Oil, Oil everywhere, i'll take me a drink.

Jerry Pournelle has a nice short essay about the craziness
going on around the world. Just to quote the end:

I long ago concluded that we are not capable of guarding the liberty of the people of the Near East, and that we ought to develop our own energy resources. I see no reason to change my views, although it will be far more expensive now. It will only get more expensive in future. We need to drill for oil, build nuclear power plants, and develop natural gas. Those ought to be our first priorities. Once we have energy we can use it to build those green facilities that we are told will save the planet, but if we cannot save ourselves, we certainly cannot save the planet.

I like reading JP probably because I agree pretty closely with
what he says, and he's able to say it without stupid or offensive
jokes. He was against the Iraq war from the beginning, I was
lukewarm for it until it started, then I felt the war should be
supported without being lukewarm.

Where we agree most strongly is on energy. The lunacy of sending
billions of dollars per month to countries that would nuke us if
they could get away with it is astonishing. Having to watch every
oil industry cycle where the price goes up and then crashes, each
time more of the US oil industry is destroyed and we end up importing
more.

Energy is the key. We've got a few trillion left on our mastercard,
we should be building up energy self sufficiency. If the dollar is
worthless at some point, imported energy will be prohibitively
expensive and it might be too late to stop the final spiral down
to 19th century agrarianism, with internet. (very little travel,
and what does occur happens by slow train) "The sheep look up" by
John brunner type outcomes. Or is it Stand on Zanzibar?

Part of the problem is politicians and people enjoy the point in the
cycle when everything is crashed, and gas is $1 again. All the
alternative energy industries reset back to zero, and people go
back to buying hummers (not the good kind). I'm with the greenies
slightly in thinking that fuel prices need to be higher than 90 cents
per gallon. One way to do that is now that oil is $100/bbl again,
setting an import tax on oil to keep a minimum price, somewhere
between $50-$80/bbl, and apply if for natural gas as well to keep
nat gas prices north of $3.5/cu ft.

That will make nukes look cheaper, and solar look cost effective
in some areas, or at least it won't totally kill the US energy
industry every 5 years.

Some other things are still needed of course, convert all trucks
to run on natural gas. Build nukes and clean coal,etc. But anything
we can do to keep money in the US will help build the long term
future.

Fire on the Deepwater Horizon

There was a blowout and fire out on the Deepwater Horizon
which was working for BP in Mississippi Canyon 252, which is the
Maconda field. From Rigzone, it appears that they've found everyone,
yahoo is still saying 11 men are missing though, so I hope Rigzone is
correct

They were trying to plug and abandon the well after an exploration well,
I'd guess they did a well test and were trying to set a plug afterwards so
that they can move the rig to the next well, and either they swabbed in
a kick by moving the drillpipe up too quickly, or perhaps they thought they had
the well killed after the well test and it bit them in the ass. (I have no idea
what happened, i'm just speculating).

It's interesting to me because it scares the hell out of me, the idea of having to
evacuate from a burning rig is pretty much the worst case for the oilfield. On
land you can just run away, in shallow water maybe swim to land or another rig,
but in deepwater there is usually nothing within miles, and the water is 5000' deep.
To carry out an evacuation and not lose anyone is an amazing feat, and depends completely
on the professionalism of the workers of transocean and bp.

[picture from

Rigzone, better

version there)

Recursive history and the matrix

it was 10 years ago this month that "the matrix" came out, which was
a super fantastic movie whose premise scared the crap out of me, mostly
because I have enough recursive dreams that I don't need the floating
in a tank dreaming about a computer program story to get weirded out.

I started in the oilfield in '91 and got laid off the same year as the price of
oil ramped up then crashed due to the gulf war. When I was working and the
layoffs started, I had simultaneous nightmares about working offshore and
about being laid off, so when I did get laid off it was sort of a relief.
Then, after not getting a job for 3 months, I was having nightmares about not
finding a job, but was also having nightmares about being back offshore being
worried about being laid off. The obvious scenario was when I was rehired, and I was
offshore and I had nightmares about being jobless, but dreaming about being offshore, and I would just wake up and say "what the heck?".

Since then, whenever there is a downturn and layoffs start, I have circular nightmares
where I'm dreaming I'm unemployed dreaming that I'm offshore, or variations of
that theme until my subconscious looks like one of those infinitely reflecting bowling
alley mirrors.

