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Petróleo Brasileiro S.A. - Petrobras Message Board

  • docjoe999 docjoe999 Dec 21, 2008 3:03 PM Flag

    cost of oil production

    One thing the Saudis have been touting is they want the price of oil to go to $75 so world production does not slump because that is how much it costs to produce.

    I have been miffed at that number since I read earlier this year the cost of the last barrel of crude was $50. In fact, I remember Canada had tar sands costs of $10 a barrel back in 2000. So how does one go from $10 to $75 a barrel in production costs?

    Once more the peak oil debunked author gets it right, "In fact, high oil production costs have been driven primarily not by geology or EROEI, but by the same bubble dynamics that made the price of everything go up. Numerous projects were cancelled in the last year or two because the industry was overheating. Rigs, steel, white collar expertise, manual labor, materials, shipping -- everything was too expensive, and project budgets were ballooning out of control. Now that the bubble has popped, construction costs will come back down to earth. The smart players will do their project construction now, at bargain basement prices, and reap the benefits in the next cycle of high oil prices. That's the secret to riding the oil wave: build when costs are low, and pump when prices are high."

    The "high costs" we keep hearing about were actually driven by hyper-inflationary conditions, and are now coming down. Contrary to the naive view, production costs are not fixed. In Alberta, the primary drivers of high costs are steel and labor:

    Five years ago [i.e. 2003], the capital cost of building a project that mined bitumen and processed it into high-quality crude was around C$40,000 per barrel of production, reckons Andrew Potter, a UBS Securities analyst. The same project today could cost C$180,000 per barrel, or around C$18 billion for a typical 100,000 barrel-a-day development.

    Soaring raw material prices, notably for steel, have played a big role. Oil sands will likely find some relief here: Steel prices have slumped three-quarters from summer highs as major consumers - China in particular - rein back demand amid fears of a global economic slowdown. But the main culprit is labor.

    Steel is already down the toilet, and wages aren't set in concrete, particularly in a time of deflation and surging unemployment. The only reasonable conclusion is that the cost of producing in the oil sands is (or will soon be) rapidly dropping, together with the price of oil.

    It is interesting to me that the U.S. oil majors did not get caught up in the insanity of the oil bubble. To me, the fact that Chevron said no to the huge Jack 2 field due to high rig prices said it all.

    PBR was a Wall Street dariling. It used debt to continue to push production higher, which was what Wall Street wanted, and Wall St. made fun of stodgy oil Exxon and Chevron.

    The thing I don't think the Wall St. guys got about PBR though is that its main priority is securing oil for Brazil not making money.

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    • Loss of bio-diversity is indeed a horrible price to pay for the sprawl of urban "progress". I encourage you to post your 7 acres and talk with some local vets about populating a sanctuary for the wildlife they inevitably are asked to save. Imagine how rewarding it would be to have foxes or badgers again on your land.

      Let's talk astronomy next time.

      Peace,

      Musk

    • Musket,

      My perceptions are tainted by the fact that I work a long way from home and do not have much spare time to socialize. I have a job and a commute and between the two, they have eaten my life. OTOH, I know from talking with my co-workers that I am not too different from them. We are all so busy that we could not smell the flowers even if we could arrange a mutually agreeable time with all out family members to do so. I do not know anyone who has the time to maintain much of a social life. Farmers who have seasonal down time are probably better off, but most of them are working multiple jobs.

      "You live in the richest, most diverse, most multi-cultural, most open and outward looking country in the world, but all you see is:
      - "strip malls and franchise operations that are either simply awful or too expensive for an average person to enjoy"

      "Perhaps this is the reality where you live. If so, I feel sorry for you. The good news is you probably don't have to go far to see more."

      TRUE! I live in Northern Illinois. If I lived in Wisconsin, the strip malls would be punctuated with preserved forests and wildlife... Instead, every year, I see more fence rows, and creeks bulldozed to be replaced by more tillable acreage and drain tiles- as if a few hundred square feet of additional corn is really going to make any difference. Every fall, groups of hunters get together to stalk and kill the hand full of coyotes that migrate in from wisconsin. I have seen three Badgers since 1982. Every one of them was roadkill. I have a seven acre strip of abandoned railroad bed where I built an observatory long ago. There is a deer stand in a tree about 200 feet beyond the end of my property line so even if I wanted to protect the deer, they could be easily driven in the direction of that stand. About 500 feet beyond the end of my property is a creek that used to have muskrat. But constant trapping in that creek has cleared them out and now the biggest thing in the creek is a 5" chub. I used to have fox dens on my 7 acres but haven't seen a fox there in ten years and don't know why. Maybe snowmobilers running them over for sport...

