ENER How much does it really cost to get a barrel of oil out of the ground?

[Dennis Olson]

http://briansullivan.blogs.foxbusiness.com/2008/09/06/lukoils-sub-5-buck-oil/

Lukoil’s Sub-$5 Buck Oil
By Brian Sullivan

We know that oil producers around the globe are making big profits with crude trading above $100 per barrel. What we didn’t know - until now - was exactly how much. The numbers are staggering.

Friday we interviewed Lukoil’s (LUKOY) Head of Business Strategy, Andrei Gaidamaka. I asked him what Lukoil’s cost-per-barrel is, not expecting an answer. But we got one. And that answer was $4.30. Let’s repeat: 4-dollars and thirty cents per barrel. Admittedly that doesn’t include transport or taxes (the Russian government takes its own huge “windfall” profits tax at anything above $30 per barrel), but to think that its cost is below $5 a barrel is truly incredible.

Given this, and that Lukoil’s efficiencies are nowhere near Saudi Aramco’s (and probably a higher cost of labor as well), its feasible to believe that Saudi producers have costs below $2 or $3 bucks per barrel. They could be making more than $100 a barrel in profit. Staggering.

The Lukoil interview is below:

(This is a flash video, and I couldn't get the link to post here. You'll have to click through to the actual story to see the video interview - Dennis)

 

[Troke]

Huh? I thought everybody knew that. BTW, that is Saudi Arabia and such places. I ain't too sure about the US. Lots of pumps didn't start until oil got to $40 or so.

 

[Oilpatch Hand]

Depends on the field and what stage of recovery you're in. In the U.S., it's pretty easy for your lifting costs to exceed the price per barrel once the price of oil gets below $20. That's exactly what happened in 1998-99: crude oil was fetching $8/bbl at Cushing, OK in 1998, due to the Asian financial crisis. Unfortunately, it cost a producer $14/bbl to get it there.

What happened next? Since it makes no economic sense to produce a well that isn't making any money, they quit producing all the wells that had become uneconomic at the then-prevailing price of crude. That was a whole lot of them, and the abandonment of those wells, in part, triggered the scenario we have today.

But we had absurdly cheap gasoline back then, and that was all that mattered, of course.

 

[Nuthatch]

I can't believe that includes all the overhead: speculation, research, workman's comp, insurance, security, etc. besides the transport that was mentioned as not included.

 

[Josie]

Well, I guess they have some pretty steep "shipping and handling" charges?

 

[FarmerJohn]

I bought a bunch of oil-related stocks back when crude was around $12. I've done well.

What I don't know is how many of the wells in the US that were uneconomical at those prices remain sealed.... How difficult would it be to start them up again?

FJ

 

[ParanoidNot]

I bought a bunch of oil-related stocks back when crude was around $12. I've done well.

What I don't know is how many of the wells in the US that were uneconomical at those prices remain sealed.... How difficult would it be to start them up again?

FJ

Hard to say with out specifics, and every field is different. Many of the stripper wells, once shut in, cannot be restarted. They "sand out" and become plugged. Often times it is more expensive to try to rehabilitate a well than it is to just re-drill it. And depending on how much the well might produce, it just isn't economical to do either. Many times, if a stripper well is blocked in for too long of a time, it is cheaper to just plug and cap it.

Don't forget, many small wells only produce a half barrel per day, and will for years, so long as you keep pumping them. But those wells are labor intensive, requiring a pumpman to visit every day to make sure the pump is working, that the seals aren't leaking, performing routine maintainence, etc. . . . 150 barrels of oil is only worth $15,000 (using $100/bbl), which sounds like a lot until you consider that drilling a well, even a shallow well running spaghetti string, from mob to demob, could cost $50,000 to $500,000 dollars. Just pumping the well might run you anywhere from $5000 to $10,000 a year after you pay your electric bill, pumpman, tankman, consumables, spareparts, transportation costs (not just of the oil, but also the vehicals that drive to the well head every day). etc. . . .

 

[rmagee58]

Alot of companies have automated part of the job a pumper does, such as measuring the tank daily to record production. Some uneconomical wells are sold for salvage value. Some wells produce more water than anything else and the companies have to pay to have this hauled off and disposed or they put in injection wells to shoot it back into the formation for secondary recovery. Every field is different so lifting costs vary accordingly. This business has been a rollercoaster for the last 3 decades. With todays siesmic advances, the risk is lower, however the cost of gaining that knowledge is high. I would not expect with the price of tubulars today that you could drill and operate a well on 5 bucks.

 

[dharma]

I asked him what Lukoil’s cost-per-barrel is, not expecting an answer. But we got one. And that answer was $4.30.

