Paper on correlation of oil field efficiency from year-to-year?

[Guest Schwab711]

Does anyone have information on how long above-average oil field efficiency continues? I'm looking for something that tests whether oil fields with above-average efficiency (below-average recovery costs) still have above-average efficiency the next year? What % remain efficient from year-to-year?

How long do they remain efficient?

If a certain field has relatively high efficiency, what are the odds that adjacent fields are efficient?

 

I'm trying to determine how much of an advantage exploration companies can have.

 

Also, does anyone know of similar studies for other types of commodities?

[SharperDingaan]

To most folks ‘efficiency’ = outputs/inputs = value of whatever is extracted/(variable cost to extract + the fixed cost (equip amort etc.) of the well). If the rise in the YOY average commodity price is higher than the depletion rate – the well is getting more efficient (top line of the equation). The same thing will happen if you can buy it cheaply, cut variable costs, or drill more from the same platform – to lower the fixed costs (bottom line of the equation).

 

Perspective matters. If you think WTI has moderately further to go – you want to be in names that have been cost cutting aggressively, AND that have lower depletion rates; to benefit from BOTH an improving top AND bottom line. The ‘hidden’ value in many of the PWE producing & shut-in assets.

 

Geology matters. As the well depletes, there is less output - & more of that reduced output is water, & other liquids. A shale oil depletion rate of 25% is often because of primarily water; especially in areas where water flood is the major extraction technique.

 

Exploration is relative. Wild cat through to deep sea drilling (fishing pool), technology A versus B (shale boom), politically stable versus chaotic (Brazil, Nigeria, etc.). Arguably an investment in Petrobras – post scandal; is a more reliable & less risky exploration play - than an investment in a wildcat play. Different risks.

 

SD

   

 

 

[Guest Schwab711]

To most folks ‘efficiency’ = outputs/inputs = value of whatever is extracted/(variable cost to extract + the fixed cost (equip amort etc.) of the well). If the rise in the YOY average commodity price rise is higher than the depletion rate – the well is getting more efficient (top line of the equation). The same thing will happen if you can buy it cheaply, cut variable costs, or drill more from the same platform – to lower the fixed costs (bottom line of the equation).

 

Perspective matters. If you think WTI has moderately further to go – you want to be in names that have been cost cutting aggressively, AND that have lower depletion rates; to benefit from BOTH an improving top AND bottom line. The ‘hidden’ value in many of the PWE producing & shut-in assets.

 

Geology matters. As the well depletes, there is less output - & more of that reduced output is water, & other liquids. A shale oil depletion rate of 25% is often because of primarily water; especially in areas where water flood is the major extraction technique.

 

Exploration is relative. Wild cat through to deep sea drilling (fishing pool), technology A versus B (shale boom), politically stable versus chaotic (Brazil, Nigeria, etc.). Arguably an investment in Petrobras – post scandal; is a more reliable & less risky exploration play - than an investment in a wildcat play. Different risks.

 

SD

 

 

Thanks for the response. I know "efficiency" is dependent on the price of oil, but I was hoping to find something that would ignore the price of oil (there's probably an industry-specific term for what I mean but I don't know it).

 

I'm trying to find out whether the cost per barrel is stable year-to-year. It would be great to find a table or something that shows cost per barrel ("C") at year 0 [so C(0)] and the various probabilities and values of C(1) [the distribution function of the cost of oil extraction?]. Does anyone know this information informally, just to get an idea?

 

How variable would this distribution be by location?

[SharperDingaan]

To most folks ‘efficiency’ = outputs/inputs = value of whatever is extracted/(variable cost to extract + the fixed cost (equip amort etc.) of the well). If the rise in the YOY average commodity price rise is higher than the depletion rate – the well is getting more efficient (top line of the equation). The same thing will happen if you can buy it cheaply, cut variable costs, or drill more from the same platform – to lower the fixed costs (bottom line of the equation).

 

Perspective matters. If you think WTI has moderately further to go – you want to be in names that have been cost cutting aggressively, AND that have lower depletion rates; to benefit from BOTH an improving top AND bottom line. The ‘hidden’ value in many of the PWE producing & shut-in assets.

 

Geology matters. As the well depletes, there is less output - & more of that reduced output is water, & other liquids. A shale oil depletion rate of 25% is often because of primarily water; especially in areas where water flood is the major extraction technique.

 

Exploration is relative. Wild cat through to deep sea drilling (fishing pool), technology A versus B (shale boom), politically stable versus chaotic (Brazil, Nigeria, etc.). Arguably an investment in Petrobras – post scandal; is a more reliable & less risky exploration play - than an investment in a wildcat play. Different risks.

 

SD

 

 

Thanks for the response. I know "efficiency" is dependent on the price of oil, but I was hoping to find something that would ignore the price of oil (there's probably an industry-specific term for what I mean but I don't know it).

 

I'm trying to find out whether the cost per barrel is stable year-to-year. It would be great to find a table or something that shows cost per barrel ("C") at year 0 [so C(0)] and the various probabilities and values of C(1) [the distribution function of the cost of oil extraction?]. Does anyone know this information informally, just to get an idea?

 

How variable would this distribution be by location?

 

 

Look for companies with the bulk of their production in ONE field; look up their annual reserve study on either SEDAR or EDGAR. It will be very technical, but will lay out the various cost and probabilities at different production rates. Compare the same field over 2-3 companies to get a rough idea of what variables, how to use them, & their magnitude.

 

Cost can vary quite a bit between fields, & when the well was drilled. Harder formations take more hours to drill the same length. Drill in a boom and the cost per hour can easily be 50-70% higher than 'normal'.

 

Broad strokes;

Variable lifting cost/bbl rises as the field depletes. Occurs in production steps

Fixed cost/bbl drops as price rises. More oil becomes extractable, creating a larger denominator.

 

SD

 

 

[Guest Schwab711]

Basically, I'm trying to figure out how volatile the actual lowest cost producers are for oil exploration companies over a period of years. I imagine new extraction techniques, improving progress/efficiency of well started 3-7 years ago, and depletion change the cost of production in the US fairly frequently. Has anyone ever looked into this?

 

As a quick ancedotal example, it looks like the "lowest-cost producers" in this article have held up well (note: MF is not the greatest source ever and they provide zero evidence for their claims):

http://www.fool.com/investing/general/2014/07/28/are-these-the-best-3-energy-growth-stocks-in-ameri.aspx

 

I'm interested in this topic for general commodities. POSCO was a fairly famous BRK investment that has performed terribly over any period in the last 10 years. I think it is widely assumed that low cost commodity producers has a competitive advantage or a moat (which is probably more inaccurate), but I have never seen any proof. I'm trying to collect the data needed to prove but it is fairly time consuming thus far so I figured I'd try to see if anyone has already done this.