Why is Saudi Arabia doing this?

[Chop]

Looks like the Saudis and Russians have finally worked it out.

Awesome! As a young teenager, the media powers that be drilled hatred of Russia/USSR into my head through the use of Nikolai Volkoff.* As far as the Iron Sheihk goes, later I learned that sheihks were from Arabia, not Iran... Oh yeah, the actor/athlete that played Nikolai Volkoff was actually from Croatia, not Russia. Great entertainment nonetheless. Other than World Cup soccer, pro wrestling used to be the greatest spectacle of national prejudice in the sporting/entertainment world.



*As young teenagers, we didn't really know what communists were, but we knew they were very bad.

 

[ShAArk92]

Saudi has barked at the Russians today.

Could get very interesting, to say the least.

 

[Mr. Deez]

Oh yeah, the actor/athlete that played Nikolai Volkoff was actually from Croatia, not Russia.

And he was a conservative in real life.

 

[mchammer]

And he was a conservative in real life.

Yeah, anyone who grew up behind the iron curtain is conservative nowadays.

 

[UTChE96]

It seems to me the Saudis and Russia have the leverage; especially Russia.
For there to be a deal, both the Saudis and Russia demand that the US curtail production. Trump, arguably doesn't have the ability to force independent oil companies to shut down, and if he does so, that further hurts the economy, particularly in Texas.

I think we are saying the same thing. The leverage the US has is the possibility of limiting US shale production to a certain level to prevent Russia and OPEC from losing their market share.

The Russians and Saudis are tired of cutting production only to have the US shale producers immediately fill that supply void. Keeping the shale production down requires keeping oil prices below $30 indefinitely which is not sustainable for Russia or SA. This is all part of a negotiation which I believe will end up with some type of agreement to limit US oil production in return for OPEC+ cutting production.

 

[Monahorns]

Shale producers can't flood the market in a way that replaces Russian and Saudi oil. If they do the price goes down below the profitability thresh hold. No need to socialistically, central plan it. Price is the allocater.

 

[AC]

UTChE96,
You work in the O&G Industry. It’s refreshing to hear sensible analysis of our Industry and some logical outcomes to get the price back north of $50/bbl. There’s a lot of crap out there from haters of Big Oil regarding our Industry. How it’s not coming back for a looong time, doom and gloom. I’m still somewhat busy with my refinery customers.

 

[mchammer]

UTChE96,
You work in the O&G Industry. It’s refreshing to hear sensible analysis of our Industry and some logical outcomes to get the price back north of $50/bbl. There’s a lot of crap out there from haters of Big Oil regarding our Industry. How it’s not coming back for a looong time, doom and gloom. I’m still somewhat busy with my refinery customers.

We are too. They want to spend what was budgeted in 2020, otherwise it is GONE

 

[Austin_Bill]

Price changes are an opportunity for profit.

Isn't that one of the Ferengi rules of acquisition?

 

[Musburger1]

Keeping the shale production down requires keeping oil prices below $30 indefinitely which is not sustainable for Russia or SA. This is all part of a negotiation which I believe will end up with some type of agreement to limit US oil production in return for OPEC+ cutting production

Russia is in position to live with sub $30 oil for some time supposedly. The Saudis and US shale? Probably not. The Saudis have large state deficits and need a higher price to take care of the population. The US shale industry is having to service enormous debt levels. In a game of who can hold out the longest (or who gets out first) Russia is thought to be in the strongest position. So if no deal emerges Trump will need to think outside the box.

 

[Monahorns]

Leave it to Mus to claim that Russia is in the strongest position. Wah wah wah waaaaaaah...

 

[Musburger1]

Leave it to Mus to claim that Russia is in the strongest position. Wah wah wah waaaaaaah...

I’m basing that determination on debt and cash flow. Perhaps there is other criteria you can bring in to make the case against Russia holding the most favorable position. The US companies have debt out the wazoo and are sinking further at sub $30 prices. The Saudis need a higher oil price to keep their budget manageable. Russia doesn’t have those problems.

