Comment by scurvy
5 years ago
Considering that the front-month oil contracts went negative today (paid to buy a barrel of oil), I think more (well funded and adept) players will try to hastily arrange more storage facilities. There's just no place to put the stuff right now.
It's quite difficult to turn-off an active well. Deep-water wells are all but impossible to stop.
Actually, deep water wells are usually quite easy to shut in by design. They frequently need to be shut in due to hurricanes or infrastructure maintenance. You don't drill a $100 million deepwater well without all the bells and whistles.
Very cheap wells with low production (onshore, say ~10 barrel per day) are the ones that tend to be difficult to shut in, as they're not designed for easy temporary shut-ins.
That having been said, most of the "must produce" issues are contractual. There are plenty of contracts with production quotas/etc. Similarly, pipelines need a minimum volume to keep flowing, and once they're stopped, they can be difficult to start again (inspections/etc, as well as physically starting things flowing).
ALL wells, including the "very cheap wells" are easy to shut in, by design. It is an essential safety feature, mandated by all relevant codes, rules and regulations.
SOME wells can be a little difficult to restart after a shut-in. This includes, for example, offshore wells which extract waxy crude - the crude can simply solidify in the pipe if allowed to cool down to ambient temperature. See link below. This is usually not a big problem for a planned shutdown, as the facility will take measures to prevent such a situation (eg flush the pipes with diesel right after shutdown).
I suspect the problem might be more difficult with some pipelines, as these may be impractical to flush.
https://www.khavaranparaffin.com/articles/161-wax-problems-i...
Yes, any well must be able to be shut in. I phrased that poorly. What I meant was that not all wells respond to a shut in in the same way. It's not uncommon for things to take months to recover to the same production levels after a shut in. (At least for conventional wells -- unconventionals are significantly different.)
(Major caveat here: I'm an exploration geologist who later went into remote sensing, so my knowledge of actual operations is pretty spotty. Feel free to ignore me on this, but I'm going to keep rambling anyway.)
I was referring to a lot of onshore wells in declining or very small conventional fields. In many cases, a shut in that lasts for more than a few weeks basically leads to a P&A, as production won't recover without a workover, and a workover isn't worth it. That's what I meant by "not designed for it" -- production is expected to be sub-par after a shut in and a workover was never in the plans. A shut in means a death sentence for some wells, so operators prefer to keep them trickling along when possible, as it leads to a higher EUR. (Also most of these are hooked up to stock tanks, not production gathering pipelines, so it's a bit of a different world.)
However, I'm extrapolating from the very little experience I've had with that. Literally one tiny onshore field in TN (yes, Tennessee) that I worked in/with 15 years ago a summer after undergrad (I was actually mostly collecting seismic with a tiny source and a short string of geophones from the back of a pickup truck, so not terribly closely related). I may very well be way off base.
You've missed your very best chance ever to lead with "Well, actually"!
That might have been true 20-30 years ago. Today, all of the easy oil has been tapped. They're going out farther, deeper, and under much high pressures than before. Oh, and they're less regulated.
> You don't drill a $100 million deepwater well without all the bells and whistles. <
You will if you can make a couple $B off it. It's a risk. The deep gulf has mudslides that take out rigs. It happened to Taylor Energy in 2004. All the tech in the world couldn't prevent that spill.
https://www.nola.com/news/article_a55f87c0-8253-11ea-9f24-23...
What does that have do the ability to shut in a well? A shut in isn't stopping something that's leaking or stopping a blowout. It's the ability to deliberately and temporarily stop production.
A loss of containment is very very very bad and a huge problem, but it's not related to a shut in.
I'm well aware of shallow hazards (e.g. mass wasting aka mudslides). I've mapped them in many areas. I'm well aware of the ongoing Taylor spill. I've actually worked with monitoring it using satellite imagery from the regulatory side. I've also worked with it from the oil industry side...
None of that is even remotely relevant here, though... I'm still very unclear how anything you mentioned relates to anything I said...
That having been said, if you think _anything_ around the oil industry isn't done with safety and environmental concerns first and foremost, you've _clearly_ never been anywhere around the industry. I'm dead serious.
What they do is really, really, really damned dangerous and it's fair to debate whether that risk is worth it at a societal level.
However, don't for a goddamn second think that these folks don't care or are sloppy. _Every_ meeting all the way to the top starts with a discussion about safety and possible environmental impacts. I really, really mean that... Every damn one. It's vastly more important than very literally anything else. The first decision is _always_ HSE, never money.
Yeah, things can go wrong in very bad ways. It's not because people don't care or are trying to make a buck at the expense of the environment. It's because they're working in a really difficult environment. Yes, deepwater horizon was preventable. Yes it was due to a poor well design. BP fucked up. That doesn't mean that the oil industry is some evil mustache twirling villain.
You want cheap vegetables, flights across the continent, and plastics? Right now, we have to have oil for that. It ain't ideal, but it's not because people are out there trying to make money off of environmental disasters.
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I fully expect some environmental accident b/c that's cheaper than paying people to take it. Also considering at least in the US, the EPA was told not to investigate things during the shut down.
The negative price has to do with the short delivery date, and the lack of storage at the (landlocked) delivery point. June 2020 WTI is still over $20/barrel.
If anyone had storage to bring online in the next few weeks, in Cushing, Oklahoma, they'd make a killing. At this point, they're going to need to ship it to a port, to get on a tanker.
