The Real Cost of Driving....

[Brian Ellis]

You don't have to 'dig up' tar sands anymore. Steam extraction is much faster/cheaper and most of Canadas are near-surface deposits.

Riddle of the sands

Could hydrocarbons dug out of the sand in western Canada hold future promise as a feedstock for the petrochemical industry? As a key player in the Athabasca Oil Sands Project, Shell is at the forefront of tapping a vast reserve of oil sands hydryocarbons, from which synthetic crude is produced. But time and economics are critical factors in determining whether this could provide an effective long-term replacement for diminishing sources of ethane extracted from conventional natural gas.

Riddle of sands

The Athabasca Oil Sands Project became fully operational in June this year (2005 -BE), producing up to 155,000 barrels of heavy crude oil, in the form of bitumen, per day. At full production it can potentially produce the equivalent of 10 percent of Canada's oil needs.

A joint venture of Shell Canada Limited (60 percent), Chevron Canada Limited (20 percent) and Western Oil Sands LP (20 percent), the AOSP consists of two components: the Muskeg River Mine, located 75 kilometres north of Fort McMurray, Alberta, and the Scotford Upgrader, located adjacent to Shell's Scotford Refinery, near Fort Saskatchewan, Alberta. Shell Canada serves as the overall project administrator.

Mining for oil
At the Muskeg River Mine, a mix of oil and sand is removed from just below the surface using massive trucks and shovels. The largest of the mines' four electrical and two hydraulic shovels can hold about 100 tons - a scoop about the size of a school bus. Its mining trucks can carry up to 400 tons. To put the scale of the mining operations into perspective, one heavy-hauler truck tire stands one-and-a-half stories tall, 1.5 metres wide and weighs 4,900 kilograms, or almost as much as five cars.

http://www.shellchemicals.com/magazine/1,1098,896-article_id=156,00.html

You obviously know better than Shell how to extract the bitumen, so maybe you could get a job as a consultant to tell them how to do it!

And remember, it is bitumen, not crude, so the cracking is much more energy-intensive. I did a consultancy job for a company here, a few years ago. They had been engaged by the Cyprus refinery to advise on the disposal of still bottoms: they had accumulated a massive dump over the years, covering hectares. Essentially, the bottoms were a mixture of very heavy bitumen and sand that comes suspended in the crude. The MP was too high for it to be incorporated in road aggregate. My analysis showed that it was 30-40% sand, so there were megatonnes of useless hydrocarbons. I enquired about cracking it, but was told that it was technically possible to crack 60-70% of the HCs, but the energy required was so high that it could not be economical by a whole order of magnitude. I don't know, but I could easily imagine that the Alberta sands are quite similar. I think crude, at that time, was about $28/bbl. In the end, we mixed it (1-2%) into the HFO used for calcining cement.

[Dr Mordrid]

Wiki;

Steam Assisted Gravity Drainage (SAGD)

Steam assisted gravity drainage was developed in the 1980s by an Alberta government research center and fortuitously coincided with improvements in directional drilling technology that made it quick and inexpensive to do by the mid 1990's. In SAGD, two horizontal wells are drilled in the oil sands, one at the bottom of the formation and another about 5 metres above it. These wells are typically drilled in groups off central pads and can extend for miles in all directions. In each well pair, steam is injected into the upper well, the heat melts the bitumen, which allows it to flow into the lower well, where it is pumped to the surface. SAGD has proved to be a major breakthrough in production technology since it is cheaper than CSS, allows very high oil production rates, and recovers up to 60% of the oil in place. Because of its very favorable economics and applicability to a vast area of oil sands, this method alone quadrupled North American oil reserves and allowed Canada to move to second place in world oil reserves after Saudi Arabia. Most major Canadian oil companies now have SAGD projects in production or under construction in Alberta's oil sands areas.

[Nolicorice]

Yes, you lose a lot of the money the moment you drive a car off the lot, but 50% seems a bit much. And just a side note on that topic. I've heard (New York Times and other sources) that in California used Priuses actually sell for a premium compared to what they cost as new. If this is true it would mean that owning a Prius would cost substantially less than an old Caddy.

You lose almost 50% of the money you invested in your car the moment you drive it off the lot, unless you go for a two year trade-in cycle (for the same brand of vehicle). The only way you keep your principal "in-play" is to keep up the two year trade in cycle. That's not environmentally sound, it's just business.

Hybrids cost quite a bit more to maintain because of longevity issues surrounding their batteries. Public safety concerns come up because the risk of electric shock rescue personnel can be exposed to...think about a bad wreck in wet weather.

Most hybrid's are built with the Devil's own as far as raw materials go. You won't see see a RoHS sticker on one for a very, very long time. The environmental cost in building Hybrids is a very open question. The amount of fuel used in producing them vs. regular vehicles should be figured as the total "energy budget" over the expected lifetime of the vehicle. This should include things like power losses incurred when converting energy, etc...