 

[Mr. Deez]

 

[UTChE96]

Russia is in position to live with sub $30 oil for some time supposedly. The Saudis and US shale? Probably not.

They would have to live with sub $30 oil forever if they want to keep the US shale off the market. In the short-term, some of the smaller and overleveraged mid-sized players will be driven out leading to more consolidation by the larger players and the integrated oil companies. But those reserves are not going anywhere. As soon as commodity prices get back to an economic range, drilling will start right back up and the shale supply will be restored relatively quickly.

The Russians know this. I agree that they can survive $30 for a while but that doesn't mean they want to. They would prefer a deal that limits US shale production.

 

[Musburger1]

Who in their right mindset is going to invest in sub $30/barrel oil when it costs $50/barrel to extract? Exxon sure is hell isnt going to and no lender in their right mind would.

 

[UTChE96]

Who in their right mindset is going to invest in sub $30/barrel oil when it costs $50/barrel to extract? Exxon sure is hell isnt going to and no lender in their right mind would.

You are correct that no one would drill at sub $30/bbl. But Exxon and Chevron would love to snatch up the reserves at a deep discount to develop when commodity prices come back. That's just smart business.

FYI - your estimate of $50/bbl breakeven is high for XOM and CVX. I believe I read that CVX and XOM have even gotten down to the low $30s. That breakeven point will continue to drop as the industry consolidates, becomes more efficient, and technology continues to advance.

 

[Musburger1]

You are correct that no one would drill at sub $30/bbl. But Exxon and Chevron would love to snatch up the reserves at a deep discount to develop when commodity prices come back. That's just smart business.

FYI - your estimate of $50/bbl breakeven is high for XOM and CVX. I believe I read that CVX and XOM have even gotten down to the low $30s. That breakeven point will continue to drop as the industry consolidates, becomes more efficient, and technology continues to advance.

Someone would eventually begin drilling again, but it might be a long time before prices rise to the point it’s economical. As far as profitability at $30, all I can tell you is the price had been well over $30 for a long time, yet a lot of companies are in debt in the billions and have never had positive cash flow.

 

[Phil Elliott]

No need to socialistically, central plan it. Price is the allocater.

Rule #1: The market is always right
Rule #2: When in doubt, see rule #1

 

[UTChE96]

As far as profitability at $30, all I can tell you is the price had been well over $30 for a long time, yet a lot of companies are in debt in the billions and have never had positive cash flow.

Yes, a lot of poorly run, inefficient companies will likely go bankrupt if oil prices stay at this low level. Their assets and reserves will be sold off at bargain basement prices to pay the creditors. Which is exactly what I meant about consolidation by the integrated oil companies.

Cash flow in the O&G industry is a lagging indicator. Most of the companies in the Permian have been drilling like crazy which consumes lots of cash as they develop their reserves. Now that oil prices do not justify drilling, cash flow will improve as companies stop all their CAPEX spending. Of course, shale production will start to drop off at some point with no drilling (prob 6-8 months) to replenish production.

 

[Musburger1]

I’ve got a question. Does Texas generate tax revenue based on volume of oil or by the amount of revenue. In other words, if I produce a barrel of oil, does the state receive a set amount for each barrel or does it depend on how much the barrel is sold?

 

[UTChE96]

I think it's a mix of a percentage and some fixed taxes per bbl. I suspect the percentage is the higher tax amount. But I don't know the exact details.

 

[Musburger1]

I used google in the attempt to see how much state tax is collected from oil and gas but the results were confusing. One table made it appear about 3% of the revenue came from production taxes totaling just short of $2 billion. But another article stated the Texas oil and gas industry paid $14 billion in state taxes and royalties in 2018.

