Oil: What is economic? by Jeff Petty MBA, Texas in Feb 2015
Oil: What’s Economic?
The recent tumble in crude oil prices has led to confusing and misleading commentary from some market participants. Having been a commodities trader, investment banker and now oilfield engineer/investor, I’d like to bring an important thought to attention.
Look at the mobile phone in your hand and think about how fast the technology has changed each year and over the last 5 year period. We’ve come a long way from the first iPhone and Android operating system. Believe it or not, oilfield technology is moving even faster than that. The biggest misconception is that the price to extract oil stays the same. It doesn’t. Five years ago, the breakeven price on Permian Basin shale was $95 a barrel; today, the breakeven price is $60 a barrel.
Some people are afraid of Peak Oil. I would counter with this fact: the Permian Basin, the biggest oil field in America, has been pumping oil since the 1920’s; it is conservatively estimated that 80% of the oil is still underground. Which leads to my major point:
~ There is no such thing as unrecoverable oil; only uneconomic oil.
All oil can be physically drilled; it’s just a matter of if it can be done economically, and technology is bringing that cost down every year. The industry can drill 40,000 foot (12,192m) wells. I’ve personally been on wells where we drilled down 13,000 (3,962m) feet and then drilled horizontally for another 7,000 feet (2,133m). You can put up to 40 frac stages on such a well.
People think that the Saudi’s control the oil market due to the size of their low-cost reserves. However the biggest player is the American technology sector, which is rapidly defanging OPEC and will only continue to do so. And while Saudi Arabia has low lifting costs, they also have a very large social spending budget to maintain that American shale producers do not. In the end, their cost structure will get the better of them. That’s true of most OPEC nations.
In summary, if there’s money to be made, there will be plenty of motivation to develop the technology to get it out of the ground at a profit.
By Jeff Petty, MBA, Texas in February 2015