Arjun, Always appreciate how you present data and bring thoughtful insight to what that data may be telling us. Impressive round totals…. If you get to Houston let’s get a round in.
Arjun, thanks for sharing about your personal life too. I'm curious about whether you think your productivity and knowledge is better overall with a better balance and more golf, or whether you think it's best to just hardcore focus 24/7/365 on the subject. I'm in finance as well and I've found that I can focus for a year or so until I'm burnt out, then I need to take a few week unplugged mental break to recharge and then I can get back to it. I haven't figured out a better (or healthier) system, so I would be very curious to learn from your experience!
Answer probably worthy of a future "On a personal note" post :) Short answer is there is no right answer. I worked 24/7/350 and don't regret a minute of it. Though I am glad I was also afforded the opportunity to take a step back while my kids are at home. There is for sure no right answer other than trying to find "work" that you love so it's (mostly) not actually work. And not doing work simply for a pay check, though a pay check is important and many don't have the choice to receive a paycheck for work they actually love. So I have been super lucky.
I do find that in order to work effectively in the markets you need to hone a fine edge, and there's no substitute for being immersed 24/7/365. The minute you step away you begin to lose a little bit of the edge as events move on without you, but immersion in one's work comes at the cost of mental, physical and social health. That would definitely be a note we'd all be interested in!
I agree that what you are describing is how I felt. I was either "all-in" or off my game. I used to take the last 10 days in August and then the 7-10 days around Christmas/New Years off. That was basically it. But I loved my job at GS!
First off, I really appreciate you posting the two cost curve graphics. As you mentioned in a reply to another of your notes it's almost impossible for us retail investors to find that info in the public domain. As an amateur retail investor I'm trying to better understand these graphics in relation to current global production and demand. In the description of a similar graphic to Exhibit 1 in an article on the Dallas Fed website it states:
"NOTES: Identified projects ( pre-sanction, under development and producing) are evaluated each year and assigned a breakeven price and peak oil production. The oil cost curve depicts the cumulative peak oil production of identified projects. Kboe/d is thousand barrels of oil equivalent per day."
I'm assuming that applies here as well. But I'm still having trouble relating this to current global production supply. For example, what does it practically mean here that for example in 2022 a price of approximately $60 gives a "Cumulative peak oil production" of about 22 Mboe/d when global production in 2022 averaged around something like 99 Mboe/d?
Looking at Exhibit 2 in conjunction with long dated oil futures being in the $60-$70 range I get the impression that even if cheaper Venezuelan and Iranian oil where to come back online American shale and Canadian oil sands would remain the long term "marginal" oil barrels that kind of set the floor of general prices assuming increasing demand projections are accurate. Again, just a hunch since I'm not sure how to relate these graphics to general global production levels.
Michele Della Vigna, who you probably know, had some interesting comments in a post on the GS website that seem to agree with what you're saying but get a bit more specific:
"We have exhausted all of the spare capacity in the system, and now we are no longer able to cope with supply disruptions like the one we are currently witnessing because of the Russia-Ukraine conflict. [...] In every commodity, when you try to forecast a future price, you want to understand the price needed to get enough new projects to be developed. Since 2017, the cost curve of oil has become smaller because there are fewer available resources and it’s become steeper because higher oil prices will be needed for production and to supply energy for a growing world population. That’s how a cost curve can help you in understanding the price dynamic in a commodity and that’s what we tried to do in Top Projects for oil and gas. At the current cost of capital, we need $90-per-barrel oil prices in order to get enough capacity on stream. A shrinking and steeping cost curve suggests upward pressure to long-term energy prices."
The reason I'm so adamant about trying to understand what all these indicators say isn't to try and predict oil prices, but to get a feel for what are reasonable normalized price ranges over the next 3-5 years.
As an example, XOM gave an investor presentation in Dec. in which they project 14% ROCE by 2025 and 17% ROCE by 2027 based on a Brent price of $60. I know this is a macro piece, so not asking you to comment on XOM, but just using it as an example of wanting to understand what's reasonable medium term given the usual caveats about the general unpredictability of oil prices...
