IS TODAY'S OIL PRICE A CRISIS? OR AN OPPORTUNITY?By Ray Metcalfe
April 27, 2020
In the 1980s, the Saudis developed the ability to do something no other oil-producing country can. They developed the ability to produce over twelve million barrels per day but set their target production between 9 and 10 million. Saudi can cause a gradual increase or decrease in world oil markets by adding or subtracting 1 million barrels. Several OPEC countries can turn their oil spigot up and down, but only Saudi can flood the market and crash prices with an extra 3 million barrels per day. When Russia told Saudi to go pound sand, Saudi pounded out another 3 million barrels, reminding Russia and OPEC members who fail to abide by Saudi's prescribed quotas, that selling 2 million barrels per day for $50 per barrel is more profitable than selling 3 million for $25. In early March, Russia, Mexico, and all the members of OPEC agreed to a 9.7 million barrels per day cut, which is the largest cut OPEC has ever done but, thanks to COVID-19 worldwide commerce has fallen by one third and the demand for oil has likely also fallen by about one third. Historically, the world has produced and consumed about 97 million barrels per day. A one-third decrease in demand means the world is producing 32 million more barrels per day than it is consuming; ten times more oil than Saudi has historically produced to force its OPEC members to comply with Saudi's quotas. The world's oil terminals are being hit by a tidal wave of oil. Some areas of the US have no place to put the oil already in transit. Ships, pipelines, and railroad cars are full and unable to unload because the storage tanks at their destinations are full. In a few days, much of the world's oil production and transportation will simply stop. There will be losers, and there will be winners, but Alaska can come out on top if it plays it's cards right. The first casualty of this tidal wave will likely be the Canadian Tar Sands, and quite possibly the XL pipeline. They have been on government subsidy life support ever since the price of oil fell below $85 per barrel. It costs about $23 to $ 33 to get tar sands oil out of the ground, and Warren Buffet's railroad charges $32 per barrel to ship it to West Texas refineries where, because it is so dirty and hard to refine, it sells for $20 to $30 per barrel less than West Texas benchmark. For tar sands crude to bring a $55 breakeven, the benchmark has to be $85 or better. The primary reason for building the XL pipeline is to get off Warren Buffets' railroad and reduce the cost of shipping from $32 per barrel to around $10. Still, the outlook for a profitable Tar Sands isn't looking good even if the XL Pipeline is built. The second casualty, most, if not all, of the US and Canada based fracking operations. According to the March 10, 2020 issue of Fortune Magazine, most analysts put the breakeven rate for fracking at a minimum of $40/barrel, and some as high as $55/barrel, just to break even. Price as of 4/17/2020, $18.27. They are losing over $36 and more on every barrel. By the time oil starts moving again, and prices rebound, most of America's and Canada's fracking operations will have gone bankrupt, and fossil fuel will likely be obsolete before they are ever economic to restart. The third casualty may be Hilcorp's attempt to purchase the rest of BP Alaska. Oil fell so far in the first week of March that a reporter with Bloomberg News said Hilcorp owner Jeffrey Hildebrand's wealth fell from $5.4 billion to $2.4 billion in March, five weeks before oil prices went negative and speculators started paying people to take ownership of oil they had ordered but had no place to store. It's a pretty good bet that Hildebrand's wealth has continued its nosedive and Hilcorp's financial future is not looking pretty and the lenders Hilcorp had lined up to finance their purchase of BP Alaska have likely changed their minds. Which brings me to the whole point of this story: It is high time that we Alaskans get over our identity crisis, put on our big boy pants, and start acting like we know we are in the oil business. Countries like Norway, Saudi, and Kuwait, they know they are in the oil business. They all own oil companies, pipelines, tankers, and gas stations. And they make a lot more money from there oil than we make from ours. Alaska is in the oil business, and Alaska has cash. While small players like maybe Hilcorp are circling the drain, Alaska can clean up and secure its future in ways most Alaskans never dreamed. BP Alaska's value has fallen to half the $5.6 billion Hilcorp agreed to when they started negotiating. BP needs cash, and there are no other buyers in sight. The Permanent Fund should put up a $3 billion cash now offer and see what happens. Alaska can re-higher BP's Alaska residents, and replace the thousand or so who don't live here with people who do. As owners, no more paying BP $20 to $30 a barrel to produce our oil. Anything above $22 would be pure profit for Alaska's Permanent Fund. BP's share of the pipeline and tanker tariffs would also be ours. For forty-three years, Alaska's North Slope producers have done everything in their power to keep new explorers off the slope. Whenever they weren't beating up on each other, they were ganging up to deny new players fair access to collector lines, and conditioning facilities. Our incentives would be to make newcomers our partners. The roads and pipelines we build would be public transportation corridors. Our seismic information would be available for all to see. As owners, Alaskans will quickly learn that the propaganda BP, Conoco, and Exxon have been pumping into Alaska's airwaves for 43 years, was a ruse. Pipelines and tankers when in combination with on shore giant oil fields like Prudhoe and Kuparuk, have made Alaska's oil production the lowest cost oil production in North America. Lower 48 fracking requires many times the number of wells and many times the man-hours to produce the same amount of oil and costs over twice as much to produce and transport. When residential developers build subdivisions and sell lots to builders, their plans are public information. They cannot sell a single lot until construction is complete, and ownership of sewer lines, water lines, streets, and sidewalks are given to the city or state for public maintenance and access. If we Alaskans want the world to come to our oil patch, we need to make access convenient for those who want to explore. We need to apply the same access management principle to the North Slope. We need to manage it like we own it, and by the way, we do own it. Ray Metcalfe
About: Ray Metcalfe spent four years rough-necking and drilling in Alaska's oil fields in the 60s and 70s, and in the 70s and early 80s was in the Alaska Legislature where in 1982, he was the co-author of the original investment strategy for the Permanent Fund. In 2005 and 2006 he was the whistle blower that blew the whistle on VECO owner Bill Allen for paying bribes to six legislators in exchange for their votes to give Alaska's oil away.
Editor's Note:
Received April 23, 2020 - Published April 27, 2020 Related Viewpoint:
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