Oil Production - the Fundamentals

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I am not a geek, so I don't comment here on computer issues. But I do know the oil and gas exploration and production business, since that is my job with one of the 7 sisters. These are the facts -

1. The rig count is at a 40 year low. These $150,000/day semisubmersibles et. al. offshore drilling rigs are rapidly rusting in port. At $11/bbl. they will soon become scrap. 2. The Gulf of Mexico is the only place where serious e&p is going on and it's coming to a grinding halt at these prices. Onshore is dead. 3. Existing production is going pedal to the metal. New exploration projects are being deferred or scrapped since now uneconomic. 4. The exploration that is taking place is primarily in the deepwater and to bring a project on requires about 3 years of engineering, 3 years of construction, and about a billion dollars per tension leg platform. That's right, a billion dollars. 5. We've got 1 well (out of 6) on 1 TLP that produces more oil per day than half of Appalachia. The point of this post? 1. Y2k will strike an industry alredy on its knees, an industry critical to this nation's infrastructure. 2. The problem will not be solved by opening the spigot on mom& pop stripper wells in the hills of Kentucky. (Please, you know who you are.) 3. Ramp up to bring any kind of substantial production on line takes YEARS!!!!!!!!!!!!!!!!!!!!! 4. If there is severe degradation of Gulf production and transportation to onshore refineries (who have their own problems), the last tank of gas you buy will be on Dec. 31.

So please, no more pontificating about the ability of the oil industry to ramp up production overnight so as to speed any recovery. It's not going to happen.

-- James (b@b.com), January 23, 1999


James, thanks for the post. I plan to buy some gasoline or oil futures or call options very soon. $.35 for gasoline, come on?! Was this a high stakes game played by the big boys to take over the weaker players? Once refineries start to drop off line, the price of gasoline will have to rise. If the price keeps going south, they will give you a tank of gas with every car wash you buy.

-- Bill (y2khippo@yahoo.com), January 23, 1999.

James, top of the morning...

Yup, business sure sucks lately.... I live in the middle east, and a large of our company's revenue comes (or used to come) from the oil & gas industry.

Regarding your comment on ramping up production, have your considered the several million barrels per day of spare *onshore* production in Saudi Arabia alone?


-- Morgan (morgan96@netscape.net), January 24, 1999.

Morgan, check out this article:

"We are concerned about the shipping of oil products, because ocean shipping and foreign ports have both been flagged as among the least prepared sectors," Gershwin said.

http://www.washingtonpost.com/wp-srv/WPlate/1999-01/21/248l-012199- idx.html

-- Gayla Dunbar (privacy@please.com), January 24, 1999.

Hi Gayla,

Article noted and filed, thanks. Can't really tell you much about tanker shipping. The scuttlebutt around here (I work in a free zone port) is that the port is ready to meet any y2k eventualities. But, hard information is hard to come by and anything else is just so much grist for the rumor mill. As for our own company, we ship mostly break-bulk cargo, on mid-size ships that are not heavily computerized (i.e. can still navigate by sextant) and to remote ports that sometimes don't even have working cranes to offload the cargo, let alone a computer.

If oil production IS disrupted, reducing supply and in turn increasing prices, my colleagues and I will be dancing jigs and popping champagne corks. As also noted above by James, business is terrible right now, and a mere depression would be an improvement.

The question I posed was about spare oil production. The onshore oil in the Middle East is comparatively easier and cheaper to extract and deliver to market than offshore oil. Saudi Arabia can produce 8 mbd with just 1,400 wells (vs. 6.3 mbd with more than 1/2 million wells for the U.S.).

For more information on the oil industry, I was going to post for you a link to a couple of articles that appeared in the Oil and Gas Journal last August. I found them at the American Petroleum Institute, www.api.org, but alas! I guess API's and our proxy server are having a disagreement, and netscape crashes every time I bring it up. In any case, if you root around in there, it'll come up.

-- Morgan (morgan96@netscape.net), January 24, 1999.

