The Powers of Fossil Fuels, an Update with Data per 2017

This post is an update and small expansion of The Powers of Fossil Fuels spanning more than two centuries of the history of the world’s energy, primarily fossil fuels (FF), consumption.

  • Between 2002 and 2017 world energy consumption grew with about 39%, world Gross Domestic Product (GDP) by 130% and world total debts by more than 160% (market value and expressed in US dollars).
  • The narrative of the growth story of the world economy (GDP) appears as a rule to leave out two participants:
    1. DEBT and the accelerating debt growth since the 1980’s, more notably since the start of this millennium and how this unprecedented growth in total world debt helped pull forward ENERGY demand.
      Post the Global Financial Crisis (GFC in 2008/2009) the continuity of economic growth became facilitated by concerted policies by the world’s major central banks by their low interest policies and Quantitative Easings (QE).
      Lower interest rates allowed room for more DEBT on most balance sheets and growth in total DEBT is important for continued economic growth.
    2. ENERGY (and primarily FFs) consumption and its strong growth facilitated by the rapid growth in DEBT.
  • Simplistic explained is GDP a monetary measure of the annual volume of transactions.
    These transactions involve the exchange of products and services which require some input of ENERGY and in recent years growing amounts of DEBT allowed for this to happen.
    This illustrates that money/currency is a claim on ENERGY.
    The orderly retirement of the growing DEBT is a claim on future ENERGY.
  • This post also takes a brief look at the recent years’ growth in solar and wind (renewables, RE) and how their growth measured up against FFs since 1990 and Year over Year (YoY) changes for FF and RE since 2000.

Figure 1: The chart shows the developments in total world energy consumption split on sources as of 1800 and per 2017.
Energy sources are stacked according to when these were introduced into the world’s energy mixture.
The black line (plotted versus the left hand scale) shows development in the world’s GDP in current US dollars since 1980 based on data from the International Monetary Fund (IMF).

In the early 1800s biomasses (primarily wood) were humans’ primary source for exogenous energy. Coal was gradually introduced into the energy mixture after the successful development and deployment of the steam engine which gave birth to the Industrial Revolution. Coal is a nonrenewable, abundant and a denser energy source than wood.

The growing use of biomasses had led to deforestation in those areas serving energy intensive industries like mining and metals.

The steam engine and its use of abundant coal as an energy source made it possible to rapidly expand the industrial production, create economic growth and thus the Industrial Revolution was made possible by fossil fuels.

With the most recent discoveries and introduction of fossil oil and natural gas there appeared to be several abundant sources of volumetric dense energy that could entertain exponential debt fueled economic growth.

Fossil fuels represent natures’ legacy stock of dense energy (ancient sunlight) that during some decades has been subject to an accelerated depletion.

Several reports in the media may now leave the impression that we are at the threshold for a smooth transition from FFs to RE (solar and wind).

How does this measure up against hard data for RE (solar and wind) versus FFs?

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World Crude Oil Supplies per July 2017

In this post I present developments in world crude oil (including condensates) supplies since January 2007 and per July 2017.

  • In this post the world crude oil (inclusive condensates) supplies is split into three entities, North America [Canada, Mexico and the US], OPEC(13) and other Non OPEC [World – {North America + OPEC(13)}] with a closer look at Brazil.
  • For OPEC(13) a closer look at developments of number of active oil rigs versus developments in the oil supplies. This is supplemented with developments in the oil supplies versus the number of active oil rigs for some selected OPEC countries.
  • Looking at figure 07 for OPEC(13) the increase in its supplies as of late 2014/early 2015 followed a period with noticeable growth in oil rigs and likely capacity expansions/modifications of oil process/treatment facilities.
    The accompanying increase in OPEC(13) supplies may simply have been rationalized from a pure business desire to recover the investments (CAPEX) from these capacity expansions.
  • Finally a closer look at developments in petroleum consumption/demand and stock changes for the Organization for Economic Cooperation and Development (OECD).
    The OECD has about half of total global petroleum consumption and a major portion of the global petroleum stocks.
  • “It took a lot of costly oil to bring down the oil price. This is the magic from lots of cheap credit.”

Data from this post is primarily from EIA Monthly Energy Review October 2017.

Figure 01: Figure 1: The stacked areas in the chart above shows changes to crude oil supplies split with North America [North America = Canada + Mexico + US], OPEC and other non OPEC [Other non OPEC = World – (OPEC + North America)] with January 2007 as a baseline and per July 2017. Developments in the oil price (Brent spot, black line) are shown against the left axis.

