As a lead-in to discussing the main theme of this series: the role System Justification plays in the climate change/peak oil denial strategy, it would be useful to provide a brief summary of some of the more pressing and critical facts suggesting an issue or two in Fossil Fuel Production Land….
But all is not well with the oil sector. Between 2000 and 2012, $2.6 Trillion USD was invested in oil infrastructure CAPEX, with no gain in oil production (this data includes shale oil production in USA).¹ Global crude and condensate production has plateaued since approximately 2005. The problem with this is world population is 13.8% larger now than in 2005 (7.4 billion people 5/2/2016 vs 6.5 billion in 2005). Increasingly unconventional sources of oil are being used to meet demand, where these sources are expensive to extract and struggle to meet the desired quantities.
Oil companies delayed making decisions on 68 major projects world-wide last year, accounting for some 27 billion barrels of oil and equivalent natural-gas volumes and bringing total 2015 deferred spending to $380 billion industry-wide, energy consultancy Wood Mackenzie said in a report [earlier this year].…
The put-off projects indicate a development slowdown that could lead to supply constraints — and rising oil prices — years down the road.
It seems fitting that oil prices fell back under $30 on the day that two major oil companies reported disastrous earnings results showing the damage of the past year and a half. The decline in prices that began in mid-2014 has wreaked havoc across all different types of companies—NOCs, IOCs, independents, oil majors, oilfield services—and there seems to be no respite in the short run. Companies are continuing to lay off staff, cut back on projects, and report eye-opening losses.
These cutbacks will eventually bite at some point, whether as early as the second half of this year or later on this decade. The current low price environment, and its fallout, will lead to a tighter market and possibly a shortage given that supply projects are capital intensive and typically involve significant lags before coming online. The industry’s capital spending will drop for two consecutive years in 2016, for the first time since the 1980s.
That same article also noted this:
Both Exxon and Chevron will slice capex [capital expenditures] by around 25 percent this year, while BP is also scaling back. Some of the biggest U.S. independents, which have been instrumental in the shale boom, are slashing spending at even more dramatic levels. Continental, led by CEO Harold Hamm, announced that it would cut capex by an enormous 66 percent this year, with the company planning to reduce production by 10 percent. New York-based Hess, meanwhile, has said its capex would come it at $2.4 billion this year, down 40 percent from 2015. Independent Anadarko, which is active in U.S. shale and international markets, is slicing its capital spending in half for 2016, after a 40 percent decline last year. Reuters reported, citing analysts at Bernstein, that U.S. oil companies as a whole are expected to cut capex by 38 percent this year.
The decline in the oil rig count cannot, in the near term, be directly linked to a decline in oil production due to so many DUCs [wells drilled but uncompleted]. But eventually it must. Steep declines in oil production must eventually follow steep declines in the rig count. And as we see a drop in production we will see a corresponding rise in prices. This, in turn, will cause an increase in well completions, knocking the price back down again.
Continental Resources, a prolific shale producer in North Dakota and Oklahoma, announced in its latest quarterly report that it would stop drilling in the Bakken this year. Continental said it would maintain its four existing rigs in the Bakken, but would not deploy ‘stimulation crews’ to frack any wells. With most well completions in the Bakken deferred, new sources of production will not come online. As a result, Continental Resource’s production in the Bakken will fall. The shale company’s output was already down about 1.5 percent in the fourth quarter compared to the third, but production will likely slip to between 180,000 and 190,000 of oil equivalent per day (boe/d) by the end of the year, or a decline of roughly 15 to 20 percent from the end of 2015….
The array of spending cuts and production declines announced by dozens of separate companies may be difficult to wrap one’s head around. Put simply, the major shale basins in the United States are nearly all in decline.
Companies that grew quickly thanks to the shale boom are trying to weather the dramatic slide in oil prices with measures like scaling back production and laying off workers. But for many, sunk costs and high debt levels mean cutbacks are not enough.
As a result, defaults and bankruptcies are mounting in the U.S. energy industry as the price of crude bounces along under $30 a barrel amid a worldwide oil glut. And with some forecasts pointing to oil — already down more than 70% since mid-2014 — possibly falling below $20 a barrel, failures are expected to continue. What’s more, plummeting energy prices have been a large contributor to the huge slide in global stock markets now underway….
And there’s reason to believe the shakeout will continue. A report from consultant AlixPartners said the projected revenues of 134 North America-based exploration and production companies show there could be a gap of $102 billion against their operating and capital expenditures in 2016….
The industry … has already cut more than 200,000 jobs in the past 18 months, according to AlixPartners. Companies have also renegotiated contracts with suppliers and dropped capital spending by 20% to 40%. ‘Drilling activity in the United States declined by more than 50% in the past 12 months,’ the AlixPartners report stated….
‘Projects all around the world are being cancelled or postponed,”’ [Wharton finance professor Erik] Gilje says. ‘If you’re in a position to be responsive here, you basically are going to cut back everything that you can in terms of investment.’
The low oil price has forced all companies, from the majors to the independents, to slash capex by billions of dollars in 2016, after already making drastic cuts last year.
S&P also provided a warning for the longer-term effects of current cutbacks: ‘Reduction in investment will affect future cash-generating assets.’ In other words, the industry will suffer setbacks from the current downturn for some time, even when prices recover.
IGNORING THE OBVIOUS
To deny that a peak in oil production is a concern at all requires both a significant skill-set in mental gymnastics and a near-total lack of concern for … just about everyone else and their future. Must be nice, Right?
Clearly the impacts of a decline in affordable, available fossil fuel supplies are not a one-and-done event. Just because peak oil is not yet obvious to even the densest of the dense does not mean we aren’t already dealing with crucial elements of production challenges.
So how long should be wait to begin consideration of the even more widespread impacts? What will then trigger a need to start planning? Could even the most persuasive pseudo-factual argument convince a single sentient adult that the transition away from fossil fuel dependence—in light of the above and many other interrelated facts—is going to be piece o’ cake, and of very short duration?
How many more ignored facts should we tolerate, and how many more opportunities must fall by the wayside while nonsense and self-serving denials at the public’s expense before those who do know but choose to deny decide that perhaps they have a different contribution to offer?
Choices still exist, but we cannot continue lopping them off just because….
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The Tretiak Agenda
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We face a choice going forward. There’s a kind of false dichotomy, a false choice that we’re being presented between policies on the left or policies on the right. It’s not left or right, it’s forward or backward. It’s a choice between investing in the future, leaving a better future for the next generation just like parents and grandparents did for us, or ignoring these hard choices and sentencing the next generation to a lower standard of living, to fewer opportunities, and a future that we could do better by. Former USDOT Deputy Secretary John Porcari
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Peak Oil Matters offers observations and insights about the realities of declining fossil fuel production, and its impact on our future well-being