About every 3 months the people on this forum change to the point where the following article must once again be brought into view. The article was written by a Japanese whose company was associated with the design and installation of water desalination plants on the Arabian Gulf. It was written by Mr. Adachi Susumu, and was published June 16, 1998 in Westergaard Year 2000.

The following is a quote from this needs to be read article:

This lengthy letter is intended to remind my friends who are living in the oil producing countries on the Arabian Gulf of the fact that your life depends wholly on fresh water generated from the seawater desalination (or desalting) plants. In view of the Year 2000 Problems, desalination plants seem to be vulnerable to the Y2K threat because of their heavy reliance on computer and embedded systems. Once these plants malfunction, the effect is fatal or apocalyptic. It also means that all the people in the world whose life depends on the oil from the Gulf countries are being threatened by the functionality of the desalination plants there beyond Year 2000.......

How much would we rely on oil from a Saudia Arabia that had lost life supporting water desalination? How many workers would be available to pumnp on-shore oil?


-- de (dealton@concentric.net), January 24, 1999.

Before anyone gets to giddy about how much money they're going to make on buying calls on oil in anticipation of a depression, remember that prices are a function of supply and *demand*, not just demand. If everyone is huddled around a smut pot because the trains aren't running and the phones aren't working and the banks are in turmoil, the won't be much demand. You may be able to capitalize off of catastrophe, but it ain't going to be easy. If infrastructure is down, how are you going to settle your transaction? Are you going to take a check for your profits? Does your contract require you to take a check? Have you read the fine points in the prospectus to know all of the different ways in which the "Smart Money" has ensured that it can't get screwed but that you can? Good luck.

-- Puddintame (dit@dot.com), January 24, 1999.

Man, my typing is really bad this morning. I'm going to have to start proofreading before I submit. Change to "not just supply" and pardon the remaining typos.

-- Puddintame (dit@dot.com), January 24, 1999.

The shipping business relies exclusively on oil products (both highly refined products (lube oil, etc.) and low and medium grade (bulk) fuel) for the diesels and support equipment. They can't directly burn even the crude in oil tanks next to the docks and terminals in the MidEast. Id refineries and distribution become interupted, it might be difficult to get ships and employ foreign shipping crews anywhere.

It might be profitable, but be very carefull about investing in a house of cards all leaing on its neighbor.

-- Robert A. Cook, PE (Kennesaw, GA) (cook.r@csaatl.com), January 24, 1999.


Thanks for mentioning the article, I hadn't read it. The hot link doesn't work though Mr. Susumu sounds like an interesting guy to have a beer with. Bit misinformed, but interesting.

I can see how to folks who are unfamiliar with the Middle East, Mr. Susumu's article can be quite alarming. Unfortunately (or fortunately), it is not entirely accurate, at least not for Saudi Arabia. In Saudi Arabia, the number one source of fresh water is from (irreplaceable) fossil ground water. And, much like California, subsidized agriculture consumes the greatest part, about 90 percent!!!!! (that was the figure for Saudi about 5 years ago, may have changed a bit up or down since then) This is so that local farmers can grow useless wheat and barley in the sand dunes at 5 or 10 times the world price. Just like California, where the water table drops every year and alfalfa and cotton are grown on irrigated semi-arid land. Go figure. Maybe the Saudis retained the US Bureau of Reclamation and USDA as consultants. It's a ludicrous sight, as you fly over the desert, to see great circles of green amongst the red sand dunes (irrigation is mostly done with pivot arm irrigators).

The water for the capital, Riyadh, comes partly from underground sources (don't know the percentages) and also from desal plants in Dhahran and Jubail, via pipeline. I worked in Riyadh on a water project in '79, where underground was drilled, pumped and sent by pipeline to the City. I remember one geologist saying that there was the equivalent of a couple of great lakes (as in Huron and Erie) under the sands of central Saudi. There are of course desalination plants, on the west coast in Jeddah and Yanbu, and on the East Coast in Dhahran and Jubail. I don't know the exact number. The main desal plant in Jeddah is notorious for shutdowns due to shoddy maintenance (the Ministry of Water and Electricity keeps huge cisterns fully stocked for such occurrences). So, the water for our housing compounds used to be delivered daily by tanker truck, some of which filled up at artesian wells. There's even one desal/power plant project south of Jeddah which was started by Bechtel in 1995, and which has NOT even been completed to this day.