      "rats and opossum."

      My 7 acres is down to a sole feral cat and some opossums... so we are even there.

      I invite you to come and visit here in mid-winter. You can see for yourself the night/day difference between Illinois and Wisconsin in terms of the attitudes toward preservation of habitat and wildlife. Even where it is preserved in Illinois, it is probably private property marked: "no trespassing".

      Yes, industrial-scale agriculture as practiced here makes food abundant, but it has taken a heavy toll on the diversity of wildlife.

      One of the reasons the suburbs NW of Chicago have a lot of deer and coyotes is because hunters cannot use firearms in the suburbs. So the choice those animals face is bullets or car tires.

      A digression on the subject of medical care: This is just one case but it is surprising. My pastor contracted a skin disease that was killing him. He traveled to Italy to see his daughter one last time and went to see her local doctors while he was there. This doctor was married to a free-lance medical researcher who quickly, with substantial effort diagnosed the ailment and prescribed a treatment that cured him. He would have died here. He survived because he went to Italy.

      "rats and opossum."

      My 7 acres is down to a sole feral cat and some opossums... so we are even.

      "Count your blessings." Yes, but that does not mean that every aspect of modern society is a blessing. Nor does it mean that progress has been free of unintended and negative consequences.

    • Win and Fred:

      We can agree to disagree... As bad as they are right now, I think with a longer term perspective, things do not look so bleak. I remember the '70's and how bleak things seemed at the height of the oil embargo and the iran hostage affair. They got better.

      Looking forward, there is no doubt that the rest of the world is "catching up": that's good for them, good for us, good for everything except for the environment. (There are already too many humans.) If you want to pursue investment opportunities in the emerging markets, great. I have and am, but my expectations are in (inverse) proportion to the risks, because I know what can happen. (By the way, Brazilians are not easily able to invest outside their country though you enjoy the freedom to invest in Brazil. Think about that.)

      I'm hopeful that in 10 years when we look back, the Obama win will be seen as a watershed event in American History... Of course, it already is, but I mean in terms of a "reversion to the mean", where cronyism, corporate and individual greed, war, social divisiveness, religeous fundamentalism -- all the hallmarks of the Bush era -- were pushed aside in favor of the "other" values that have influenced America's prouder moments: open mindedness, environmentalism, hard work, sacrifice, investment in the future, innovation, belief in the vision of a place where much is possible for many.

    • Nice story.

    • Fred:

      You live in the richest, most diverse, most multi-cultural, most open and outward looking country in the world, but all you see is:

      - "strip malls and franchise operations that are either simply awful or too expensive for an average person to enjoy"
      - "grey"
      - redundancy

      Perhaps this is the reality where you live. If so, I feel sorry for you. The good news is you probably don't have to go far to see more. In fact, look within and you will see all the colors and contrasts imaginable (OMG, where did that come from?!).

      In any case, another observation: I have never been on safari in africa, but I can tell you that the USA has more amazing wildlife easily visible than anywhere I have ever been (50 countries). In many parts of the USA, INCLUDING THE CITIES, one can, on a daily basis and with great ease, see an amazing variety of large mammal and avian species in the wild: Deer, moose, elk, buffalo, fox, beaver, squirrels, porcupines, eagles, hawks, ducks, geese, etc, etc.... The sad fact is that in most other places these animals get eaten or "collected" for sale before they can even reproduce. Where I live in Brazil there are virtually no wild mammals left apart from rats and opossum.

      Count your blessings.

    • "Fred I don't know why you say "agree that Brazil has us soundly beaten in the food, language and culture departments". The USA has more, better restaurants at every price level than anywhere I have ever been."

      Big cities with ethnic neighborhoods may preserve pockets of excellence and experimentation but seemingly everywhere else it is strip malls and franchise operations that are either simply awful or too expensive for an average person to enjoy. I live 125 miles from Chicago and never go there for the restaurants. Perhaps I should but the last thing I want to do on a weekend for recreation is drive to Chicago. By the time I paid for the gas, tolls and parking, I'd have nothing left for food.

      There is one thing that might explain why your memories of the USA and my current opinions diverge. If you go to a set of different Chinese restaurants today, the food tastes almost exactly the same. It turns out that there has been alot of supply chain integration and it seems that most of these establishments are buying their egg rolls frozen.. from the same supplier. The result saves the restaurants alot of labor, but the result is mediocrity. I suspect that the same is true for many other types of restaurants - like the Italian places which really only have a choice of two different Mozarella cheeses.

