they’re bringing on alternative substitutes, but they're only partial substitutes. The actual, physical volume of crude oil production has probably been flat to down since 2005. Over the past ten years, it has taken us trillions of dollars, basically, to keep us on an undulating plateau in actual crude oil production. What happens going forward?

So, basically, the conventional wisdom is the fact that we’ve seen an increase in liquids production, seems there’s no evidence of the peak in sight. And, I think in regard to crude oil production, that argument is manifestly false. I think that we’ve probably seen a peak in actual crude oil production, 45 and lower API gravities, despite trillions of dollars of upstream capex expenditures.
 
I started wondering in late 2005 what happens to oil exports from an exporting country, given a production decline and rising consumption. And, so I just started, I just constructed a simple little model. I assumed a production of about two million barrels a day or so at peak, consumption of one, and assumed production falls about 5% per year, basically what the North Sea did, and assumed consumption increases to 2.5% per year. What the model showed was that exports, net exports would go to zero in only nine years, even though a roughly modest production decline. So, the easy way to state it is giving an ongoing, inevitable decline in production, unless an exporting country cuts their domestic oil consumption at the same rate as the rate of decline in production, or at a faster rate, it’s a mathematical certainty that the net export decline rate, what they actually ship out to consumers will exceed the rate of decline in production. And, furthermore, it accelerates. 

Click the play button below to listen to Chris' interview with Jeffrey Brown (43m:48s)

This is a companion discussion topic for the original entry at https://peakprosperity.com/jeffrey-brown-to-understand-the-oil-story-you-need-to-understand-exports/

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To understand the oil story we need to understand exports.  Well I listened to the podcast twice and I am shocked and confused. It sounds to me like the Bobble Heads in charge aren't on top of the export data or are minimizing, obfuscating or ignoring the information.  Isn't this information and data that should be shouted from the roof-tops?  The Bobble Heads said the Titanic was UNSINKABLE, oops wrong.  Now it's we are awash in petroleum, don't worry be happy. Soon it's oops, wrong again … really?  And people are using "implied numbers" or the "available data" this tells me there is some room for error. This wasn't an - "ah ha" podcast this was a Holy Shit podcast.  
Looking forward to others feed back.

AKGrannyWGrit

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Im glad to see this information being discussed on PP.   When I came across it on the oil drum a number of years ago, it really clicked with me.  Powerful Stuff.

 

John

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Great examination of the variables in the oil business. Funny that a graph on Canadian exports wasn't included in this analysis. Watching the performance on the Canadian crud (oops, I mean't crude) stocks tumble, his analysis hits the nail on the head. Canadian heavy crude producers are facing huge discounts and they have had to use the condensate to blend heavier sources just pipe it to market. And if it doesn't hit the refiner's specs, it is either rejected or priced even lower, as Mr Brown points out. The CAPEX on these Alberta sources has been cut way back and they are only shipping existing heavy crude and conventional production just to keep the lights on. Layoffs in western Canada haven't been this high in a long time. I wonder why?
The interesting thing I see is that the major refiners in the US are making comfortable margins on finished products that most of the exporting countries are importing. Has your gasoline dropped as much as the price of crude? Doubt it. I'm not saying the refiners are having a cakewalk, but low priced base products certainly don't hurt. Bottom line - the good stuff is getting scarce. The 7 billion of us will soon be 9 billion. Just one more affirmation of PP's message. Great discussion and another good slant on the topic. Keep up the good work, Chris.

 

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"What happens going forward?"
Gail Tverberg has a new article somewhat related to this.  It seems to me that things will continue pretty much as the status quo up to a critical event which will lead to an abrupt (over night?) total collapse of the financial ponzi scheme as a result of the progression of the oil story.  All ponzi schemes end abruptly; one day Bernie Madoff was worth billions, the next he was flat broke and behind bars.  For me, reading the following article reinforces what Chris always advocates in regards to preparing for the future:  "I'd rather be a year early than a day late".

http://ourfiniteworld.com/2015/09/14/how-our-energy-problem-leads-to-a-debt-collapse-problem/

Btw, nice interview.  I love the interviews regarding energy as I believe it's the biggest E of the the 3 E's.