Thank you Robert. It's a complex topic that likely requires a post more than a reply. The short version is I have country or regional supply forecasts. you start with a total amount of production from a particular year. You try to include production from specific fields where data exists. The remainder excluding modeled fields I call "base production". The Top Projects report is how we modeled future supply from specific fields. The uncertainty would be how much of the base production is offset through "exploitation" spending. One can often see a pattern in whether that ex-Top Projects production is being replace or not and/or if the inherent decline is consistent or accelerating. With the Top Projects there is timing and execution and geology risk (i.e., do you get the expected production). Fields are not developed purely on what is "lowest cost" as politics and budgets and prirorities and geologic or execution uncertainty or pipeline availability all play a role. So one can't simply look at a cost curve and determine a "fair" oil price. But it is a piece of the puzzle. Realize a quick answer here, but it's a longer discussion.
Hey Arjun. Great post like always. If you are ever in Melbourne Aust let me know and we can go out for a round or three. We have 2 of the top 20 course in the world just a couple of km down the road.
Matt, thank you so much! And I do hope to take you up on your generous offer. I have a cousin who is now Australian and in Melbourne. I've been to Perth but never the East Coast. Arjun
Jan 23, 2023·edited Jan 23, 2023Liked by Arjun Murti
Re: GS top projects cost curve - why did the quadrupling of project capacity from '09 through '17 not help drive up profitability for the OFS industry? Even ones focused on shale like Cameron etc.
I'll have to check the numbers more closely, but basically the same reasons why "$100 oil" did nothing for the majors/E&Ps where ROCE fell after peaking in 2006 at $65 oil. Too much capacity added, etc. But I don't know OFS #s off the top of my head like Majors/E&Ps...so will circle back if answer needs correcting.
One more quick comment. Let's not forget the Clearwater play in the Marten Hills, Charlie Lake area of Alberta. Hottest heavy oil play going now with about a dozen operators participating. High perm sandstone with low viscosity 20 degree oil. No fracs or steam injection required. Cheers
FYI-I will have an article on Tamarack Valley Energy, (TNEYF) coming to the free side on Seeking Alpha next week. Not a Clearwater pureplay-quite, but the biggest (742 sections) after Spur. Netbacks in the $40's at $75 WTI. Cheers
Wow...I learned something here. I didn't know there was a pre-Bruce Dickinson version of Iron Maiden. Shame on me-big fan. Fave Iron Maiden concert- Samba Drome, Rio de Janeiro 2009.
Too much here to assimilate and comment generally except lots of good stuff in this post. I agree on the Canadian oil sands producers. Technology is evolving in this space. Unit costs are coming down. Canadian Natural Resources, (CNQ), Suncor, (SU), MEG Energy, (MEGEF) are my top picks. Cheers and thanks for all the good info!
Struggled a bit with the cost curves but appreciated the explanation. I find myself somewhat frustrated that there wasn't a comment on a couple of companies you'd focus on with this information but suspect that's not your objective. Maybe something to consider b/c the odd nugget would be a great hook for the reader.
Iron Maiden-should have guessed you were a fan with that hairdo:). (I sport the same).
Thank you Pat for your comment. I am actually purposely avoiding talking about what current companies should do. Given various affiliations I have, this isn't meant as an investment newsletter that makes explicit recommendations either on stocks or what companies should do.
Thanks Arjun, I am not a golfer but connected with a number of clubs in Denver if you are in town. I’ll do my best to get you onto the course of your choice. However I am a tennis player, so if you play any tennis that would be a lot of fun!
Arjun, Always appreciate how you present data and bring thoughtful insight to what that data may be telling us. Impressive round totals…. If you get to Houston let’s get a round in.
Thank you Steve...and hope to get out for a round.
