Why It’s So Hard to Stop Oil Production

Why it’s so hard to stop Oil Production

Oil Economics 101

Stopping Production is Difficult:

It takes a long time and a lot of money to find and develop a new oil field. It’s very difficult to stop and then restart production.

Consumption doesn’t respond quickly to price

Demand changes slowly. Large changes in the oil price don’t change behavior too much in the short-term. For example, people commute to work the same amount whether a barrel of oil costs $30 or $60 (inelastic oil demand).

Scarcity Oil Premium:

When high demand runs into fixed supply, each additional barrel drives the market price dramatically above the production cost. (Oil companies have high fixed costs and low variable costs.)

Therefore:

When demand for oil increases quickly – even by a small amount – the price goes up out of proportion to the demand increase.
When demand for oil decreases quickly – even by a small amount – the price goes down out of proportion to the demand decrease.

Stopping Oil Production is Hard

“While it can cost millions of dollars to drill a new oil well — tens of million for offshore wells — it doesn’t cost much to keep an existing well running. That’s one reason so many companies were slow to respond to the virus outbreak, If you can clear your operating cost and continue to produce profitably, that’s the analysis that producers go through.”

– Mark Berg (Vice President at Pioneer Natural Resources)

“Capping a well is not like putting the cap back on the ketchup bottle.” Capping some wells can be cheap. But high-pressure, high-temperature wells are harder to cap and plugging them is more permanent and expensive.”

– Professor of Business Economics and Public Policy and Faculty Director of the Penn Wharton Budget Model.)

“When you shut in wells, especially for a long period of time, you have a lot of surprises when you turn them back on.” – – – Clay

– Bretches (Operations Executive at Apache Corporation)

“Once shut in, the biggest shock to the well is an abrupt change in pressure dynamics, including the oil and gas flowing into the wellbore.”

– Terry Engelder (former Penn State Geoscience Professor, known as the “father” of the Marcellus Shale)

“What you will find is that for the most part wells don’t like being shut in for several reasons. In shale, one of those top reasons is that the wells run the risk of the tiny fractures made by fracking closing up again.”