      "As for language... I'm not sure what criteria to use but how would you conclude that brazilian portuguese has american english beaten?"

      In a word: Color. Everything that makes English extremely practical, also tends to make it gray.

      Culture? The melting pot is like a proverbial Cuisinart machine set on "Frappe" and there is less and less to distinguish any of us from anyone else. Pretty soon, we will all have the same opinions and we will all be redundant.

    • "It's because the values and principals that guide our society, culture, economy and political institutions -- support fairness, progress, open-mindedness, participation, equal opportunity, rule of law, distrust of authority, self sufficiency, environmentalism, etc."

      The average American today supports none of the things you mentioned above. They will say they do, but they do not. If a revival of those virtues does not happen, we will have peaked.

    • Muskie,
      Anti-Americanism? Where the hell do you get that? I once admired all that America stood for.

      I just call them as I see them coming. And I don't dwell on the past. I focus on the future.

      Like I alluded to in an earlier post, the trends in standards of living are clear. Average Americans are falling behind and standards of living are improving in many other parts of the world. You deny that?

      When investing, I like to consider such facts and when the trends are so well established, I find it hard to ignore. To me this all has important implications as to where I invest... and what I invest in, but that's just me..

      And isn't that the American way or you want to take away my freedom as to where I can invest?

      << I can tell you without particular bias, THE USA IS THE BEST COUNTRY IN THE WORLD TO LIVE IN AND RAISE A FAMILY.>>


      No bias? Good grief.

      <<We prevail because we have the strongest and fairest institutions to promote individual well-being ever devised. Whatever you may think, the current crises will make those institutions, our society, our people stronger, not weaker.>>

      Again, no bias?

      I don't know about you and Doc and what social circles you might be in but you might want to experience first hand what's been going on in the back alleys and streets in most cities and towns in the US right now.

      I don't like the trends that I've been seeing.

      And as for this crisis making institutions better, that's an opinion that I'm just not willing to share at this point because of the corruption that seems to rule from the highest places. You really think Obama or anyone else who might come to power will be able to eliminate the entrenched interests (or want to) and clean up the problems? How about eliminate the Federal reserve?

      I don't know about you but it seems to me that the system no longer works for the people. No sir, the elites are running the show and the concentration of wealth that we've seen over these last few years is proof.

      Just look at monetary policy and the bailouts,....this is done on the backs of the average worker (and retiree) who will eventually pay thru higher taxes or decreased purchasing power of his earned wages (or pensions) all while the US CPI has conveniently understated inflation by atleast 5 % over the last number of years. That's a real good sign of a system working for the avg Joe isn't it?

      Some say that it will take a break point before we see real change in the US and I'm not sure I want to be too exposed to US based investments if that's what it takes to get the changes that are needed.

      =========================

      And Doc, if you think I'm a "grass is always greener on the other side" type, as well as being anti-American, you got me wrong....as usual. And you can cut out the personal attacks. Stick to business.

      I fully appreciate the issues and challenges for the emerging markets but I also like to look forward. And I see lots more to look forward to in many of the emerging market countries...even if I've never been to visit them.


      BTW, since when is it a requirement that people visit a country to learn about them and to be able to intelligently invest in them?

      You think because you've traveled and visited a few places that you 'know' more than anybody else about investing and business?

      Or is it because you just like to use any means possible to try and discredit my arguments?

      Rather than bragg about where you've been, I'd be more interested in hearing about YOUR thinking and thought process for projecting the future based on what you've 'seen' rather than other analyst opinions or that you might of heard.

      I would prefer to hear original thinking and logic which is what I've tried to bring to the table.

    • Doc, small towns do exist like that in the USA. I am from the South (Georgia) and my Dad was from a small town in VA. I find in the South and small towns people still know each other, visit, you can borrow a cup of sugar. Heck, if their is a wedding shower, it´s in the Social Section of the local newspaper. Also, American´s are the most generous people in thw world, we still have huge hearts. Now one good thing about the Latin Community is their sense of loyality to their families, look how they treat the elderly. An expample is my mentally ill Mom living with us and my Latin Husband does not mind at all. You will see this also among people in the USA in rural communities. It just also depends on how we were raised. I was raised to believe we do not abadon or elderly parents, you take care of them. And they took care of us when we were young. Many still have big hearts and soulds in the USA, do not give up hope on us.
      God Bless,
      Lillie

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PBR
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