Since layoffs are started my subconscious has already started cranking
out freaky dreams, but now the difference between 1991 and now is so drastic that
what was a nightmare about being unemployed has become a dream of lost youth,
sort of a "oh my god I dreamt I had worked offshore for 17 years and then I got laid
off" only to wake up and find that yes I'm 42 and not 24. Holy Heck!

Just give me the freaking blue pill already.

The amazing Lou Karnac

Lou Minatti has his
predictions for 2009.
I think they are all pretty
good, predicting that oil
will go to $10 to $15 is
probably right, we're in a
race right now to see
if production will slow
down enough to prevent
all storage and tankers
filling up. When that happens
the oil industry will crash
one more time. It hasn't
crashed yet, it's sort of
limping along with the hope
that things will pop up above
$50 again. Because the rig
rates have gone up so high
over the past 3 years, a deepwater
rig is above $500k per day now. It's not unusual for a deepwater well to
cost $50 million now, so we need $50 oil at a bare minimum or else all that
work will shut down this year.

The question is what will happen after this crash, will things bounce back quickly
or will things drift along like the 2nd half of the 80's.

here's what I wrote back in May:

If the price of oil can stay high for another 5 years, then the US will be radically
different at the end of that time power-wise. The more likely outcome will be
that the economy will continue to slow, we'll stop buying plastic chinese crap, then
they'll slow down, and the price of oil will head back to 12 dollars, resetting the
system again at 1980.

Global warming my butt

Ace links to excerpts from a report on the senate website (I connected via
interweb pipes) where 650 earth scientists are saying they are global
warming skeptics. I'm a skeptic too, but as a paid minion of the oil industry
that's part of my job. These guys have day jobs as scientists so believe
them (hypnotic voice on) believe them, believe them, it's getting colder,
(hypnotic voice off)

here's my favorite quote:

“The IPCC has actually become a closed circuit; it doesn’t listen to others. It doesn’t have open minds… I am really amazed that the Nobel Peace Prize has been given on scientifically incorrect conclusions by people who are not geologists,” - Indian geologist Dr. Arun D. Ahluwalia at Punjab University and a board member of the UN-supported International Year of the Planet.

There are better quotes, but that gentleman complains about non-geologists winning the nobel,
as a geologist.

I'm skeptical because I look at squiggly lines all day as part of my job. The hocky stick was a
a couple of straight lines made up of all different kinds of data, ice cores, tree rings, thermometers
and satellite data. It's hard enough putting together data that was all acquired the same week,
but splicing a bunch of crep together that doesn't match known historical data points like the
medieval warming period told me its a bunch of spliced crep.

There are more priorities that we should be worrying about now, apart from all the financial
disasters we should be trying to get energy independence for the usa, using whatever technology
is available from drill drill drill to nukes. peak oil is the approaching really big problem, even if
prices go to $8 next month, it won't change how much oil is in the ground. Once the oil runs out we
see what real poverty looks like.

[I'm not sure how to do it, but I'd start with an import tax on oil. If the us energy industry isn't
protected we'll see that most of the alternative energy industry will be destroyed at the same time.
Better to keep prices somewhat high, $50/bbl, and keep pushing ahead to energy independance
and not use cheap oil to keep suckling at the tit of the foreign oil industry.]

Fun with jetlag

I'm back in Italy and I'm having a lot of trouble with jetlag this trip.
I screwed up and slept a couple of hours thursday afternoon when I
arrived, then I couldn't sleep again until 6 am friday. I was guilty of
asleep at the office all day friday, luckily nothing of importance happened
and I safely made it home without getting myself run off. The really stupid
thing I did was I repeated the mistake last night too, then slept until 1 pm.

Now it's midnight on saturday night and I couldn't be more awake, I'm
stuck watching my crappy sky tv satellite. It's in black and white because
we have an ntsc tv and the analog signal is pal, I switched out the box for
an hd box thinking that hdmi should be the same all around the world, but
all I get is the top half of the screen, so I'm sticking with the analog signal
in black and white. 1000 channels of mostly nothing, with lots of history
channels and nat geo channels, but they are all repeating the same shows
from earlier in the evening. Sadly the only thing on that's interesting are
the dial-a-porn channels, where a model answers the phone and gradually
takes off her clothes. (I'm learning italian, I have to watch)

I can't imagine how they make money unless the guys calling are paying $100
per minute, because they are almost never talking on the phone. Oh well,
you know you're bored when you're drinking italian new wine out of a 3 liter
plastic jug watching italian porno in black and white, and the most interesting
thing to think of is their business plan.