It was the oil companies’ rapid growth in CAPEX leveraged by cheap debt [ref US Light Tight Oil (LTO)] and expectations of a sustained higher oil price that brought about a situation where supplies started to run ahead of consumption/demand that brought the oil price down. During the run up to the oil price collapse, supplies also grew from other non OPEC (ex North America) from developments sanctioned while the oil price was high and expected to remain so.

Following the oil price collapse several of these developments had to take considerable write downs.

This coincided with increased OPEC supplies in what became widely explained as a bid from OPEC for market share.

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A little on the Profitability of the Bakken(ND)

In the first part of this post I present an update on the profitability for Light Tight Oil (LTO) extraction in the Bakken (ND) as one big project.

This is followed with economic life cycle analysis for the average LTO well of the 2014, 2015 and 2016 vintages in the Bakken.

This analysis found that companies in aggregate continue to outspend net cash flows from operations and for 2017 this is now expected to total $2 – $3 Billion.

  • The strong growth and sustained high LTO extraction from the Bakken were facilitated by considerable amounts of debts. The growth in total debts outstanding (employed capital) continues to grow, albeit at a slower pace.
  • With oil prices sustained at present levels the total employed capital (primarily debt) constitutes severe obstacles for the profitability for the Bakken.
  • In a scenario where no wells were added post 2017 and the wellhead (at WH) price remained at $40/bo [~ $50/bo WTI] estimated losses for the project would be $20 – $22 Billion.
  • In a scenario where no wells were added post 2017 and the wellhead price remained at $60/bo [~ $70/bo WTI], the payout was reached after 7,5 years (in 2025) and the estimated return for the project becomes 3,5%.
  • With a sustained wellhead price at $74/bo [~ $84/bo WTI] post 2017, the payout was reached after 4,3 years (in 2022) and the estimated return becomes 7%.
    What makes the profitability for the Bakken challenging are the number of years front loaded with negative cash flows.
  • So far the recent years improvements in flow and Estimated Ultimate Recovery (EUR) have not entirely caught up with the decline in and the sustained lower oil price.
  • For the average 2016 vintage well it was estimated that a sustained oil price of $53/bo at WH [~ $63/bo WTI] would return 7%.

    Figure 01: The chart above shows the estimated rolling 12 months totals [black columns] net cash flows. The red area shows the estimated cumulative net cash flow since Jan-09 and per Jul-17. LOE, G&A and interest rates (effective, i.e. adjusted for tax effects) based on a weighted average from several companies’ SEC 10-K/Q filings. Taxes according to what has been in force. Price of oil, North Dakota Sweet (NDS) and realized gas price as reported by several companies.

In the Bakken(ND) and since January 2009 and per July 2017 an estimated $100 Billion has been used for manufacturing operational LTO wells and at end July 2017 an estimated $35 Billion were outstanding to be recovered from the estimated remaining proven developed producing (PDP) reserves.

At the most CAPEX for well manufacturing in the Bakken out spent cash flow from operations at an annual rate of $9 Billion. For the Bakken there has been two distinct CAPEX cycles, the first in 2011/2012 while the oil price remained high, followed by another in 2015 after the collapse in the oil price.

The second cycle may have been rationalized by several factors like an expected rebound in the oil price, which OPEC (primarily its Middle East members) helped derail through their rapid increase in oil supplies starting in early 2015 in an (believed) effort to fight for market share. The second cycle may also have been rationalized by the incentive structure for management of LTO companies in which these were rewarded by volume growth over profitability.

Incurred costs for drilled, uncompleted wells (DUCs) and salt water disposal wells (SWDs) are not included. Directors cut for September 2017 listed 889 wells waiting for completion. Costs from any heavy and costly well maintenance/interventions are not included.

The DUCs represents $2,2 – $2,7 Billion in capital employed.

For the Bakken as one big project and the life cycle analysis the gross interest costs of 6% were reduced by 35% to reflect corporate tax effects.

Effects from hedges and from bankruptcy proceedings (debt restructuring) are not included.

Any arbitrage from the realized oil price adjusted for wellhead price, transport costs and any tax effects from this arbitrage are not included.

Some companies are now recirculating primarily borrowed money (at some interest) from the net operating cash flow and injecting additional capital  to continue the manufacturing of new wells.

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Written by Rune Likvern

Sunday, 8 October, 2017 at 19:26

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