Arjun, thanks for sharing about your personal life too. I'm curious about whether you think your productivity and knowledge is better overall with a better balance and more golf, or whether you think it's best to just hardcore focus 24/7/365 on the subject. I'm in finance as well and I've found that I can focus for a year or so until I'm burnt out, then I need to take a few week unplugged mental break to recharge and then I can get back to it. I haven't figured out a better (or healthier) system, so I would be very curious to learn from your experience!
J
Answer probably worthy of a future "On a personal note" post :) Short answer is there is no right answer. I worked 24/7/350 and don't regret a minute of it. Though I am glad I was also afforded the opportunity to take a step back while my kids are at home. There is for sure no right answer other than trying to find "work" that you love so it's (mostly) not actually work. And not doing work simply for a pay check, though a pay check is important and many don't have the choice to receive a paycheck for work they actually love. So I have been super lucky.
I do find that in order to work effectively in the markets you need to hone a fine edge, and there's no substitute for being immersed 24/7/365. The minute you step away you begin to lose a little bit of the edge as events move on without you, but immersion in one's work comes at the cost of mental, physical and social health. That would definitely be a note we'd all be interested in!
I agree that what you are describing is how I felt. I was either "all-in" or off my game. I used to take the last 10 days in August and then the 7-10 days around Christmas/New Years off. That was basically it. But I loved my job at GS!
First off, I really appreciate you posting the two cost curve graphics. As you mentioned in a reply to another of your notes it's almost impossible for us retail investors to find that info in the public domain. As an amateur retail investor I'm trying to better understand these graphics in relation to current global production and demand. In the description of a similar graphic to Exhibit 1 in an article on the Dallas Fed website it states:
"NOTES: Identified projects ( pre-sanction, under development and producing) are evaluated each year and assigned a breakeven price and peak oil production. The oil cost curve depicts the cumulative peak oil production of identified projects. Kboe/d is thousand barrels of oil equivalent per day."
I'm assuming that applies here as well. But I'm still having trouble relating this to current global production supply. For example, what does it practically mean here that for example in 2022 a price of approximately $60 gives a "Cumulative peak oil production" of about 22 Mboe/d when global production in 2022 averaged around something like 99 Mboe/d?
Looking at Exhibit 2 in conjunction with long dated oil futures being in the $60-$70 range I get the impression that even if cheaper Venezuelan and Iranian oil where to come back online American shale and Canadian oil sands would remain the long term "marginal" oil barrels that kind of set the floor of general prices assuming increasing demand projections are accurate. Again, just a hunch since I'm not sure how to relate these graphics to general global production levels.
Michele Della Vigna, who you probably know, had some interesting comments in a post on the GS website that seem to agree with what you're saying but get a bit more specific:
"We have exhausted all of the spare capacity in the system, and now we are no longer able to cope with supply disruptions like the one we are currently witnessing because of the Russia-Ukraine conflict. [...] In every commodity, when you try to forecast a future price, you want to understand the price needed to get enough new projects to be developed. Since 2017, the cost curve of oil has become smaller because there are fewer available resources and it’s become steeper because higher oil prices will be needed for production and to supply energy for a growing world population. That’s how a cost curve can help you in understanding the price dynamic in a commodity and that’s what we tried to do in Top Projects for oil and gas. At the current cost of capital, we need $90-per-barrel oil prices in order to get enough capacity on stream. A shrinking and steeping cost curve suggests upward pressure to long-term energy prices."
https://www.goldmansachs.com/insights/pages/from-briefings-28-april-2022.html
The reason I'm so adamant about trying to understand what all these indicators say isn't to try and predict oil prices, but to get a feel for what are reasonable normalized price ranges over the next 3-5 years.
As an example, XOM gave an investor presentation in Dec. in which they project 14% ROCE by 2025 and 17% ROCE by 2027 based on a Brent price of $60. I know this is a macro piece, so not asking you to comment on XOM, but just using it as an example of wanting to understand what's reasonable medium term given the usual caveats about the general unpredictability of oil prices...
