Share Investment, Discussion & Tips

[BlasterBates]

It's more complicated than that. The cost of shale production varies dramatically across the US, depending on the formation, and production costs have become dramatically lower with improved productivity and reductions in associated services costs. In other words, that $80 figure is simply not representative. There are many US counties where the cost of production is in the $10-20 per barrel range. Also, there's a big difference between sustaining existing production and authorizing new production, in terms of cost, and this is why production has been resilient in the face of price declines. The first thing to go is the authorization of new production, of course. However, existing wells continue to sustain a high level of production (albeit for a more limited period than conventional production, because the reserves are more concentrated). The high-cost producers have been going under for some time. Bottom line, shale is here to stay, but the ~$20-30 range is where a large number of small producers will start to go tits-up (and possibly some regional banks too). I agree that there will be a spike, but it won't be to $80 without some serious changes in supply/demand elsewhere.

yes the cost of production is $20-30, but you have to sink a lot more than that to get the shale field producing. This is the same of any oil field. That's why producers are maxing out, because they make an "operational profit".

Oil News: Shale Drillers Slash Spending by 50% -- The Motley Fool

The 80 dollars is the operational cost plus paying back the original investment.

$80 is the barrier for new investment
$30 dollars is the barrier where the oil producer goes bankrupt within weeks.

At 80$ a barrel shares go up and up
At 60$ a barrel shares cease to go up and shareholders refuse to put more money in but the company can pay it's loans off
At 30$ a barrel eventually they go bankrupt.

[MrMarkyMark]

RBS-cries-sell-everything-as-deflationary-crisis-nears.

Everyone will surely listen, as they have such a good track record, regarding all this

[pjclarke]

Everyone will surely listen, as they have such a good track record, regarding all this

Their definition of catastophe is a 10-20% fall in European stock markets.

“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?

Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?

These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

Buffett again.

[jamesbrown]

yes the cost of production is $20-30, but you have to sink a lot more than that to get the shale field producing. This is the same of any oil field. That's why producers are maxing out, because they make an "operational profit".

Oil News: Shale Drillers Slash Spending by 50% -- The Motley Fool

The 80 dollars is the operational cost plus paying back the original investment.

$80 is the barrier for new investment
$30 dollars is the barrier where the oil producer goes bankrupt within weeks.

There is no "$80 per barrel". It varies dramatically across different regions and formations, so there will be no spike to $80. As I said, the high-cost producers have already gone under in many cases. Some relevant commentary here (although a few months out of date):

US crude oil's break-even cost: How low can it go?

I agree with your underlying sentiment, just not your point about the basic economics of $80.

ps. regional banks won't pull loans for existing, profitable, production, even if there is still a large capital repayment due for the original wells. Obviously, they'd prefer a loan to be repaid under revised terms than to have a default, so existing production is much more sticky (and this is clear from the numbers).

[BlasterBates]

There is no "$80 per barrel". It varies dramatically across different regions and formations, so there will be no spike to $80. As I said, the high-cost producers have already gone under in many cases. Some relevant commentary here (although a few months out of date):

US crude oil's break-even cost: How low can it go?

I agree with your underlying sentiment, just not your point about the basic economics of $80.

That report is about the profitably of an existing well, i.e. at what point do you simply shut the well. You need a much a higher price to expand or find new fields. This you have to continuously do to ensure you maintain oil production in the long term.

$80 is the price you need so an investor says yes to a greenfield site or possibly expanding an existing field, where you currently have no production facilities.

I'm not disagreeing that an existing field will continue production at $30-40, of course it will and it will be maintained at prices down to $30

https://en.wikipedia.org/wiki/Oil_shale_economics

According to a survey conducted by the RAND Corporation, the cost of producing a barrel of oil at a surface retorting complex in the United States (comprising a mine, retorting plant, upgrading plant, supporting utilities, and spent shale reclamation), would range between $70–95 ($440–600/m3, adjusted to 2005 values). This estimate considers varying levels of kerogen quality and extraction efficiency. In order for the operation to be profitable, the price of crude oil would need to remain above these levels. The analysis also discusses the expectation that processing costs would drop after the complex was established. The hypothetical unit would see a cost reduction of 35–70% after its first 500 million barrels (79×106 m3) were produced. Assuming an increase in output of 25 thousand barrels per day (4.0×103 m3/d) during each year after the start of commercial production, the costs would then be expected to decline to $35–48 per barrel ($220–300/m3) within 12 years. After achieving the milestone of 1 billion barrels (160×106 m3), its costs would decline further to $30–40 per barrel ($190–250/m3).[1][7]

...and at current prices we are seeing big oil companies mothballing new plans.

[jamesbrown]

That report is about the profitably of an existing well, i.e. at what point do you simply shut the well. You need a much a higher price to expand or find new fields. This you have to continuously do to ensure you maintain oil production in the long term.

Go back and read my earlier posts and you'll see that I made the same point. However, existing production is much more sticky than you assume. You're talking about trading opportunities in 2016, are you not? There will be no shale-induced bounce to $80 in 2016 (although there could be a shale-induced bounce) and, if there is a sustained bounce to $80, shale will ramp-up substantially (and quite quickly when compared to traditional production). Total production costs are far below $80 in many formations and regions. The variations in production costs across the US obviously apply to new wells as much as existing wells, so citing any average is pretty meaningless in the context of US production, $80 or otherwise.

[jamesbrown]

Wikipedia is out of date on this and that report seems to be from 2005 anyway.

Anyway, I'm not going to argue the point anymore I think we're generally in agreement, except for the $80.

[BlasterBates]

Go back and read my earlier posts and you'll see that I made the same point. However, existing production is much more sticky than you assume. You're talking about trading opportunities in 2016, are you not? There will be no shale-induced bounce to $80 in 2016 (although there could be a shale-induced bounce) and, if there is a sustained bounce to $80, shale will ramp-up substantially (and quite quickly when compared to traditional production). Total production costs are far below $80 in many formations and regions. The variations in production costs across the US obviously apply to new wells as much as existing wells, so citing any average is pretty meaningless in the context of US production, $80 or otherwise.

Well Shale oil production has been declining for the last few months, and I disagree it will bounce back at $50 because at that price it began it's decline. Large oil majors were shelving shale oil investments in 2014.

at 20-$30 it could drop off very quickly because producers go bankrupt.

I don't say that oil shares will bounce back immediately in 2016, I would extend my forecast to 2017

[SimonMac]

The big boys (BP & RDSB) have enough cash reserves/credit to sit out while the upstarts get squeezed to breaking point as the price drops lower (maybe even to $10), once that is finished the price will steadily rise back to around $40, but this is a long term view.

[AtW]

At 30$ a barrel eventually they go bankrupt.

Nah, they'll learn how to live with nice high price of 30 bucks, if you look at charts oil was 10-15 for a long period, the only thing that would change is that thieves and corrupt officials (which is 99% of them) won't be buying quiet as much premium London real estate, and also a lot less spending on EPL football clubs.