What Gaidamaka did not say (smart Russian) is that, given Russia's current taxes, the oil companies do not make money on an exported barrel until they receive over $90 for it. They do a bit better with domestic sales.

Lifting or lease operating costs for a company using extremely cheap labor and essentially no environmental safeguards are going to be a great deal different than they would be for, say, BP operating in the Gulf of Mexico. And even those are very different from "all-in" costs of oil production as reflected in the actual price of a barrel.

 

[TJA]

Considering that there's somewhere around a 20 million barrel a day demand (give or take a bit) and around an 18 million barrel a day production (again give or take a bit), a better question would be 'how much are we willing to pay to make sure that we're not the ones sitting in that 2 million barrel a day hole not getting oil'.

*EDIT*
or was that 22 mil demand and 20 mil production?

 

[dstraito]

Profits

I think a better measure than the cost to extract versus the sales price is to look at the company's actual profit numbers. When Mobile made $10 Billion dollars one quarter, many were quick to label that amount excessive and want to immediately apply Windfall Profits Tax to the oil companies (Think Jimmy Carter and NO GAS).

The fact of the matter was the profit margin was between 8 and 10 percent, hardly excessive.

Why weren't excessive profits from companies in the Mortgage and Finance business routinely charged for their 80+ percent profits?

Because they were not as popular a target for the politicians.

Don't fool yourself. If we allow a Windfall Profits Tax to be levied WE, the consumers, will be the ones paying that bill when the charges are passed on. Additionally, there will be less exploration and in general, less oil to go around, probably to the point where we are buying gas on even and odd days or using coupons for rationing.

 

[Kris Gandillon]

Russia...

Where physicians outside of Moscow, earn typically $75 to $150 month. We hire them as translators at $20/day and they jump at the chance. They forget medicine to go be translators for us and are glad to do it.

So the Russian quoted cost of recovery is not surprising to me. Labor costs are dirt cheap over there and a lot of people do not realize that.

Kris

 

[rmagee58]

In America where we have free enterprise, we start and sustain businesses based on a potential profit. Even though I have been in energy accounting and reporting for a long time, never would I have enough dollars to wage against a risk like this business. In the old days they were called wildcatters, today they know from the process of elimination where to sling their money.

 

[Delta]

I ran this question by an acquaintance who owns a small domestic oil production company. Funny response: he didn't have a clue.

If he has money in the bank and sees an attractive prospect, he'll hire a drilling company and they'll drill a hole. If he doesn't hit oil he just waits for the income from existing wells builds up to where he can try again. If he hits oil, so much the better. Back in the 80s I heard that the average was one paying well for every ten drilled. At that time it cost over $100,000 to drill an ordinary shallow well. (And that was when oil was $5). My friend tells me that recently his costs have gone right up with the price of oil.

I've got to wonder how my friend offsets costs against production for tax purposes. But maybe the well head production tax doesn't take the cost of production into the equation at all. Maybe he can't write off his costs.

 

[night driver]

YEah it may cost 5 bux to lift that barrel out of the ground but what did it cost to FIND WHERE to DRILL?? THEN what did it cost to DRILL??


It's like saying that the program I asked you to write costs me X amount per line of code. And that would be if I used your hourly wage divided by your lines per hour rate of coding.

Tends to understate it a LOT because I haven't included the benefits I pay for for you, nor have I figured in your space in the office, your utilities usage, etc....

 

[Laurane]

There are whole areas in Russia.....

where the oil spills have ruined the environment - there are no controls on wells and spills.

Break even prices for crude in 2008

Bahrain 40
Kuwait 17
Saudi Arabia 30
U.A.E. 25
Oman 40
Qatar 30
Canada's oil sands 33
---------------------------------------------
Then again prices have escalated and nobody really can agree on a price

"CALGARY -- As oil backpedalled again yesterday to a five-month low, oil sands projects are getting increasingly squeezed as soaring costs boost the break-even price.

A new report found the break-even oil price required by new mining projects in the oil sands has jumped to $85 a barrel, an increase of $20 or 31% in barely more than a year.

In the report, National Bank Financial senior vice-president Peter Ogden said the break-even price -- which assumes an 8% rate of return, capital costs of $120,000 per flowing barrel and operating costs of $27 a barrel -- has crept up because of climbing labour and material costs and higher royalties in Alberta under a new fiscal regime beginning in January."
http://www.financialpost.com/reports/oil-watch/story.html?id=772092

 

[sbelew]

The "cost to get it out of the ground" is not relevant. How much does a diamond cost to get out of the ground? Gold?

The issue is scarcity. If you could extract or manufacture oil from seawater or the air in massive quantities, it would be dirt cheap. You can't, so it isn't.