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Step one of the oil bust was for companies to turn to the capital markets and borrow more and issue more equity. They did both to the tune of $44 billion over the first half of 2015 in the US.
The next step was to just keep pumping as fast as possible, even to the possible extent of harming the wells, in a last ditch attempt to squeeze cash out during lean times to meet hefty operational and debt interest expenses.

Step three…?

Well, that involves selling off your assets, kind of like holding a tag sale after you’ve lost your job and tapped out every borrowing line from every friend and relative.

Shale Drillers Turn to Asset Sales as Early Swagger Wanes

Sept 10, 2015

The first wave of deals is already looming: sales of land holdings in prolific oil regions. Oil market gyrations since July have made valuations hard to pin down, dimming the outlook for sales of whole companies. Instead, executives are looking to shore up their balance sheets by selling land or wooing deep-pocketed private equity groups or hedge funds to invest in their operations in exchange for a share of revenue, Samji said.

Sales Announced

Cobalt International Energy Inc. sold off discoveries in Angola last month and EOG Resources Inc. has begun an auction for acreage in Colorado and Wyoming. Anadarko Petroleum Corp. said it will continue to weigh offers, and Chesapeake said Tuesday it’s still pursuing asset sales. The Oklahoma City-based producer is said to be seeking buyers for dry gas acreage in the Utica shale formation, according to people with knowledge of the matter.

“Chesapeake is not desperate,” Chief Executive Officer Doug Lawler told investors Tuesday. “We are not going to have a fire sale on any asset.”

Illustrating the tough choices companies are facing, W&T Offshore Inc. announced Sept. 1 the sale of acreage in West Texas’s Permian basin, the highest oil-producing area in the U.S., for $376 million. The price amounted to about $8,000 an acre, less than a fourth what was paid for similar land in another deal just months ago, according to an analysis by Raymond James.

The Houston-based producer spent $120 million more than it made during the first six months of the year, and has drawn about half of a $500 million bank loan. A sale of prime Permian acreage might allow W&T to double its liquidity, or the amount of money it has on hand in cash and credit to pay for drilling and other expenses, according to Bloomberg Intelligence.

And here’s your handy list of bankruptcy targets:

Of course, in a couple of years, as declines mount and new production fails to materialize things are going to get serious. Keep a close eye out for activity in the Middle East, the last known place on earth with cheap, untapped deposits in Iraq and Iran.

Obama has apparently taken the diplomacy route with Iran, there are others who would prefer to demonize Iran with trumped up charges of being an existential threat to world peace, attack them, and take their oil.

One of these two approaches will win out….

 

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Saw this article, referred by TAE.  Some big write-downs are coming for shale oil assets.  I thought it was due to land in 1Q 2015, but apparently its based on a 12-month average of oil prices.  If oil prices stay low, there will be more writedowns every quarter.
The key: will this affects the ability to get new cash from our friendly bankers?  The moment the banks turn off the tap, the depletion clock starts ticking on the shale drillers.  That 45% decline rate will then take hold…and each quarter production will drop, the tide will go out, and all the naked swimmers will all be exposed.

Theoretically anyways.

http://www.wsj.com/articles/write-downs-abound-for-oil-producers-1442184600

U.S. oil-and-gas producers have written down the value of their drilling fields by more in 2015 than any full year in history, as the rout in commodity prices makes properties across the country not worth drilling. A group of 66 oil and gas producers have taken impairment charges totaling $59.8 billion through June, according to a tally by energy consultancy IHS Herold Inc.

U.S. securities regulators require exploration-and-production companies to value drilling properties and reserves according to energy prices over the previous 12 months.

That means the formulas used to calculate their value at the end of June still included prices from the second half of last year, before oil prices had made much of their descent to their current price around $45 a barrel. “There’s a disconnect between the 12-month average and reality,” said IHS analyst Paul O’Donnell. “There will be pricing impairments for the next two quarters, at least.” Prices used to determine asset values at the end of June were $71.50 a barrel for oil and $3.40 a million British thermal units for natural gas, IHS says. That compares with U.S. crude prices of $59.47 a barrel and $2.83 for natural gas on June 30. The consultancy expects the prices used at year-end to determine asset value will be around $50.50 and $2.80, respectively.