Thank you Robert. It's a complex topic that likely requires a post more than a reply. The short version is I have country or regional supply forecasts. you start with a total amount of production from a particular year. You try to include production from specific fields where data exists. The remainder excluding modeled fields I call "base production". The Top Projects report is how we modeled future supply from specific fields. The uncertainty would be how much of the base production is offset through "exploitation" spending. One can often see a pattern in whether that ex-Top Projects production is being replace or not and/or if the inherent decline is consistent or accelerating. With the Top Projects there is timing and execution and geology risk (i.e., do you get the expected production). Fields are not developed purely on what is "lowest cost" as politics and budgets and prirorities and geologic or execution uncertainty or pipeline availability all play a role. So one can't simply look at a cost curve and determine a "fair" oil price. But it is a piece of the puzzle. Realize a quick answer here, but it's a longer discussion.
Hey Arjun. Great post like always. If you are ever in Melbourne Aust let me know and we can go out for a round or three. We have 2 of the top 20 course in the world just a couple of km down the road.
Matt, thank you so much! And I do hope to take you up on your generous offer. I have a cousin who is now Australian and in Melbourne. I've been to Perth but never the East Coast. Arjun
Re: GS top projects cost curve - why did the quadrupling of project capacity from '09 through '17 not help drive up profitability for the OFS industry? Even ones focused on shale like Cameron etc.
I'll have to check the numbers more closely, but basically the same reasons why "$100 oil" did nothing for the majors/E&Ps where ROCE fell after peaking in 2006 at $65 oil. Too much capacity added, etc. But I don't know OFS #s off the top of my head like Majors/E&Ps...so will circle back if answer needs correcting.
One more quick comment. Let's not forget the Clearwater play in the Marten Hills, Charlie Lake area of Alberta. Hottest heavy oil play going now with about a dozen operators participating. High perm sandstone with low viscosity 20 degree oil. No fracs or steam injection required. Cheers
I need to catch up on Clearwater, thank you.
FYI-I will have an article on Tamarack Valley Energy, (TNEYF) coming to the free side on Seeking Alpha next week. Not a Clearwater pureplay-quite, but the biggest (742 sections) after Spur. Netbacks in the $40's at $75 WTI. Cheers
Wow...I learned something here. I didn't know there was a pre-Bruce Dickinson version of Iron Maiden. Shame on me-big fan. Fave Iron Maiden concert- Samba Drome, Rio de Janeiro 2009.
Too much here to assimilate and comment generally except lots of good stuff in this post. I agree on the Canadian oil sands producers. Technology is evolving in this space. Unit costs are coming down. Canadian Natural Resources, (CNQ), Suncor, (SU), MEG Energy, (MEGEF) are my top picks. Cheers and thanks for all the good info!
the first 2 Maiden albums are 2 of the best ever. Bruce started with No of the Beast, which is a pretty good start.
And thank you on rest of post! Love the Canadian oils.
Let’s get out there and rip it !!! Aka play some golf!
I am in!!!! Let's make this a 2023 objective. Will ping you in the Spring.
Perfect!
Lots of good stuff in here Arjun so many thanks.
Struggled a bit with the cost curves but appreciated the explanation. I find myself somewhat frustrated that there wasn't a comment on a couple of companies you'd focus on with this information but suspect that's not your objective. Maybe something to consider b/c the odd nugget would be a great hook for the reader.
Iron Maiden-should have guessed you were a fan with that hairdo:). (I sport the same).
Cheers
Pat
Lake Country BC
Thank you Pat for your comment. I am actually purposely avoiding talking about what current companies should do. Given various affiliations I have, this isn't meant as an investment newsletter that makes explicit recommendations either on stocks or what companies should do.
Thanks Arjun, I am not a golfer but connected with a number of clubs in Denver if you are in town. I’ll do my best to get you onto the course of your choice. However I am a tennis player, so if you play any tennis that would be a lot of fun!
Steve Mazzini
Denver CO
Thank you Steve! I went to DU...miss Denver.