Wednesday, December 24, 2014

Looking Back -- The Late 1970s, Early 1980s -- Posted December 24, 2014 During The New Slump In Oil Prices

I assume there are typographical errors on this page; I will eventually get around to correcting them.

From Seeking Alpha, is this the best investment in shale oil? This is a must read, not for investment purposes -- remember, this blog is not an investment site -- but to compare the situation now with past situations in the oil industry, as noted in the excerpt from The Prize below "the fold." [SA articles are often archived and available only by subscription. This article may be worth saving. A word to the wise.]

Don sent me the SA article linked above quite some time ago; I was traveling and only recently got back to it. And I'm glad I did.

For The Archives

From page 714, The Prize: The Epic Quest For Oil, Money, & Power, by Daniel Yergin:
Meanwhile the oil market was responding to the phenomenal rise in prices over the 1970s and consumers' fears for the future. Yet the exporters were still unwilling to face up to the fact that that "objective conditions" of the marketplace were truly shifting.
They would not contemplate a price cut.
Prices were still in disarray, but finally, October 1981, they came to a new agreement.
Saudi Arabia would raise its price from thirty-two to thirty-four dollars a barrel, while the others agreed to bring their price down from thirty-six to thirty-four dollars.
So prices would be unified. When all the changes were factored in, the average price of oil on the world market would still, because of the Saudi increase, go up a dollar or two. For the other producers, the compromise did, of course, mean a price cut. Yet there were consolations. Saudi Arabia had agreed, at last, as part of the deal to go down to its old 8.5-million-barrel-per-day ceiling.
Iraq and Iran remained locked in bitter battle. Yet even a war between two of the most important exporters could only retard but not cancel out the powerful forces that had been set in motion by the two oil shocks.
October 1981 represented the last time that the OPEC price would go up, at least for a decade. The "divine laws of supply and demand" were already in motion to drive prices down, though not yet with the thunderous vengeance that was still to come. It was, as Yamani had said, as simple as ABC.
That was the end of chapter 34.

Chapter 36: "The Good Sweating: How Low Can It [the price of oil] Go?

Chapter 36 includes a section sub-titled "Market Share." It begins:
In the first days of June 1985, OPEC ministers congregated at Taif in Saudi Arabia. Yamani read them a letter from King Fahd, who sharply criticized the cheating and discounting by other OPEC countries that had led "to a loss of markets for Saudi Arabia."
Saudi Arabia would not abide such a situation forever. "If Member countries feel they have a free hand to act," said the King, "then all should enjoy this situation and Saudi Arabia would certainly secure its own interests. 
I read this book years ago, but reading it again, is quite fascinating in light of the current situation.

If one has not read this book, you may not be interested in reading from the beginning, but certainly from Chapter 34.

By the way, and this was back in the late 1970s, this excerpt from the book:
Some companies like Occidental and Unocal, were already working on shale oil technology.
In 1980, Exxon, the world's largest oil company, looking ahead to what seemed the inevitable shortage, hastily bought its way into the Colony Shale Oil Project on the Western Slope.
Sixty years before, in another period of shortage, the company had acquired acreage in  the same are to develop shale oil as a fuel. Nothing had come of it then.
Now Exxon became, by far, the leader, spending fully a billion dollars on shale oil development, getting ready for the "new era of energy."
Exxon had had a love affair with shale oil for a long time," recalled Clifton Garvin, the company's chairman. "It was a challenge, technically, and certainly economically."
Nevertheless, the country seemed committed to developing secure sources of liquid fuels. And the technology seemed available.

But over the subsequent two years, the economic outlook changed quickly and drastically. In real terms, the oil price was going down; so was demand. So were forecasts for both. Surplus production capacity was building in the oil-exporting countries. And, all along, the cost estimates for the Colony Project kept going up.
"We were looking at $6 or $8 billion for 50,000 barrels per day," recalled Garvin. "And there was no expectation that that was the end of it.
The next day, Garvin assembled a senior management team and  asked what would be the consequences of stopping. "It was a tough decision. I rode that decision."

On May 2, 1982, Exxon announced tersely that it was terminating the Colony Project. Nothing that the company now saw in the economic outlook could make the shale oil project viable.
The boom on Colorado's Western Slope ended literally in hours, as work came to an instant, in three towns in Colorado, newly built homes were empty; weeds quickly covered landscaped lots; half the apartments went unrented; construction workers from the Midwest packed up and headed home; traffic evaporated from the roads; and teenagers with nothing else to do took to vandalizing the partly built homes and office buildings.
The very next paragraph is incredible, but I have to stop somewhere.

