Word For The Day: Underwhelming -- April 17, 2016

Updates

April 20, 2016: stating the obvious -- in prepared remarks, Russian energy minister said Decision-making within the OPEC has become more complicated and since 2008 the international oil cartel has taken no action to regulate the global oil market. 

April 18, 2016: from Harold Hamm: forget Doha -- over-supply over by the end of the year.

April 17, 2016: oil futures drop --

April 17, 2016: no deal reached. Pissing contest between Saudi Arabia and Iran. Reuters is reporting:

A deal to freeze oil output by OPEC and non-OPEC producers fell apart on Sunday after Saudi Arabia demanded that Iran join in despite calls on Riyadh to save the agreement and help prop up crude prices.

The development will revive oil industry fears that major producers are embarking again on a battle for market share, especially after Riyadh threatened to raise output steeply if no freeze deal were reached.

My hunch: no one cares. But good news for American drivers. In the big scheme of things, it was probably best there was not an "artificial" attempt to raise oil prices; let the market work. My hunch: Saudi is more interested in their "post-oil" plan.

Original Post 

Disclaimer: this is an opinion piece. There will be more "errors" than usual. When talking about "cost" of producing oil one can get whatever numbers one chooses. In addition, I mention "taxes" in the post; I've long forgotten the tax structure for Bakken oil and Bakken oil is just of many "oils" in the 57 US states being produced. 

Yesterday, I wrote:

Again, if "they" are not drilling, and they are not fracking, what are "they" doing? At least one operator has said "they" can make money on $25-oil in the Bakken.

My hunch is some "new" operators (buying stressed property at fire-sale prices) can make money on $10 oil. They're not fracking and they aren't drilling. The aren't building new pads. They aren't building new roads to the pads. They aren't signing huge lease checks.

Hold that thought.

From The Wall Street Journal today, two links on cost of producing oil: the second link was inside the story at the first link.

The first link: front-page story on cost of producing oil as OPEC and non-OPEC oil producers (excluding Lynn Helms) meet in Doha to discuss Saudi's self-imposed trillion-dollar mistake -- the headline: Saudi Insistence on Iranian Input Casts Doubt on Oil Deal.

Oil producers that supply nearly half of the world’s output started a day of negotiations over a possible freeze with what participants described as a draft deal.

But Sunday’s meeting quickly turned to sniping and confusion after Saudi Arabia’s delegation appeared to step back from any agreement without rival Iran.

Ahead of the meeting, delegates circulated a draft accord that calls for freezing output at January levels until October 1, 2016, to gauge its effect on prices. The freeze, first suggested in February by big producers like Saudi Arabia and Russia, is intended to limit global supply and bolster prices.

It seems to be playing out pretty much as expected: sniping among the tribes. And confusion.

The draft, reviewed by The Wall Street Journal, calls for a monitoring committee comprising members of the Organization of the Petroleum Exporting Countries and other countries that would be charged with ensuring compliance among signatories.

Ryadh has publicly signaled it won’t consider a freeze without Iran. Saudi Crown Prince Mohammed bin Salman, the country’s top economic official, repeated that view over the weekend.

That tone contrasted with the kingdom’s delegation here, led by longtime Saudi Oil Minister Ali al-Naimi. He landed in Doha Saturday and has declined to comment ahead of the meeting.

But people familiar with the Saudi delegation’s thinking said Riyadh was willing to sign a deal despite what they described as “political” statements from Prince Salman.

Later Sunday, Mr. Naimi’s delegation changed its tune with fellow participants and insisted on Iranian participation after all, two delegates familiar with the matter said. The switch was “surprising and contradicts what they have been saying for the last few days,” according to one Persian Gulf oil official in Doha familiar with the new stance. 

I found the story somewhat, should we say, underwhelming?

It's kind of funny for Saudi to demand Iranian participation. Iran is entirely irrelevant. OPEC and Russian produce about 20 million bopd. Iran? What? 500,000 bbls. Let's say a million. 5% at most against 20 million bopd and vs total global production (1/96 = 1%). I'm surprised, using those numbers, Saudi Crown Prince Heir-To-The-Throne Most-Magnificent One, Protector Of The Kingdom And Generally All-Around Good Guy didn't demand that Lynn Helms attend. If nothing else, to talk about flaring.

[Note: a reader later reminded me that OPEC produces about 3 million bopd; I guess I was comparing apples with oranges, with Iran supplying maybe a million bopd to the export/global market.]

So, the story underwhelms. The TV crawler tomorrow morning on CNBC will show oil slumping 5% before it recovers a bit.

What was much more interesting was the link inside the link.

In that first linked WSJ article, there is a little graphic about halfway down. Click on it and you get: cost of producing a barrel of oil and gas.

The analysts break out the cost of producing oil using four categories:

• capital spending
• production costs
• administrative / transportation costs
• gross taxes

Each of those costs are accompanied by a graph. Lingering over the graph with one's cursor, and more information pops up.

I tell you, folks, this is a keeper. Archive it.

Do me a favor. Take the four graphs, and remove "capital spending" from US shale and note the total cost of oil for US shale. 

Some of the hedge funds that have recently bought stressed Bakken properties are likely running their new operation on cash flow only, without any (much?) capital spending, waiting to flip the properties.

As long as you've played along this long, note that US shale taxes are a heavier burden than production costs. But I believe, the 12% tax on Bakken oil is incentivized to 6% (in round numbers) for first year of production or something like that. At least at one time. $30 oil x 0.06 = $1.80. [I could be way wrong on this. Do no quote me on this. If this information is important to you, go to the source, or go to Doha.] 

As a reminder to newbies, the "cost" for producing oil in Saudi Arabia is entirely irrelevant. What is relevant is what the kingdom "needs" to manage its budget. In general, for the past decade, it's been said that Saudi needs $100 oil. In 2015, the kingdom set their budget based on $60 oil (suggesting it never thought oil would go under $60 -- on average over the year). With all that is going on in the Mideast, Saudi needs oil to be a lot higher than $60 if they don't want to drain their cash reserves over the next couple of years.

So, when you see the UK, at $48/bbl, at the high end, and Saudi Arabia at $8, at the low end, one is not comparing apples to oranges, or even camels to steers. Put Saudi's bar at $60 (2016 - myth) or $100 (reality) and the graph changes substantially.

Again, there are so many story lines with this WSJ article, but I'm going to leave it at that.