Petrobras Slashes Oil Reserves To Lowest Level In 14 Years -- Reuters -- January 13, 2016

Note: in a long note like this there will be typographical and factual errors. It has not been triple-checked. Facts and opinions of the writer are commingled. There may be some unintentional flaring. This is not an investment site. Do not make any investment, financial, or travel decisions based on what you read here or think you may have read here. If this is important to you, go to the source. By the asterisks at the bottom of the article, it appears the article is still in progress. The writer is a huge fan of the oil industry. And a huge fan of Ayn Rand as was Alan Greenspan. 

From Reuters/Rigzone: Petrobras Slashes Oil Reserves to Lowest Level in 14 Years.

Lowest level since 2001. 

This is one of the nice things for me about the blog. I started the blog in 2007 simply to learn about the Bakken. I discuss that at length at the "Welcome" post.

One of the things that always confused me was the issue of "oil reserves." For example, when I started the blog, I would not have understood how Brazil's oil reserves could be "slashed to the lowest level in 14 years" overnight by some bureaucrats sitting in high-rise cubicles. Now I understand.

The reserves are based on what is likely to be produced over the next five years based on current technology (with some slack for innovation) and what the market will need (often expressed in the likely price of oil over the next five years) in addition to other factors, like financial capability. So, "oil reserves" does not equal "original oil in place" (OOIP).

If nothing else, that one "a-ha" has made the blog worthwhile, at least for me.

Back to the Petrobras story linked above, an incredibly interesting article. Here are the data points in easy-to-read bullet format:

• Petrobras slashed it oil and natural gas reserves by 20%
• current reserve estimates: 10.52 billion boe; their lowest since 2001
• reserve estimates one year earlier: 13.13 billion boe
• the reasons: 
• plunge in energy prices
• a heavy debt load
• high costs
• corruption scandal
• bigger-than-expected cut surprised the market 
• reserves are a key factor in determining a company's ability to borrow and provide a return on investment
• one analyst: "it's a classic case of mismanagement and government interference (I will get back to this later when I discuss the Bakken)
• in the last decade, Petrobras spent $350 billion to find some of the world's largest-ever offshore discoveries but the company now has less commercially viable oil and gas than it did 14 years ago
• 2010: CEO forcast 30 billion reserves by now (2016)
• 2016: 10 billion boe

And then this:

• a rebound, though, could be limited. Even if oil doubles to about $70 a barrel much of what Petrobras owns may still be uneconomic.

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Definition of the Bakken

When I talk about the Bakken, I am generally talking about the "geographical Bakken" in western North Dakota, and to some extent eastern Montana. I don't talk much about the "geographical Bakken" in Canada.

But in addition to the "geographic Bakken" I often talk about the Bakken in two different aspects.

I talk about the Bakken as a revolution in the oil and gas industry across the US, not just the "geographical" Bakken. The "revolutionary Bakken" includes the Permian, the Eagle Ford, the Niobrara, and a dozen other tight oil plays in the US.

The third Bakken is the "experimental Bakken" in which this has been one of the biggest success stories in the US oil and gas industry as an experiment. I limit the "experimental Bakken" pretty much to North Dakota (for reasons that will be evident a bit later) but the "experimental Bakken applies across other places in the US as well. The experiment that simply amazes me is the coordination and cooperation in an Ayn-Rand-free-market-capitalism framework among the oil and gas industry (drillers and infrastructure), the state agencies, and the surface and mineral owners. North Dakota was fortunate that a major portion of its oil wealth was outside federal jurisdiction, making it easier for the state to control its own destiny. The federal government, in the big scheme of things with regard to the Bakken, had one decision to make and I think it took eight years for the federal government to make a decision on a single pipeline. Had the North Dakota state government worked at that glacial speed, the Bakken would not have happened. And instead of $30 oil, we might be talking about $150 oil -- which we were some years ago.

From my armchair, I think the state, the NDIC, the oil industry, the surface owners, local county and state jurisdictions, private citizens did incredibly well to manage this boom. I've talked about this before and could go on forever, but I will stop here.

I was reminded of this by the Petrobras story linked above. Look at the bullets up above again.

Specifically, look at bullet #4, the reasons for the Petrobras problem which include "corruption scandal." With the amount of money pouring into North Dakota since 2007 and politicians' involvement there was always a risk of corruption, broadly defined. If one wants to see how a state governor can cause considerable damage through corruption this article in The American Spectator will be quite enlightening. Far-fetched? Okay, re-read the history of the "Teapot Dome Scandal" which involved the federal government. (By the way, the "teapot dome scandals of the past have simply moved to something new and different: the laundering of federal tax dollars through wind/solar scams back to a certain national political party, but I digress.)