Better than thinking of my business plan. Lou Minatti mentioned in a blog
post that oilfield service companies in houston are about to do big layoffs
according to a high placed relative of his. I understand why that will have
to happen to some extant, the big question will be will they cut to get ahead
of the problem to maintain or increase profitability, or will they just lop off
the bottom 10%. hmmm.

In 1991 they fired almost everyone (90% of staff) because the business
died when prices crashed back to $8/barrel, but they layoffs happened
in stages. In smaller downward dips like 1994, 1996 and 2007 they just
layed off the bottom 10%. In 1998 they tried a different tack and layed
off everyone above a certain seniority who weren't on a management track,
which in one way was more shocking than laying off everyone slowly, because
the guys you'd think would never leave were gone in a blink. Almost all got
hired back pretty quickly as contractors when it picked up again a couple months
later, but it was still a weird higher management decision that I hope they
don't repeat.

It all depends on demand, if demand drops too much too fast until all storage
and all tankers are full, it will go to $10 and all drilling not on deepwater rigs will
stop. The good news there will be a quicker rebound as the rest of the economy
comes back quicker, the bad news is that it will ensure $300 oil in 2 years because
drilling activity won't make it back in time.

oh, well, back to black and white tv.

Rabbits, coyotes and an import tax on oil

Having worked in the
oilfield since 1991, I tend
to be a pessimist about the
price of oil, meaning I worry
that it will go down. Since I
also drive a car and eat I worry
that it will keep going up as
well. It's a conundrum that
will likely be solved shortly
by the market, as previous oil price
spikes have been followed by
crashes for the past 150 years (see, The Prize, by Daniel Yergin).

One way to model the price of oil over time is as a differential equation, with
consumers chasing oil. The above chart models a similar system of coyotes
and rabbits. (the link goes to the University of toledo, thanks) As the rabbit
population grows, the coyote population grows, then
the rabbit population crashes, soon followed by the coyote population. The price
of oil has followed this dynamic for the past 30 years, as more consumers join the
market, the price goes up, then the economy cools and the oil industry crashes into
dust. The points on the chart with high rabbit population are equivalent to when the living
for the consumer is easy, the price of oil is low and oil companies and service companies
are laying off engineers by the dozens. When the rabbit population is low are the oil industries
fat times, it is easy to change jobs, day rates are soaring and things are booming, baby!

[before 30 years ago the shut-in production of the texas oilfields helped to damp out
a lot of the wild spikes, now there is very little shut in production even in SA. To increase
production we have to drill. ]

These cycles will continue until the LAST CYCLE, where we'll pass peak production and consumption will always be higher than production with ever increasing prices. I don't think we're at the last cycle yet, it is reasonably likely that the slowing economy will decrease demand, decreasing demand not just for oil but for crap from China, which will double whammy the price of oil back down to the $40 dollar range. By this time next year we'll see people with H3's filling up for $30 again.

Suggested Solution:
I'd like to suggest some coyote control right now. There should be an import tax for the US
to artificially support the price of oil at around $80, low enough that it might never have any
effect whatsoever, high enough that if there is a crash than all the expensive projects in the
deepwater GOM, oil shale, etc can have a high enough guaranteed price to continue. We'll
protect some US industry, as well as the new alternative energy industry, and keep the US
on the path to improve it's energy future, not let it backslide back to cheap oil.

offshore blues

so I'm stuck offshore again. I can see that the only way I can avoid working
offshore until I'm 72 is to find a job in another industry or win the lottery or run
a titty bar somewhere in south louisiana.

The problem I have in the oilfield now is I feel like I'm selling my life, bit by bit,
day by day for money. 'Here's your money in exchange for spending a day away
from home and family, see you tomorrow when I take another day out of your life',
said the devil laughing as he turned to walk away.

the oilfield is like a machine, because so much money is spent on the rig and equipment,
it's no problem to pay to keep you prisoner on the rig until they need you. Everything
and everyone has to be early to avoid the rig sitting and waiting while equipment and people
arrive. I understand the economics perfectly, I am just weary of it.

There's really not much one can do about it at this point, we are all the sum of all the
decisions ever made, so that if I had saved more in the 90's and lost less in the dot com
crash I'd have fuck you money to walk away. I really don't have that, so I'm offshore feeling
sorry for myself while roustabouts pressure wash the windows in front of me, sort of a tracks of
my tears with high pressure water blasting the bulkhead in front of me.

It could be worse, I could be on the other side of the bulkhead running the pressure washer,
instead of sitting in air conditioning writing on a blog....so I'll stop whining for a while, things
usually turn out for the best.

“Fatherland, Socialism or Death!”

