Wall Street Is Finally Going to Make Money Off the Permian
bloomberg.com
bloomberg.com
Oil business is not that easy to analyze. There is no such thing as "recovered about 50 cents for each dollar invested". People think the oil business is all about drilling. In reality it's first about reserves and then about drilling. "Each dollar invested" goes first towards acquiring new reserves and upgrading existing ones (from possible to probable, from probable to proven). A bit of "each dollar invested" goes into the actual drilling. The sale price of the oil certainly exceeds the actual cost of drilling (oil producers are very, very elastic in shutting down drills). But how exactly do you measure the return on investment for the money that does not go into the actual drilling?
No one interested in investing looks at money so simplistically.
A muni bond would have yielded $.50, but you still have the underlying asset, so it isn't a loss, its a guaranteed return of 50% every 10 yrs, until the bond matures (you get your $1 back) or is defaulted on.
The SP500 doesn't guarantee anything, and there are 10 yr periods where it has negative growth.
As for it being a muni bond, the risk is low but still there. Municipalities do in fact default sometimes.
There’s reasons why other investments exist and one is the risk of the investment. Municipal bonds are really stable and some investors just want predictable returns and will sacrifice overall returns for stability and lower risk.
Oil investments aren’t municipal bonds, but I expect most oil investors want stable returns.
So if you buy a $1M bond for $850k, but then interest rates go up and the value of the bond drops to $650k, then you've lost money through opportunity cost, but you'll still get your $1M at maturity.
Not that different with oil fields. If you assume it will produce X barrels, but only produces 20%*X barrels, not only is the money you're making lower, but the value of the oil field also drops (since its value is dependent upon production potential).
But this info isn’t enough to decide anything without the current value of the investment. If the investment is $0 then that’s horrible. If it’s $1 then it’s paid out 50% over ten years so not that great. But if it’s $2, then that’s a good investment.
The fact that this crucial information is missing from the article makes me think the author is an idiot or excluding it because it doesn’t support his position.
You generate assets during that period and the potential to pump oil. Same way that you invest money to a startup with 0 revenues.
"Making money" is complicated. If you hold rights to shale oil, they may be worth more or less, depending on external conditions. You might sell on those rights, or leverage those rights, and it might go on a long, long time and never be actually invoked to process the shale. It was the act of being ABLE to, which drove the money cycle. It put a bottom over supply chain risk.
The BP company that owns the exploration rights pays BP to determine the feasibility, then BP pays BP to extract the oil, then BP pays BP to ship the oil, then BP pays BP to refine the oil, then BP pays BP to distribute the refined products, then BP pays BP to fill the tanks at the bowsers, then we pay BP to fill our car, and every one of those BP segments makes a margin.
So yeah, I agree, just because a drilling operation looks like a loss in isolation, unless you view it in context of that entire vertical integration, you're missing the woods for the trees.
In the US, this last step is not BP. The gas station is almost certainly not owned by BP, but rather pays BP royalties as a franchisor, and also does not buy oil from BP directly, I believe a gas station operator buys from separate trucking businesses that contract with refineries (that may or may not be owned or operated by BP) to deliver the oil to the gas station.
That's just vertical integration, a lot of companies do it to varying degrees. For example there is a long history of power plants owning coal mines. Bell, at one point in history owned the mines that produced the resources they used to make their telephones!
VAT is not a sales tax but a tax for the full chain of added value.
BP as a whole should be responsible for the cleanup cost, around wells and of the air.
The point is to ensure that all of the "unprofitable" but necessary precursors to the small fraction of the business that makes all the money, spooling up established and productive wells during favorable market conditions, are coordinated to maximize those conditions in the face of the uncertainty of industrial prospecting, rather than the interests a contractor might have. In such a skewed-return field, other strategies risk over-fitting; it'd be like if you saw the housing collapse coming in 06 or so and responded by trying to target your retirement investments against a granularity level of individual regional banks. Just shorting an index will pay out far more on average, even if it's more "inefficient".
Oil is one of the original businesses that developed these strategies. John Rockefeller was surprised to have made money post Standard Oil!
While this is true traditionally, shale is a different ballgame. A lot of the money spent in these shale plays is gone forever.
If you spend $8 million to drill a well and expect to make a 20% ROR at $70 oil, you're going to have a bad time when the price of WTI collapses to $40. And these shale wells have such fast decline rates that 10 years later they'll be making 1/100th of their initial rates. You either make your money fast, or take a big loss on the chin.