Specifically, look at bullet #7: it's a classic case of mismanagement and government interference. I can come up with a dozen great decisions that the NDIC made since 2007 that probably did more for the success of the Bakken (geographic, revolutionary, and experimental Bakkens) than anything the operators did. And that's saying a lot. But mismanagement and government interference could have resulted in a very different outcome in te Bakken.

When the Bakken boom was just starting, there was a very, very active Google discussion group on the Bakken in which members Monday-morning quarterbacked the NDIC. I remember the complaints and concerns. At the time I pointed out the pettiness of these complaints and concerns. I am unable to recall or provide one example of a legitimate concern brought up by those ankle-biters biting the ankles of the commissioners. That tells me, in retrospect, how well the NDIC has done balancing the demands and concerns of the industry, the state, and private individuals with interests as far ranging as mineral rights, surface rights, real estate, farming, dust, traffic congestion, highway construction, highway maintenance, schools, strip clubs, and Wal-Mart.

It's very possibly and quite likely there will be much more "blood on the scoria roads and pads in the Bakken" before this is all over. But the OOIP in the Bakken (the revolutionary Bakken) is not going anywhere, except to the surface, eventually.

Costs to life oil in the Bakken will continue to fall. When I read that last bullet regarding Petrobras .. wow, that was an eye-opener: Even if oil doubles to about $70 a barrel much of what Petrobras owns may still be uneconomic.

I doubt deep-sea drilling any easier or less expensive than the freezing, turbulent north Atlantic. If $70 oil is not economic for Petrobras in the warmer, calmer oceans off Brazil, it's hard to see how its economic for some operators in the northern seas. 

Oh, by the way, Petrobras has one more problem that was not mentioned in the article, but one that I mentioned years ago when I first saw huge troubles for Petrobras. The biggest problem Petrobras may have has to do with the pristine beaches: the government will take no chances with an oil spill that could affect its tourism industry.

Don't be surprised if in the next iteration, those bureaucrats in those high-rise cubicles but Petrobras' reserves by another 20%. The 2016 Summer Olympics in Brazil is just a few months away.

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A Note to the Granddaughters

When we first moved to the DFW area (Dallas-Ft Worth, just west, maybe just ever-so-slightly-north) of the airport, I gave myself a challenge: to see something or do something new every day. I haven't been fully successful, but considering some days I do multiple new things or see multiple new things, it may average out a lot better than I first supposed.

This past week I struck a mother lode of reading material that will keep me busy for weeks. It started with our visit to the Dallas Museum of Art. We delayed going to the DMA for a number of reasons, most of which centered around traffic congestion, potholes on I-35W, and lack of parking. Last week after reading about the refugees streaming into Germany, I figured I could manage a drive into Dallas.

Wow, what an incredible surprise. This is a gem of which few people are aware, even those who have contributed to the DMA or who visit it regularly. I can say that with some sense of sureness because of the comments made in a small monograph published by the museum just this past year, c. 2015: From Chanel to Reves: La Pausa and its Collections at the Dallas Museum of Art. Near the beginning of the monograph:

Thus, by an extraordinary coincidence, only recently discovered and publicized, the Dallas Museum of Art became the major repository of objects that had once belonged to "Coco" Chanel.

To understand the "importance" of this one needs to read the national bestseller, Mademoiselle: Coco Chanel and the Pulse of History, by Rhonda K. Garelick, c. 2014.

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For Military -- Active and Retired

A non-discounted "regular" ticket price for a three-day hopper ticket for Disneyland, Anaheim, California, costs $275, or roughly $100/day. (A hopper ticket allows one to hop from the "original" Disneyland theme park to the adjacent Disney theme park, California Adventure.

I was blown away by the deals offered military active and retired: $143 for the same ticket.

I had forgotten all about that discount. We used it back in 2010 or thereabouts -- it really was (and is) an incredible deal. It was introduced by Disney back in 2009 and has been renewed yearly since then. 

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Speaking of Great Deals

Look for the $49.99 Omaha Steak deal in this week's Parade Magazine that comes with many Sunday newspapers.

The $49.99 deal (with an additional $15 - $20 shipping charge) is a great introductory offer and has been offered weekly for quite some time now. I don't think you can find it on the Omaha Steak website but you can order it through the site, if you have the product code: 46191WNS. This particular offer (but there will always be more) expires April 30, 2016, so if you expect a refund from the IRS, you now have at least one idea how to spend it. The other idea, much more likely to occur, is to simply give the refund to your spouse.