 
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Thank you Chris and Jeff for an excellent post/podcast!
Peak oil is now the most underrated, most ignored, and most dismissed issue that could put an end to industrialized civilization. With sites like The Oil Drum being no longer active, we need to take up the slack here at Peak Prosperity.

Sure, the trends of peak oil have the potential to ruin us if we ignore them, but I really appreciate the excellent point made that all the cheap oil we've had in the "Happy Motoring era" has made people depressed and isolated from other people. As Jeffrey Brown says, "Lose your ability to drive and you become happier."

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cut about 7 acres of hay this weekend. we were much happier than we would have been had the 100hp climate controlled john dear been used. we will tedder today and bale thurs.(will use a tractor for the baling)

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The other area to keep an eye on is offshore - where 30% of world production now comes from. Working in offshore renewable energy, we watch the offshore oil & gas sector like hawks - we charter offshore assets from the same pool - its carnage. CAPEX reductions of 20% to 30%, similar figures for lay offs. And, being offshore, it will take time to turn this particular tap back on.

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I just want to add a very small scale comment about energy frugality. This subject is actually difficult because the total real lifetime costs of Prius-type hybrids and Tesla-type all-electric vehicles are hard to come by. I recall reading a report (from Tesla) defending the total lifecycle cost of their vehicles, which use Lithium-ion batteries. I don't have enough information on this topic to make an assessment, but I do know buying used cars means the production cost has already been spent. I also know that compact vehicles with efficient engines get mileage that compares very favorably with hybrids. My 1998 Honda Civic got 36 MPG on a recent camping trip that required a climb to 8,200 feet (Lassen Nat'l Park), a descent to near-sea level and then another climb of 3,500 ft (Trinity Alps)–all with a load of camping equipment. Based on my limited experience with hybrids, I sincerely doubt a hybrid could have done much better–perhaps 10% more mileage for quadruple the cost of the used Civic.
We camped next to two guys camping out of a large recent-model Subaru with a storage pod on racks. They complimented us on camping out of a Civic with no racks–and we had open space in our trunk. We eat extremely well while camping and carry a full complement of cooking gear, including a wok, saucepan, frying pan, etc., so it's not a lack of equipment. It's just being efficient, nothing fancy.

I have read that 5% of all US electricity consumption goes to powering zombie appliances–TVs, DVD players, game consoles etc. that are plugged in and draining power even while on sleep mode or standby. That equates to something like 30+ entire power plants devoted to nothing but keeping millions of devices on standby. Is this necessary, or a prudent use of limited resources? Is it something we can address in our daily lives?

Sadly, the rise of financialization has pushed the cost of buying a home/flat in bikeable urban zones to the moon. If you're lucky enough to get into such a zone, you can bike about as many miles as you drive. At least that's our experience–roughly 1,200 miles for the auto and the bike annually, not counting long trips/camping.

Here's a question: what's the price point for real conservation? I would say $6/gal. minimum, with real conservation kicking in at $8 to $10/gallon. On the other hand, people in Europe pay $7+/gallon and they keep driving, so maybe it's more like $10-$12/gallon…

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Was this after prices dropped? I haven't been following the oil story too closely since The Oil Drum shut down but I had this suspicion that the shale oil bubble created by Wall Street was inversely contributing to the severity of the oil price crash because if the companies respond to decreasing prices by pumping faster then that would cause even greater price crashes since oil cannot be stored significantly for any length of time. The only way to distort oil price is to subsidize the producers with free money like Wall Street has done, or to subsidize consumers. In this sense oil is acting as the polar opposite of gold due to its low stock to flow ratio.

If this is the case then because of the shale oil boom, oil is behaving like a giffen good, but on the supply side, not the consumption side. I don't know, is there a name for such a situation? This cannot end well and the future rebound up on the other side will be equally violent. I wonder how the timing of shale well supply running dry might coincide with a collapse of the financial system and loss of the US dollar as reserve currency, which would entail that the US will lose its ability to import oil via its trade deficit and the drop in supply will even further intensify the oil shortages in the US. Scary to think about, and Alberta oil sand cannot ramp up quickly to make up the difference.

