talk 644

Oil Price
H. Soo

Many of you are concerned about the continuing high oil and gas prices. With my ten years of experience in the oil and gas industry, I offer you the following personal observation why the prices are so high.

1. The production cost of oil and gas depends greatly on the source well depth, chemical sulfur content, and location. For the on land oil, the Iraqi oil is only a few dozen feet under the ground, and can be easily extracted with conventional pumping for $4 a barrel. The Saudi oil is deeper at about a hundred feet and will cost $8 barrel to bring to the surface. American oil wells after so many years of extracting become dribbles and cost $20 a barrel to bring to the surface. Shipping cost is not so important; it is only a few dollars a barrel.

Now there are offshore oil fields. In the U.S, Gulf of Mexico, Europe’s North Sea, West Africa, there are lots of drilling platform. The cost is high because of the difficult engineering and thus large cash investment; In the U.S. it is about $18 a barrel offshore. More so in the North Sea because it is a maturing field. Shallow water (300 to 600 ft) drilling is nearly saturated. Now is drilling under 6000 ft of water, and then10,000 feet under the seabed to get at the oil reservoir. Next step will be for 10,000 ft under water. Such offshore drilling can easily cost 1 or 2 billion investments for a large field and with cost overrun, may end up 3 billion dollars. It is extremely risky business because mistakes cannot be rectified under such deep water, and the whole project may have to be abandoned and lose every dollar.

Now you see why Bush and Cheney wanted to start the Iraqi war. The plan was for a quick conquest of Iraq, secure the oil fields, and start pumping at $4 a barrel. The cheap Iraqi oil can supply the U.S. for 50 years and create a U.S. boom for many, many years and Bush-Chaney will be glorified in perpetual for this economic miracle. Except that Bush is so dumb, unschooled and useless, he screwed up the whole scheme and created a world fiasco. Now you have to pay for it. Bush was so obsessed with military glory, that like his father before him, they ignore the economy aspect of the equation.

2. My company is scrambling for work. The big oil companies are not releasing big projects for us the consulting/construction firms. While such high oil prices had been for several years now, why the oil companies are not rushing to cash in on this new highs? Are they crazy? No. Any businessman knows that if you invest to produce more of your hot commodity, the price will start to drop as more and more oil coming to market. And there are always large risks in any engineering projects. So, why not sit back and enjoy your profit. Let those real hungry smaller oil companies take the risk. Maybe they will lose their shirt.

A large offshore production drill platform with all its accessories can easily cost 1 to 1.5 billion dollars to complete. Let us assume the production of oil alone from this platform is 200,000 barrels a day. Of course there are always extra natural gas to be sold as part of the produce also. The produced oil will be sold at $50 a barrel for an intake of $10,000,000 a day. Deducting all kinds of expenses, it will be 3.5 million a day in income. In one year of operating 300 days only, the return is 1 billion. The ballpark figure in general is 2 years to recoup all your investment. Very good. Now, if you do nothing, the price shoots up to $70 a barrel and suppose this company produces 2 million barrels a day, the net increase is 40 million dollars a day without doing anything. No risk what so ever. Excellent. What will happen if you invest billions of dollar and start producing more and then the price drops to $30 a barrel? The CEO will be fired for being so stupid, maybe even hanged upside down from a flag post at the company entrance.

3. Why such high oil price only under Bush’s presidency? We all believed Bush and Cheney were oilmen and could easily see a way out of this mess. Unfortunately, the truth is just the opposite. Both of these Texans have their powerful friends from the oil and energy business to reciprocate. These good old boys must be taken care of. Under a different president, he can jawbone the big oils to start drilling to bring down the prices or else. One simple way is to order the IRS to examine their books. This will scare the hell out of the big boys. The auditing can easily irritate them for years and tons of lawyer fees. The good old boys will surely be willing to sacrifice a little profit than to be cursed by the IRS or the Justice Department.

4. Finally, I am happy to report there will be years of good employment ahead in this oil business. Companies are looking for experienced people everyday in spite of the scarcity of big projects. After years of down sizing and staff cutting, there are very few old timers around who will not screw up a project. The young American engineers all want to go the quick route of management to avoid the hard work of learning how to do the work. Moreover, I am proud that the American government is finally coming closing to our Chinese model of cronyism and self-serving. This is one friction less for world peace.

5. I am sorry to say I cannot help you with stock tips. It is too late. Oil refiner Valero shot up 10 times, Stolt Offshore shot up 5 times in a couple years. These big gains were never reported in the business/investment news. So, you know you are not given the juicy meat just bones by those financial experts. Nearly all oil industry companies double or triple their money. But now, Ford and GM are junk bonds. Four major airlines file for bankruptcy. With the rising oil price, I suspect our world is becoming a bubble.