The major price decline beginning in 2014 and the huge hit during the pandemic (oil prices went negative, remember!) has made shale a major loser for investors. And plenty of the reserves companies booked had to be written off, either because of overly optimistic price requirements or inflated production estimates. Just look at Apache's Alpine High fiasco.
Nobody likes extracting and burning hydrocarbons, but let's be honest. Shale gas removed a lot of uncertainty around the US' ability to supply itself with energy in a pinch, and markets love stability.
Wall Street has already made plenty of money off of places like the Permian basin and Bakken fields.
Ditto for the current geo-political thing where European companies are actively divesting from their home-markets and investing instead in the US, partly because energy (including natural gas) is cheaper in the United States.
> "According to the U.S. Energy Information Administration’s (EIA) latest Drilling Productivity Report, oil output in the Permian Basin will surpass 5.3 million barrels per day in July. The agency forecasts that crude volumes from the western part of Texas and the south-eastern part of New Mexico will go up from a record 5,232 thousand barrels per day (Mbbl/d) in June to 5,316 Mbbl/d next month. The projected production figure for July would be a new high for America’s biggest oil field and reflects the steady addition of rigs. As proof of improvement in activity, the rig count in the Permian Basin has risen to 344 from an all-time low of 116 in August 2020.... As crude prices hover around the $120-barrel level, production is expected to increase in six of the seven unconventional plays, with the largest gain of 84,000 barrels per day seen in the Permian Basin."
https://money.yahoo.com/surging-oil-prices-push-permian-1157...
Now, what factor above all other led to the steep increase in global oil prices? The Ukraine war, and the resulting sanctions on Russian oil exports. Why did the Ukraine war break out, and why was a diplomatic solution not pursued? Maybe this is all just part of a plan: war creates scarcity, scarity increases prices, and higher prices means more profits.
Oil exporting interests don't want to see an end to the war, I imagine - nor an escalation to nuclear conflict, which would be bad for business. A perpetual relatively slow burn is their ideal long-term goal.
The countries suffering the most economic drain as a result are the oil importers, Germany etc. - but, on the silver lining side, this situation is encouraging a more rapid adoption of renewable energy technology on a global scale.
My own view is that the various conflicts between Russian-aligned and US-aligned groups and nations since about 2003 all across the region (Georgia, Azerbijian-Armenia, etc.) are really just a consequence of Putin's failure to sign up with Wall Street on petrodollar recycling (similar to Syria and Assad in this respect).
If Russian oil money had been deposited with Wall Street since 2003, as Saudi oil money has mostly been, then US media would have treated the Russian war on Ukraine no differently then they've treated the Saudi war on Yemen - justified action against neo-Nazi militias vs. justified action against Iran-backed terrorist groups, etc. If you want more propaganda lines, Russia is just intervening in a Ukrainian civil war, just as the US intervened in a Syrian civil war.
I don't think any of these media-amplified claims have much to do with true motivations, however. My views might be somewhat influenced by excessive focus on commodities, but aren't modern wars largely waged for economic control over resouces, at least as a major factor? And in such situations, is one organized crime cartel really better than another when it comes to mafia conflicts, in the absence of some obviously grotesque evil like the Holocaust?
Do you actually pay any attention to the war crimes Russia commits?
You mean the shelling that only exists because of a Russian started conflict with Russian soldiers?.
I feel sorry for those dead civilians but I fail to see how it justifies raping Ukrainian children.
The entire invasion by Russia in 2014 was in violation of the Budapest memorandum in the first place.
More have been killed by the Russians by a large margin in this one year since the war started than had been killed during the entire 2014-2021 war in Donbas. Where are your tears for them?.
> there are no good guys here.
Between the country defending its existence and its people from extinction being perpetuated by a force that indiscriminately targets civilians with precision weapons and sexual violence, and the invading force thats trying to perpetuate a war of conquest.
There is a clear good side and bad side. There is the clearest war in a long time, it is like trying to both sides WW2.
In a topic which isn't centrally about the Russo-Ukrainian war, we should try to avoid as much as possible igniting the miserable arguments that ensue about it. Hopefully we can stick to the subject of oil prices, specifically.
Oil prices were briefly affected by the war, but Russia is now exporting just as much oil as it did in January 2022:
https://www.iea.org/data-and-statistics/charts/russian-total...
Overall, if this is an oil company plot, it failed. Demand mostly shifted around. Meanwhile, equipment has become more expensive, which isn't great for oil producers. Russian exports of metals are sanctioned, which isn't convenient for building stuff. Simply put, I don't think that a $700B industry would be so foolish.