Anyone got a spare oil tanker? :-) I only slightly kid, makes me wonder how quickly I could acquire a number of oil storage units.
edit: this tanker is off the gulf coast right now... https://horizonship.com/ship/274m-suezmax-crude-oil-carrier-...
Actually, I think the real players have already been doing this for a few weeks. If there's a buck to be made, you can bet someone is on it.
I was wondering whether they couldn't rapidly build some new storage (cost-effectively), but probably the answer is no.
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That's one of the reasons why spot prices are crashing: we've used up the supply of spare oil tankers to store the oil we're not using.
Just with a cursory "oil tanker for sale" search, they appear to be for sale in the $10-20MM range.
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Did you read the part where I wrote, "there's no place to put the stuff?"
I also specifically said "front month contract".
June oil is barely over $20 today and will probably drop under that mark by week's end.
The point of futures is that I could sell my oil _today_ to be delivered in June for $20. Any change in June oil prices from that point onwards doesn’t matter once I’ve sold the contract.
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>Deep-water wells are all but impossible to stop.
While I realize you're referring to a functioning deep-water well, working as designed, I can't help but remember the complete mess from Deepwater Horizon. If it's difficult to stop a correctly functioning deep-water well, I have even more respect for that mess of a situation (and a bit more disdain for the practice in general):
https://en.m.wikipedia.org/wiki/Deepwater_Horizon_oil_spill
That was ten years ago today, actually. I just watched this wonderful 11 minute video on the failure: https://www.youtube.com/watch?v=FCVCOWejlag
Those videos are great, very educational. Like a mashup of Khan Academy, Derek Lowe, and Calvin & Hobbes.
I ended up watching a bunch of those videos, they are really well made, thank you for the link
That occurred during drilling not production so all the standard well head facilities were not in place.
There were still mechanical failures all over in safety devices. We're drilling much deeper than under higher pressures now than Deepwater Horizon.
To imply that deepwater oil production is safe, is crazy. Storms happen. Mudslides (underwater) happen. Pandemics happen. This is why majors contract out to the offshore drillers. They want nothing to do with it.
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When the price went negative, it made me wonder if I could legally take delivery of barrels of oil in my back yard.
I'd like to assume there are some EPA rules that preclude one from storing barrels of oil just anywhere, but at the same time, the EPA is currently not enforcing any regulations.
I also wondered about delivery on these contracts. Does that include delivery to any address I specify? Can I get paid $3000 to take 100 barrels and ask them to drop it off at my house?
And then what? After the price recovers and I want to sell the barrels, will someone come get them from house?
> When the price went negative, it made me wonder if I could legally take delivery of barrels of oil in my back yard.
Typically, the exchange contract is quite specific about where and how delivery can be made, and “in barrels shipped to your backyard” isn't an option. See, e.g., the delivery procedures here: https://www.cmegroup.com/trading/energy/crude-oil/light-swee...
Also, “barrels” are just a (traditional for the commodity) unit of measure (42 US gallons/35 imperial gallons), not actual containers used for delivery.
You've dashed all my hopes for a quick buck, but thank you for the enlightening information!
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https://thedailywtf.com/articles/Special-Delivery accidental coal delivery, but still.
Even if the oil came in physical barrels, the contract is for 1000 barrels of oil, so you would need quite a lot of space in your back yard. That quantity is more like a railroad car full of oil. You might be able to arrange for the oil to be put in a tank car and delivered to a train track somewhere if you wanted to try this, though I suspect you would not make nearly as much money in the process as you think.
The reason wells are hard to shut in has nothing to do with the actual turning off the tap. All wells are designed to turned off with BOPs (blow out preventers, etc). The problem is that if you shut in a well for an extended period of time, you damage the reservoir and will have to do remedial work to get it back to its production rate (if ever). This is why producers are not keen to shut down production. They have to weigh the short term cost of the current prices against the cost of future losses over the lifetime of the reservoir
Nobody's going to spend money to build new storage facilities for an oil glut that will go away in, at most, a month or two.
If you're sure about that, I hope you're investing accordingly...
Not exactly. If you are not sure the glut will last for a while and then disappear you don't invest. There is a ton of money to make but only if you get the details right, if any is wrong there is a ton of money to lose.
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Paid to take on the futures contract obligation. If you happened to need or want physical oil delivered in Oklahoma a month from today, you got a good deal as futures traders unloaded their contracts.
Does it happen often that future contract falls into negative territory?
No, this is the first time since oil futures began trading in 1983.
The technical term for this is contango [1]. Last time this happened to crude oil was after the GFC, as mentioned in the article.
[1] https://en.wikipedia.org/wiki/Contango#Description
Contango means that futures prices further out are higher than futures prices in the nearer term, and is normal for oil futures; what's notable is the extreme slope of the futures curve we're seeing.
So like... why doesn't someone just fill a reservoir or something?
That's what the strategic petroleum reserve in Louisiana is. They filled massive salt domes with crude oil. The salt keeps away bacteria that can foul the oil.
Well, that's a little more involved than a reservoir, in fairness. Makes me wonder though if we might see something like this pop up in the private sector in case this happens again. Even a tens of millions of dollar investment in storage would look reasonable alongside the potential profit having millions of barrels of storage would bring right now.
You have to dig a hole before you can fill it.
Backhoes are cheap. Maybe environmental issues? I imagine someone would have a problem if I just dug a hole and filled it.
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I am surprised there hasn’t been an “accidental” pipeline leak around Cushing. Who could have known that leaving a valve open could dump so much oil onto the ground.