Hi all,
Thought I would do a write up for you. I have noticed quite a bit of inaccurate information on this sub-reddit regarding oil and gas. I have a background that is pretty specialized. Non-renewable commodities focused economics background, alongside an international relations, and geology background.
First things first, some petroleum engineering/geology: Natural gas is considered a byproduct of petroleum. Meaning they are often found together, however most of this will be oil.
If you look at the U.S. crude oil, and natural gas production graphs found here https://www.eia.gov/petroleum/production/#oil-tab you will notice that they look incredibly similar.
You cannot transport oil and natural gas in the same pipeline. They require two different pipelines.
The cost to produce a barrel of oil largely depends on the geology of the area, in addition to the business environment. If you google “most oil reserves by country” you will notice something odd. Venezuela has the more reserves than most other countries, but produces next to none. That’s because the geology is bad, and their break even price is around $120. https://www.businessinsider.com/everyone-loves-a-discount-but-wheres-the-support-for-oil-prices-2014-11
We will see an increase in the price of oil and gas, but this also presents new opportunities for countries with high break-even prices. An example of this could be Canada, who needed a WTI price between $85 to $95 in order to break even according to IHS Markit in 2016. https://ihsmarkit.com/research-analysis/production-cost-and-the-canadian-oil-sands-in-a-lower-price-environment.html
Break even price readings:
https://knoema.com/infographics/vyronoe/cost-of-oil-production-by-country
So these companies will just produce more, right?
First off, let me say that the idea we are “running out of oil” is incorrect, and inherently flawed. We typically discover more oil than we consume every year. From 1991-2011 the global consumption of oil grew by 32%, but the reserves (economically viable to extract) increased by 60%. https://www.worldenergy.org/assets/images/imported/2013/10/WER_2013_2_Oil.pdf
COVID-19 put a pause on the exploration of oil and gas. This could be a serious problem. Oil reserves flat lined and have remained relatively the same in recent years. For smaller O&G producers, they may not want to produce more oil until they get more reserves. If their reserves are not growing at a higher rate than their production, eventually they will be out of business.
In simple terms: Imagine you are living off of a savings or investment account. You spend 50k a year, but you gain 60k from interest/investing every year. Eventually you can start to spend more. But there is a multi year stretch where you are still spending 50k a year, but you are only gaining 40k in income. You know this is not sustainable in the long term. You either a) have to spend less, or b) have to get more interest/gains from investing. You cannot continue down this path. There are some oil & gas companies in this situation.
Russia/Ukraine and Pipelines:
https://mondediplo.com/maps/gas-pipelines
https://www.nationalgeographic.org/photo/europe-map/
Most of the pipeline and LNG carriers in the area run through Ukraine. Logically, if war breaks out, Ukraine will not continue to allow Russia to transport on pipelines going through their country. This leaves only the pipelines so the north that run through Belarus, Poland, etc. But they do not have the capacity to supply the rest of the E.U.. The E.U. will likely sanction Russia, and refuse to buy their oil and gas. Ukraine does produce a fair bit of natural gas, but if there is a war, it is highly unlikely they will be worried about producing this for export to other countries.
The transport time to get oil and gas from other countries to the European Union could be a few weeks or more. The Persian Gulf area is close by, but this requires going through the Suez Canal, which can only take the 2nd largest tanker. There is about 571 of them globally. It can be done, but it will be a challenge to quickly meet their supply.
One topic that is not being discussed in here is the North Sea oil producers. Norway has a substantial oil industry, and can quickly supply the U.K., Germany, France, etc. It could be very likely that the EU tries to encourage companies in this area to ramp up production, to alleviate their pain. This can be achieved easiest since Norway has a state-run oil company.
TLDR:
Oil and gas production and prices will go up. Chance to see producers in countries with bad geology make record profits. Russia likely sanctioned, and Russia to Ukraine to Europe pipelines likely will be shut off. Potential for North Sea/Norwegian oil companies begin to produce lots more oil, as it is the closet location, and can quickly alleviate supply shocks compared to shipping from Middle East or USA.
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