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Charles,
Your comment strikes at a subject near and dear to my heart. When we installed solar power to our house a few years back, I realized it would behoove us to reduce consumption in order to maximize the benefits of a grid tied system which pays you for your production. By paying attention to all the phantom power loses and being more mindful of use, we were able to cut our consumption far more than anticipated. Turning computers, TV's etc off at the powerstrip rather than leaving things plugged into the outlet made a difference. It adds up. Thank you for bringing this into the conversation. Powerstrips to the people! I would encourage you, Chris, Adam…whoever has the podium to explore and encourage this more. Here in the NW we aren't burning coal for electricity but we do have too many dams on rivers. Reducing aggregate demand in combination with renewables seems the best path forward to me.

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Yes, the overpumping of wells is a phenomenon we've covered here before…and here's the evidence.

An oil well obtains its pressure from the gas mixed in…gasses compress where liquids don't…so it's the gas in there that pushes the oil to the surface…

Ordinarily the so-call "Gas-Oil-Ratio" (GOR) is carefully managed and if it were plotted you'd see the amount of gas and oil produced stay in a reasonably tight ratio.  

Indeed, this was true across the universe of Bakken wells for many years in a row but, wouldn't you know it, broke apart and has drifted an eye popping 30% higher ever since the price of oil began its slide (note the black and red lines).

This tells me that the desperate operators are over-working their wells, and quite probably damaging them in their haste to generate revenue to service their debts.

More gas is being produced…the chokes have been opened up, and the wells are producing as much as they can…for a while…the out years are likely to be vastly reduced for a host of complex reasons. 

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I don't believe that all of the oil companies are overpumping their wells.  My evidence is anecdotal, but I do keep my ear to the ground.  Last month I spoke to a "company man" with Marathon oil as he delivered some used 5/8" sucker rod to my farm (for building raised beds).  The rod was from an Anadarko site, so he was fairly plugged into several companies "on the ground".
As we offloaded pipe, I specifically asked about how they were operating their wells these days.   He said they were running them slower, to get a longer well life and produce less while prices were low.  He also said used sucker rod was harder to find, because companies were trying to make things last longer (i.e., getting a longer service life from materials used in production).  He said they were continuing development drilling at a fast pace, which was a surprise to me given how many unemployed or underemployed geologists I'm seeing.  

Marathon is big player, with a market cap at about #170 of US companies and about #275 in the world.  And I only spoke with one person on the ground.  But the information I got did not indicate they were overpumping, instead it indicated they are managing their wells for the long term.  I think this links back to an earlier post by Chris that talked about the difference between what the deep-pocketed large players are doing vs. what the desperate debt-funded junior players are doing.  It's a good idea to keep both concepts in play as we evaluate future energy.

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Aloha! Come on … it is human nature to deny negative events and changes. Who wants to admit the gravy train is over? Certainly not one single politician in Washington DC or any other global capital.
I have a direct relationship with Chesapeake. They have just bought rights to drill on one of my family's oil and gas properties on the Haynesville Shale play just outside Shreveport, LA. During the gold rush days when exploration was booming for gold mines in 2003-2008 I wrote an article for Northern Mining and Goknet entitled Micro Mining. I interviewed people who were mining engineers and also CEOs of exploration companies. One of the best take away tips I got was that the best place to drill for gold was at or near a former producing gold mine. Just replace the word "gold" with the word "oil" or "gas" and guess what? You now know why Chesapeake is coming back to the Haynesville Shale and drilling new wells. Not reworking old wells but drilling new ones. They are also getting good land deals the second round since the land owners are now used to a higher lifestyle and want it to continue. Even when depletion sets in and it does rapidly on frac wells the royalty checks are still $3k-$10k per month over a longer period of years. Our family gas wells started with monthly checks of over $50k in 2008. The first year was great but after that depletion set in more rapidly. Now we are in the $3k-$8k monthly royalty range. Naturally royalties depended on the market price of NG and production rates. Now production rates are at record lows and market prices are also at record lows. I would expect Chesapeake to back off production.

I agree that Chesapeake has slowed production rates which is only prudent during market lows, but revenue growth rates which translates to free cash flow is going to dry up. This causes budgets for exploration to shrink. It makes sense then to use your exploration and development budgets to go back to known producing regions.