I sometimes wonder if we wouldn't be doing the world more of a favor by building ICE engines with NO emission controls, and focusing on thermal efficiency exclusively.

It could be that the total energy saved in reducing the complex infrastructure (Obtaining Raw materials, manufacture, design and maintenance) associated with emission controls devices and hybrids could be a bigger benefit to the environment than having to live with current ICEs which use a sizable fraction of their power running (and thus transporting) emissions control devices.

Just a thought.

[GNEP]

1) I think the average cost of production for a boe (barrel of oil equivalent - compensating for the fact it's heavy crude (not as heavy as straight bitumen)) in Athabasca is about $20 to $25. Marginal cost would be lower, so now it's built, the AOSP and associated Scotford Refinery upgrades would remain economic down to <$15/bbl iirc. Unfortunately I don't have access to the numbers any more, and if I did I wouldn't be allowed to post them here...

2) Refining capacity has indeed been the bottleneck in the last few years, and not oil production, and this is related to a few things: (a) the bad experience of refiners through the 80s and most of the 90s where margins were slim to non-existant. Memories of this (very long) period tend to reduce the appetite for building new refineries (which have a long lead time and are very capital intensive, especially on a modern "world scale" (b) Refinery-grade steel prices have been very high due in part to the economic expansion of China and India, increasing the cost of maintaining/upgrading existing refineries, and of building new ones. (c) Demand has has been high in the post-economic-crisis Asian market, and has also grown in the US. Much higher taxes on gasoline in the US (in line with Europe) would IMHO in the medium term incentivise a reduction of demand to the extent that refinery capacity could catch up with demand. (d) Hurricanes haven't helped.

3) Brian: the (listed) oil majors are definitely NOT cartelised. They actually hold relatively little power over their market. Crude is commoditised, albeit heavily influenced by a real cartel (OPEC). The oil majors account for a crazily small amount of production when put next to the Nationals. Refined products are commoditised, with the major regions (N America, EU, and the East) being subsets of the market with arbitrage between them all as price differentials justify transport costs between them. And the retail margins are slim generally; competition in most developed (and developing) countries is healthy - profitability bizarrely is effectively determined by local planning regulations in a lot of Western countries.

The last couple of years (2004-2005, now residing according to my sources) have seen an uncommon coincidence of high crude prices, high refining margins, and healthy (ie positive!) marketing margins. Which of course means that the oil majors have been very profitable over that period. But actually through no positive action of their own making. When I was running the short-, medium- and strategic planning in Shell's global downstream business, this made any back-of-the-envelope model I could come up with about as accurate at forecasting as a 15-month long process involving hundreds of people About the only thing that the majors do in fact control (in the downstream - I know this business much better than the upstream, although I have worked offshore a long time ago) is their costs - thus even in times of high profitability they control these as ruthlessly as any large organisation can (ie not very well...)

G

[Dr Mordrid]

You can always tell when a PC'er, non-investor and/or socialist starts yapping about commodity markets, stocks & profit margins

And just to put a cap on what GNEP said;

the profit margin of the major oil companies is ~8%, much less (3-4 times less) than other similarly sized companies....both manufacturing and retailers. The only major companies that routinely operate at lower margins are grocery chains, which average ~3%.

The high fuel prices are due to;

1. SPECULATION!! The real cartels are the commodity markets of NYC and London. Who are the speculators? Mostly your own 401k managers, but also investment managers for union, municipal & corporate retirement funds and other such institutional investors.

2. Fear. Every time there is bad intl. news, such as Irans president Ahmadinejad & Hugo Chavez (Venezuela) rattling their sabers, this causes commodity speculators to spook and 'go long'....meaning to bet on shortage-induced price increases which drives up retail prices.

If you think a-holes like Ahmadinejad and Chavez are doing this purposefully, yer right and this is one of the major market manipulations going at the moment. It drives up the price/bbl and therefore their income from oil sales.

3. because of 'not in my back yard' and enviro-wacko's no new refineries in the US for 30+ years despite population increases etc. This will change soon due to new legislation, but about 25 years too late. Lower production in a time of demand = higher prices, be it oil or ice cream.

4. Katrina etc. KO'ing >100 platforms and a few Gulf Coast refineries (see # 3).

5. TAXES!! About $0.50 to $1.00 a gallon in the US (depending on the State) and MUCH more elsewhere.

etc. etc.

[cjolley]

...the profit margin of the major oil companies is ~8%, much less (3-4 times less) than other similarly sized companies...

If "3-4 times less" means what it sounds like it means to you then I am torn between wanting to know what you are investing in, or wanting to sell you investments.
(I have a great deal on a toll bridge, honest!)

24% - 32% profit for a major corp?
Which one?
Do they pay dividends?
I'm practically drooling...