As for other Middle Eastern countries that rely almost exclusively on desal plants (Kuwait, Qatar, UAE, Oman) and don't practice silly desert agriculture, I've been told that this is a planned decision in order eliminate reliance on seasonal rains to recharge underground acquifers. Couple years of drought, and forget about baths. Maybe that's the way it is, I don't know. But I do know this: here in Dubai, where all fresh water comes from a desal plant, and ground water is not drawn on very extensively (resulting in a high water table), three or four days of heavy rains and the place is an absolute swamp (it's raining today, we'll see how long it'll take me to get home).

Anyways, what I'm trying to say is that desal plants are not essential to "life", and their malfunction is certainly not "fatal or apocalyptic". All you have to do is not grow terribly expensive desert wheat and alfalfa for a while. As for distribution? Well, forget coastal tankers. Try thousands of existing tanker trucks. A high price is only about 50 US$ for 15 cubic meters.

The desert only appears to be barren. In a pinch, groundwater will do. Think Great Man Made River in Lybia - all fossil ground water from under the Sahara Desert. Been without water plenty of times, not very fun, you get a bit or a lot smelly, and VERY VERY conservation minded.

By the way, Mr. Susumu got another small detail wrong. The "Shattal-Arab river" which he claims is the ONLY source of fresh water for the Middle East, is actually the Shatt-Al-Arab estuary/waterway of the Tigris and Euphrates RIVERS. And as I've said above, you have to consider acquifers as a water source. A small but odd geographical error for one whose bio states has studied Arabic and has traveled widely in the area . I'd recommend a little Thesiger for further reading. Did you read the disclaimer at the end of the article?

Oh, one more point.. you ask: ""how many workers would be available to pump onshore oil?"" Plenty, I think. The overwhelming majority of the Middle East workforce are contract workers from a multitude of nations, and ain't none of them going home unless the employer decides so and authorizes an exit visa and gives them their passport back. Sort of like indentured servitude.


-- Morgan (morgan96@netscape.net), January 25, 1999.


You are correct that ships run on refined oil products and not crude. So, whether they run or not depends on refinery compliance. Well, a colleague and I had lunch about a month back with some chaps from a major oil co (major!), who are on a refinery expansion project. This oilco has a refining joint venture with the Saudi Gov't. Being curious, I asked about the y2k status of the refinery. They replied that after an extensive survey, the number of suspect embedded systems or components was so small as to make remediation unnecessary (his words, not mine). Their contingency plan involved waiting wait until after rollover and "fix-on-failure", as the current term goes. Based on their study, they felt that they had sufficient manual and mechanical backup systems to ensure delivery of their product after 2000. But to be fair, while to me this was a real life conversation, to you this is only hearsay evidence, not facts.

By the way, did you ever hear anything from your lumberyard contact on the nature of their remediation cost?

I'm with you and Puddintame on one respect: buying calls or options on oil is about as safe and easy as jamming a stick of butter up a bobcat's a**. The casual little guy investor might as well take the money, burn it, and be done with it.


-- Morgan (morgan96@netscape.net), January 25, 1999.

Yes I did - The "lumberyard" really is more like a prefab housing/roof truss assembly plant - has 700 employees, computer and software remediation for accounting/inventory/planning management software replacement was 250,000 for all costs combined - and the manager said about another 20,000 for "various" PC's and programs. Said it worked out to about 5000 per employee.

The earlier number was incorrect - thanks for reminder to update.

-- Robert A. Cook, PE (Kennesaw, GA) (cook.r@csaatl.com), January 25, 1999.

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