 

[Galvestonhorn]

It’s called a “severance tax” that’s paid to the State of Texas on each bbl of oil and/or mcf of gas produced and it’s based on what the product is sold for. Gas is around 7:5% and oil around 5%:

And that’s a lot of dough.

 

[Musburger1]

It’s called a “severance tax” that’s paid to the State of Texas on each bbl of oil and/or mcf of gas produced and it’s based on what the product is sold for. Gas is around 7:5% and oil around 5%:

And that’s a lot of dough.

Thanks. Found this.

As of 2018, the Permian Basin has produced more than 33 billion barrels of oil, along with 118 trillion cubic feet of natural gas. This production accounts for 20% of US crude oil production and 7% of US dry natural gas production.​

So using 33 billion barrels multiplied by $30 time 5% would be about $50 billion. At $60/barrel we're talking $100 billion. That difference would mean quite a lot to the State Government. Of course, it production scaled down to, say 10 billion barrels, the State would be in a world of hurt.

Edit: 33 billion may be a cumulative number. If so, I'll have to re-edit the above calculation because it won't make sense.

 

[AC]

Look, UTChE96 is an engineer with around 22-24 yrs experience in our Industry. I have 26+ years experience. He’s been right on each point. I do business with major refineries Gulf Coast wide and this month, Exxon Mobil is keeping my business alive with their Spring Turnarounds.
I’ll just state that adjustments must be well thought out and planned. I got hurt with $26/bbl WTI in 2016 but it hit me in late 2017. I’ve recovered now and I keep tweeting my 2018-2019 adjustments. I think by May my business will be ready for whatever the Industry throws at me. Managing capex budgets is the big key! I think I’ll still be OK with Gas Plants after the quarantine. Trump will make his adjustments as well and get WTI up. By 2021 this will be a memory!

 

[Musburger1]

Disregard above calculations.

The RRC reports that from June 2018 to May 2019, total Texas reported production was 1.388 billion barrels of crude oil and 9.2 trillion cubic feet of total gas.
​

Using these figures, 1.4 billion times $30 times 5% would be about $2.2 billion per year ($4.5 billion at $60). Still a good chunk of change. Plus whatever the gas revenue comes up to.

 

[Monahorns]

They would have to live with sub $30 oil forever if they want to keep the US shale off the market. In the short-term, some of the smaller and overleveraged mid-sized players will be driven out leading to more consolidation by the larger players and the integrated oil companies. But those reserves are not going anywhere. As soon as commodity prices get back to an economic range, drilling will start right back up and the shale supply will be restored relatively quickly.

UTChe96, the other things is that if the new price target is $30, then shale producers will continue to innovate to get costs down so that they are profitable at $30. The current situation won't last forever.

 

[Monahorns]

Who in their right mindset is going to invest in sub $30/barrel oil when it costs $50/barrel to extract? Exxon sure is hell isnt going to and no lender in their right mind would.

Markets aren't stagnant. That is the big conceit of Statists and central planners.

Technology will improve to where they can make money at the lower price.

 

[UTChE96]

UTChe96, the other things is that if the new price target is $30, then shale producers will continue to innovate to get costs down so that they are profitable at $30. The current situation won't last forever.

Absolutely, I made that exact point in a subsequent post.

 

[mchammer]

Look, UTChE96 is an engineer with around 22-24 yrs experience in our Industry. I have 26+ years experience. He’s been right on each point. I do business with major refineries Gulf Coast wide and this month, Exxon Mobil is keeping my business alive with their Spring Turnarounds.
I’ll just state that adjustments must be well thought out and planned. I got hurt with $26/bbl WTI in 2016 but it hit me in late 2017. I’ve recovered now and I keep tweeting my 2018-2019 adjustments. I think by May my business will be ready for whatever the Industry throws at me. Managing capex budgets is the big key! I think I’ll still be OK with Gas Plants after the quarantine. Trump will make his adjustments as well and get WTI up. By 2021 this will be a memory!

Gas patch very busy