[Dr Mordrid]

A few representative profit margins;

Dell: 7.96% (same as 'big oil')
Dow: 8.40% (ditto)
Target stores: 12%
Knight Ridder (USA Today & 30 others): 14.49%
Intel: 20.46%
Cisco: 20.59%
EBAY: 21.87%
Google: 23.66%
Amgen: 29.82%
Microsoft: 31.59%
Yahoo: 32.77%

etc. etc. etc.

Good long term investment: selected municipal bonds, utilities & insurance companies.

SERIOUSLY check out Roth IRA's

Advantage: the ability to have investment earnings completely escape taxation. The advantage comes at a price, though: you don't get a deduction when you contribute to the Roth IRA. 98%+ of the time the balance is in your favor.

Other US economics news;

Unemployment <5%, 4.7% this month, which historically indicates 'full employment'
Job growth averaging >200,000/month for several quarters; >5 million new jobs in last 2 years alone
GDP increasing at an annual rate of 4.8%, a very high number
Productivity way up
Inflation very low: <4% for several straight years despite > fuel costs
Incomes up for several straight quarters
Record level of home ownership (>65%)
Foreign trade deficits down
Tax revenues way up due to > economic activity, thus a shrinking budget deficit

etc. etc. etc.

[GNEP]

Woah there Doc; this accountant wants to know what you mean by "profit margin"? I sincerely hope it's got nothing to do with turnover...

[Dr Mordrid]

Standard def: net income/total revenues * 100

AKA: return on sales

[GNEP]

Standard def: net income/total revenues * 100

Which unfortunately doesn't mean much when comparing firms in different industries... I could write something really long and convoluted here explaining why, but it's bedtime and so I'll just cut to the conclusion: there is no decent accounting measure for comparing firms in different sectors. If there was one, it would incorporate forward-looking info and risk, and you ain't gonna find much to help you there in published numbers.


Sorry, had a bit of a finance geek moment there. I do apologise - normal service will be resumed forthwith To think that calling myself a "spreadsheet monkey" in polite society is preferable to admitting what I actually do is rather frightnening really

[Dr Mordrid]

Margins are only a part of proper technical analysis, but that wasn't the question posed either by CJ or you. Besides that; I never did put much faith in the elves

[GNEP]

OK, to relate it back to the topic then: profit/sales is not a useful measure in the downstream oil business. Profit/[refining- or marketing-]margin (margin being the difference between your revenues and your cost of goods sold in this case crude for the refinery margins; refined product for the marketing businesses) is more useful. In fact, we essentially always STARTED our P&L when analysing performance at the margin level. Because when you make a $ refining, and a $ marketing a barrel no matter what the oil price (wildly approx, but hey...), you want any analysis to be independent of whether crude is at $20/bbl or $80/bbl.

The effects of this can actually increase volatility of profits in certain cases, and working capital movements can be huge, but again, a separate discussion... all a bit simplified - can't really fit it all in to one post because then it would be too boring to read

Anyway, deffo bed.

[Dr Mordrid]

Agreed re: oils volatility as regards profits, reinvestment etc.

It's always entertained me how elves can take two paragraphs to say something a market fundamentalist could say in one axiom

[cjolley]

SERIOUSLY check out Roth IRA's

Sorry, maxed out on our IRAs for the year, can't do any more untill next year.
Thanks for the advice though...

Incomes up for several straight quarters

Totally bogus. Only the top %10 or so are seeing increases.
They are big enough increases to lift the average to positive.
But that is not a broad increase in incomes by any sane definition.

Foreign trade deficits down
Tax revenues way up due to > economic activity, thus a shrinking budget deficit

Borrowing > $1,000,000,000,000 couldn't have anything to do with any of that could it?

It just kills me to see right wingers take the purely Keynesian economic increase resulting from the borrowing that inevitably follows unpaid for tax cuts and hallucinate them into a "new" theory of self funding tax cuts.
These same people would go berzerk if someone on the left suggested gooseing the economy with borrowing that massive.

PS Individual stocks I hold: XOM, CHK, OGE, TM, CLX, DNA

PPS And I drive a $2400 scooter to work that gets >60mpg. Completely blowing away Mr. Shallow Analysis's Caddy.

PPPS And the premium that we paid when we started buying 100% wind generated electricity has turned into a rebate.

[GNEP]

PPS And I drive a $2400 scooter to work that gets >60mpg. Completely blowing away Mr. Shallow Analysis's Caddy.

And I cycle in to work so beat that Although it's just started raining pffft.

I never even got round to commenting on the original analysis of prius vs caddy. In a nutshell, it fits fairly and squarely into the "lies, damn lies and statistics" category. It's a conclusion in search of a justification (an analytical technique that's beginning to get worryingly familiar now I'm working in the Dept of Health... otherwise known as "spin" )