For The Granddaughters

 Yes, it was posed.


  1. The Prize snippet is great.

    The Seeking Alpha article is a mess. The guy has no new analysis but just blathers and repeats other stuff about breakeven. He even has mistakes like saying CLR predicts up to 29% growth. Really trashy article. No substantive new analysis.

    If we drop to 100 rigs, the Bakken WILL decline.

    We've already been to this party in 2009...

    1. I liked the Seeking Alpha article exactly for the reason you suggested, though I might have phrased it differently. I think it's another great discussion, the Sheiks vs Shale (The Economist:

      I find all of this so fascinating, the North Dakota Bakken boom that began in 2007 and everything that has followed.

      For me, the first chapter: all about the technology and the potential of the Bakken.

      Second chapter: the money behind "stopping the Bakken." (earthquakes, global warming, methane emissions, ground water contamination, the risk of Bakken crude oil exploding in downtown Chicago, running out of water for golf courses because of water needed for fracking, the deterioration of roads; too much dust; the list goes on and on).

      Third chapter: it was obvious that there was going to be an oversupply of oil, and yet it seemed to catch many of us off-guard. Or did it?

      Fourth chapter: where we are now. How we get through this. What is Saudi's end game? Is it simply nothing more than market share among OPEC members? Exxon's experience with shale in 1979 is certainly different than CLR's experience with shale in 2013. I'm not sure why CLR might not increase oil production 29% next year. I'm pretty jazzed about my piece on permitting ( I purposely elected not to point out three comments/analysis regarding permitting (I will do that later, perhaps), and I don't recall what the Seeking Alpha writer (we are talking about) had to say about permitting (he mentioned it, but I didn't pay much attention to his comments), but my hunch is he and I are on the same wavelength when it comes to what our response would be (if we chose to respond) to articles talking about the decline in permitting.

      I'm also jazzed about my piece on re-fracking, and I found it interesting that was where the Seeking Alpha writer started his discussion.

      I guess I will leave it at that. I appreciate you taking the time to write. I think it's a fascinating subject and a fascinating time. This is not an investment blog or an investment site, but opportunities for young investors don't come along like this very often, and I'm not talking about investing in the Bakken. I'm looking at the new Dow highs, and what inexpensive energy might mean for America and China.

      Saudi says we will probably never see $100 oil again. I think that is remarkable -- in the early 1970s I was taking a bus to school, leaving my car at home, because of the OPEC embargo; I was truly worried that we would soon run out of oil. Never in my wildest dreams would I have guessed that we would ever see the glut we are now seeing. And "we" haven't even begun to exploit a) western Canadian oil sands; b) all the US shale; c) all the deep-sea stuff to the degree that even $125 oil would result in.

      We have already seen a decline in Bakken production: occurred last month, and rig counts in October were almost as high as they've ever been. The question for me is not whether Bakken production will decrease (it already has) but how good the operators can get at producing oil when push comes to shove.

  2. The world oil market cannot be predicted right now . Too many variables. It will take 1-2 years for this shakeout and unlike recent history when everyone was a winner, in the next year or two, there will be winners, losers and survivors . And when the markets stabilize, we will go from there. Until then, energy will experience volatility, mostly, I forsee to the downside .

    1. Can't disagree. I find it fascinating. Either a lot has changed or nothing has changed in the oil and gas industry. I want to say I see differences this time, but when one reads "The Prize" one gets the feeling this is fairly normal for the oil and gas industry -- a cycle of ups and downs.

  3. The sa article is really not all that profound. All it says is that one frac sand supplier is better than the rest. So, if that is correct , then yes it probably has the best chance going forward . Shale oil isn't going to die, but some companies will get hit hard financially and may fold up. A year from now, the financial/business landscape is going to look very different. If you like volatility, this the place to be.

    1. I didn't even read that far; once he got to talking about a specific fracking sand company, I quit reading -- because this is not an investment site, I pretty much quit reading when writers start making recommendations, as it were.

      I found the first part of the article conversational and something that newbies and I would toss around while having coffee.

      What caught my interest, I've already mentioned: fracking during the downturn. I don't know if readers are following the MRO re-fracking story closely but that's one of three fracking stories that will be interesting to follow. The other two stories: EOG's activity in North Dakota and Texas for the next two years; and, the new completion techniques mentioned (and being used) by Whiting and CLR. Possibly, a fourth story: whether it plays out like Harold Hamm says that SCOOP right now is a better play (financially) than the Bakken.

      Regardless of the price of oil, if a well pays for itself in one year, that's not bad. I think it's going to be quite fascinating.