The New york times (yes, i've gone back to reading that leftist rag) has
a fantastic article written by Tina Rosenberg on oil in Venezuela. It goes
through the problems that having large amounts of oil can cause and what
the best solution can be. The article goes through some history of oil in Venezuela
and what chavez has done to pdvsa.

What happened in the previous nationalization is a clue to what is about to happen
in venezuela during the current nationalization:

Paradoxically, nationalization brought the government less money and less control. When Venezuela’s oil was still in private hands, the government collected 80 cents of every dollar of oil exported. With nationalization the figure dropped, and by the early 1990s, the government was collecting roughly half that amount. This low return to the country’s coffers was partly a result of that age-old conflict between short- and long-term reward. Because wells run dry and machinery ages, oil companies everywhere must invest lots of money just to keep production steady, and to grow, they need even more. Without new investment, Pdvsa would lose 25 percent of its oil production every year. Its officials were convinced that Venezuela benefited more if Pdvsa’s profits went to producing more oil, not more government. “Social revenue has always overshadowed investing in the industry,” said Ramón Espinasa, who was chief economist of Pdvsa from 1992 to 1999. “But I think the priority has to be to maintain oil. If you have one dollar left, it should be invested in keeping capacity. Otherwise next time around you will not have a single dollar to distribute.”

Most laymen think that you just drill a hole in the ground and oil comes out forever,
but in reality the oil production declines with decreases in pressure, and more money has
to be spent to drill more wells and expose new formation to production, or workover the
wells that are in production or inject fluids to maintain pressure and production. Money
has to be spent to produce oil, and lots of it. Oil companies might make huge profits of
billions of dollars, but as a percentage of revenues it's not that terrific. (exxon makes $377 billion in revenue, but only $40 billion in profit, Cisco makes $40 billion in revenue but
$7 billion in profit).

National oil companies are even worse, even the good ones are treated as jobs factories,
when I took a trip for a well in south asia, every service hand position had a national oil
company counterpart, so every meeting had 25 people in it, instead of the typical IOC
6 or 8 people in a meeting. So if Chavez is making pdvsa take out all it's cash to support
charity, production will decrease even faster than it does for average NOC's.

To me, the money quote:

As a slogan, “Negotiate a Better Royalty Rate!” doesn’t have the ring of “The Oil Is Ours!”; nationalization of natural resources can bolster a country’s psyche even if the management of those resources is a failure. The urge to nationalize is, at its core, a political one. Chávez seized Pdvsa not so it would produce more but so he could directly control the money. When governments give into this urge, they tend to be susceptible to the temptations of using oil for short-term gain.

NOC's should do what is done in the USA for collecting royalties from oil and gas.
Charge a high bonus to get rights to drill in an area in an open auction, then charge
the highest royalty the market will bear, then be fair and open about how the money
is collected and don't change the rules in the middle of the game. Oil companies are
smart, they do the calculation and if they won't make their corporate minimum profit
then they won't bid. If they will make enough profit but the reserves will be safe for
some foreseeable future than most companies will pay high royalties to stay in the game.
(I don't think exxon and cop left venezuela because of the extortionate royalties, but
because it seems more likely they'll lose the whole investment).

anyway, go read the article.

So there's a gulf of mexico in mexico too?

I know it must be frustrating for Mexicans that when gringo's
talk about hurricane impacts on the gulf of mexico, they generally
are talking about the northern gulf coast.

There is production that is exported to the US from the oilfields offshore
Ciudad Carmen, and right now that infrastructure is in the bullseye for
a hit from Hurricane Dean. From the Oil Drum:

















The Oil drum goes into great detail about what might happen,
the prevailing opinion seems to be not much, if Dean exits the
Yucatan as a Cat 1 or 2 moving 18 miles an hour and passes north
of the Cantarell field, then it won't affect much. The production will
just be stopped until all the offshore guys can get back on crew boats
and ride the choppy waters back out to the rigs and platforms.

In my opinion the worst case would be if the track shifts further south and bullseyes
the cantarell field as a cat 3. A lot of the older platforms build before
the bust in '86 could get knocked over as they seem to do in the
northern gulf coast. Since Cantarell production is already dropping
like a rock, this will only hurt mexico and keep the price of oil high.

update 22 Aug

It looks like the storm crossed the oilfields as a cat 1 moving pretty
quickly, so, probably nothing happened. For a weak storm to have a big
effect offshore it has to move slowly so that the wind has time to build
some big waves. (see hurricane juan, 1985 for an example)