The industry is consolidating and I see buyouts and mergers on the horizon. Exxon is moving its global operations to a little town outside Houston, Texas called The Woodlands, which is right where I am. I can tell you that even with major cuts in oil and gas futures The Woodlands is a boom town! I count no less than seven high rise cranes in this small town north of Houston. Go anywhere and you immediately notice traffic overload and the shopping areas are packed to the max. I just saw regular gas here at $1.89USD. What I see here is the complete opposite of the Big Island and Puna. I still have our place in Hawaii though. Even with all that "boom" the two enemies of all booms "time and debt" will eventually come to visit. The boom will bust, but I think the bust in the rest of the US and the world will be at riot levels before Houston goes bust. I also just read that Houston will move ahead of Chicago as the third largest US city. Thanks to politics and debt Chicago is one more city to add to the Walking Dead tv show.

The end of Empires has always been the toxic mix of politics and debt in excess. Denial is alive and well in the shale fields as it is alive and well at the recent televised Republican Debate. The brainwashing in DC is extremely evident as the only viable Republican candidates who had a smidgen dose of reality were the ones who never held public office. The epitome of DENIAL came when Jeb defended his brother W as a US president who made America safe. Did history just get re-written at that debate or did the WTC collapse on W's watch? More Americans died on US soil in 2001 than died in 1941 at Pearl Harbor and even the Hawaiians will debate that Pearl Harbor was not US soil in 1941. The invaders in 2001 were not a well equipped highly trained military from a developed Nation with a long standing army like Japan. It was 13 religious kooks who took last minute flying lessons and took advantage of a super lax security system in a country with a $1T annual military budget. How in God's name then did W keep America safe in 2001? Nobody in that debate challenged Jeb on that fact. It was as if 11 future president wanna-bes suddenly were hit with a huge dose of complete amnesia.

Lets be real here. Peak oil is just one thing. Historically at the end of Empire everything goes "peak"! Maybe we should just call it PEAK DENIAL, because once denial runs it course all that is left is the dirty filthy remains of total reality. PEAK THAT!

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Hmmmm…love the post, Kaimu.  Don't underestimate denial, though.  It's much more than a river in Africa.

Denial may live as long as we do, and not just as one of Pandora's evils in a general sense, but very specifically, denial may reign supreme for peak oil, climate change, false flags and the complexity of ethics until the last scapegoat and deviant have been incinerated and there is nothing left but a pale outline of our own face in whatever murky puddles are remaining.  

Sorry to be grim…I'm channeling my inner-Mark Twain, and that's the old Sam Clemens, not the young jolly one who wrote about jumping frogs and raft trips down the river.

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Post peak oil.  The United States capitulates, unable to hold Iraq, unable to take Iran.  Russia moves his queen to the center of the board, Syria, check.  China can now buy Iranian oil using any currency they chose, sucks to be India.  What will Saudi do?  Defect now in an attempt to retain some shred of self control, or submit to Chinese occupation after collapsing under the unrealistic expectations of a mountain of princes and paupers who have been over indulged.  What of Israel?  Tightly cornered with a knife to her throat, a ticking bomb capable of who knows what.  Yah but, yah but, yah but, think of the humanity!  Irrelevant.  Both the Russians and the Chinese have a history of throwing tens of millions of civilians under the bus, collateral damage.  Only issue with civilians is going to be how disruptive are they going to be as they thrash around starving to death.  Perhaps shopping malls with watch towers really are for "first responders".  Not intended to be used to inter dissidents but as forward operating bases to be used to protect vital infrastructure like keeping civilians from clogging transportation routes with derelict automobiles.
Fascinating

John G

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Having been raised by a European survivor of WWII bombing raids I strongly agree that some may be looking at reflections in murky puddles if they can see.  However, rather than sarcaz about where we will end up I will vote for jumping off the train of denial as soon as possible.  The rate of survival for deniers is way less than train jumpers.

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I want some of what they are smoking.
OPEC says no $100 oil until 2040.  Maybe they mean internally they won't pay that much for oil since it looks like they won't be exporting much by 2040.

http://www.cnbc.com/2015/09/16/oil-prices-steady-after-big-jump-following-us-stock-draw.html