Oil Company Woes: This is What Energy Depletion Looks Like

[David MacLeod]

The Bellingham Herald had a front page article Wednesday indicating the dismay being expressed by the County Council over the fact that the two largest corporate taxpayers are challenging their property tax assessments.  These would be BP Cherry Point refinery and the Phillips 66 refinery in Ferndale.

The Bellingham Herald article by John Stark tells us that BP is challenging the most recent property tax assessment of $975 million, which they say is at least $275 million too high. BP is the number 1 taxpayer in Whatcom County, and number 2 is Phillips 66, which got an assessed value of $459 million for 2014 taxes and is also contesting its assessment, seeking a reduction of $35 million.

Council member Pete Kremen said he thought BP was asking for far too big a tax cut. “It is a huge, audacious ask, in my opinion,” Kremen said. “I think it is absurd. … It’s one of the richest corporations in the history of civilization.”

Kremen went on to joke that BP needs the money to pay for the oil spill in the Gulf of Mexico that resulted from the explosion of their Deepwater Horizon oil rig.

I would argue that we need to connect the dots to a more systemic problem the oil industry as a whole is facing.  Ironically, these “richest corporations in the history of civilization” actually are facing some serious cash flow difficulties.  The problem was spelled out in painful detail recently in a presentation by Steven Kopits at Columbia University.  You can view the hour long presentation or download the pdf here. Or you can get an overview from Gail Tverberg over at the excellent Our Finite World blog. She titled her post Beginning of the End? Oil Companies Cut Back on Spending. It boils down to this:

Steve Kopits recently gave a presentation explaining our current predicament: the cost of oil extraction has been rising rapidly (10.9% per year) but oil prices have been flat. Major oil companies are finding their profits squeezed, and have recently announced plans to sell off part of their assets in order to have funds to pay their dividends. Such an approach is likely to lead to an eventual drop in oil production…

Kopits presents data showing how badly the big, publicly traded oil companies are doing. He looks at two pieces of information:

• “Capex” – “Capital expenditures” – How much companies are spending on things like exploration, drilling, and making of new offshore oil platforms
• “Crude oil production” -

A person would normally expect that crude oil production would rise as Capex rises, but Kopits shows that in fact since 2006, Capex has continued to rise, but crude oil production has fallen…According to Koptis, the cost of oil extraction has in recent years been rising at 10.9% per year since 1999. (CAGR means “compound annual growth rate”)…Kopits explains that the industry needs prices of over $100 barrel…

…companies have found themselves coming up short: they find that after they have paid capital expenditures and other expenditures such as taxes, they don’t have enough money left to pay dividends, unless they borrow money or sell off assets. Oil companies need to pay dividends because pension plans and other buyers of oil company stocks expect to receive regular dividends in payment for their equity investment. The dividends are important to pension plans. In the last bullet point on the slide, Kopits is telling us that on this basis, most US oil companies need a price of $130 barrel or more.

…Kopits reports that all of the major oil companies are reporting divestment programs. Does selling assets really solve the oil companies’ problems? What the oil companies would really like to do is raise their prices, but they can’t do that, because they don’t set prices, the market does–and the prices aren’t high enough. And the oil companies really can’t cut costs. So instead, they sell assets to pay dividends, or perhaps just to get out of the business.

So what is the problem? Evidence continues to support the notion that, as many of us “peak oilers” have been saying for many years,  conventional oil production peaked in 2005.  Since that time the industry has had to increasingly rely on unconventional oil – the expensive, dirty, hard to get “oil” found in the ultra-deep waters of the ocean, from tar sands, from the Bakken shale, etc. The problem is not that those resources do not exist, the problem is that they are not cheap, they are not easy, and the energy returned on the energy invested continues to shrink.

Part 2 of the problem is that the oil companies can’t charge $130 a barrel, because that would crash the economy, and when the economy tanks, so do the oil prices, at which point the amount of oil they extract and process will have to shrink as well.

Continuing on this theme, I recommend the recent discussion between Chris Martenson and Richard Heinberg, which is a bit easier to follow that the above referenced presentations by Kopits and Tverberg.  Martenson says The Oil Revolution Story is Dead Wrong.

Chris Martenson: So I want to start here. The Party’s Over, the book that did get me started on peak oil, written in 2003. And very clearly articulated, oil is a finite substance, and we built this whole giant growing economic model around it and that is a problem, it is a predicament. Here we are, eleven years later in 2014, and the party is still continuing. What is going on?

Richard Heinberg: Well, you know, I recently went back and reread the first edition of The Party’s Overbecause it was the tenth year anniversary. And I was actually a little surprised to see what it really says. My forecasts in The Party’s Over were really based on the work of two veteran petroleum geologists—Colin Campbell and Jean Laherrère. So they were saying back before 2003, because it published in 2003, so it was actually written in 2001 and 2002. So they were saying back in 2000 and 2001 that we would see a peak in conventional oil around 2005—check—that that would cause oil prices to bump higher—check—which would cause a slowdown in economic growth—check. But it would also incentivize production of unconventional oil in various forms—check—which would then peak around 2015, which is basically almost where we are right now and all the signs are suggesting that that is going to be a check-off, too. So amazing enough, these two guys got it perfectly correct fifteen years ago.

Chris Martenson: Well, it is an amazing part of the story is that at a price, there is always more oil, right? If it was a trillion dollars a drop, I assume we would find ways to actually flip North Dakota over and scrape the source rock out. And so the price and availability and supply of oil is always a big deal. I see that a lot when people are talking about the resources of natural gas that exist but fail to tell me at what price those exist, right? To get the resource is always possible but the price is important.

And yet, we look at the economic sphere and we discover that the economy also has a price for oil but it’s what it can afford to pay.

Richard Heinberg: That is exactly right.

Chris Martenson: And as I look across the last three years, we have roughly been averaging $100 a barrel on the international landscape. And what do we see? We see Ukraine suddenly dissolving, we see Southern Europe with 50% unemployment rates—all things that I think were predicted by almost anybody who was really looking at the peak oil story a long time ago. It is all really coming true and yet the story today is not really connecting those two pieces together, except for people like you and myself and a number of others, but really a handful.

Richard Heinberg: Right. Yeah, the big news right now is that the industry needs prices higher than the economy will allow, as you just outlined. So we are seeing the major oil companies cutting back on capital expenditure in upstream projects, which will undoubtedly have an impact a year or two down the line in terms of lower oil production. That is why I think that Campbell and Laherrère were right on in saying 2015, 2016 maybe, we will also start to see the rapid increase of production from the Bakken and the Eagle Ford here in the US start to flatten out. And probably within a year or two after that, we will see a commencement of a rapid decline…

Read more here (or listen to the podcast):  http://www.resilience.org/stories/2014-03-10/the-oil-revolution-sto...

Is peak oil a myth? Tell that to our local refineries who are experiencing the downslope of formerly abundant oil flowing through the  Alaska pipeline, and now must instead turn to the more expensive and problematic oil coming via trains from North Dakota.

The era of easy oil is over, and the prospect of oil trains, coal trains, and less tax revenue from oil companies are all signs that things are changing, and changing fast. This is what the first stages of energy depletion look like.