The play in oil

In geology a “play” is a geological formation that contains particular rock types, but with the development of the petroleum industry from the turn of the twentieth century, “plays” that contained hydrocarbons (“petroleum plays”) became much sought after. Of recent, with speculators playing an increasingly important role in determining the price of commodities in general and oil in particular, the word “play” has assumed another connotation that must be given cognisance when analysing the viability of producing those commodities.
When oil prices shot up beyond US0/barrel in the early part of this century, the majors like ExxonMobil continued with the rifle approach to exploit large basins with several plays. But some small operators in the US used long-existing technology in horizontal drilling and hydrofracking (introducing water with additives under pressure) to extract gas from shale rock formations. They reduced prices so steeply in the industry that the market crashed. By 2011 they moved into the extraction of the oil particles stuck to the shale – shale oil – and an industry was born. By 2015 they were producing four million barrels/day of “shale oil” and pushing prices below US/barrel as Saudi Arabia refused to slash its production to bring supply in line with demand.
The tremendous spurt in shale oil production was facilitated by two factors – the constant innovation in extraction techniques by shale oil operators, and the willingness of US based investors to back what they considered to be a less risky investment. The innovations in recovery of shale oil caused a huge shakeup in the industry but made it possible for the survivors to make money even when oil prices are in the s range. With the boom in investment banking during the “go-go” years in the US – precipitated by permitting banking institutions to speculate with their customers’ money – the word “play” acquired its double meaning as investors were ever willing to fund new rigs in shale oil.
All of this becomes relevant as ExxonMobil assures the Government and people of Guyana that the “world class” petroleum find uncovered by Lisa 1 and Lisa 2 will start reaching the market by 2020/2021. The point being that shale oil, which has cut costs by 40% since 2012, has now become the benchmark for the price of oil. A recent report by Wood Mackenzie, a reputable oil analysis firm, concluded that “U.S. shale is the lowest cost option for new oil production and is likely to be more competitive than conventional offshore drilling.”
With speculative funds ever ready to plunge in, prices will most likely continue to hover for the next few years around a mean in the USs, while costs of deep sea oil like ours will hover around US. Another analyst points out that supply and demand will always be factors helping to determine the price of commodities like oil. They are not determinative.
He explained: “The trend in oil price consists of three parts: a long-term steady inflationary rise; a short-term (days and months) supply and demand interaction; and occasional external (mostly derivative-driven) speculative force lasting a few years.” At present, from US/barrel in 2000, oil prices are where they would have been but for speculative interventions.
While the CEO of ExxonMobil earlier last week assured that the Stabroek find is “easily viable at today’s price” (US), since deepwater oil producers have only cut their costs by 12% in the timeframe where shale oil achieved 40%, the operators will be under continuous pressure to become more efficient by cutting their capital and operational expenses. The Government has informed the expectant Guyanese populace that they are “renegotiating” the contract the PPP Government signed in 1999 and it is hoped that they have brought aboard negotiators that are au fait with the global oil industry so that there is a win-win outcome for both parties.